FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended June 30, 1999
_____________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 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
______ _____
The number of shares outstanding of the Registrant's voting Common
Stock, as of August 6, 1999 was 11,818,759 shares excluding
3,289,957 shares held as treasury stock.
<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 June 30, 1999, the condensed consolidated
statements of operations and cash flows for the six month and three
month periods ended June 30, 1999 and 1998 have been subjected to
a review, in accordance with standards established by the American
Institute of Certified Public Accountants, by Ernst & Young LLP,
independent auditors, whose report with respect thereto appears
elsewhere in this Form 10-Q. The financial statements mentioned
above are unaudited and reflect all adjustments, consisting only of
adjustments of a normal recurring nature, except for the loss
provision recognized in the second quarter on firm raw material
purchase commitments and a lower of cost or market adjustment
as discussed in Note 10 to the Condensed Consolidated Financial
Statements, which are, in the opinion of management, necessary
for a fair presentation of the interim periods. The results of
operations for the six months ended June 30, 1999, are not
necessarily indicative of the results to be expected for the full
year. The condensed consolidated balance sheet at December 31,
1998, was derived from audited financial statements as of that
date. Reference is made to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, for an expanded discussion
of the Company's financial disclosures and accounting policies.
<PAGE>
<TABLE>
<CAPTION>
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at June 30, 1999 is unaudited)
(dollars in thousands)
June 30, December 31,
ASSETS 1999 1998
______ ________ ____________
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,039 $ 1,555
Trade accounts receivable, net 58,143 52,730
Inventories:
Finished goods 27,708 34,236
Work in process 7,930 7,178
Raw materials 21,469 22,431
_________ _________
Total inventory 57,107 63,845
Supplies and prepaid items 10,626 7,809
Long-lived assets to be disposed of
net (Note 9) 4,694 -
_________ _________
Total current assets 133,609 125,939
Property, plant and equipment, net 94,573 99,228
Other assets, net 22,523 23,480
_________ _________
$ 250,705 $ 248,647
========= =========
</TABLE>
(continued on following page)
2
<PAGE>
<TABLE>
<CAPTION>
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at June 30, 1999 is unaudited)
(dollars in thousands)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
____________________________________ ____________ ____________
<S> <C> <C>
Current liabilities:
Drafts payable $ 296 $ 758
Accounts payable 25,307 24,043
Accrued loss on firm purchase commitments
(Note 10) 7,500 -
Accrued liabilities 16,881 19,006
Current portion of long-term debt 26,020 13,954
__________ __________
Total current liabilities 76,004 57,761
Long-term debt (Note 6) 155,738 155,688
Commitments and Contingencies (Note 5)
Redeemable, noncumulative convertible
preferred stock, $100 par value; 1,463
shares issued and outstanding 139 139
Stockholders' equity (Notes 3 and 7):
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, 15,108,676 shares
issued 1,511 1,511
Capital in excess of par value 39,286 38,329
Accumulated other comprehensive loss - (1,559)
Accumulated deficit (53,687) (35,166)
__________ __________
35,110 51,115
Less treasury stock, at cost:
Series 2 Preferred, 5,000 shares 200 200
Common stock, 3,289,957 shares
(3,202,690 in 1998) 16,086 15,856
__________ __________
Total stockholders' equity 18,824 35,059
__________ __________
$ 250,705 $ 248,647
========== ==========
(see accompanying notes)
3
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30, 1999 and 1998
(Amounts in thousands, except per share amounts)
1999 1998
___________ ___________
<S> <C> <C>
Businesses continuing at June 30,:
Revenues:
Net sales $ 149,578 $ 157,261
Other income (expenses) (147) 1,361
__________ __________
149,431 158,622
Costs and expenses:
Cost of sales (Note 10) 117,385 121,124
Selling, general and administrative 28,859 29,698
Provision for losses on firm purchase
commitments (Note 10) 7,500 -
Interest 8,834 8,602
__________ __________
162,578 159,424
__________ __________
Loss before businesses disposed
of or to be disposed of (13,147) (802)
Businesses disposed of or to be disposed of
(Note 9):
Revenues 6,374 8,172
Operating costs, expenses and interest 8,105 9,404
__________ __________
(1,731) (1,232)
Gain (loss) on disposal of business (1,971) 12,993
__________ __________
(3,702) 11,761
Income (loss) before provision for
income taxes (16,849) 10,959
Provision for income taxes 50 260
__________ __________
Net income (loss) $ (16,899) $ 10,699
========== ==========
Net income (loss) applicable to
common stock (Note 2) $ (18,521) $ 9,077
========== ==========
Weighted average common shares
outstanding (Note 2):
Basic 11,856,472 12,661,182
Diluted 11,856,472 17,456,828
Income (loss) per common share (Note 2):
Basic $ (1.56) $ .72
========== ==========
Diluted $ (1.56) $ .61
========== ==========
</TABLE>
(See accompanying notes)
4
<PAGE>
<TABLE>
<CAPTION>
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, 1999 and 1998
(Amounts in thousands, except per share amounts.)
1999 1998
_____________ ____________
<S> <C> <C>
Businesses continuing at June 30:
Revenues:
Net sales $ 79,389 $ 83,972
Other income 62 259
____________ ____________
79,451 84,231
Costs and expenses:
Cost of sales (Note 10) 63,310 63,585
Selling, general and administrative 14,531 14,697
Interest 4,467 3,879
Provision for losses on firm
purchase commitments (Note 10) 7,500 -
____________ ____________
89,808 82,161
____________ ____________
Income (loss) before business disposed
or to be disposed of (10,357) 2,070
Business disposed of or to be disposed of
during 1999 (Note 9):
Revenues 3,506 3,415
Operating costs, expenses and interest 4,267 4,084
____________ __________
(761) (669)
Loss on disposal of business (1,971) -
____________ __________
(2,732) (669)
____________ __________
Income (loss) before credit for
income taxes (13,089) 1,401
Credit for income taxes - (20)
____________ __________
Net income (loss) $ (13,089) $ 1,421
============ ===========
Net income (loss) applicable to
common stock (Note 2) $ (13,895) $ 618
============ ==========
Weighted average common shares
outstanding (Note 2):
Basic 11,835,020 12,576,185
Diluted 11,835,020 12,711,735
Income (loss) per common share (Note 2):
Basic $ (1.17) $ .05
============ ===========
Diluted $ (1.17) $ .05
============ ===========
</TABLE>
(see accompanying notes)
5
<PAGE>
<TABLE>
<CAPTION>
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months ended June 30, 1999 and 1998
(dollars in thousands)
1999 1998
__________ __________
<S> <C> <C>
Cash flows from operations:
Net income (loss) $ (16,899) $ 10,699
Adjustments to reconcile net income (loss)
to cash flows provided(used) by operations:
Depreciation, depletion and amortization:
Property, plant and equipment 5,717 6,021
Other 636 677
Provision for possible losses
on receivables and other assets 712 1,071
Inventory write-down and provision for
losses on firm purchase commitments 9,100 -
Loss on sale of assets 23 -
Loss (gain) on businesses disposed of
or to be disposed of 1,971 (12,993)
Cash provided (used) by changes in assets
and liabilities:
Trade accounts receivable (5,669) (4,359)
Inventories 5,429 3,786
Supplies and prepaid items (2,807) (1,580)
Accounts payable 1,044 (2,598)
Accrued liabilities (87) 544
__________ __________
Net cash provided (used) by operations (830) 1,268
Cash flows from investing activities:
Capital expenditures (4,195) (3,837)
Principal payments on loans receivable 480 40
Proceeds from sales of equipment and
real estate properties 3 63
Proceeds from sale of the Tower - 29,266
Increase in other assets (157) (1,269)
__________ __________
Net cash provided (used) by investing activities (3,869) 24,263
Cash flows from financing activities:
Payments on long-term and other debt (4,341) (18,581)
Borrowings on term notes 2,555 -
Net change in revolving debt facilities 10,284 (3,290)
Net change in drafts payable (463) 226
Dividends paid (Note 3):
Preferred Stocks (1,622) (1,622)
Common Stocks - (125)
Purchases of treasury stock (Note 3) (230) (1,642)
Net proceeds from issuance of common stock - 71
___________ _________
Net cash provided (used) by financing activities 6,183 (24,963)
___________ _________
Net increase in cash and cash equivalents
from all activities 1,484 568
Cash and cash equivalents at beginning of period 1,555 4,934
___________ _________
Cash and cash equivalents at end of period $ 3,039 $ 5,502
=========== =========
</TABLE>
(see accompanying notes)
6
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1999 and 1998
Note 1: Income Taxes At December 31, 1998, the Company had regular-
tax net operating loss ("NOL") carryforwards for tax purposes of
approximately $63.8 million (approximately $31.4 million alternative
minimum tax NOLs). Certain amounts of regular-tax NOL expire beginning
in 1999.
The Company's provision for income taxes for the six months ended June 30,
1999 of $50,000 is for current state income taxes and federal alternative
minimum tax.
Note 2: Earnings Per Share 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 first six
months of 1999 and have thus, been excluded from the computation of
diluted loss per share for the six month and three month periods then
ended.
7
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Note 2: 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)
Six Months Three Months
1999 1998 1999 1998
__________ __________ __________ __________
<S> <C> <C> <C> <C>
Numerator:
Numerator for 1998 diluted
earnings per share - net
income (loss) $ (16,899) $ 10,699 $(13,089) $ 1,421
Preferred stock dividends (1,622) (1,622) (806)
(803)
__________ __________ _________ _________
Numerator for 1999 and 1998
basic and 1999 diluted
earnings per share - income
(loss) available to common
stockholders (18,521) 9,077 (13,895) 618
Preferred stock dividends on
preferred stock assumed to
be converted - 1,622 - -
__________ __________ __________ __________
Numerator for 1998 diluted
earnings per share $ (18,521) $ 10,699 $ (13,895) $ 618
========== ========== ========== ==========
Denominator:
Denominator for basic
earnings per share -
weighted-average
shares 11,856,472 12,661,182 11,835,020 12,576,185
Effect of dilutive
securities:
Employee stock options - 128,290 - 131,550
Convertible preferred
stock - 4,662,726 - -
Convertible note payable - 4,000 - 4,000
__________ ___________ __________ __________
Dilutive potential common
shares - 4,795,646 135,550
__________ ___________ __________ __________
Denominator for diluted
earnings per share -
adjusted weighted-
average shares and
assumed conversions 11,856,472 17,456,828 11,835,020 12,711,735
=========== =========== ========== ==========
Basic earnings (loss)
per share $ (1.56) $ .72 $ (1.17) $ .05
=========== =========== =========== ==========
Diluted earnings (loss)
per share $ (1.56) $ .61 $ (1.17) $ .05
=========== =========== =========== =========
</TABLE>
8
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Note 3: Stockholders' Equity. The table below provides detail of activity in
the stockholders' equity accounts for the six months ended June 30, 1999:
Common Stock Non- Capital Accumulated
_______________ redeemable in excess Other Com-
Par Preferred of par prehensive
Shares Value Stock Value Loss
_______ ______ _________ ________ __________
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1998 15,109 $ 1,511 $ 48,000 $ 38,329 $(1,559)
Net loss
Foreign currency trans-
lation adjustment 1,559
Total comprehensive income (Note 8)
Expiration of employee
stock option and
related accrued
compensation 957
Dividends declared:
Series B 12% pre-
ferred stock ($6.00
per share)
Series 2 preferred
stock ($1.625 per
share)
Redeemable preferred
stock ($10.00 per
share)
Purchase of treasury
stock
______ _______ _________ ________ _________
(1)
Balance at June 30,
1999 15,109 $ 1,511 $ 48,000 $ 39,286 $ -0-
======= ======= ======== ======== ========
Treasury
Accumu Treasury Stock
lated Stock Prefer-
Deficit Common red Total
_________ ________ ________ _______
<S> <C> <C> <C> <C>
$(35,166) $(15,856) $ (200) $35,059
(16,899) (16,899)
1,559
________
(15,340)
957
(120) (120)
(1,487) (1,487)
(15) (15)
(230) (230)
________ ________ _________ _______
$(53,687) $(16,086) $ (200) $18,824
======== ======= ========= =======
<FN>
(1) Includes 3,290 shares of the Company's Common Stock held in treasury.
Excluding the 3,290 shares held in treasury, the outstanding shares of
the Company's Common Stock at June 30, 1999 were 11,819.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Note 4: Segment Information
___________________________
Six Months Ended Three Months Ended
June 30, June 30,
____________________ ____________________
1999 1998 1999 1998
____ ____ ____ ____
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Net sales:
Businesses continuing:
Chemical $ 69,690 $ 69,315 $ 38,945 $ 40,637
Climate Control 56,025 59,257 29,326 29,321
Automotive Products 18,993 21,198 8,888 10,708
Industrial Products 4,870 7,491 2,230 3,306
Business to be disposed of -
Chemical 6,374 8,208 3,506 3,461
_________ _________ __________ __________
$ 155,952 $ 165,469 $ 82,895 $ 87,433
========= ========= ========== =========
Operating profit (loss):
Businesses continuing:
Chemical:
Recurring operations $ 4,125 $ 6,606 $ 2,678 $ 5,027
Inventory write-down and
losses on purchase
commitments (9,100) - (9,100) -
________ _________ _________ _________
(4,975) 6,606 (6,422) 5,027
Climate Control 5,715 6,312 3,008 3,500
Automotive Products (299) 71 (308) 478
Industrial Products (913) (518) (501) (214)
Business to be disposed of -
Chemical (1,488) (995) (643) (567)
_________ _________ _______ _______
(1,960) 11,476 (4,866) 8,224
General corporate expenses
and other (3,841) (4,671) (1,667) (2,842)
Interest expense:
Business to be disposed of (243) (237) (118) (102)
Recurring operations (8,834) (8,602) (4,467) (3,879)
_________ _________ ________ ________
(9,077) (8,839) (4,585) (3,981)
Gain (loss) on business
disposed of or to be
disposed of (1,971) 12,993 (1,971) -
_________ _________ ________ ________
Income (loss) before pro-
vision for income taxes $ (16,849) $ 10,959 $ (13,089) $ 1,401
========== ========= ========= ========
</TABLE>
10
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1999 and 1998
Note 5: Commitments and Contingencies
Nitric Acid Project
___________________
In June 1997, two wholly owned subsidiaries of the Company, El
Dorado Chemical Company ("EDC"), and El Dorado Nitrogen Company
("EDNC"), entered into a series of agreements with Bayer
Corporation ("Bayer") (collectively, the "Bayer Agreement"). Under
the Bayer Agreement, EDNC agreed to act as an agent to construct,
and upon completion of construction, operate a nitric acid plant
(the "EDNC Baytown Plant") at Bayer's Baytown, Texas chemical
facility. The construction of the EDNC Baytown Plant was completed
in May 1999, and EDNC began producing and delivering nitric acid to
Bayer at that date. Sales by EDNC to Bayer out of the EDNC Baytown
Plant production during the quarter ended June 30, 1999, were
approximately $4 million. EDC guaranteed the performance of EDNC's
obligations under the Bayer Agreement. Under the terms of the Bayer
Agreement, EDNC is leasing the EDNC Baytown plant pursuant to a leveraged
lease from an unrelated third party with an initial lease term of ten years.
Upon expiration of the initial ten-year term, the Bayer Agreement may be
renewed for up to six renewal terms of five years each; however, prior to
each renewal period, either party to the Bayer agreement may opt against
renewal. Financing of the EDNC Baytown Plant was provided by an unaffiliated
lender. Neither the Company nor EDC has guaranteed any of the repayment
obligations for the EDNC Baytown Plant. In connection with the leveraged
lease, the Company entered into an interest rate forward agreement to fix
the effective rate of interest implicit in such lease. As of June 30, 1999,
the Company has deferred approximately $2.9 million associated with such
agreement which will be amortized over the initial term of the lease.
See Note 7, "Changes in Accounting," for the expected accounting upon
adoption of SFAS #133.
In January 1999, the contractor constructing the EDNC Baytown Plant under a
turnkey agreement, informed the Company that it could not complete
construction alleging a lack of financial resources. EDNC at that time
demanded that the contractor's bonding company provide funds necessary for
subcontractors to complete construction. A substantial portion of the costs
to complete the EDNC Baytown Plant ($12.9 million), which were to be funded
by the construction contractor, have been funded by proceeds from the bonding
company; however, the nonperformance by the contractor constructing the EDNC
Baytown Plant increased the cost of the plant which is reflected in higher
rentals under the Company's leveraged lease.
Debt Guarantee
______________
The Company previously guaranteed up to approximately $2.6 million of
indebtedness of a start-up aviation company, Kestrel Aircraft Company
("Kestrel"), in exchange for a 44.9% ownership interest. At December 31,
1998, the Company had accrued the full amount of its commitment under the
debt guarantees and fully reserved its investments and advances to Kestrel.
In the first quarter of 1999, upon demand of the Company's guarantee, the
Company assumed the obligation for a $2.0 million term note, due in equal
monthly principal payments of $11,111, plus interest, through August 2004
11
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1999 and 1998
and funded approximately $500,000 resulting from a subsidiary's partial
guarantee of Kestrel's obligation under a revolving credit facility. In
connection with the demand of the Company to perform under its guarantees,
the Company and the other guarantors formed a new company ("KAC") which
acquired the assets of the aviation company through foreclosure.
The Company and the other shareholders of KAC are attempting to sell the
assets acquired in foreclosure. Proceeds received by the Company, if any,
from the sale of KAC assets will be recognized in the results of operations
when and if realized.
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 the subsidiaries 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 June 30, 1999, 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. Such amount 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.
The subsidiary's insurance carriers have been notified of this matter;
however, the amount of possible coverage, if any, is not yet determinable.
12
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1999 and 1998
B. On February 12, 1996, the Chemical Business entered into a Consent
Administrative Agreement ("Administrative Agreement") with the state of
Arkansas to resolve certain compliance issues associated with nitric acid
concentrators. Pursuant to the Administrative Agreement, the Chemical
Business installed additional pollution control equipment to address the
compliance issues. The Chemical Business was assessed $50,000 in civil
penalties associated with the Administrative Agreement. In the summer of
1996 and then on January 28, 1997, the subsidiary executed amendments to
the Administrative Agreement ("Amended Agreements"). The Amended
Agreements imposed a $150,000 civil penalty, which penalty has been paid.
Since the 1997 amendment, the Chemical Business has been assessed
stipulated penalties of approximately $67,000 by the Arkansas Department
of Pollution Control and Ecology ("ADPC&E") for violations of certain
provisions of the 1997 Amendment. The Chemical Business believes that the
El Dorado Plant has made progress in controlling certain off-site
emissions; however, such off-site emissions have occurred and continue to
occur from time to time, which could result in the assessment of
additional penalties against the Chemical Business by the ADPC&E for
violation of the 1997 Amendment.
During May 1997, approximately 2,300 gallons of caustic material spilled
when a valve in a storage vessel failed, which was released to a storm
water drain, and according to ADPC&E records, resulted in a minor fish
kill in a drainage ditch near the El Dorado Plant. In 1998, the ADPC&E
issued a Consent Administrative Order ("1998 CAO") to resolve the event.
The 1998 CAO includes a civil penalty in the amount of $183,700 which
includes $125,000 to be paid over five years in the form of environmental
improvements at the El Dorado Plant. The remaining $58,700 was paid in
1998. The 1998 CAO also requires the Chemical Business to undertake a
facility-wide wastewater evaluation and pollutant source control program
and wastewater facility-wide wastewater minimization program. The
program requires that the subsidiary complete rainwater drain-off studies
including engineering design plans for additional water treatment
components to be submitted to the ADCP&E by August 2000. The construction
of the additional water treatment components shall be completed by August
2001 and the El Dorado plant has been mandated to be in compliance with
final effluent limits on or before February 2002. The wastewater program
is currently expected to require future capital expenditures of
approximately $5.0 million.
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
13
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1999 and 1998
defendants, to fix prices in connection with the sale of commercial
explosives. This litigation has been consolidated, for discovery purposes
only, with several other actions in a multi-district litigation proceeding
in Utah. Discovery in this litigation is in process. The Chemical
Business intends to vigorously defend itself in this matter.
The Company's Chemical Business has been added as a defendant in a
separate lawsuit pending in Missouri. This lawsuit alleges a national
conspiracy, as well as a regional conspiracy, directed against explosive
customers in Missouri and seeks unspecified damages. The Company's
Chemical Business has been included in this lawsuit because it sold
products to customers in Missouri during a time in which other defendants
have admitted to participating in an antitrust conspiracy, and because it
has been sued in the preceding described lawsuit. Based on the
information presently available to the Company, the Company does not
believe that the Chemical Business conspired with any party, to fix prices
in connection with the sale of commercial explosives. The Chemical
Business intends to vigorously defend itself in this matter.
During the third quarter of 1997, a subsidiary of the Company was served
with a lawsuit in which approximately 27 plaintiffs have sued
approximately 13 defendants, including a subsidiary of the Company
alleging personal injury and property damage for undifferentiated
compensatory and punitive damages of approximately $7,000,000.
Specifically, the plaintiffs assert property damage to their residence and
wells, annoyance and inconvenience, and nuisance as a result of daily
blasting and round-the-clock mining activities. The plaintiffs are
residents living near the Heartland Coal Company ("Heartland") strip mine
in Lincoln County, West Virginia, and an unrelated mining operation
operated by Pen Coal Inc. During 1999, the plaintiffs withdrew all
personal injury claims previously asserted in this litigation. Heartland
employed the subsidiary to provide blasting materials and personnel to
load and shoot holes drilled by employees of Heartland. Down hole
blasting services were provided by the subsidiary at Heartland's premises
from approximately August 1991, until approximately August 1994.
Subsequent to August 1994, the subsidiary supplied blasting materials to
the reclamation contractor at Heartland's mine. In connection with the
subsidiary's activities at Heartland, the subsidiary has entered into a
contractual indemnity to Heartland to indemnify Heartland under certain
conditions for acts or actions taken by the subsidiary for which the
subsidiary failed to take, and Heartland is alleging that the subsidiary
is liable thereunder for Heartland's defense costs and any losses to, or
damages sustained by, the plaintiffs in this lawsuit as a result of the
subsidiary's operations. Subject to final documentation, this litigation
has been settled with the subsidiary's payment of approximately $81,000,
which was accrued at June 30, 1999.
The Company, including its subsidiaries, is a party to various other claims,
legal actions, and complaints arising in the ordinary course of business. In
14
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1999 and 1998
the opinion of management after consultation with counsel, all claims, legal
actions (including those described above) and complaints are not presently
probable of material loss, are adequately covered by insurance, or if not so
covered, are without merit or are of such kind, or involve such amounts that
unfavorable disposition is not presently expected to have a material effect
on the financial position of the Company, but could have a material impact to
the net income (loss) of a particular quarter or year, if resolved
unfavorably.
Note 6: 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, (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.
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 unaudited balance sheet
information of ClimaChem and its subsidiaries as of June 30, 1999 and
December 31, 1998 and the results of operations for the six month and
three month periods ended June 30, 1999 and 1998 are detailed below.
15
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
_____________ _____________
(in thousands)
<S> <C> <C>
Balance sheet data:
Current assets (1)(2) $ 103,785 $ 90,291
Property, plant and equipment, net 78,689 82,389
Income tax receivable 1,750 -
Notes receivable from LSB and affiliates, net 13,443 13,443
Other assets, net 16,083 10,480
___________ ___________
Total assets $ 213,750 $ 196,603
=========== ===========
Current liabilities $ 48,540 $ 35,794
Long-term debt 138,730 127,471
Deferred income taxes 9,755 9,580
Stockholders' equity 16,725 23,758
__________ __________
Total liabilities and stockholders equity $ 213,750 $ 196,603
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
_________________________________________________
<S> <C> <C> <C> <C>
Operations data:
Total revenues $ 132,092 $ 137,327 $ 71,863 $ 73,900
Costs and expenses:
Cost of sales 105,557 107,439 58,387 57,028
Selling, general and
administrative 22,083 20,348 11,202 10,569
Loss on business to be
disposed of 1,971 - 1,971 -
Provision for losses on
firm purchase commit-
ments 7,500 - 7,500 -
Interest 6,647 6,273 3,368 2,960
________ _________ __________ _________
143,758 134,060 82,428 70,557
________ _________ __________ _________
Income (loss) before pro-
vision (credit) for
income taxes (11,666) 3,267 (10,565) 3,343
Provision (credit) for
income taxes (3,074) 1,700 (3,124) 1,730
__________ _________ _________ ________
Net income (loss) $ (8,592) $ 1,567 $ (7,441) $ 1,613
========== ========= ========= =========
16
<PAGE>
<FN>
(1) Notes and other receivables from LSB and affiliates are eliminated
when consolidated with LSB.
(2) Current assets include receivables due from LSB which aggregate
$1.6 million and $5.0 million at June 30, 1999, and December 31,
1998, respectively.
</FN>
</TABLE>
The Company funded a term and revolving line of credit of a total of
$18.5 million with an asset-based lender for its Automotive Products
Business on May 10, 1999. This facility replaced the Automotive
Products Business' previous loan agreement under the Company's Revolver
and provides for a $2.5 million term loan and a $16.0 million revolving
credit facility (an increase of borrowing ability calculated as of
May 10, 1999, of $3.5 million compared to the Automotive Products
Business' availability under the replaced facility) based on
eligible amounts of accounts receivable and inventory. This
facility provides for interest at a bank's prime rate plus one
percent (1%) per annum, or at the Company's option, the lender's
LIBOR rate plus two and three-quarters percent (2.75%) per annum.
The effective interest rate at June 30, 1999, was 7.93%. The term
of this new facility is through May 7, 2001, and is renewable
thereafter for successive twelve-month terms. As a result of the
terms and conditions of this facility, outstanding borrowings under
the revolving credit facility of $9.2 million at June 30, 1999 and
$.6 million under the term loan are classified as long-term debt
due within one year (borrowings by the Automotive Products Business
under the Company's revolving credit agreements were classified as
long-term debt due after one year in the accompanying condensed
consolidated balance sheets as of December 31, 1998). The
Automotive Products Business was required to secure such loan with
substantially all of its assets. The loan agreement contains
various affirmative and negative covenants, including a requirement
to maintain tangible net worth of not less than $6.4 million. The
Company was required to provide the lender with a $1.0 million
standby letter of credit to further secure such loan. As a result
of this financing, the Company's Revolving Credit Facility, that is
not available to the Automotive Products Business, now provides for
the elimination of its financial covenants so long as the remaining
borrowing group maintains a minimum aggregate availability under
such facility of at least $15 million. As of June 30, 1999, the
remaining borrowing group had availability of $16.4 million.
Note 7: Change in Accounting 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, 2000.
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
17
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 10, 1999 and 1998
value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet determined what
all of the effects of SFAS #133 will be on the earnings and
financial position of the Company; however, the Company expects
that the deferred charges associated with the interest rate forward
agreement discussed in Note 5, "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 8: Comprehensive Income The Company presents comprehensive income
in accordance with 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. Other
comprehensive income for the six month and three month periods ended
June 30, 1999 and 1998 is detailed below.
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
______________________ ______________________
1999 1998 1999 1998
_______________________________________________
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $ (16,899) $ 10,699 $ (13,089) $ 1,421
Foreign currency
translation income (loss) 1,559 (606) 1,337
(616)
_________ _________ _________ _________
Total comprehensive income
(loss) $ (15,340) $ 10,093 $ (11,752) $ 805
========= ======== ========= =========
</TABLE>
Note 9: Business Disposed of or to be Disposed of. On May 7,
1999, the Company's wholly owned subsidiary, Total Energy Systems
Limited and its subsidiaries ("TES") entered into an agreement (the
"Asset Sale Agreement") to sell substantially all the assets of TES
("Defined Assets"). Under the Asset Sale Agreement, TES retains its
liabilities and will liquidate such liabilities from the proceeds
of the sale and from the collection of its accounts receivables
which were retained by TES pursuant to the Asset Sale Agreement.
The loss associated with this transaction included in the
accompanying Condensed Consolidated Statements of Operations for
the six months and three months ended June 30, 1999, is
approximately $1,971,000 and is comprised of disposition costs
of approximately $.3 million, the recognition in earnings of
18
<PAGE>
LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1999 and 1998
the cumulative foreign currency loss of approximately $1.1 million
at June 30, 1999, and approximately $.6 million related to the
resolution of certain environmental matters.
The Company received approximately $3.4 million at closing on
August 2, 1999, in net proceeds from the assets sold, exclusive of
approximately $.7 million related to an agreed to retention
related to the final reconciliation of the value of the inventory
sold, after paying off $6.4 million bank debt and the purchaser
assuming approximately $1.1 million debt related to certain
capitalized lease obligations. The Company expects to complete the
liquidation of the assets and liabilities retained during the
fourth quarter of 1999.
In March 1998, the Company closed the sale of real estate and
realized proceeds of $29.3 million net of transaction costs and
a gain onthe transaction of approximately $13 million.
Note 10: Inventory Write-down and Loss on Firm Purchase Commitments
___________________________________________________________________
Due to decreased selling prices for certain of the Chemical
Business' nitrogen-based products, the Chemical Business wrote-down
the carrying value of certain inventories at June 30, 1999, by
approximately $1.6 million, representing the cost in excess of
market.
At June 30, 1999, the Chemical Business has firm uncancelable
commitments to purchase anhydrous ammonia pursuant to the terms of two
contracts. The purchase price(s) the Chemical Business will be required
to pay for anhydrous ammonia under one of these contracts, which is for a
significant percentage of the Chemical Business' anhydrous ammonia
requirements, currently exceeds and is expected to continue to exceed the
spot market prices throughout the purchase period. Additionally, the current
excess supply of nitrate-based products caused, in part, by the import of
Russian nitrate, has caused a significant decline in the sales prices, with
no improvement in sales prices expected in the near term. Due to the decline
in sales prices, the cost to produce the nitrate-based products, including
the cost of the anhydrous ammonia to be purchased under the contracts,
exceeds the anticipated future sales prices of such products. As a result,
the accompanying Condensed Consolidated Financial Statements include a loss
provision for anhydrous ammonia required to be purchased during the remainder
of the contracts of approximately $7.5 million. The loss provision recorded
as of June 30, 1999, is based on the forward contract pricing existing
at June 30, 1999. This pricing can move upward or downward in future
periods. Based on forward pricing existing as of August 13, 1999, the
Chemical Business would be required to recognize an additional $400,000
loss. This loss provision estimate may change in the near term.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") should be read in conjunction with the
Company's June 30, 1999 Condensed Consolidated Financial Statements.
Certain statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" may be deemed
forward-looking statements. See "Special Note Regarding Forward-Looking
Statements".
OVERVIEW
General
_______
The Company is pursuing a strategy of focusing on its core
businesses and concentrating on 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. The Company is also considering the sale of other assets that
are non-core to its Chemical and Climate Control Businesses.
The Company recently concluded its evaluation of the spin-off of
its Automotive Business ("Automotive") to its shareholders as a dividend
and decided that it would not be able to spin-off Automotive. The
Company is continuing to evaluate other methods of reducing or
eliminating its investment in Automotive. As part of its efforts, the
Company has finalized a new credit facility for Automotive. See
"Liquidity & Capital Resources" of this MD&A for a description of the
credit facility.
The Company has further announced that it is negotiating to sell
its Industrial Products Business. The terms of such sale, if any, have
not been finalized, and there are no assurances that the Company will
finalize its negotiations or, if such is finalized, whether the terms
thereof will be acceptable to the Company.
Certain statements contained in this Overview are forward-looking
statements, and future results could differ materially from such
statements.
20
<PAGE>
<TABLE>
<CAPTION>
Information about the Company's operations in different industry segments
for the six month and three month periods ended June 30, 1999 and 1998 is
detailed below.
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
__________ _________ _________ _________
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Sales:
Businesses continuing:
Chemical $ 69,690 $ 69,315 $ 38,945 $ 40,637
Climate Control 56,025 59,257 29,326 29,321
Automotive Products 18,993 21,198 8,888 10,708
Industrial Products 4,870 7,491 2,230 3,306
Business to be disposed of
Chemical(1) 6,374 8,208 3,506 3,461
________ ________ ________ ________
$155,952 $165,469 $ 82,895 $ 87,433
======== ======== ======== ========
Gross profit (loss) (2):
Businesses continuing:
Chemical $ 11,227 $ 12,150 $ 6,270 $ 7,725
Climate Control 17,313 17,321 8,992 8,985
Automotive Products 4,008 4,966 1,912 2,826
Industrial Products 1,247 1,700 507 851
Business to be disposed of
Chemical(1) (229) 159 (71) ( 8)
________ ________ ________ ________
$ 33,566 $ 36,296 $ 17,610 $ 20,379
======== ======== ======== ========
Operating profit (loss) (3):
Businesses continuing:
Chemical:
Recurring operations $ 4,125 $ 6,606 $ 2,678 $ 5,027
Inventory write-down and
losses on purchase
commitments (9,100) - (9,100) -
________ _______ _______ _______
(4,975) 6,606 (6,422) 5,027
Climate Control 5,715 6,312 3,008 3,500
Automotive Products (299) 71 (308) 478
Industrial Products (913) (518) (501) (214)
Businesses to be disposed of
Chemical(1) (1,488) (995) (643) (567)
________ ________ _______ ______
(1,960) 11,476 (4,866) 8,224
General corporate expenses (3,841) (4,671) (1,667) (2,842)
Interest expense:
Business to be disposed of (243) (237) (118) (102)
Recurring operations (8,834) (8,602) (4,467) (3,879)
________ ________ _______ _______
(9,077) (8,839) (4,585) (3,981)
Gain (loss) on business disposed
of or to be disposed of (1,971) 12,993 (1,971) -
________ ________ _______ _______
Income (loss) before provision
for income taxes $(16,849) $ 10,959 $(13,089) $ 1,401
======== ======== ======== =======
<FN>
(1) On May 7, 1999, the Company's wholly owned Australian
subsidiary, TES, entered into an agreement to sell
21
<PAGE>
substantially all of its assets which sale was substantially
completed on August 2, 1999. See Note 9 of Notes to Condensed
Consolidated Financial Statements for further information.
The operating results for TES have been presented separately
in the above table.
(2) Gross profit by industry segment represents net sales less
cost of sales exclusive of the $1.6 million write-down of
inventory.
(3) Operating profit (loss) by industry segment represents revenues
less operating expenses before deducting general corporate expenses,
interest expense and income taxes and before gain on sale of the
Tower in 1998.
</FN>
</TABLE>
Chemical Business
_________________
Sales in the Chemical Business (excluding the Australian
subsidiary in which substantially all of its assets were disposed
of in August, 1999) have increased from $69.3 million in the six
months ended June 30, 1998 to $69.7 million in the six months ended
June 30, 1999 and the gross profit (excluding the Australian
subsidiary, the inventory write-down and provision for loss on firm
purchase commitments) has decreased from $12.2 million in 1998 to
$11.2 in 1999. The gross profit percentage (excluding the
Australian subsidiary and the effect of the $1.6 million inventory
adjustment in 1999) has decreased from 17.5% in 1998 to 16.1% in
1999. The decline in sales price exceeded the decline in raw
material costs resulting in a lower gross profit margin.
As of June 30, 1999, the Chemical Business has commitments to
purchase approximately 200,000 tons of anhydrous ammonia under two
contracts. The Company's purchase price of anhydrous ammonia under
these contracts can be higher or lower than the current market spot
price of anhydrous ammonia. Pricing is subject to variations due
to numerous factors contained in these contracts. Based on the
pricing index contained in one of these contracts, it is presently
priced above the current market spot price. As of June 30, 1999,
the Chemical Business has remaining purchase commitments of
approximately 120,000 tons under this contract. The Chemical
Business is required to purchase a minimum of 7,000 tons monthly
under another contract expiring in June 2000.
As stated above, the Chemical Business has commitments to
purchase anhydrous ammonia pursuant to the terms of two contracts.
The purchase price(s) the Chemical Business will be required to pay
for anhydrous ammonia under one of these contracts currently
exceeds and is expected to continue to exceed the spot market
prices throughout the purchase period. Additionally, the current
excess supply of nitrate-based products, caused, in part, by the
import of Russian nitrate, has caused a significant decline in the
sales prices; no improvement in sales prices is expected in the
near term. This decline in sales price has resulted in the cost of
anhydrous ammonia purchased under these contracts when combined
with manufacturing and distribution costs, to exceed anticipated
future sales prices. As a result, the accompanying Condensed
Consolidated Financial Statements include a loss provision for
anhydrous ammonia required to be purchased during the remainder of
the contracts of approximately $7.5 million. The provision for
22
<PAGE>
loss at June 30, 1999, is based on the forward contract pricing
existing at June 30, 1999, and estimated market prices for products
to be manufactured and sold during the remainder of the contracts.
This is a forward-looking statement, and there are no assurances that
such estimates will be proven to be accurate. Differences, if any,
in the estimated future cost of anhydrous ammonia and the actual cost
in effect at the time of purchase and differences in the estimated
sales prices and actual sales prices of products manufactured could
cause the Company's operating results to differ from that estimated
in arriving at the loss provision recorded at June 30, 1999. The
Chemical Business currently has an excess inventory of nitrogen-
based products on hand. Additionally, substantial excess stocks of
competing nitrogen products on the market have resulted in a cutback
in the production level at the El Dorado Arkansas facility. There are
no assurances that the Chemical Business will not be required to record
additional loss provisions in the future. Based on the forward pricing
existing as of August 13, 1999, the Chemical Business would be required to
recognize an additional $400,000 loss. See "Special Note Regarding
Forward-Looking Statements."
Due to decreased selling prices for certain of the Chemical
Business' nitrogen-based products, the Chemical Business also wrote
down the carrying value of certain inventories at June 30, 1999, by
approximately $1.6 million, representing the cost in excess of
market value.
In June, 1997, a subsidiary of the Company entered into an
agreement with Bayer Corporation ("Bayer") whereby one of the
Company's subsidiaries agreed to act as agent to construct a nitric
acid plant located within Bayer's Baytown, Texas chemical plant
complex. The construction of the plant was completed during the
quarter ended June 30, 1999. This plant is being operated by the
Company's subsidiary and is supplying nitric acid for Bayer's
polyurethane business under a long-term supply contract. Sales
from this plant were approximately $2.8 million during the quarter
ended June 30, 1999. Management estimates that, at full production
capacity based on terms of the Bayer Agreement and , based on the
price of anhydrous ammonia as of the date of this report, the plant
should generate approximately $35 million to $40 million in annual
gross revenues. Unlike the Chemical Business' regular sales
volume, the market risk on this additional volume is much less
since the contract provides for recovery of costs, as defined, plus
a profit. The Company's subsidiary is leasing the nitric acid plant
pursuant to a leverage lease from an unrelated third party for an
initial term of ten (10) years which began on June 23, 1999. See
"Special Note Regarding Forward-Looking Statements."
The results of operation of the Chemical Business' Australian
subsidiary have been adversely affected due to the recent economic
developments in certain countries in Asia. These economic developments
23
<PAGE>
in Asia have had a negative impact on the mining industry in Australia
which the Company's Chemical Business services. As these adverse
economic conditions in Asia have continued, they have had an adverse
effect on the Company's consolidated results of operations. On May 7,
1999, the Company's wholly owned Australian subsidiary entered into an
agreement to sell substantially all of its assets. This transaction
was substantially completed on August 2, 1999. Revenues of the
Australian subsidiary for the six month and three month periods ended
June 30, 1999, and June 30, 1998, were $6.4 million, $8.2 million, $3.5
million, and $3.5 million, respectively. For the year ended December
31, 1998, the Australian subsidiary had revenues of $14.2 million and
a net loss of $2.9 million; $3.7 million net loss for the six months
ended June 30, 1999, including a loss on sale of $2.0 million. See Note
9 of Notes to Condensed Consolidated Financial Statements for further
information concerning this transaction.
Climate Control
_______________
The Climate Control Business manufactures and sells a broad
range of hydronic fan coil, air handling, air conditioning,
heating, water source heat pumps, and dehumidification products
targeted to both commercial and residential new building
construction and renovation.
The Climate Control Business focuses on product lines in the
specific niche markets of hydronic fan coils and water source heat
pumps and has established a significant market share in these
specific markets.
Although sales of $56.0 million for the six months ended
June 30, 1999, in the Climate Control Business were approximately
5% less than sales of $59.3 million in the six months ended
June 30, 1998, the gross profit percentage improved from 29.2% in the
first six months of 1998 to 30.9% in the first six months of 1999.
Automotive and Industrial Products Businesses
_____________________________________________
As indicated in the above table, during the six months ended
June 30, 1999 and 1998, respectively, the Automotive and Industrial
Products recorded combined sales of $23.9 million and $28.7
million, respectively, and reported operating losses (as defined
above) of $1.2 million and $.4 million, respectively. The net
investment in assets of these Businesses has decreased during the
last three years and the Company expects to realize further
reductions in future periods. During the quarter ended June 30, 1999,
the Automotive Business converted its investment in a wholly-owned
subsidiary, International Bearings, Inc. ("IBI") to a fifty percent
(50%) non-controlling investment in a joint venture ("the JV")
continuing the industrial bearings business formerly operated by IBI.
Automotive sold its inventory, having a book value of approximately $2.4
million to the JV for approximately $1.5 million cash and $.9 million
in interest bearing notes. Automotive retains an equity interest in
the JV which has not been assigned any value at June 30, 1999. IBI
retained receivables of approximately $600,000 which should be fully
collected during the third quarter 1999.
The Company continues to eliminate certain categories of machines
from the Industrial Products product line by not replacing machines when
sold. The Company previously announced that it is negotiating the sale
24
<PAGE>
of its Industrial Products Business. The sale of the Industrial
Products Business is a forward-looking statement and is subject to,
among other things, the buyer's and the Company's lending institutions
agreeing to the terms of the transaction, including the purchase price,
approval of the Company's Board of Directors and negotiation and
finalization of definitive agreements.
RESULTS OF OPERATIONS
Six months ended June 30, 1999 vs. Six months ended June 30, 1998.
_________________________________________________________________
Revenues
________
Total revenues, excluding the gain on the disposition of a
business in 1998, for the six months ended June 30, 1999 and 1998
were $155.8 million and $166.8 million, respectively (a decrease of
$11.0 million). Sales decreased $9.5 million and other revenues
decreased $1.5 million. The decrease in other revenues was
primarily due to nonrecurring operations of the Tower, sold in
March 1998. The Company recognized a pre-tax gain on the sale of
approximately $13.0 million in the first quarter of 1998.
Net Sales
_________
Consolidated net sales included in total revenues for the six
months ended June 30, 1999, were $156.0 million, compared to $165.5
million for the first six months of 1998, a decrease of $9.5
million. This decrease in sales resulted principally from: (i)
decreased sales in the Climate Control Business of $3.2 million due
to decreased sales volume in this Business' Heat Pump product
lines, production line changes and training time for new employees
which slowed production temporarily, (ii) decreased sales in the
Automotive Products Business of $2.2 million, principally resulting
from the presence in 1998 of certain bulk sales to an industrial
user and initial stocking orders from a new retail chain store
customer as well as customer mix, and (iii) decreased sales in the
Industrial Products Business of $2.6 million due to decreased sales
of machine tools, and (iv) decreased sales in the Chemical Business
of $1.5 million primarily due to reduced sales of the Australian
subsidiary and reduced selling prices on the Company's nitrogen
based products due primarily to the import of Russian nitrate
resulting in an over supply of nitrate-based products offset by
sales of nitric acid products pursuant to the Bayer Agreements (see
Note 5 of Notes to Condensed Consolidated Financial Statements).
Gross Profit
____________
Gross profit, excluding the effect of the $1.6 million
inventory write-down discussed in Note 10 of Notes to Condensed
Consolidated Financial Statements, would have been 21.5% for the
first six months of 1999, compared to 21.9% for the first six
months of 1998. The decrease in the gross profit percentage was
primarily the result of decreases in the Chemical and Automotive
Businesses. The decrease in the Chemical Business was primarily
the result of reduced selling prices for the Company's nitrogen
based products. See "Overview Chemical Business" elsewhere in this
25
<PAGE>
"Managements Discussion and Analysis of Financial Condition and
Results of Operations" for further discussion of the Chemical
Business' decreased sales. The decrease in the Automotive Business
was primarily due to customer mix.
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative ("SG&A") expenses as a
percent of net sales from businesses continuing at June 30, 1999,
were 19.3% in the six-month period ended June 30, 1999, compared to
18.9% for the first six months of 1998. This increase is primarily
the result of decreased sales volume in the Climate Control Business,
the Industrial Products Business and, the Automotive Business without
equivalent corresponding decreases in SG&A. Additionally, costs
associated with new start-up operations in 1999, by the Climate Control
Business, having minimal or no sales, contributed to the increase in
dollars as well as expense as a percent of sales.
Interest Expense
________________
Interest expense for the Company was $9.1 million in the first
six months of 1999, compared to $8.8 million for the first six
months of 1998. The increase of $.3 million primarily resulted
from increased borrowings.
Income (Loss) Before Taxes
__________________________
The Company had a loss before income taxes of $16.8 million
in the first six months of 1999 compared to income before income
taxes of $11.0 million in the six months ended June 30, 1998. The
decreased profitability of $27.8 million was primarily due to the
gain on the sale of the Tower in 1998, the lower gross profit, the
loss on disposition of the Australian subsidiary, lower sales, the
inventory write-down and the provision for losses on purchase
commitments, as previously discussed.
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
1 of Notes to Condensed Consolidated Financial Statements, the
Company's provisions for income taxes for the six months ended
June 30, 1999 and the six months ended June 30, 1998 are for
current state income taxes and federal alternative minimum taxes.
26
<PAGE>
Three months ended June 30, 1999 vs. Three months ended June 30, 1998.
_____________________________________________________________________
Revenues
________
Total revenues for the three months ended June 30, 1999, and
1998 were $83.0 million, and $87.6 million, respectively (a
decrease of $4.6 million). Sales decreased $4.5 million and other
income increased $.1 million.
Net Sales
_________
Consolidated net sales included in total revenue for the three
months ended June 30, 1999, were $82.9 million, compared to $87.4
million for the three months ended June 30, 1998. The decrease in
sales resulted principally from: (i) decreased sales in the
Chemical Business (excluding the Australian subsidiary) of
approximately $1.7 million resulting from reduced selling prices
for the Company's nitrogen based products, partially offset by
sales of nitric acid to Bayer Corporation as discussed elsewhere in
this report, (ii) decreased sales by the Automotive Business due to
customer mix in 1999 and certain bulk sales to an industrial user
and initial stocking order from a new retail chain store customer
in 1998, and (iii) decreased sales in the Industrial Products
Business resulting from the effects of the Company limiting the
product lines that it markets as well as diminished demand for the
products of the Business. Sales in the Climate Control Business
was approximately the same in both periods.
Gross Profit
___________
Gross profit, excluding the effect of the $1.6 million
inventory write-down discussed in Note 10 of Notes to Condensed
Financial Statements, would have been 21.2% for the second quarter
of 1999, compared to 23.3% for the comparable quarter of 1998. The
decrease in the gross profit percentage was primarily the result of
decreases in the Chemical and Automotive Businesses. The decrease
in the Chemical Business was the result of reduced selling prices
for the Company's nitrogen based products. The decrease in the
Automotive Business was primarily due to customer mix.
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative ("SG&A") expenses as a
percent of net sales from businesses continuing at June 30, 1999
were 18.3% in the three months ended June 30, 1999, compared to
17.5% for the three months ended June 30, 1998. The increase in
SG&A as a percent of sales principally resulted from sales
decreasing without a corresponding decrease in SG&A expense and
increased cost of the Company sponsored medical care programs for
its employees due to increased health care costs. SG&A expense
decreased approximately $.2 million while sales decreased $4.5
million.
27
<PAGE>
Interest Expense
________________
Interest expense for the Company was $4.6 million in the three
months ended June 30, 1999, compared to $4.0 million for the three
months ended June 30,1998. The increase of $.6 million primarily
resulted from increased borrowings.
Income (Loss) Before Taxes
__________________________
The Company had a loss before income taxes of $13.1 million
in the second quarter of 1999 compared to income before income
taxes of $1.4 million in the second quarter 1998. The decreased
profitability of $14.5 million was primarily due to an inventory
write-down of $1.6 million, the provision for losses of $7.5 million
on firm uncancelable purchase commitments , $2.0 million loss on the
sale of the Australian subsidiaries assets, and decreased gross profit
from sales in the Chemical and Automotive Businesses, as previously
discussed.
Liquidity and Capital Resources
_______________________________
Cash Flow From Operations
_________________________
Historically, the Company's primary cash needs have been for
operating expenses, working capital and capital expenditures. The
Company has financed its cash requirements primarily through
internally generated cash flow, borrowings under its revolving
credit facilities, and the issuance of senior unsecured notes by
its wholly owned subsidiary, ClimaChem, Inc., in November 1997.
Net cash used by operations for the six months ended June 30,
1999 was $.8 million, after $6.4 million for noncash depreciation
and amortization, $.7 million in provisions for possible losses on
accounts receivable, provision for loss on the disposition of the
Australian subsidiary of $2.0 million, inventory write-down for
$1.6 million, provision for losses on purchase commitments of $7.5
million and including the following changes in assets and
liabilities: (i) accounts receivable increases of $5.7 million; (ii)
inventory decreases of $5.4 million excluding the effect of the write-
down; (iii) increases in supplies and prepaid items of $2.8 million; and
(iv) decreases in accounts payable and accrued liabilities of $1.0
million. The increase in accounts receivable is primarily due to
increased sales and increased days of sales outstanding in the
Climate Control Business and seasonal sales of agricultural
products in the Chemical Business, offset by decreased sales in the
Industrial Products Business. The decrease in inventory was due
primarily to a decrease at the Automotive Products Business due to
liquidation of excessive inventories, including the sale of
approximately $1.6 million of current inventory in connection with
the sale of the business of a subsidiary, offset by increases in
the Climate Control Business in anticipation of higher sales volume
in the heat pump product lines and increases in the Chemical
Business due to reduced sales of the Australian subsidiary.
28
<PAGE>
Inventory in the Automotive and Industrial Products Businesses
decreased from $29.0 million at December 31, 1998, to $23.4 million
at June 30, 1999.
Cash Flow From Investing And Financing Activities
__________________________________________________
Cash used by investing activities for the six months ended
June 30, 1999 included $4.2 million in capital expenditures. The
capital expenditures were primarily for the benefit of the Chemical
and Climate Control Businesses to enhance production and product
delivery capabilities.
Net cash provided by financing activities included (i)
payments on long-term debt of $4.4 million, (ii) net increases in
revolving debt of 10.3 million, (iii) the issuance of a $2.6
million term note by the Automotive Business, (iv) decreases in
drafts payable of $.5 million, (v) dividends of $1.6 million, and
(vi) treasury stock purchases of $.2 million.
During the first six months of 1999, the Company declared and
paid the following aggregate dividends: (i) $12.00 per share on
each of the outstanding shares of its Series B 12% Cumulative
Convertible Preferred Stock; (ii) $1.625 per share on each
outstanding share of its $3.25 Convertible Exchangeable Class C
Preferred Stock, Series 2; and (iii) $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.
As of June 30, 1999, the Company and certain of its
subsidiaries, including ClimaChem and its subsidiaries were parties
to a working capital line of credit evidenced by two separate loan
agreements ("Revolving Credit Agreements") with an unrelated lender
("Lender") collateralized by receivables, inventory, and
proprietary rights of the Company and the subsidiaries that are
parties to the Revolving Credit Agreements and the stock of certain
of the subsidiaries that are borrowers under the Revolving Credit
Agreements. The Revolving Credit Agreements, as amended during the
quarter ended June 30, 1999, provide for revolving credit
facilities ("Revolver") for total direct borrowings up to $65.0
million, including the issuance of letters of credit. The Revolver
provides for advances at varying percentages of eligible inventory
and trade receivables. The Revolving Credit Agreements, as
amended, provide for interest at the lender's prime rate plus .5%
per annum or, at the Company's option, at the Lender's LIBOR rate
plus 2.875% per annum. At June 30, 1999, the effective interest
rate was 7.93%. The term of the Revolving Credit Agreements is
through December 31, 2000, and is renewable thereafter for
successive thirteen month terms. At June 30, 1999, the
availability for additional borrowings, based on eligible
collateral, approximated $16.4 million. Borrowings under the
29
<PAGE>
Revolver outstanding at June 30, 1999, were $25.7 million. The
Revolving Credit Agreements, as amended, requires the Company to
maintain certain financial ratios and contain other financial
covenants, including tangible net worth requirements and capital
expenditure limitations; however, with the refinancing of the
Automotive Products Business loan agreement as discussed below, the
Company's financial covenants are eliminated, so long as the
remaining borrowing group maintains a minimum aggregate
availability under the Revolving Credit Facility of $15.0 million.
Should the availability drop below $15 million for three
consecutive business days, the Company would be required to
maintain the financial ratios discussed above. The annual interest
on the outstanding debt under the Revolver at June 30, 1999 at the
rates then in effect would approximate $2.0 million. The Revolving
Credit Agreements also require the payment of an annual facility
fee of 0.5% of the unused revolver and restrict the flow of funds,
except under certain conditions, to subsidiaries of the Company
that are not parties to the Revolving Credit Agreements.
Under the Revolving Credit Agreements discussed above, the
Company and its subsidiaries, other than ClimaChem and its
subsidiaries, have the right to borrow on a revolving basis up to
$6 million, based on eligible collateral. At June 30, 1999, the
Company and its subsidiaries, except ClimaChem and its
subsidiaries, had borrowings under the Revolver approximately equal
to then eligible collateral ($2.3 million).
On May 7, 1999, the Company's Automotive Products Business
entered into a Loan and Security Agreement (the "Automotive Loan
Agreement") with an unrelated lender (the "Automotive Lender")
secured by substantially all assets of the Automotive Products
Business to refinance the Automotive Products Business' working
capital requirements that were previously financed under the
Revolver. The Company was required to provide the Automotive
Lender a $1.0 million standby letter of credit to further secure
the Automotive Loan Agreement. The Automotive Loan Agreement
provides a Revolving Loan Facility (the "Automotive Revolver"),
Letter of Credit Accommodations and a Term Loan (the "Automotive
Term Loan").
The Automotive Revolver provides for total direct borrowings
up to $16.0 million, including the issuance of letters of credit.
The Automotive Revolver provides for advances at varying
percentages of eligible inventory and trade receivables. The
Automotive Revolver provides for interest at the rate from time to
time publicly announced by First Union National Bank as its prime
rate plus one percent (1%) per annum or, at the Company's option,
on the Automotive Lender's LIBOR rate plus two and three-quarters
percent (2.75%) per annum. The Automotive Revolver also requires
the payment of a monthly servicing fee of $3,000 and a monthly
unused line fee equal to 0.5% of the unused credit facility. At
June 30, 1999, the effective interest rate was 8.75% excluding the
effect of the source fee and unused line fee (9.4% considering such
fees). The term of the Automotive Revolver is through May 7, 2001,
and is renewable thereafter for successive twelve-month terms. At
June 30, 1999, outstanding borrowings under the Automotive Revolver
30
<PAGE>
were $9.2 million; in addition, the Automotive Products Business
had $1.4 million, based on eligible collateral, available for
additional borrowing under the Automotive Revolver. As a result of
the terms and conditions of this facility, outstanding borrowings
at June 30, 1999, have been classified as long-term debt due within
one year.
The Automotive Loan Agreement restricts the flow of funds,
except under certain conditions, between the Automotive Products
Business and the Company and its subsidiaries.
The Automotive Term Loan is in the original principal amount
of $2,550,000. The Automotive Term Loan is evidenced by a term
promissory note (the "Term Promissory Note") and is secured by all
the same collateral as the Automotive Revolver. The interest rate
of the Automotive Term Loan is the same as the Automotive Revolver
discussed above. The terms of the Term Promissory Note require
sixty (60) consecutive monthly principal installments (or earlier
as provided in the Term Promissory note) of which the first thirty-
six (36) installments shall each be in the amount of $48,611, the
next twenty-two (22) installments shall each be in the amount of
$33,333.33, and the last installment shall be in the amount of the
entire unpaid principal balance. Interest payments are also
required monthly as calculated on the outstanding principal
balance. On May 10, 1999, the Automotive Revolver funded
approximately $9.3 million, and the Automotive Term Loan funded
$2,550,000, the aggregate total of approximately $11.9 million was
simultaneously transferred to the lender in payment of the
Automotive Products Business' balance under the Revolver.
The annual interest on the outstanding debt under the
Automotive revolver and Automotive term loan at June 30, 1999, at
the rates then in effect would approximate $1.1 million.
In addition to the credit facilities discussed above, as of
June 30, 1999, the Company's wholly owned subsidiary, DSN
Corporation ("DSN"), is a party to several loan agreements with a
financial company (the "Financing Company") for three projects. At
June 30, 1999, DSN had outstanding borrowings of $9.6 million under
these loans. The loans have repayment schedules of 84 consecutive
monthly installments of principal and interest through maturity in
2002. The interest rate on each of the loans is fixed and range
from 8.2% to 8.9%. Annual interest, for the three notes as a
whole, at June 30, 1999, at the agreed to interest rates would
approximate $.8 million. The loans are secured by the various DSN
property and equipment. The loan agreements require the Company to
maintain certain financial ratios, including tangible net worth
requirements. In April 1999, DSN obtained a waiver of the
covenants through June 2000.
As previously discussed, the Company is a holding company and,
accordingly, its ability to pay dividends on its outstanding Common
Stock and Preferred Stocks is dependent in large part on its
ability to obtain funds from its subsidiaries. The ability of the
Company's wholly owned subsidiary, ClimaChem (which owns all of the
stock of substantially all of the Company's subsidiaries comprising
31
<PAGE>
the Chemical Business and the Climate Control Business) and its
subsidiaries to transfer funds to the Company is restricted by
certain covenants contained in the Indenture to which they are
parties. Under the terms of the Indenture, ClimaChem and its
subsidiaries cannot transfer funds to the Company, except for (i)
the amount of income taxes that they would be required to pay if
they were not consolidated with the Company, (ii) an amount not to
exceed fifty percent (50%) of ClimaChem's consolidated 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 and ClimaChem's subsidiaries pursuant to a certain
services agreement and a certain management agreement to which the
companies are parties. During 1998 and the first six months of
1999, ClimaChem reported a consolidated net loss of approximately
$2.6 million and $8.6 million, respectively. Accordingly,
ClimaChem and its subsidiaries were unable to transfer funds to the
Company in 1998 and the first six months of 1999, except for
reimbursement of costs and expenses incurred by the Company on
their behalf or in connection with certain agreements.
Due to ClimaChem's net losses for the year 1998 and the
Company's (other than ClimaChem and its subsidiaries) limited
borrowing ability under the Revolver, management recommended to the
Board of Directors and such recommendation was approved, that the
Company discontinue payment of cash dividends on its Common Stock
for periods subsequent to January 1, 1999, until the Board of
Directors determines otherwise. In addition, as of the date of
this report, after consideration of the losses reported in the
accompanying Condensed Consolidated Statements of Operations for
the six months ended June 30, 1999, management has concluded that
the Company does not have adequate liquidity to pay the next
regular quarterly dividend of $.8125 per share on its outstanding
$3.25 Convertible Exchangeable Class C Preferred Stock Series 2 and
will recommend to the Board of Directors that such dividend not be
declared at this time.
Future cash requirements (other than cash dividends) include
working capital requirements for anticipated sales increases in the
Company's core Businesses and funding for future capital
expenditures. Funding for the higher accounts receivable and
higher inventory requirements resulting from anticipated sales
increases will be provided by cash flow generated by the Company
and the revolving credit facilities discussed elsewhere in this
report. Inventory reductions in the Industrial Products and
Automotive Products Businesses should generate cash to supplement
those Businesses' availability under their respective revolving
credit facilities. In addition, the Company is also considering the
sale of certain assets which it does not believe are critical to
its Chemical and Climate Control Businesses. In 1999, the Company
has planned capital expenditures of approximately $10 million,
primarily in the Chemical and Climate Control Businesses, a certain
amount of which it anticipates will be financed by equipment
finance contracts on a term basis and in a manner allowed under its
various loan agreements. Such capital expenditures include
approximately $1.5 million ($.6 million in the six months ended
June 30, 1999), which the Chemical Business anticipates spending
32
<PAGE>
related to environmental control facilities at its El Dorado
Facility, as previously discussed in this report. The Company
currently has no material commitments for capital expenditures.
As previously noted, the Company and its subsidiaries, other
than ClimaChem and subsidiaries of ClimaChem, are primarily
dependent upon their availability under the Revolver, and funds
available from ClimaChem, for their working capital. As described
above, both sources of working capital are limited. As a result,
management has discontinued the repurchase of the Company's stock
until such time as the liquidity and capital resources improves
and will recommend to the Board of Directors that the next regular
quarterly dividend on its preferred stock not be declared.
Management believes that with these actions, and the effect of
certain cost reductions being undertaken, that the Company will
have adequate cash flow to meet its presently anticipated working
capital and debt service requirements. The last sentence of this
paragraph is a forward-looking statement and is subject to the
"Special Note Regarding Forward-Looking Statements."
Subsequent to June 30, 1999, the Company announced it had
decided to discontinue the spin-off of the Automotive Business to
its shareholders. The decision was due primarily to the Automotive
Business' inability to raise additional equity capital as a stand
alone business. The Company has decided to aggressively pursue
consideration of a number of alternative approaches to separate the
Automotive Business from LSB.
During 1998 and pursuant to the Company's previously announced
repurchase plan, the Company purchased 909,300 shares of Common
Stock, for an aggregate purchase price of $3,567,026. From
January 1, 1999, through June 30, 1999, the Company has purchased
under its repurchase plan a total of 87,267 shares of Common Stock
for an aggregate amount of $230,233.
Foreign Subsidiary
__________________
As previously discussed in this report, on August 2, 1999, the
Company substantially completed an agreement to sell substantially
all of the assets of TES, effectively disposing of this portion of
the Chemical Business. Under the terms of the Indenture to which
ClimaChem is bound, the net cash proceeds from the sale of TES, are
required (i) within 270 days from the date of the sale to be
applied to the redemption of the notes issued under the Indenture
or to the repurchase of such notes, or (ii) within 240 days from
the date of such sale, the amount of the net cash proceeds be
invested in a related business of ClimaChem or the Australian
subsidiary or used to reduce indebtedness of ClimaChem. All of the
proceeds received by the Company, through the date of this report
(approximately US$3.5 million), have been applied to reduce the
indebtedness of ClimaChem. The Company expects that the remaining
net proceeds from the disposition of TES will be reinvested in
related businesses of ClimaChem or used to retire additional
indebtedness of ClimaChem.
33
<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, which expires June 15, 2005, 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 to $3.8 million. The $3.8 million loan, less a
$1.5 million valuation reserve, is carried on the books as a note
receivable in other assets. As of the date of this report, the
decision has not been made to exercise its option to acquire the
stock of the French manufacturer.
In 1995, a subsidiary of the Company invested approximately
$2.8 million to purchase a fifty percent (50%) equity interest in
an energy conservation joint venture (the "Project"). The Project
had been awarded a contract to retrofit residential housing units
at a US Army base which it completed during 1996. The completed
contract was for installation of energy-efficient equipment
(including air conditioning and heating equipment), which would
reduce utility consumption. For the installation and management,
the Project will receive an average of seventy-seven percent (77%)
of all energy and maintenance savings during the twenty (20) year
contract term. The Project spent approximately $17.5 million to
retrofit the residential housing units at the US Army base. The
Project received a 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 Company has decided not to exercise the Option and has allowed
the term of the Option to lapse. Through the date of this report
the Company has made option payments aggregating $1.3 million ($1.0
million of which is refundable) and has loaned the Optioned Company
approximately $1.4 million. The Company has recorded reserves of
$1.5 million against the loans and option payments. The loans and
option payments are secured by the stock and other collateral of
the Optioned Company.
Debt Guarantee
______________
At December 31, 1998, the Company and one of its subsidiaries
had outstanding guarantees of approximately $2.6 million of
indebtedness of a startup aviation company in exchange for an
ownership interest in the aviation company of approximately 45%.
34
<PAGE>
During the first quarter of 1999, the Company was called upon
to perform on both guarantees. The Company paid approximately
$500,000 to a lender and assumed an obligation for a $2.0 million
note, which is due in equal monthly principal payments, plus
interest, through August 2004, in satisfaction of the guarantees.
In connection with the demand on the Company to perform under its
guarantee, the Company and the other guarantors formed a new
company ("KAC") which acquired the assets of the aviation company
through foreclosure.
The Company and the other shareholders of KAC are attempting
to sell the assets acquired in foreclosure. Proceeds received by
the Company, if any, from the sale of KAC assets will be recognized
in the results of operations when and if realized.
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 $35 million at June 30,
1999. As of December 31, 1998, the Company had available regular
tax NOL carry-overs of approximately $63.8 million based on its
federal income tax returns as filed with the Internal Revenue
Service for taxable years through 1998. These NOL carry-overs will
expire beginning in the year 1999. 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 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 Issues
________________
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date
using "00" as the Year 1900 rather than the Year 2000. This could
result in a system failure or miscalculations causing disruptions
35
<PAGE>
of operations, including, among other things, a temporary inability
to process transactions, create invoices, or engage in similar
normal business activities.
Beginning in 1996, the Company undertook a project to enhance
certain of its Information Technology ("IT") systems and install
certain other technologically advanced communication systems to
provide extended functionality for operational purposes. A major
part of the Company's program was to implement a standardized IT
system purchased from a national software distributor at all of the
Company and subsidiary operations, and to install a Local Area
Network ("LAN"). The IT system and the LAN necessitated the
purchase of additional hardware, as well as software. The process
implemented by the Company to advance its systems to be more
"state-of-the-art" had an added benefit in that the software and
hardware changes necessary to achieve the Company's goals are Year
2000 compliant.
Starting in 1996 through June 30, 1999, the Company has
capitalized approximately $1.2 million in costs to accomplish its
enhancement program. The capitalized costs include $.4 million in
external programming costs, with the remainder representing
hardware and software purchases. The Company anticipates that the
remaining cost to complete this IT systems enhancement project will
be less than $50,000, 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 scheduling systems,
the Company is 100% complete on the assessment and remediation
phases. As of the date of this report, the Company has completed
its testing and has implemented its remediated systems for all of
its businesses. The assessments also indicated that limited
software and hardware (embedded chips) used in production and
manufacturing systems ("operating equipment") also are at limited
risk. The Company has completed its assessment and identified
remedial action which will be completed in the third quarter 1999.
In addition, the Company has completed its assessment of its
product line and determined that the products it has sold and will
continue to sell do not require remediation to be Year 2000
compliant. Accordingly, based on the Company's current assessment,
the Company does not believe that the Year 2000 presents a material
exposure as it relates to the Company's products.
The Company has queried its significant suppliers,
subcontractors, distributors and other third parties (external
agents). The Company does not have any direct system interfaces
with external agents. To date, the Company is not aware of any
external agent with a Year 2000 Issue that would materially impact
the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that
36
<PAGE>
external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-
compliance by external agents is not determinable at this time.
Management of the Company believes it has an effective program
in place to resolve the remaining aspects of the Year 2000 Issue
applicable to its businesses in a timely manner. If the Company
does not complete the remaining phases of its program, the Year
2000 Issue could have a negative impact on the operations of the
Company; however, management does not believe that, under the most
reasonably likely worst case scenario, such potential impact would
be material.
The Company is creating contingency plans for certain critical
applications. These contingency plans will involve, among other
actions, manual workarounds, increasing inventories, and adjusting
staffing strategies. In addition, disruptions in the economy
generally resulting from Year 2000 Issues could also materially
adversely affect the Company. See "Special Note Regarding Forward-
Looking Statements".
Contingencies
_____________
The Company has several contingencies that could impact its
liquidity in the event that the Company is unsuccessful in
defending against the claimants. Although management does not
anticipate that these claims will result in substantial adverse
impacts on its liquidity, it is not possible to determine the
outcome. The preceding sentence is a forward-looking statement
that involves a number of risks and uncertainties that could cause
actual results to differ materially, such as, among other factors,
the following: the EIL Insurance does not provide coverage to the
Company and the Chemical Business for any material claims made by
the claimants, the claimants alleged damages are not covered by the
EIL Policy which a court may find the Company and/or the Chemical
Business liable for, such as punitive damages or penalties, a court
finds the Company and/or the Chemical Business liable for damages
to such claimants for a material amount in excess of the limits of
coverage of the EIL Insurance or a court finds the Chemical
Business liable for a material amount of damages in the antitrust
lawsuits pending against the Chemical Business in a manner not
presently anticipated by the Company. See Note 5 of Notes to
Condensed Consolidated Financial Statements.
Quantitative and Qualitative Disclosures about Market Risk
__________________________________________________________
General
______
The Company's results of operations and operating cash flows
are impacted by changes in market interest rates and raw material
prices for products used in its manufacturing processes. The
Company also has a wholly owned subsidiary in Australia, for which
the Company has foreign currency translation exposure. The
derivative contracts used by the Company are entered into to hedge
37
<PAGE>
these risks and exposures and are not for trading purposes. All
information is presented in U. S. dollars. See Note 9 of Notes to
Consolidated Financial Statements for a discussion of the
Australian subsidiary in 1999.
Interest Rate Risk
__________________
The Company's interest rate risk exposure results from its
debt portfolio which is impacted by short-term rates, primarily
prime rate-based borrowings from commercial banks, and long-term
rates, primarily fixed-rate notes, some of which prohibit
prepayment or require substantial prepayment penalties.
Reference is made to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, for an expanded analysis of
expected maturities of long-term debt and its weighted average
interest rates and discussion related to raw material price risk.
As of June 30, 1999, the Company's variable rate and fixed
rate debt which aggregated $181.8 million exceeded the debt's fair
market value by approximately $5.3 million. The fair value of the
Company's Senior Notes was determined based on a market quotation
for such securities.
Foreign Currency Risk
_____________________
At June 30, 1999, the Company had a wholly owned subsidiary
located in Australia, for which the functional currency is the
local currency, the Australian dollar. Since the Australian
subsidiary accounts are converted into U.S. dollars upon
consolidation using the end of the period exchange rate, declines
in value of the Australian dollar to the U.S. dollar result in
translation loss to the Company. As a result of the commitment to
sell the Australian subsidiary, which was closed on August 2,
1999, the cumulative foreign currency translation loss of
approximately $1.1 million has been included in the loss on disposal
of the Australian subsidiary at June 30, 1999.
38
<PAGE>
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained within this report may be deemed
"Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements in
this report other than statements of historical fact are Forward-
Looking Statements that are subject to known and unknown risks,
uncertainties and other factors which could cause actual results
and performance of the Company to differ materially from such
statements. The words "believe", "expect", "anticipate", "intend",
"will", and similar expressions identify Forward-Looking
Statements. Forward-Looking Statements contained herein relate to,
among other things, (i) ability to improve operations and become
profitable on an annualized basis, (ii) establishing a position as
a market leader, (iii) payment of dividends on Preferred Stock, (iv)
the amount of the loss provision for anhydrous ammonia required to be
purchased, (v) declines in the price of anhydrous ammonia, (vi)
availability of net operating loss carry-overs, (vii) amount to be
spent in 1999 relating to compliance with federal, state and local
Environmental laws at the El Dorado Facility, (viii) Year 2000 issues,
(ix) improving liquidity and profits through liquidation of assets or
realignment of assets, (x) the Company's ability to develop or adopt
new and existing technologies in the conduct of its operations, (xi)
anticipated financial performance, (xii) ability to comply with the
Company's general working capital and debt service requirements,
(xiii) ability to be able to continue to borrow under the Company's
revolving line of credit, (xiv) sale of the Industrial Products
Business, (xv) adequate cash flows to meet its presently anticipated
capital requirements, and (xvi) ability of the EDNC Baytown
Plant to generate $35 to $40 million in annual gross revenues once
operational. While the Company believes the expectations reflected
in such Forward-Looking Statements are reasonable, it can give no
assurance such expectations will prove to have been correct. There
are a variety of factors which could cause future outcomes to
differ materially from those described in this report, including,
but not limited to, (i) decline in general economic conditions,
both domestic and foreign, (ii) material reduction in revenues,
(iii) material increase in interest rates; (iv) inability to
collect in a timely manner a material amount of receivables,
(v) increased competitive pressures, (vi) inability to meet the
"Year 2000" compliance of the computer system by the Company, its
key suppliers, customers, creditors, and financial service
organization, (vii) changes in federal, state and local laws and
regulations, especially environmental regulations, or in
interpretation of such, pending (viii) additional releases
(particularly air emissions into the environment), (ix) material
increases in equipment, maintenance, operating or labor costs not
presently anticipated by the Company, (x) the requirement to use
internally generated funds for purposes not presently anticipated,
(xi) ability to become profitable, or if unable to become
profitable, the inability to secure additional liquidity in the
form of additional equity or debt, (xii) the effect of additional
production capacity of anhydrous ammonia in the western hemisphere,
(xiii) the cost for the purchase of anhydrous ammonia increasing or
39
<PAGE>
the Company's inability to purchase anhydrous ammonia on favorable
terms when a current supply contract terminates, (xiv) changes in
competition, (xv) the loss of any significant customer, (xvi)
changes in operating strategy or development plans, (xvii)
inability to fund the working capital and expansion of the
Company's businesses, (xviii) adverse results in any of the
Company's pending litigation, (xix) inability to obtain necessary
raw materials, (xx) inability to recover the Company's investment
in the aviation company, (xxi) Bayer's inability or refusal to
purchase all of the Company's production at the new Baytown nitric
acid plant; (xxii) continuing decreases in the selling price for
the Chemical Business' nitrogen based end products, and (xxiii)
other factors described in "Management's Discussion and Analysis of
Financial Condition and Results of Operation" contained in this
report. Given these uncertainties, all parties are cautioned not
to place undue reliance on such Forward-Looking Statements. The
Company disclaims any obligation to update any such factors or to
publicly announce the result of any revisions to any of the
Forward-Looking Statements contained herein to reflect future
events or developments.
40
<PAGE>
<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 June 30, 1999,
and the related condensed consolidated statements of operations for
the six-month and three-month periods ended June 30, 1999 and 1998,
and the condensed consolidated statements of cash flows for the
six-month periods ended June 30, 1999 and 1998. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data, and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of
expressing an opinion regarding the financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of LSB
Industries, Inc. as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (not presented herein); and in
our report dated February 19, 1999, except for paragraphs (A) and
(C) of Note 5 and Note 14, as to which the date is April 14, 1999,
we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of
December 31, 1998, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
August 19, 1999
41
<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, 1998, which Item 3 is incorporated by reference
herein.
Item 2. Changes in Securities
______ _____________________
Not applicable.
Item 3. Defaults upon Senior Securities
______ _______________________________
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
______ ___________________________________________________
<TABLE>
<CAPTION>
At the Company's 1999 Annual Meeting of Shareholders held on
June 24, 1999, the following nominees to the Board of Directors
were elected as directors of the Company:
Number of
Shares Number of
"Against" and Abstentions
Number of to "Withhold and Broker
Name Shares "For" Authority" Non-Votes
____ ___________ ____________ _________
<S> <C> <C> <C>
Raymond B. Ackerman 9,724,111 1,652,357 0
Gerald G. Gagner 9,895,048 1,481,420 0
Bernard G. Ille 9,724,425 1,652,043 0
Donald W. Munson 9,724,411 1,652,057 0
Tony M. Shelby 9,894,144 1,481,524 0
</TABLE>
Messrs. Ackerman, Ille, Munson and Shelby had been serving on
the Board of Directors at the time of the Annual Meeting and were
reelected for a term of three (3) years. Mr. Gagner had been
serving as a director of the Company at the time of the Annual
Meeting and was elected for a term of one (1) year. The following
are the directors whose terms of office continued after such Annual
Meeting: Robert C. Brown, M.D., Charles H. Burtch, Horace G. Rhodes
and Jerome D. Shaffer, M.D.
42
<PAGE>
<TABLE>
<CAPTION>
At the Annual Meeting, Ernst & Young, LLP, Certified Public
Accountants, was appointed as independent auditors of the Company
for 1999, as follows:
Number of
Shares Number of
"Against" and Abstentions
Number of to "Withhold and Broker
Shares "For" Authority" Non-Votes
____________ ____________ __________
<S> <C> <C> <C>
10,819,787 547,402 9,279
</TABLE>
<TABLE>
<CAPTION>
At the Annual Meeting, the Company's 1998 Employee Stock
Option and Incentive Plan was approved as follows:
Number of
Shares Number of
"Against" and Abstentions
Number of to "Withhold and Broker
Shares "For" Authority" Non-Votes
___________ ____________ ___________
<S> <C> <C> <C>
6,209,998 1,916,119 3,250,351
</TABLE>
<TABLE>
<CAPTION>
At the Annual Meeting, the Company's Outside Directors Stock
Purchase Plan was approved, as follows:
Number of
Shares Number of
"Against" and Abstentions
Number of to "Withhold and Broker
Shares "For" Authority" Non-Votes
___________ ____________ __________
<S> <C> <C> <C>
6,364,697 1,763,541 3,248,230
</TABLE>
Item 5. Other Information
______ _________________
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
______ ________________________________
(A) Exhibits. The Company has included the following exhibits
in this report:
4.1 Sixth Amendment dated May 10, 1999, to Amended and
Restated Loan and Security Agreement between BankAmerica
Business Credit, Inc., and Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company and Slurry Explosive Corporation.
43
<PAGE>
4.2 Second Amended and Restated Loan and Security Agreement
dated May 10, 1999, by and between Bank of America National
Trust and Savings Association and LSB Industries, Inc.,
Summit Machine Tool Manufacturing Corp., and Morey Machinery
Manufacturing Corporation.
4.3 Loan and Security Agreement dated May 7, 1999, by and
between Congress Financial Corporation and L&S Automotive
Products Company.
10.1 LSB Industries, Inc. 1998 Stock Option and Incentive
Plan which the Company hereby incorporates by reference from
Exhibit "B" to the LSB Proxy Statement, dated May 24, 1999,
for Annual Meeting of Stockholders.
10.2 LSB Industries, Inc. Outside Directors Stock Option Plan
which the Company hereby incorporates by reference from
Exhibit "C" to the LSB Proxy Statement, dated May 24, 1999,
for Annual Meeting of Stockholders to be held June 24, 1999.
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 June 30, 1999.
SIGNATURES
__________
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has caused the undersigned, duly authorized, to
sign this report on its behalf on this 23rd day of August 1999.
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)
44
SIXTH AMENDMENT
TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS SIXTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT (the "Amendment") is dated as of May 10, 1999, and
entered into by and between BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION ("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, that certain
Third Amendment to Amended and Restated Loan and Security Agreement
dated as of August 14, 1998, that certain Fourth Amendment to
Amended and Restated Loan and Security Agreement dated as of
November 19, 1998, and that certain Fifth Amendment to Amended and
Restated Loan and Security Agreement dated as of April 8, 1999 (as
so amended, the "Agreement");
WHEREAS, LSB Industries, Inc. ("LSB") has refinanced its
automotive group of subsidiaries identified as L&S Bearing Co., an
Oklahoma corporation, L&S Automotive Products Co., a Delaware
corporation, LSB Extrusion Co., an Oklahoma corporation, Rotex
Corporation, an Oklahoma corporation, Tribonetics Corporation, an
Oklahoma corporation, and International Bearings, Inc., an Oklahoma
corporation (collectively, the "Automotive Group");
WHEREAS, the Automotive Group has entered into a financing
arrangement with Congress Financial Corporation ("Congress") for a
line of credit and term loan of up to $18,550,000 which funds were
used to pay off Lender's working capital loans to the Automotive
Group and, in addition, upon Borrower's request Lender has issued
a one-year letter of credit for the benefit of Congress with LSB as
"account debtor";
WHEREAS, Lender and each member of the Automotive Group have
executed mutual releases;
WHEREAS, the Borrower desires that the Lender amend the
Agreement in certain respects; and
WHEREAS, the Lender is willing to 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:
<PAGE>
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.
ARTICLE II
Amendments
Section 2.01 The following definitions are hereby amended in
their entirety to read as follows:
"LSB Borrower Subsidiaries" means LSB, Morey Machinery
Manufacturing
Corporation and Summit Machine Tool Manufacturing Corp.
"LSB Consolidated Borrowing Group" means the LSB Borrower
Subsidiaries and
the CCI Consolidated Borrowing Group.
"LSB-Related Loan Agreements" means the following loan
agreements: (i) this
Agreement; and (ii) the Second Amended and Restated Loan and Security
Agreement
dated of even date herewith between Lender and the LSB Borrower
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) (with
Availability calculated for this purpose without taking into account any
then outstanding
Overadvance Amount) on each such Business Day.
Section 2.02 The following new definition is hereby added to
the Agreement:
"Overadvance Amount" means the following amounts which
are taken into account in calculating Availability under the
other LSB-Related Loan Agreement: $500,000 before October 31,
1999; $333,334 between October 31, 1999 and November 29, 1999;
and $166,668 between November 30, 1999 and December 30, 1999.
ARTICLE III
Ratifications, Representations and Warranties
Section 3.01. 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
-2-
<PAGE>
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 IV
Conditions Precedent
Section 4.01. 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 March 31, 1999, 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.
-3-
<PAGE>
ARTICLE V
Miscellaneous
Section 5.01. 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 5.02. 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 5.03. 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 5.04. 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 5.05. 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 5.06. 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 5.07. 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,
-4-
<PAGE>
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 5.08. Headings. The headings, captions and
arrangements used in this Amendment are for convenience only and
shall not affect the interpretation of this Amendment.
Section 5.09. 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 5.10. 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 5.11. 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.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
on the date first above written.
"BORROWER":
CLIMATE MASTER, INC.
By:
___________________________________
Name:
_______________________________
Title:
_______________________________
INTERNATIONAL ENVIRONMENTAL CORPORATION
By:
____________________________________
Name:
__________________________________
Title:
_________________________________
EL DORADO CHEMICAL COMPANY
By:
___________________________________
Name:
__________________________________
Title:
__________________________________
SLURRY EXPLOSIVE CORPORATION
By:
____________________________________
Name:
__________________________________
Title:
___________________________________
"LENDER"
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:
______________________________________
Michael J. Jasaitis, Vice President
-6-
<PAGE>
<PAGE>
CONSENTS AND REAFFIRMATIONS
The undersigned hereby acknowledges the execution of, and
consents to, the terms and conditions of that certain Sixth
Amendment to Amended and Restated Loan and Security Agreement dated
as of May 10, 1999, between Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Corporation, Slurry
Explosive Corporation and Bank of America National Trust and
Savings Association ("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 May 10, 1999.
CLIMACHEM, INC.
By:
_________________________________
David Goss, Vice Chairman
-7-
<PAGE>
<PAGE>
CONSENTS AND REAFFIRMATIONS
Each of the undersigned hereby acknowledges the execution of,
and consents to, the terms and conditions of that certain Sixth
Amendment to Amended and Restated Loan and Security Agreement dated
as of May 10, 1999, between Climate Master, Inc., International
Environmental Corporation, El Dorado Chemical Corporation, Slurry
Explosive Corporation and Bank of America National Trust and
Savings Association ("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 May 10, 1999.
LSB INDUSTRIES, INC.
SUMMIT MACHINE TOOL MANUFACTURING
CORP
MOREY MACHINERY MANUFACTURING
CORPORATION
By:
_______________________________
Name:
_____________________________
Title:
____________________________
- 8 -
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
by and between
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
as Lender
and
LSB INDUSTRIES, INC.,
SUMMIT MACHINE TOOL MANUFACTURING CORP.,
and
MOREY MACHINERY MANUFACTURING CORPORATION
jointly and severally as Borrowers
Dated: May 10, 1999
<PAGE>
TABLE OF CONTENTS
SECTION
Table of Contents . . . . . . . . . . . . . . . . . . . .-i-
Preamble. . . . . . . . . . . . . . . . . . . . . . . . . .1
1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . .2
1.1 As used herein:. . . . . . . . . . . . . . . . . . . .2
Account. . . . . . . . . . . . . . . . . . . . . . . .2
Account Debtor . . . . . . . . . . . . . . . . . . . .2
Affiliate. . . . . . . . . . . . . . . . . . . . . . .2
Applicable Interest Rate . . . . . . . . . . . . . . .2
Acquisition. . . . . . . . . . . . . . . . . . . . . .2
Availability . . . . . . . . . . . . . . . . . . . . .2
Availability Reductions. . . . . . . . . . . . . . . .3
Bond Debt. . . . . . . . . . . . . . . . . . . . . . .3
Bond Indenture . . . . . . . . . . . . . . . . . . . .3
Borrower Subsidiaries. . . . . . . . . . . . . . . . .3
Business Day . . . . . . . . . . . . . . . . . . . . .3
Capital Expenditures . . . . . . . . . . . . . . . . .4
Capital Lease. . . . . . . . . . . . . . . . . . . . .4
CCI. . . . . . . . . . . . . . . . . . . . . . . . . .4
CCI Borrower Subsidiaries. . . . . . . . . . . . . . .4
CCI Consolidated Borrowing Group . . . . . . . . . . .4
CCI Consolidated Group . . . . . . . . . . . . . . . .4
CCI Guarantor Subsidiaries . . . . . . . . . . . . . .4
Code . . . . . . . . . . . . . . . . . . . . . . . . .4
Collateral . . . . . . . . . . . . . . . . . . . . . .4
Debt . . . . . . . . . . . . . . . . . . . . . . . . .4
Distribution . . . . . . . . . . . . . . . . . . . . .4
Dollars. . . . . . . . . . . . . . . . . . . . . . . .4
Early Termination Fee. . . . . . . . . . . . . . . . .5
EDC. . . . . . . . . . . . . . . . . . . . . . . . . .5
Eligible Accounts. . . . . . . . . . . . . . . . . . .5
Eligible Inventory . . . . . . . . . . . . . . . . . .7
Environmental Compliance Reserve . . . . . . . . . . .8
Environmental Laws . . . . . . . . . . . . . . . . . .8
Equipment. . . . . . . . . . . . . . . . . . . . . . .8
ERISA. . . . . . . . . . . . . . . . . . . . . . . . .8
Eurocurrency Liabilities . . . . . . . . . . . . . . .8
Eurodollar Business Day. . . . . . . . . . . . . . . .9
i
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Eurodollar Base Rate . . . . . . . . . . . . . . . . .9
Eurodollar Interest Payment Date . . . . . . . . . . .9
Eurodollar Interest Rate Determination Date. . . . . .9
Eurodollar Rate. . . . . . . . . . . . . . . . . . . .9
Eurodollar Rate Loan . . . . . . . . . . . . . . . . .9
Eurodollar Rate Reserve Percentage . . . . . . . . . .9
Event. . . . . . . . . . . . . . . . . . . . . . . . .9
Event of Default . . . . . . . . . . . . . . . . . . .9
Financial Statements . . . . . . . . . . . . . . . . 10
Fiscal Quarter . . . . . . . . . . . . . . . . . . . 10
Fiscal Year. . . . . . . . . . . . . . . . . . . . . 10
GAAP . . . . . . . . . . . . . . . . . . . . . . . . 10
Gross Availability Reductions. . . . . . . . . . . . 10
Gross LSB Accounts Availability. . . . . . . . . . . 10
Guaranty . . . . . . . . . . . . . . . . . . . . . . 10
Intercompany Accounts. . . . . . . . . . . . . . . . 10
Interest Period. . . . . . . . . . . . . . . . . . . 10
Inventory. . . . . . . . . . . . . . . . . . . . . . 10
IRS. . . . . . . . . . . . . . . . . . . . . . . . . 11
Latest Forecasts . . . . . . . . . . . . . . . . . . 11
Letter of Credit . . . . . . . . . . . . . . . . . . 11
Letter of Credit Agreement . . . . . . . . . . . . . 11
Letter of Credit Fee . . . . . . . . . . . . . . . . 11
Lien . . . . . . . . . . . . . . . . . . . . . . . . 11
Loans. . . . . . . . . . . . . . . . . . . . . . . . 11
Loan Documents . . . . . . . . . . . . . . . . . . . 11
LSB. . . . . . . . . . . . . . . . . . . . . . . . . 11
LSB Adjusted Tangible Assets . . . . . . . . . . . . 11
LSB Adjusted Tangible Net Worth. . . . . . . . . . . 11
LSB Borrower Subsidiaries. . . . . . . . . . . . . . 12
LSB Consolidated Borrowing Group . . . . . . . . . . 12
LSB-Related Loan Agreements. . . . . . . . . . . . . 12
Maximum Inventory Advance Amount . . . . . . . . . . 12
Maximum Revolving Credit Line. . . . . . . . . . . . 12
Morey. . . . . . . . . . . . . . . . . . . . . . . . 12
Multi-employer Plan. . . . . . . . . . . . . . . . . 12
Obligations. . . . . . . . . . . . . . . . . . . . . 12
Offering Memorandum. . . . . . . . . . . . . . . . . 13
Overadvance Amount . . . . . . . . . . . . . . . . . 13
Overadvance Facility . . . . . . . . . . . . . . . . 13
Overadvance Facility Termination Date. . . . . . . . 13
Participating Lender . . . . . . . . . . . . . . . . 13
Patent and Trademark Assignments . . . . . . . . . . 13
Payment Account. . . . . . . . . . . . . . . . . . . 13
PBGC . . . . . . . . . . . . . . . . . . . . . . . . 13
ii
<PAGE>
Pension Plan . . . . . . . . . . . . . . . . . . . . 13
Permitted Debt . . . . . . . . . . . . . . . . . . . 14
Permitted Liens. . . . . . . . . . . . . . . . . . . 14
Person . . . . . . . . . . . . . . . . . . . . . . . 15
Plan . . . . . . . . . . . . . . . . . . . . . . . . 15
Proceeds . . . . . . . . . . . . . . . . . . . . . . 15
Property . . . . . . . . . . . . . . . . . . . . . . 15
Proprietary Rights . . . . . . . . . . . . . . . . . 15
Public Authority . . . . . . . . . . . . . . . . . . 16
Real Property. . . . . . . . . . . . . . . . . . . . 16
Receivables. . . . . . . . . . . . . . . . . . . . . 16
Reference Rate . . . . . . . . . . . . . . . . . . . 16
Reference Rate Loan. . . . . . . . . . . . . . . . . 16
Reference Rate Margin. . . . . . . . . . . . . . . . 16
Related Company. . . . . . . . . . . . . . . . . . . 16
Reportable Event . . . . . . . . . . . . . . . . . . 16
Restricted Investment. . . . . . . . . . . . . . . . 17
Reversions . . . . . . . . . . . . . . . . . . . . . 17
Revolving Loans. . . . . . . . . . . . . . . . . . . 17
SBL Debt . . . . . . . . . . . . . . . . . . . . . . 17
Security Interest. . . . . . . . . . . . . . . . . . 17
Springing Covenant Event . . . . . . . . . . . . . . 17
Subordinated Debt. . . . . . . . . . . . . . . . . . 17
Subsidiary" or "Subsidiaries . . . . . . . . . . . . 17
Summit Adjusted Tangible Assets. . . . . . . . . . . 17
Summit Adjusted Tangible Net Worth . . . . . . . . . 18
Swap Transaction Reserves. . . . . . . . . . . . . . 18
Swap Transactions. . . . . . . . . . . . . . . . . . 18
Termination Event. . . . . . . . . . . . . . . . . . 18
UCC. . . . . . . . . . . . . . . . . . . . . . . . . 18
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . 18
1.3 Other Terms. . . . . . . . . . . . . . . . . . . . . 18
1.4 Exhibits . . . . . . . . . . . . . . . . . . . . . . 19
2. LOANS AND LETTERS OF CREDIT . . . . . . . . . . . . . . . 19
2.1 Revolving Loans. . . . . . . . . . . . . . . . . . . 19
2.2 Availability Determination . . . . . . . . . . . . . 19
2.3 Letters of Credit. . . . . . . . . . . . . . . . . . 19
2.4 Swap Transactions. . . . . . . . . . . . . . . . . . 20
2.5 Overadvance Facility. . . . . . . . . . . . . . . . . 20
3. INTEREST AND OTHER CHARGES. . . . . . . . . . . . . . . . 20
3.1 Interest . . . . . . . . . . . . . . . . . . . . . . 20
3.2 Eurodollar Borrowings: Conversion or Continuation. . 21
3.3 Special Provisions Governing Eurodollar Rate Loans . 22
iii
3.4 Maximum Interest Rate. . . . . . . . . . . . . . . . 26
3.5 Capital Adequacy . . . . . . . . . . . . . . . . . . 27
4. PAYMENTS AND PREPAYMENTS. . . . . . . . . . . . . . . . . 27
4.1 Revolving Loans. . . . . . . . . . . . . . . . . . . 27
4.2 Place and Form of Payments: Extension of Time. . . . 28
4.3 Apportionment, Application and Reversal of Payments. 28
4.4 INDEMNITY FOR RETURNED PAYMENTS. . . . . . . . . . . 28
5. LENDER'S BOOKS AND RECORDS: MONTHLY STATEMENTS . . . . . 29
6. COLLATERAL. . . . . . . . . . . . . . . . . . . . . . . . 29
6.1 Grant of Security Interest . . . . . . . . . . . . . 29
6.2 Perfection and Protection of Security Interest . . . 29
6.3 Location of Collateral . . . . . . . . . . . . . . . 30
6.4 Title to, Liens on, and Sale and Use of Collateral . 31
6.5 Appraisals . . . . . . . . . . . . . . . . . . . . . 31
6.6 Access and Examination . . . . . . . . . . . . . . . 31
6.7 Insurance. . . . . . . . . . . . . . . . . . . . . . 31
6.8 Collateral Reporting . . . . . . . . . . . . . . . . 32
6.9 Accounts . . . . . . . . . . . . . . . . . . . . . . 32
6.10 Collection of Accounts . . . . . . . . . . . . . . . 33
6.11 Inventory. . . . . . . . . . . . . . . . . . . . . . 34
6.12 Documents and Instruments. . . . . . . . . . . . . . 34
6.13 Right to Cure. . . . . . . . . . . . . . . . . . . . 35
6.14 Power of Attorney. . . . . . . . . . . . . . . . . . 35
6.15 Lender's Rights, Duties, and Liabilities . . . . . . 35
6.16 Release of Collateral and Borrower . . . . . . . . . 36
7. BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES . . . . 36
7.1 Books and Records. . . . . . . . . . . . . . . . . . 36
7.2 Financial Information. . . . . . . . . . . . . . . . 36
7.3 Notices to Lender. . . . . . . . . . . . . . . . . . 38
8. GENERAL WARRANTIES AND REPRESENTATIONS. . . . . . . . . . 39
8.1 Authorization, Validity, and Enforceability of this
Agreement and the Loan Documents . . . . . . . . . . 40
8.2 Validity and Priority of Security Interest . . . . . 40
8.3 Organization and Qualification . . . . . . . . . . . 40
8.4 Corporate Name; Prior Transactions . . . . . . . . . 40
8.5 Subsidiaries and Affiliates. . . . . . . . . . . . . 40
8.6 Financial Statements and Projections . . . . . . . . 41
8.7 Capitalization . . . . . . . . . . . . . . . . . . . 41
8.8 Solvency . . . . . . . . . . . . . . . . . . . . . . 41
8.9 Title to Property. . . . . . . . . . . . . . . . . . 41
iv
<PAGE>
8.10 Real Property; Leases. . . . . . . . . . . . . . . . 41
8.11 Proprietary Rights . . . . . . . . . . . . . . . . . 42
8.12 Trade Names and Terms of Sale. . . . . . . . . . . . 42
8.13 Litigation . . . . . . . . . . . . . . . . . . . . . 42
8.14 Labor Disputes . . . . . . . . . . . . . . . . . . . 42
8.15 Environmental Laws . . . . . . . . . . . . . . . . . 42
8.16 No Violation of Law. . . . . . . . . . . . . . . . . 43
8.17 No Default . . . . . . . . . . . . . . . . . . . . . 44
8.18 Plans. . . . . . . . . . . . . . . . . . . . . . . . 44
8.19 Taxes. . . . . . . . . . . . . . . . . . . . . . . . 44
8.20 Use of Proceeds. . . . . . . . . . . . . . . . . . . 44
8.21 Private Offerings. . . . . . . . . . . . . . . . . . 45
8.22 Broker's Fees. . . . . . . . . . . . . . . . . . . . 45
8.23 No Material Adverse Change . . . . . . . . . . . . . 45
8.24 Debt . . . . . . . . . . . . . . . . . . . . . . . . 45
9. AFFIRMATIVE AND NEGATIVE COVENANTS. . . . . . . . . . . . 45
9.1 Taxes and Other Obligations. . . . . . . . . . . . . 45
9.2 Corporate Existence and Good Standing. . . . . . . . 45
9.3 Maintenance of Property and Insurance. . . . . . . . 46
9.4 Environmental Laws . . . . . . . . . . . . . . . . . 46
9.5 Mergers, Consolidations, Acquisitions, or Sales. . . 46
9.6 Guaranties . . . . . . . . . . . . . . . . . . . . . 46
9.7 Debt . . . . . . . . . . . . . . . . . . . . . . . . 47
9.8 Prepayment . . . . . . . . . . . . . . . . . . . . . 47
9.9 Transactions with Affiliates . . . . . . . . . . . . 47
9.10 Plans and Compensation . . . . . . . . . . . . . . . 47
9.11 Reserved . . . . . . . . . . . . . . . . . . . . . . 47
9.12 Liens. . . . . . . . . . . . . . . . . . . . . . . . 47
9.13 New Subsidiaries . . . . . . . . . . . . . . . . . . 47
9.14 Distributions and Restricted Investments . . . . . . 47
9.15 Capital Expenditures . . . . . . . . . . . . . . . . 48
9.16 LSB Adjusted Tangible Net Worth. . . . . . . . . . . 48
9.17 LSB Debt Ratio . . . . . . . . . . . . . . . . . . . 49
9.18 Summit Adjusted Tangible Net Worth . . . . . . . . . 49
9.19 Summit Debt Ratio. . . . . . . . . . . . . . . . . . 49
9.20 Further Assurances . . . . . . . . . . . . . . . . . 50
10. CONDITIONS PRECEDENT TO EACH LOAN . . . . . . . . . . . . 50
11. DEFAULT; REMEDIES . . . . . . . . . . . . . . . . . . . . 50
11.1 Events of Default. . . . . . . . . . . . . . . . . . 50
11.2 Remedies . . . . . . . . . . . . . . . . . . . . . . 52
12. TERM AND TERMINATION. . . . . . . . . . . . . . . . . . . 54
v
<PAGE>
13. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 54
13.1 Cumulative Remedies; No Prior Recourse to Collateral 54
13.2 No Implied Waivers . . . . . . . . . . . . . . . . . 54
13.3 Severability . . . . . . . . . . . . . . . . . . . . 55
13.4 Governing Law. . . . . . . . . . . . . . . . . . . . 55
13.5 Consent to Jurisdiction and Venue; Service of Process55
13.6 Survival of Representations and Warranties . . . . . 55
13.7 Indemnification. . . . . . . . . . . . . . . . . . . 55
13.8 Other Security and Guaranties. . . . . . . . . . . . 56
13.9 Fees and Expenses. . . . . . . . . . . . . . . . . . 56
13.10 Notices . . . . . . . . . . . . . . . . . . . . 57
13.11 Waiver of Notices . . . . . . . . . . . . . . . 58
13.12 Binding Effect; Assignment; Disclosure. . . . . 58
13.13 Modification. . . . . . . . . . . . . . . . . . 59
13.14 Counterparts. . . . . . . . . . . . . . . . . . 59
13.15 Captions. . . . . . . . . . . . . . . . . . . . 59
13.16 Right of Set-Off. . . . . . . . . . . . . . . . 59
13.17 Participating Lender's Security Interests . . . 59
13.18 WAIVER OF JURY TRIAL. . . . . . . . . . . . . . 59
13.19 AMENDMENT AND RESTATEMENT; LIMITATIONS OF
SUBSIDIARY LIABILITY; WAIVERS OF CLAIMS . . . . 60
13.20 CROSS-COLLATERALIZATION AND CROSS-GUARANTIES. . 60
vi
<PAGE>
<PAGE>
SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
This SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
is dated May 10, 1999, and is entered into by and between BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (successor-in-
interest to BankAmerica Business Credit, Inc.), a Delaware
corporation, with offices at 55 South Lake Avenue, Suite 900,
Pasadena, California 91101 (the "Lender"), and LSB INDUSTRIES, INC.
("LSB"), a Delaware corporation, SUMMIT MACHINE TOOL MANUFACTURING
CORP. ("Summit"), an Oklahoma corporation, MOREY MACHINERY
MANUFACTURING CORPORATION ("Morey"), an Oklahoma corporation, each
with offices at 16 South Pennsylvania, Oklahoma City, Oklahoma
73107 (each individually a "Borrower" and collectively the
"Borrowers").
W I T N E S S E T H
WHEREAS, Lender, LSB and Morey, in addition to other related
parties, entered into a Loan and Security Agreement dated December
12, 1994 (which as thereafter amended from time to time is referred
to as the "Original LSB Loan Agreement"); and
WHEREAS, Lender and Summit entered into a Loan and Security
Agreement dated December 12, 1994 (which as thereafter amended from
time to time is referred to as the "Original Summit Loan
Agreement"); and
WHEREAS, on November 21, 1997 the parties to the Original LSB
Loan Agreement entered into an Amended and Restated Loan and
Security Agreement (which as thereafter amended from time to time
is referred to as the "First Amended LSB Loan Agreement"); and
WHEREAS, on November 21, 1997 the parties to the Original
Summit Loan Agreement entered into an Amended and Restated Loan and
Security Agreement (which as thereafter amended from time to time
is referred to as the "First Amended Summit Loan Agreement"); and
WHEREAS, on May 10, 1999 LSB obtained alternative financing
for several of its subsidiaries, including several parties to the
First Amended LSB Loan Agreement, and L&S Bearing Co. which was
party to a separate but related Amended and Restated Loan and
Security Agreement with Lender; and
WHEREAS, on November 21, 1997 Lender entered into a related
amended and restated loan transaction with Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company, and Slurry Explosive Corporation (collectively, the "CCI
Borrower Subsidiaries", which, along with Borrowers and certain
Subsidiaries of the CCI Borrower Subsidiaries, are referred to as
the "LSB Consolidated Borrowing Group"); and
WHEREAS, Lender and the Borrowers have agreed to consolidate
the First Amended LSB Loan Agreement and the First Amended Summit
Loan Agreement into a single loan agreement, the "Second Amended
and Restated Loan and Security Agreement"; and
1
<PAGE>
WHEREAS, the aggregate amount of all loans and letters of
credit to be made by Lender to the LSB Consolidated Borrowing Group
will not exceed Sixty-Five Million and No/100 Dollars ($65,000,000)
in the aggregate at any time outstanding;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth in this Agreement, and for good and valuable
consideration, the receipt of which is hereby acknowledged, the
Borrowers and the Lender hereby agree as follows:
1. DEFINITIONS.
1.1 As used herein:
"Account" means each Borrower's right to payment for a
sale or lease and delivery of goods or rendition of services.
"Account Debtor" means each Person obligated to a
Borrower on an Account.
"Affiliate" means: a Person who, directly or indirectly,
controls, is controlled by or is under common control with
LSB, which includes the LSB Consolidated Borrowing Group. The
term "control" (including the terms "controlled by" and "under
common control with") means the possession, directly or
indirectly, of the power to direct or cause the direction of
the management and policies of the Person in question.
"Applicable Interest Rate" has the meaning given to such
term in Section 3.1(a).
"Acquisition" means the investment in or purchase of a
corporation, association, business, entity, partnership or limited
liability company by Borrower by means of the purchase of stock,
assets, memberships, partnership interests or otherwise.
"Availability" means at any time the lesser of:
A. The Maximum Revolving Credit Line; or
B. The lesser of $6,000,000 less the Availability
Reductions; or
C. The sum of:
(1) eighty percent (80%) of the Eligible Accounts
("Accounts Availability"), plus
(2) the lesser of (a) the Maximum Inventory
Advance Amount or (b) the sum of (i) sixty
percent (60%) of the value of Eligible
Inventory other than vertical boring machines
("VBM's") and machine tools acquired in trade
in connection with the sale of other Inventory
("Trade-in-Inventory"), plus (ii) twenty-five
percent (25%) of the value of Eligible
2
<PAGE>
Inventory consisting of VBM's, plus (iii)
twenty-five percent (25%) of the value of
Eligible Inventory consisting of Trade-in-
Inventory; provided, however, that advances
against the Trade-in-Inventory shall not
exceed $500,000 in the aggregate at any one
time; plus
(3) until the Overadvance Facility Termination
Date, the Overadvance Amount; less
(4) the Availability Reductions.
"Availability Reductions" means the sum of the following
amounts:
(i) the unpaid balance of outstanding Revolving
Loans at such time;
(ii) one hundred percent (100%) of the aggregate
undrawn face amount of all outstanding Letters of Credit
at such time which the Lender has, or has caused to be,
issued or obtained for the account of any Borrower;
(iii) reserves for accrued interest on the
Revolving Loans which is past due;
(iv) the Environmental Compliance Reserve; and
(v) all other reasonable reserves which the Lender
in its reasonable discretion deems necessary or desirable
to maintain with respect to any Borrower's account,
including, without limitation, any amounts which the
Lender could reasonably be obligated to pay within a six-
month period for the account of any Borrower.
"Bond Debt" means Debt owed by any member of the CCI
Consolidated
Group on Senior Notes due 2007 (the "Notes") in the principal amount not
to exceed $125,000,000 issued pursuant to the Bond Indenture.
"Bond Indenture" means that certain Indenture dated as of
November 26, 1997 by and among CCI and other members of the CCI
Consolidated Group and Bank One, NA relating to the Bond Debt.
"Borrower Subsidiaries" means LSB, Morey, Summit Machine Tool
Manufacturing Corp., El Dorado Chemical Company, Slurry Explosive
Corporation, Climate Master, Inc., and International
Environmental Corporation.
"Business Day" means any day that is not a Saturday,
Sunday, or day on which banks in Los Angeles, California are
required or permitted to close.
3
<PAGE>
"Capital Expenditures" means all costs incurred, whether
payable in the Fiscal Year incurred or thereafter, (including
financing costs required to be capitalized under GAAP) for
purchases made during a Fiscal Year for any fixed asset or
improvement, or replacement, substitution, or addition
thereto, which has a useful life of more than one year,
including, without limitation, those costs arising in
connection with the direct or indirect acquisition of such
assets by way of increased product or service charges or
offset items or in connection with Capital Leases.
"Capital Lease" means any lease of Property that, in
accordance with GAAP, should be reflected as a liability on a
Person's balance sheet.
"CCI" means ClimaChem, Inc., an Oklahoma corporation, and
a wholly-owned Subsidiary of LSB.
"CCI Borrower Subsidiaries" means Climate Master, Inc.,
International Environmental Corporation, El Dorado Chemical
Company, and Slurry Explosive Corporation.
"CCI Consolidated Borrowing Group" means the CCI Borrower
Subsidiaries and the CCI Guarantor Subsidiaries.
"CCI Consolidated Group" means CCI and all of its Subsidiaries,
including the CCI Borrower Subsidiaries and the CCI Guarantor
Subsidiaries.
"CCI Guarantor Subsidiaries" means Climate Mate, Inc., LSB
Chemical Corp., Universal Tech Corporation, The Environmental Group,
Inc.,
CHP Corporation, Koax Corp. and APR Corporation.
"Closing Date" means November 21, 1997.
"Code" means the Internal Revenue Code of 1986, as
amended.
"Collateral" has the meaning given to such term in
Section 6.1.
"Debt" means all liabilities, obligations and
indebtedness of any Borrower to any Person, of any kind or
nature, now or hereafter owing, arising, due or payable,
howsoever evidenced, created, incurred, acquired or owing, as
would be shown on the balance sheet of such Borrower prepared
in accordance with GAAP.
"Distribution" means, in respect of any corporation: (a)
the payment or making of any dividend or other distribution of
Property in respect of capital stock of such corporation,
other than distributions in capital stock; and (b) the
redemption or other acquisition of any capital stock of such
corporation
"Dollars" and "$" means lawful money of the United States
of America.
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"Early Termination Fee" means a single fee of $500,000
which shall be jointly and severally due and owing from the
LSB Consolidated Borrowing Group if, prior to December 31,
2000, any of the LSB-Related Loan Agreements are terminated
other than in accordance with their terms.
"EDC" means El Dorado Chemical Company, a CCI Borrower
Subsidiary.
"Eligible Accounts" means all Accounts of any Borrower
which are not ineligible. Accounts shall be ineligible as the
basis for Revolving Loans based on the following criteria.
Eligible Accounts shall not include any Account:
(i) where such Account is "Past Due". For the
purposes of this provision, "Past Due" means: (a) where
the Account has terms of payment of less than ninety-one
(91) days from the invoice date, the payment thereof is
more than 90 days past due; and (b) where the Account has
terms of payment of ninety-one to three hundred sixty (91
to 360) days from the invoice date, the payment thereof
is more than 30 days past due;
(ii) where, with respect to such Account, any of the
representations, warranties, covenants and agreements
contained in Sections 6.9 and 8.2 of this Agreement are
not or have ceased to be complete and correct or have
been breached;
(iii) where such Account represents a progress
billing or as to which the Borrower has extended the time
for payment after issuance of the invoice relating to
such Account. For the purpose hereof, "progress billing"
means any invoice for goods sold or leased or services
rendered under a contract or agreement pursuant to which
the Account Debtor's obligation to pay such invoice is
expressly conditioned upon the completion by Borrower of
any further performance under the contract or agreement,
provided, however, that performance required under a
warranty claim or provision shall not make such Account
a "progress billing";
(iv) where Borrower has become aware that any one or
more of the following events has occurred with respect to
an Account Debtor on such Account: death or judicial
declaration of incompetency of an Account Debtor who is
an individual; the filing by or against the Account
Debtor of a request or petition for liquidation,
reorganization, arrangement, adjustment of debts,
adjudication as a bankrupt, winding-up, or other relief
under the bankruptcy, insolvency, or similar laws of the
United States, any state or territory thereof, or any
foreign jurisdiction, now or hereafter in effect; the
making of any general assignment by the Account Debtor
for the benefit of creditors; the appointment of a
receiver or trustee for the Account Debtor or for any of
the assets of the Account Debtor; the institution by or
against the Account Debtor of any other type of
insolvency proceeding (under the bankruptcy laws of the
United States or otherwise) or of any formal or informal
proceeding for the dissolution or liquidation of, or
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<PAGE>
winding up of affairs of, the Account Debtor; the sale,
assignment, or transfer of all or any material part of
the assets of the Account Debtor; or the cessation of the
business of the Account Debtor as a going concern;
(v) where an Account is not a valid, legally
enforceable obligation of the Account Debtor thereunder
or is subject to offset, counterclaim or other defenses
on the part of such Account Debtor denying liability
thereunder in whole or in part;
(vi) where the Borrower does not have good and
marketable title to such Account, free and clear of all
Liens, other than Liens arising under this Agreement and
the documents delivered in connection herewith;
(vii) which is owed by an Account Debtor which:
(i) does not maintain its chief executive office in the
United States or territory thereof or Canada; or (ii) is
not organized under the laws of the United States or any
state or territory thereof or Canada; or (iii) is the
government of any foreign country or any state, province,
municipality or other political subdivision thereof (all
of the foregoing being referred to as "Foreign
Accounts"); except that, to the extent that such Foreign
Accounts are secured or payable by letters of credit or
bank guarantees reasonably acceptable to Lender, such
Foreign Accounts shall be considered Eligible Accounts.
Notwithstanding the foregoing, Lender has agreed that
Foreign Accounts, if they otherwise meet all eligibility
requirements, will be Eligible Accounts even though such
Foreign Accounts are not secured or payable by letters of
credit or bank guaranties reasonably acceptable to Lender
up to an amount not to exceed at any one time more than
five percent (5%) of the Gross LSB Accounts Availability
(without taking into account such Foreign Accounts);
(viii) which is owed by an Account Debtor which
is an Affiliate;
(ix) which is owed by the government of the United
States of America, or any department, agency, or other
instrumentality thereof, unless the Federal Assignment of
Claims Act of 1940, as amended, or any other steps
necessary to perfect the Lender's Security Interest
therein, have been complied with to the Lender's
reasonable satisfaction with respect to such Account;
(x) which is owed by any state or municipality, or
any department, agency, or other instrumentality thereof,
and as to which the Lender's Security Interest therein is
not or cannot be perfected;
(xi) which arises out of a sale to an Account Debtor
on a bill and hold, guaranteed sale, sale or return, sale
on approval, consignment, or other repurchase or return
basis;
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<PAGE>
(xii) which is evidenced by a promissory note or
other instrument (unless such note or instrument is part
of chattel paper in which Lender has a first priority
perfected Security Interest) or by chattel paper (unless
Lender has a first priority perfected Security Interest
therein);
(xiii) where the goods giving rise to such
Account have not been shipped and delivered to and
accepted by the Account Debtor (provided, however, that
where the Account Debtor has agreed in writing to accept
billings for such goods, with a copy of such writing
being provided to Lender, then such Account shall be an
Eligible Account if it otherwise qualifies) or the
services giving rise to such Account have not been
performed by the Borrower and accepted by the Account
Debtor;
(xiv) if Lender believes in its reasonable
credit judgment that the prospect of collection of such
Account is impaired;
(xv) which Account is owing from an Account Debtor
in which fifty percent (50%) or more of the Accounts
owing from whom are Past Due as set forth in subsection
(i) of this definition of Eligible Accounts;
(xvi) as to which either the perfection,
enforceability, or validity of the Security Interest in
such Account, or the Lender's right or ability to obtain
direct payment to the Lender of the Proceeds of such
Account, is governed by any federal, state, or local
statutory requirements other than those of the UCC; or
(xvii) with respect to which the Account Debtor
is located in any state requiring the filing of a
Business Activities Report or similar document in order
to permit the Borrower to seek judicial enforcement in
such state of payment of such Account, unless Borrower
has qualified to do business in such state, or has filed
a Notice of Business Activities Report or equivalent
report with the applicable state office for the then
current year.
"Eligible Inventory" means Inventory of any Borrower
valued at the lower of cost or market on a "first in-first
out" ("FIFO") basis that constitutes (i) raw materials
(including raw materials stored or held by any Borrower in the
work-in-progress area and fifty percent (50%) of Inventory
classified as components) and (ii) first quality finished
goods and that (a) is not obsolete or unmerchantable, (b) upon
which the Lender has a first priority perfected Security
Interest, and (c) the Lender otherwise deems eligible as the
basis for Revolving Loans based on such other credit and
collateral considerations as the Lender may from time to time
establish in its reasonable discretion. Without intending to
limit the Lender's discretion to establish other reasonable
criteria of eligibility, no work-in-progress, service or spare
parts, packaging, used parts, shipping materials, supplies,
containers, defective Inventory, Inventory consisting of
machines being rebuilt, Inventory acquired in trade in
connection with the sale of other Inventory, slow-moving
Inventory, Inventory in transit (except for Inventory in
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<PAGE>
transit owned by Borrower, covered by insurance, and in which
Lender has a Security Interest), fifty percent (50%) of
Inventory classified as components, or Inventory delivered to
Borrower on consignment shall constitute Eligible Inventory.
Eligible Inventory shall not include Inventory stored at
locations other than those locations either owned by the
Borrower or locations for which a landlord's waiver acceptable
to Lender or a consignment agreement (with appropriate UCC
filings) has been signed by the owner of such location and
delivered to Lender. In addition, the amount of all finished
goods reserves (excluding reserves for "last-in-first-out"
valuation) shown on the books of Borrowers shall be deducted
from the value of the Eligible Inventory as used in computing
Availability, except to the extent that any such reserve has
already been taken into account in connection with any of the
above criteria.
"Environmental Compliance Reserve" means all reserves
which the Lender from time to time establishes for amounts
that are liabilities required to be paid by any Borrower
within 180 days in order to correct any violation by the
Borrower or the operations or Property of Borrower with
respect to Environmental Laws.
"Environmental Laws" means all federal, state and local
laws, rules, regulations, ordinances, and consent decrees
relating to hazardous substances, and environmental matters
applicable to the business and facilities of Borrowers
(whether or not owned by any Borrower). Such laws and
regulations include but are not limited to the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., as
amended; the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as
amended: the Toxic Substances Control Act, 15 U.S.C. Section 2601 et
seq., as amended; the Clean Water Act, 33 U.S.C. Section 466 et
seq., as amended; the Clean Air Act, 42 U.S.C. Section 7401 et seq.,
as amended; state and federal superlien and environmental
cleanup programs; and U.S. Department of Transportation
regulations.
"Equipment" means, with respect to any Borrower, all of
the now owned and hereafter acquired machinery, equipment,
furniture, furnishings, fixtures, and other tangible personal
property (except Inventory), including, without limitation,
data processing hardware and software, motor vehicles,
aircraft, dies, tools, jigs, and office equipment, as well as
all of such types of property which are leased and all of the
rights and interests with respect thereto under such leases
(including, without limitation, options to purchase); together
with all present and future additions and accessions thereto,
replacements therefor, component and auxiliary parts and
supplies used or to be used in connection therewith, and all
substitutes for any of the foregoing, and all manuals,
drawings, instructions, warranties and rights with respect
thereto wherever any of the foregoing is located.
"ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
"Eurocurrency Liabilities" has the meaning assigned to
that term in Regulation D of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
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<PAGE>
"Eurodollar Business Day" means any Business Day in which
commercial banks are open for international business
(including dealings in dollar deposits) in London, England and
Los Angeles, California.
"Eurodollar Base Rate" means, for any Interest Period, an
interest rate determined by the Lender to be the rate per
annum at which deposits in Dollars are offered to Lender in
the London interbank market at 11:00 a.m. (London time) two
(2) Business Days before the first day of such Interest Period
for delivery on the first day of such Interest Period in an
amount substantially equal to the Eurodollar Rate Loans
requested for such Interest Period and for a period equal to
such Interest Period.
"Eurodollar Interest Payment Date" means the first day of
each month during any Interest Period and the last day of such
Interest Period.
"Eurodollar Interest Rate Determination Date" means each
date of calculating the Eurodollar Rate for purposes of
determining the interest rate with respect to an Interest
Period. The Eurodollar Interest Rate Determination Date for
any Eurodollar Rate Loan shall be the second Business Day
prior to the first day of the related Interest Period for such
Eurodollar Rate Loan.
"Eurodollar Rate" means, for any Interest Period, a per
annum interest rate (rounded upward to the next 1/100th of 1%)
equal to the quotient of (a) the Eurodollar Base Rate for such
Interest Period, divided by (b) one hundred percent (100%)
minus the Eurodollar Rate Reserve Percentage for such Interest
Period.
"Eurodollar Rate Loan" means a Revolving Loan during any
period in which it bears interest at the rate provided in
Section 3.1(a)(ii), as such amount may be adjusted pursuant to
Section 3.1(b).
"Eurodollar Rate Reserve Percentage" for any Interest
Period means the reserve percentage applicable during such
Interest Period (or if more than one such percentage shall be
so applicable, the daily average of such percentages for those
days in such Interest Period during which any such percentage
shall be so applicable) under regulations issued from time to
time by the Board of Governors of the Federal Reserve System
(or any successor) for determining the maximum reserve
requirement (including, without limitation, any emergency,
supplemental or other marginal reserve requirement) for Lender
with respect to liabilities or assets consisting of or
including Eurocurrency Liabilities having a term equal to such
Interest Period.
"Event" means any event or condition which, with notice,
the passage of time, the happening of any other condition or
event, or any combination thereof, would constitute an Event
of Default.
"Event of Default" has the meaning given to such term in
Section 11.1.
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"Financial Statements" means, according to the context in
which it is used, the financial statements attached hereto as
Exhibit G-1, and the Latest Forecasts attached hereto as
Exhibit G-2, and any other financial statements required to be
given by the Borrower to the Lender under this Agreement.
"Fiscal Quarter" means any three-month period ending
March 31, June 30, September 30 or December 31.
"Fiscal Year" means LSB's fiscal year for financial
accounting purposes. The current Fiscal Year of LSB will end
on December 31, 1999.
"GAAP" means at any particular time generally accepted
accounting principles as in effect at such time.
"Gross Availability Reductions" means the sum of all
"Availability Reductions" as such term is defined in and
calculated under the LSB-Related Loan Agreements.
"Gross LSB Accounts Availability" means the sum of the
amounts calculated as "Accounts Availability" as such term is
defined in and as calculated under all of the LSB-Related Loan
Agreements.
"Guaranty" by any Person means all obligations of such
Person which in any manner directly or indirectly guarantee
the payment or performance of any indebtedness or other
obligation of any other Person (the "guaranteed obligations"),
or assure or in effect assure the holder of the guaranteed
obligations against the loss in respect thereof, including,
without limitation, any such obligations incurred through an
agreement, (a) to purchase the guaranteed obligations or any
Property constituting security therefor or (b) to advance or
supply funds for the purchase or payment of the guaranteed
obligations or to maintain a working capital or other balance
sheet condition.
"Intercompany Accounts" means all assets and liabilities,
however arising, which are due to the Borrower from, which are
due from the Borrower to, or which otherwise arise from any
transaction by the Borrower with, any Affiliate.
"Interest Period" means, with respect to each Eurodollar
Rate Loan the 90-day interest period applicable to such
Eurodollar Rate Loan as determined pursuant to Section 3.3(b).
"Inventory" means all of each Borrower's now owned and
hereafter acquired inventory, wherever located, to be held for
sale or lease, all raw materials, work-in-process, finished
goods, returned and repossessed goods, and materials and
supplies of any kind, nature or description which are or might
be used in connection with the manufacture, packing, shipping,
advertising, selling or finishing of such inventory, and all
documents of title or other documents representing them.
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<PAGE>
"IRS" means the Internal Revenue Service or any successor
agency.
"Latest Forecasts" means, (a) the forecasts of the
Borrower's monthly financial condition, results of operations,
and cash flows through the year ending December 31, 1999,
attached hereto as Exhibit G-2; and (b) thereafter, the
forecasts most recently received by the Lender pursuant to
Section 7.2.
"Letter of Credit" has the meaning specified in Section
2.3.
"Letter of Credit Agreement" has the meaning specified in
Section 2.3.
"Letter of Credit Fee" means the commissions charged
under the Letter of Credit Agreement on the outstanding amount
of each Letter of Credit.
"Lien" means: any interest in Property securing an
obligation owed to, or a claim by, a Person other than the
owner of the Property, whether such interest is based on the
common law, statute, or contract, and including without
limitation, a security interest, charge, claim, or lien
arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, agreement, or
conditional sale, or a lease, consignment or bailment for
security purposes.
"Loans" means, collectively, all loans and advances by
the Lender to or on behalf of the Borrowers provided for in
Article 2.
"Loan Documents" means all documents executed by the
Borrowers, including this Agreement, the Letter of Credit
Agreement, the Patent and Trademark Assignments, the
Guaranties, the Collateral Assignment of Notes and Liens, and
all other agreements, instruments, and documents heretofore,
now or hereafter evidencing, securing or guaranteeing the
Obligations under this Agreement, the Collateral or the
Security Interest, as the same may hereafter be amended,
modified, restated and/or extended.
"LSB" means LSB Industries, Inc., a Delaware corporation,
a Borrower under this Agreement.
"LSB Adjusted Tangible Assets" means all of the assets of
the LSB Consolidated Borrowing Group, on a consolidated basis,
except: (a) goodwill; (b) unamortized debt discount and
expense; (c) assets constituting Intercompany Accounts; (d)
fixed assets to the extent of any write-up in the book value
thereof resulting from a revaluation effective after the
Closing Date; and (e) any intangibles, as determined in
accordance with GAAP.
"LSB Adjusted Tangible Net Worth" means, at any date: (a)
the book value (after deducting related depreciation,
obsolescence, amortization, valuation, and other proper
reserves as determined in accordance with GAAP) at which the
LSB Adjusted Tangible Assets would be shown on a consolidated
balance sheet of the LSB Consolidated Borrowing Group at such
date prepared in accordance with GAAP less (b) (i) the amount
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at which the LSB Consolidated Borrowing Group's liabilities
would be shown on such balance sheet prepared in accordance
with GAAP, and (ii) LSB's redeemable preferred stock which was
valued at $146,000 as of the Closing Date.
"LSB Borrower Subsidiaries" means LSB, Summit Machine
Tool Manufacturing Corp., and Morey Machinery Manufacturing
Corporation.
"LSB Consolidated Borrowing Group" means the LSB Borrower
Subsidiaries and the CCI Consolidated Borrowing Group.
"LSB-Related Loan Agreements" means all of the following
loan agreements: (i) this Agreement; and (ii) the Amended and
Restated Loan and Security Agreement dated November 21, 1997
between Lender, El Dorado Chemical Company, Slurry Explosive
Corporation, Climate Master, Inc., and International
Environmental Corporation.
"Maximum Inventory Advance Amount" means the lesser of
(a) $32,500,000 less all then outstanding revolving loans,
advances, and outstanding letters of credit based on the
"Eligible Inventory" (as defined in each of the LSB-Related
Loan Agreements) of the LSB Consolidated Borrowing Group under
the LSB-Related Loan Agreements, or (b) $5,000,000 less all
then outstanding Revolving Loans, advances, and outstanding
Letters of Credit based on the Eligible Inventory under this
Agreement.
"Maximum Revolving Credit Line" means Sixty-Five Million
Dollars ($65,000,000) less the Gross Availability Reductions.
"Morey" means Morey Machinery Manufacturing Corporation,
a Borrower under this Agreement.
"Multi-employer Plan" means a Plan which is described in
Section 3(37) of ERISA.
"Obligations" means all present and future loans,
advances, liabilities, obligations, covenants, duties and
Debts owing by the Borrowers to the Lender, arising under this
Agreement or any other Loan Document, whether or not evidenced
by any note, or other instrument or document, whether arising
from an extension of credit, opening of a letter of credit,
loan, guaranty, indemnification (including any indemnity by
Lender in connection with the Swap Transactions or otherwise
for the benefit of the Borrowers), whether direct or indirect
(including, without limitation, those acquired by assignment
from others relating to Swap Transactions), absolute or
contingent, due or to become due, primary or secondary, as
principal or guarantor, and including, without limitation, all
interest, charges, expenses, fees, attorneys' fees, filing
fees and any other sums chargeable to the Borrowers hereunder
or under another Loan Document, or under any other agreement
or instrument with Lender relating to the Swap Transactions.
"Obligations" includes, without limitation, (a) all debts,
liabilities, and obligations now or hereafter owing from
Borrowers to Lender under or in connection with the Letters of
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Credit and the Letter of Credit Agreement, (b) all debts,
liabilities, and obligations now or hereafter owing from any
Borrower to the Lender arising from or related to the Swap
Transactions, and (c) all debts, liabilities, and obligations
owing by the Borrowers to the Lender under the original
"Continuing Guaranty with Security Agreement" documents
executed by each of the Borrowers as of the Closing Date, as
amended from time to time and of even date herewith.
"Offering Memorandum" means that certain Offering
Memorandum dated November 21, 1997, as amended or
supplemented, issued by CCI describing CCI and the CCI
Consolidated Group, the Bond Debt, and the Bond Indenture.
"Overadvance Amount" means $500,000 before October 31,
1999; $333,334 between October 31, 1999 and November 29, 1999;
and $166,668 between November 30, 1999 and December 30, 1999.
"Overadvance Facility" means the Revolving Loans then
outstanding in an amount not to exceed the Overadvance Amount
from May __, 1999 until the Overadvance Facility Termination
Date.
"Overadvance Facility Termination Date" means December
31, 1999.
"Participating Lender" means any Person who shall have
been granted the right by the Lender to participate in the
Revolving Loans and who shall have entered into a
participation agreement in form and substance satisfactory to
the Lender.
"Patent and Trademark Assignments" means the Patent
Security Agreement and the Trademark and Trade Names Security
Agreement dated as of December 12, 1994, executed and
delivered by the Borrowers to the Lender to evidence and
perfect the Lender's Security Interest in the Borrowers'
present and future patents, trademarks, trade names and
related licenses and rights, each as amended and modified from
time to time.
"Payment Account" means each blocked bank account,
established pursuant to Section 6.10, to which Proceeds of
Accounts and other Collateral are deposited or credited, and
which is maintained in the name of the Borrowers on terms
acceptable to the Lender.
"PBGC" means the Pension Benefit Guaranty Corporation or
any Person succeeding to the functions thereof.
"Pension Plan" means any employee benefit plan, including
a Multiemployer Plan, which is subject to Title IV of ERISA,
where either (a) the Plan is maintained by the Borrower or any
Related Company; or (b) Borrower or any Related Company con-
tributes or is required to contribute to it; or (c) Borrower
or any Related Company has incurred or may incur liability,
including contingent liability, under Title IV of ERISA,
either to it, or to the PBGC with respect to it.
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"Permitted Debt" means: (i) the Obligations; (ii) Debt set forth in
the most recent Financial Statements delivered to the Lender, or the
notes
thereto; (iii) Debt incurred since the date of such Financial Statements
to finance Capital Expenditures permitted hereby; (iv) Debt issued or
assumed by any Borrower in connection with an Acquisition permitted
under Section 9.14 hereof; (v) Debt resulting from a judgment having been
rendered against any Borrower that is being appealed by the Borrower in
good faith and in a timely manner, for which an adequate reserve has
been recorded on Borrower's books, and which is not fully covered by
insurance; (vi) Subordinated Debt; (vii) Debt resulting from the
refinancing of any other Permitted Debt as long as (a) such Debt does
not exceed the amount of the refinanced Debt, and (b) such Debt does not
result in payment acceleration of the refinanced Debt; (viii) Debt
resulting from trade payables and other obligations arising in the
ordinary course of business, (ix) other Debt not otherwise permitted by
this definition in an amount not to exceed $6,000,000 at any one time;
(x) Debt of the Borrowers (a) to CCI (i) existing as of November 26, 1997
and (ii) thereafter in an amount not to exceed $2,000,000 per annum, or
(b) to a member of the LSB Consolidated Borrowing Group, or (c) to a
member of the CCI Consolidated Borrowing Group, or (d) to an Affiliate
in accordance with Section 9.9 hereof, or (e) to any other Subsidiary
of LSB that is not CCI, a member of the CCI Consolidated Borrowing Group
or the LSB Consolidated Borrowing Group, provided however that the
aggregate amount of Debt outstanding to all such other Subsidiaries
under (e) shall at no time exceed $200,000 in the aggregate; (xi) the
Bond Debt; and (xii) the SBL Debt. Notwithstanding the foregoing,
Permitted Debt described in subsection (ix) of this definition, when
combined with Permitted Debt allowed under subsection (ix) of the
definition of Permitted Debt under the other LSB-Related Loan Agreement,
shall not exceed $11,000,000 at any one time. In addition to the
foregoing, Permitted Debt shall include the letter of credit in the
original amount of $1,000,000 issued by Lender for the account
of LSB and for the benefit of Congress Financial Corporation.
"Permitted Liens" means: (a) Liens for taxes not yet
payable or Liens for taxes being contested in good faith and
by proper proceedings diligently pursued, provided that a
reserve or other appropriate provision, if any, as shall be
required by GAAP shall have been made therefor on the
applicable Financial Statements, and further provided that,
with respect to the Collateral, a stay of enforcement of any
such Lien is in effect; (b) Liens in favor of the Lender; (c)
reservations, exceptions, encroachments, easements, rights of
way, covenants, conditions, restrictions, leases and other
similar title exceptions or encumbrances affecting the Real
Property; (d) Liens or deposits under workmen's compensation,
unemployment insurance, social security and other similar
laws, (e) Liens relating to obligations with respect to
surety, appeal bonds, performance bonds, bids, tenders and
other obligations of a like nature, (f) Liens existing as of
the Closing Date and granted after the date hereof in
connection with the Equipment, Real Property or other fixed
assets, provided that such Liens attach only to such Property
and the proceeds thereof, and so long as the indebtedness
secured thereby does not exceed 100% of the fair market value
of such Property at the time of acquisition; (g) Liens on
goods consigned to the Borrower or not owned by Borrower so
long as such Lien attaches only to such goods and so long as
Lender has been given notice of such Lien, (h) mechanic,
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materialmen and other like Liens arising in the ordinary
course of business securing obligations which are not overdue
or are being contested in good faith by appropriate
proceedings and adequately reserved against, (i) statutory
Liens in favor of landlords, (j) Liens against any life
insurance policy or the cash surrender value thereof which
relate to borrowings incurred to finance the premiums made
under such policy; (k) Liens not to exceed $1,000,000 at any
one time in amounts secured, which are junior in priority to
the Security Interest and which arise or are placed
inadvertently against the assets of Borrowers and are removed
within ten (10) days from receipt of notice by the Borrowers
of such Lien; and (l) Liens reflected on Exhibit A hereto.
"Person" means any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated
organization, association, corporation, Public Authority, or
any other entity.
"Plan" means, individually and collectively, all Pension
Plans, all additional employee benefit plans as defined in
Section 3(3) of ERISA, and all other plans, programs,
agreements, arrangements, and methods of contribution or
compensation providing any material remuneration or benefits,
other than the cash payment of wages or salary, to any current
or former employee(s) of the Borrower.
"Proceeds" means all products and proceeds of any
Collateral, and all proceeds of such proceeds and products,
including, without limitation, all cash and credit balances,
all payments under any indemnity, warranty, or guaranty
payable with respect to any Collateral, all proceeds of fire
or other insurance, and all money and other Property obtained
as a result of any claims against third parties or any legal
action or proceeding with respect to Collateral.
"Property" means any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or
intangible.
"Proprietary Rights" means all of each Borrower's now
owned and hereafter arising or acquired: licenses, franchises,
permits, patents, patent rights, copyrights, works which are
the subject matter of copyrights, trademarks, trade names,
trade styles, patent and trademark applications and licenses
and rights thereunder, including without limitation those
patents, trademarks and copyrights set forth on Exhibit B
hereto, and all other rights under any of the foregoing, all
extensions, renewals, reissues, divisions, continuations, and
continuations-in-part of any of the foregoing, and all rights
to sue for past, present, and future infringement of any of
the foregoing; inventions, trade secrets, formulae, processes,
compounds, drawings, designs, blueprints, surveys, reports,
manuals, and operating standards, goodwill, customer and other
lists in whatever form maintained, and trade secret rights,
copyright rights, right in works of authorship, and contract
rights relating to computer software programs, in whatever
form created or maintained.
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"Public Authority" means the government of any country or
sovereign state, or of any state, province, municipality, or
other political subdivision thereof, or any department,
agency, public corporation or other instrumentality of any of
the foregoing.
"Real Property" means all of each Borrower's rights,
title, and interest in real property now owned or hereafter
acquired by such Borrower, including, without limitation, the
real property more particularly described in Exhibit H
attached hereto, including all rights and easements in
connection therewith and all buildings and improvements now or
hereafter constructed thereon.
"Receivables" means all of each Borrower's now owned or
hereafter arising or acquired: Accounts (whether or not
earned by performance), including Accounts owed to the
Borrower by any of its Subsidiaries or Affiliates (but
excluding Accounts arising solely from the sale of Equipment,
Real Property or other fixed assets), together with all
interest, late charges, penalties, collection fees, and other
sums which shall be due and payable in connection with any
Account; proceeds of any letters of credit naming the Borrower
as beneficiary; contract rights, chattel paper, instruments,
documents, general intangibles (including, without limitation,
choses in action, causes of action, tax refunds, tax refund
claims, Reversions and other amounts payable to the Borrower
from or with respect to any Plan, rights and claims against
shippers and carriers, rights to indemnification and business
interruption insurance), and all forms of obligations owing to
Borrower (including, without limitation, obligations owing to
the Borrower by its Subsidiaries and Affiliates); guarantees
and other security for any of the foregoing; and rights of
stoppage in transit, replevin, and reclamation; and other
rights or remedies of an unpaid vendor, lienor, or secured
party.
"Reference Rate" means the per annum rate of interest
publicly announced from time to time by the Lender at its San
Francisco, California main office as its reference rate. It
is a rate set by Lender based upon various factors including
Lender's costs and desired return, general economic
conditions, and other factors, and is used as a reference
point for pricing some loans; however, Lender may price loans
at, above or below the Reference Rate. Any change in the
Reference Rate shall take effect on the day specified in the
public announcement of such change.
"Reference Rate Loan" means a Revolving Loan during any
period in which it bears interest at the rate provided in
Section 3.1(a)(i).
"Reference Rate Margin" has the meaning specified in
Section 3.1(a)(i).
"Related Company" means any member of any controlled
group of corporations including, or under common control with,
Borrower (as defined in Section 414(b) or (c) of the Code or
Section 4001(a)(14) of ERISA).
"Reportable Event" means, with respect to a Pension Plan,
a reportable event described in Section 4043 of ERISA or the
regulations thereunder, a withdrawal from a Plan described in
Section 4063 of ERISA, or a cessation of operations described
in Section 4062(e) of ERISA.
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"Restricted Investment" means any acquisition of Property
by any Borrower in exchange for cash or other Property,
whether in the form of an acquisition of stock, indebtedness
or other obligation, or by loan, advance, capital
contribution, or otherwise, except the following: (a) Property
to be used in the business of any Borrower; (b) assets arising
from the sale or lease of goods or rendition of services in
the ordinary course of business of the Borrower; (c) direct
obligations of the United States of America, or any agency
thereof, or obligations guaranteed by the United States of
America, provided that such obligations mature within one year
from the date of acquisition thereof; (d) certificates of
deposit maturing within one year from the date of acquisition,
bankers acceptances, Eurodollar bank deposits, or overnight
bank deposits, in each case issued by, created by, or with a
bank or trust company organized under the laws of the United
States or any state thereof having capital and surplus
aggregating at least $100,000,000; and (e) commercial paper
given the highest rating by a national credit rating agency
and maturing not more than 270 days from the date of creation
thereof.
"Reversions" means any funds which may become due to the
Borrower in connection with the termination of any Plan.
"Revolving Loans" has the meaning specified in Section
2.1.
"SBL Debt" means the $3 Million Dollar loan made by SBL
Corporation to LSB and/or the other Subsidiaries of LSB during the
month of October, 1997.
"Security Interest" means collectively the Liens granted
by Borrowers to the Lender in the Collateral pursuant to this
Agreement or the other Loan Documents.
"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)
(with Availability calculated for this purpose without taking
into account any then outstanding Overadvance Amount) on each
such Business Day.
"Subordinated Debt" shall mean Debt that is unsecured and
is subordinated to the payment of the Obligations.
"Subsidiary" or "Subsidiaries" means any present or
future corporation or corporations of which LSB owns, directly
or indirectly, more than 50% of the voting stock.
"Summit Adjusted Tangible Assets" means all of the assets
of Summit, except: (a) goodwill; (b) unamortized debt
discount and expense; (c) assets constituting Intercompany
Accounts; (d) fixed assets to the extent of any write-up in
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the book value thereof resulting from a revaluation effective
after the Closing Date; and (e) any intangibles, as determined
in accordance with GAAP.
"Summit Adjusted Tangible Net Worth" means, at any date:
(a) the book value (after deducting related depreciation,
obsolescence, amortization, valuation, and other proper
reserves as determined in accordance with GAAP) at which the
Summit Adjusted Tangible Assets would be shown on a balance
sheet of Summit at such date prepared in accordance with GAAP
less (b) (i) the amount at which Summit's liabilities would be
shown on such balance sheet prepared in accordance with GAAP,
and (ii) LSB's redeemable preferred stock which was valued at
$146,000 as of the Closing Date.
"Swap Transaction Reserves" means all reserves which the
Lender from time to time establishes for amounts that are
liabilities owed by EDC to the Lender.
"Swap Transactions" means interest rate swaps, treasury
locks, and all other forward rate agreements entered into by
the Lender for the account of or otherwise for the benefit of
EDC.
"Termination Event" means: (a) a Reportable Event (other
than a Reportable Event described in Section 4043 of ERISA
which is not subject to the provision for 30-day notice to the
PBGC under applicable regulations); or (b) the withdrawal of
the Borrower or any Related Company from a Pension Plan during
a plan year in which it was a "substantial employer" as
defined in Section 4001(a)(2) of ERISA with respect to such
Pension Plan; or (c) the filing of a notice of intent to
terminate a Pension Plan or the treatment of a Pension Plan
amendment as a termination under Section 4041 of ERISA; or (d)
the institution of proceedings by the PBGC to terminate or
have a trustee appointed to administer a Pension Plan; or (e)
any other event or condition which might constitute grounds
under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Pension Plan, or
(f) the partial or complete withdrawal of Borrower or any
Related Company from a Multi-employer Plan, or (g) the
withdrawal of Borrower from any state workers' compensation
system.
"UCC" means the Uniform Commercial Code (or any successor
statute) of the State of Oklahoma or of any other state the
laws of which are required by Section 9-103 thereof to be
applied in connection with the issue of perfection of security
interests.
1.2 Accounting Terms. Any accounting term used in this
Agreement shall have, unless otherwise specifically provided
herein, the meaning customarily given in accordance with GAAP, and
all financial computations hereunder shall be computed, unless
otherwise specifically provided herein, in accordance with GAAP as
consistently applied and using the same method for inventory
valuation as used in the preparation of the Financial Statements.
1.3 Other Terms. All other undefined terms contained in
this Agreement shall, unless the context indicates otherwise, have
the meanings provided for by the UCC to the extent the same are
used or defined therein. Wherever appropriate in the context,
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terms used herein in the singular also include the plural, and vice
versa, and each masculine, feminine, or neuter pronoun shall also
include the other genders.
1.4 Exhibits. All references in this Agreement to
Exhibits are, unless otherwise specified, references to exhibits
attached hereto, and all such exhibits are hereby deemed
incorporated herein by this reference.
2. LOANS AND LETTERS OF CREDIT.
2.1 Revolving Loans. The Lender shall, subject to the
terms and conditions set forth in this Agreement, and upon any
Borrower's request from time to time, make revolving loans (the
"Revolving Loans") to the Borrowers up to the limits of the
Availability. The Lender, in its discretion, may elect to exceed
the limits of the Availability on one or more occasions, but if it
does so, the Lender shall not be deemed thereby to have changed the
limits of the Availability or to be obligated to exceed the limits
of the Availability on any other occasion. If the unpaid balance
of the Revolving Loans exceeds the Availability (with Availability
for this purpose determined as if the amount of the Revolving Loans
were zero), then the Lender may refuse to make or otherwise
restrict Revolving Loans on such terms as the Lender determines
until such excess has been eliminated. The Borrowers may request
Revolving Loans either orally or in writing, provided, however,
that each such request with respect to Reference Rate Loans shall
be made no later than 1:00 p.m. (Los Angeles, California time).
Each oral request for a Revolving Loan shall be conclusively
presumed to be made by a person authorized by the Borrowers to do
so and the crediting of a Revolving Loan to the Borrowers' deposit
account, or transmittal to such Person as the Borrowers shall
direct, shall conclusively establish the obligation of the
Borrowers to repay such Revolving Loan. The Lender will charge all
Revolving Loans and other Obligations to a loan account of the
Borrowers maintained with the Lender. All fees, commissions,
costs, expenses, and other charges due from the Borrowers pursuant
to the Loan Documents, and all payments made and out-of-pocket
expenses incurred by Lender and authorized to be charged to the
Borrowers pursuant to the Loan Documents, will be charged as
Revolving Loans to the Borrowers' loan account as of the date due
from the Borrowers or the date paid or incurred by the Lender, as
the case may be.
2.2 Availability Determination. Availability will be
determined by the Lender in accordance with the terms of this
Agreement, each day on the basis of such relevant information as
the Lender deems appropriate to consider, including the collateral
summary reports and such other information regarding the Accounts
and the Inventory as the Lender shall obtain from the Borrower.
2.3 Letters of Credit. The Lender will, subject to the
terms and conditions of this Agreement and the Letter of Credit
Agreement as hereafter defined, and upon any Borrower's request
from time to time, cause merchandise letters of credit (the
"Merchandise L/C's") or standby letters of credit (the "Standby
L/C's") to be issued for the Borrowers' account (the Merchandise
L/C's and the Standby L/C's being referred to collectively as the
"Letters of Credit"). The Lender will not cause to be opened any
Letter of Credit if: (a) the maximum face amount of the requested
Letter of Credit, plus the aggregate undrawn face amount of all
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outstanding Letters of Credit under this Agreement and the other
LSB-Related Loan Agreements, would exceed Eleven Million and No/100
Dollars ($11,000,000); or (b) the maximum face amount of the
requested Letter of Credit, and all commissions, fees, and charges
due from Borrower to Lender in connection with the opening thereof,
would cause the Availability to be exceeded at such time. In
addition, with respect to any Merchandise L/C, the requested term
of such Letter of Credit may not exceed 180 days, and no
Merchandise L/C may by its terms be scheduled to be outstanding on
the Termination Date. Standby L/C's may have terms that extend
beyond the Termination Date but upon termination of this Agreement,
all Letters of Credit must be either terminated with the consent of
the beneficiary thereof, replaced with a letter of credit provided
by a financial institution acceptable to Lender, collateralized by
cash or cash equivalent, or otherwise satisfied in a manner
acceptable to Lender. The Letters of Credit shall be governed by
a Letter of Credit Financing Agreement - Supplement to Loan and
Security Agreement between the Lender and the Borrower ("Letter of
Credit Agreement"), in the form attached hereto as Exhibit "O" and
made a part hereof, in addition to the terms and conditions hereof.
All payments made and expenses incurred by the Lender pursuant to
or in connection with the Letters of Credit and the Letter of
Credit Agreement will be charged to the Borrower's loan account as
Revolving Loans.
2.4 Swap Transactions. EDC has requested and the Lender
has, in its sole and absolute discretion, arranged for EDC to
obtain Swap Transactions in amounts to be agreed to between EDC and
Lender. Each Borrower agrees to indemnify and hold the Lender
harmless from any and all obligations now or hereafter owing
arising from or related to such Swap Transactions. EDC has agreed
to pay the Lender all amounts owing to the Lender pursuant to the
Swap Transactions. In the event EDC shall not have paid to the
Lender such amounts, such amounts shall constitute a Revolving Loan
of EDC which shall be deemed to have been requested by EDC.
2.5 Overadvance Facility. Subject to all of the terms
and conditions of this Agreement, the Lender agrees to provide to
Borrowers the Overadvance Facility.
3. INTEREST AND OTHER CHARGES
3.1 Interest.
(a) Interest Rates. All amounts charged as Revolving Loans shall
bear
interest on the unpaid principal amount thereof from the date made until paid
in full in cash at the Applicable Interest Rate as described in Sections
3.1(a)(i) and (ii) but not to exceed the maximum rate permitted by
applicable law. Subject to the provisions of Section 3.2, any of the
Revolving
Loans may be converted into, or continued as, Reference Rate Loans or
Eurodollar
Rate Loans in the manner provided in Section 3.2. If at any time Revolving
Loans are outstanding with respect to which notice has not been delivered to
Lender in accordance with the terms of this Agreement specifying the basis for
determining the interest rate applicable thereto, then those Revolving Loans
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shall be Reference Rate Loans and shall bear interest at a rate determined by
reference to the Reference Rate until notice to the contrary has been given
to the Lender and such notice has become effective. Except as otherwise
provided herein, the amounts charged as Revolving Loans shall bear
interest at the following rates (the "Applicable Interest Rate"):
(i) For all amounts charged as Revolving Loans other than
Eurodollar Rate Loans, including all Revolving Loans which are Reference
Rate Loans, then at a fluctuating per annum rate equal to one-half
percent
(.50%) per annum (the "Reference Rate Margin") plus the Reference Rate;
and
(ii) If the Revolving Loans are Eurodollar Rate Loans,
then at a per annum rate equal to two and seven-eighths percent (2.875%)
per annum (the "Eurodollar Margin") plus the Eurodollar Rate determined
for the applicable Interest Period.
Each change in the Reference Rate shall be reflected in the interest rate
described in (i) above as of the effective date of such change. All interest
charges shall be computed on the basis of a year of three hundred sixty (360)
days and actual days elapsed. Except as otherwise provided herein, (1)
interest accrued on each Eurodollar Rate Loan shall be payable in arrears on
each Eurodollar Interest Payment Date applicable to such Eurodollar Rate
Loan, and (2) interest accrued on the Reference Rate Loans will be payable
in arrears on the first day of each month hereafter.
(b) Default Rate. If any Event of Default occurs, then,
while any such Event of Default is continuing, all Loans shall bear
interest at an increased rate of interest equal to the Applicable
Interest Rate thereto plus two percent (2.0%) per annum, and the
Letter of Credit Fee shall be increased to three percent (3%) per
annum.
3.2 Eurodollar Borrowings: Conversion or Continuation.
(a) Subject to the provisions of Section 3.3, the
Borrowers shall have the option: (i) to request the Lender to make
a Revolving Loan as a Eurodollar Rate Loan; (ii) to convert all or
any part of the outstanding Revolving Loans from Reference Rate
Loans to Eurodollar Rate Loans, (iii) to convert all or any part of
the outstanding Revolving Loans from Eurodollar Rate Loans to
Reference Rate Loans on the expiration of the Interest Period
applicable thereto; (iv) upon the expiration of any Interest Period
applicable to any outstanding Eurodollar Rate Loan, to continue all
or any portion of such Eurodollar Rate Loan as a Eurodollar Rate
Loan; provided, however, that no outstanding Loans may be converted
into or continued as, Eurodollar Rate Loans when any Event or Event
of Default has occurred and is continuing.
(b) Whenever the Borrowers elect to borrow, convert into
or continue Eurodollar Rate Loans under this Section 3.2, the
Borrower shall notify the Lender in writing or telephonically no
later than 11:00 a.m. (Los Angeles, California time) two (2)
Business Days in advance of the requested
borrowing/conversion/continuation date. The Borrowers shall
specify (1) the borrowing/conversion/continuation date (which shall
be a Business Day), (2) the amount and type of the Revolving Loans
to be borrowed/converted/continued, and (3) the nature of the
requested borrowing/ conversion/continuation. In the event that
the Borrowers should fail to timely notify the Lender to continue
to convert any existing Eurodollar Rate Loan, such Loan shall, on
the last day of the Interest Period with respect to such Revolving
Loan, convert to a Reference Rate Loan.
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(c) The officer of the Borrowers authorized by the
Borrowers to request Revolving Loans on behalf of the Borrowers
shall also be authorized to request a conversion/continuation on
behalf of the Borrowers. The Lender shall be entitled to rely on
such officer's authority until the Lender is notified to the
contrary in writing. The Lender shall have no duty to verify the
authenticity of the signature appearing on any written notification
or request and, with respect to an oral notification or request,
the Lender shall have no duty to verify the identity of any
individual representing himself as one of the officers authorized
to make such notification or request on behalf of the Borrowers.
The Lender shall incur no liability to any Borrower in acting upon
any telephonic notice or request referred to in this Section 3.2,
which the Lender believes in good faith to have been given by an
officer authorized to do so on behalf of the Borrowers, or for
otherwise acting in good faith under this Section 3.2 and, upon
lending/conversion/continuation by the Lender in accordance with
this Agreement pursuant to any such telephonic notice, the
Borrowers shall have effected the borrowing/conversion/continuation
of the applicable Loans hereunder.
(d) Any written or telephonic notice of conversion to,
or borrowing or continuation of, Revolving Loans made pursuant to
this Section 3.2 shall be irrevocable and the Borrowers shall be
bound to borrow, convert or continue in accordance therewith.
3.3 Special Provisions Governing Eurodollar Rate Loans.
Notwithstanding any other provisions to the contrary contained in
this Agreement, the following provisions shall govern with respect
to Eurodollar Rate Loans as to the matters covered:
(a) Amount of Eurodollar Rate Loans. Each election of,
continuation of, or conversion to a Eurodollar Rate Loan, shall be
in a minimum amount of Five Million Dollars ($5,000,000) and in
integral multiples of One Million Dollars ($1,000,000) in excess of
that amount.
(b) Determination of Interest Period. The Interest
Period for each Eurodollar Rate Loan shall be for a three (3) month
period. The determination of Interest Periods shall be subject to
the following provisions:
(i) In the case of immediately successive Interest
Periods, each successive Interest Period shall commence on the
day on which the next preceding Interest Period expires.
(ii) If any Interest Period would otherwise expire
on a day which is not a Business Day, the Interest Period
shall be extended to expire on the next succeeding Business
Day; provided, however, that if the next succeeding Business
Day occurs in the following calendar month, then such Interest
Period shall expire on the immediately preceding Business Day.
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(iii) The Borrowers may not select an Interest
Period for any Eurodollar Rate Loan, which Interest Period
expires later than the Stated Termination Date.
(iv) There shall be not more than two (2) Interest
Periods in effect at any one time, and no more than two (2)
Interest Periods may begin during any calendar month.
(v) If an Interest Period starts on a date for
which no numerical correspondent exists in the month in which
such Interest Period ends, such Interest Period will end on
the last Business Day of such month.
(c) Determination of Interest Rate. As soon as
practicable after 11:00 a.m. (Los Angeles, California time) on the
Eurodollar Interest Rate Determination Date, the Lender shall
determine (which determination shall, absent manifest error, be
presumptively correct) the Interest Rate for the Eurodollar Rate
Loans for which an Interest Rate is then being determined and shall
promptly give notice thereof (in writing or by telephone confirmed
in writing) to the Borrower.
(d) Substituted Rate of Borrowing. In the event that on
any Eurodollar Interest Rate Determination Date the Lender shall
have determined (which determination shall, absent manifest error,
be presumptively correct and binding upon all parties) that:
(i) by reason of any changes arising after the date
of this Agreement affecting the interbank Eurodollar market or
affecting the position of Lender in such market, adequate and
fair means do not exist for ascertaining the applicable
interest rates by reference to which the Eurodollar Rate then
being determined is to be fixed; or
(ii) by reason of (1) any change after the date of
this Agreement in any applicable law or governmental rule,
regulation or order (or any interpretation thereof and
including the introduction of any new law or governmental
rule, regulation or order) or (2) any other circumstances
affecting Lender or the interbank Eurodollar market or the
position of Lender in such market (such as, for example, but
not limited to, official reserve requirements required by
Regulation D of the Board of Governors of the Federal Reserve
System to the extent not given effect in the Eurodollar Rate),
the Eurodollar Rate shall not represent the effective pricing
to Lender for Dollar deposits of comparable amounts for the
relevant period;
then, and in any such event, the right of the Borrowers to request
application of the Eurodollar Rate to some or all of the Loans
shall be suspended until the Lender shall notify the Borrowers that
the circumstances causing such suspension no longer exist, and such
Loans shall be Reference Rate Loans.
(e) Illegality. In the event that on any date Lender
shall have reasonably determined (which determination shall, absent
manifest error, be final and conclusive and binding upon all
parties) that the making of, conversion into, or the continuation
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of, Lender's Eurodollar Rate Loans has become unlawful as the
result of compliance by Lender in good faith with any law,
governmental rule, regulation or order (whether or not having the
force of law and whether or not failure to comply therewith would
be unlawful), then, and in any such event, Lender shall promptly
give notice (by telephone confirmed in writing) to the Borrowers of
such determination. In such case and except as provided in Section
3.3(f), the obligation of Lender to make or maintain any Eurodollar
Rate Loans during any such period shall be terminated at the
earlier of the termination of the Interest Period then in effect or
when required by law, and the Borrowers shall, no later than the
earlier of the termination of the Interest Period in effect at the
time any such determination pursuant to this Section 3.3(e) is
made, or when required by law, repay the Eurodollar Rate Loans,
together with all interest accrued thereon.
(f) Options of the Borrower. In lieu of prepaying the
Eurodollar Rate Loans as required by Section 3.3(e), the Borrowers
may exercise either of the following options:
(i) Upon written notice to the Lender, the
Borrowers may release Lender from its obligations to make or
maintain Loans as Eurodollar Rate Loans and in such event, the
Borrowers shall, at the end of the then current Interest
Period (or at such earlier time as prepayment is otherwise
required), convert all of the Eurodollar Rate Loans into
Reference Rate Loans in the manner contemplated by Section
3.2, but without satisfying the advance notice requirements
therein; or
(ii) The Borrowers may, by giving notice (by
telephone confirmed immediately by telecopy) to Lender require
Lender to continue to maintain its outstanding Reference Rate
Loans as Reference Rate Loans, but without satisfying the
advance notice requirements set forth in such Section 3.2.
(g) Compensation. In addition to such amounts as are
required to be paid by the Borrowers pursuant to the other Sections
of this Article 3, the Borrowers agree to compensate the Lender for
all expenses and liabilities, including, without limitation, any
loss or expense incurred by Lender by reason of the liquidation or
reemployment of deposits or other funds acquired by Lender to fund
or maintain the Lender's Eurodollar Rate Loans to the Borrowers,
which Lender sustains (i) if due to the fault of the Borrowers a
funding of any Eurodollar Rate Loans does not occur on a date
specified therefor by Borrowers in a telephonic or written request
for borrowing or conversion/continuation, or a successive Interest
Period does not commence after notice therefor is given pursuant to
Section 3.2, (ii) if any voluntary or mandatory prepayment of any
Eurodollar Rate Loans occurs for any reason on a date which is not
the last scheduled day of an Interest Period, or (iii) as a
consequence of any other failure by the Borrowers to repay
Eurodollar Rate Loans when required by the terms of this Agreement.
(h) Quotation of Eurodollar Rate. Anything herein to
the contrary notwithstanding, if on any Eurodollar Interest Rate
Determination Date no Eurodollar Rate is available by reason of the
failure of to be offered quotations in accordance with the
definition of "Eurodollar Base Rate," the Lender shall give the
Borrowers prompt notice thereof and (i) any Eurodollar Rate Loan
requested to be made at the Eurodollar Rate to be determined on any
Eurodollar Interest Rate Determination Date shall be made as a
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Reference Rate Revolving Loan, and (ii) any notice given by the
Borrowers to convert any Loans into or to continue any Loans as
Eurodollar Rate Loans at the Eurodollar Rate to be determined on
any such Eurodollar Interest Rate Determination Date shall be
ineffective.
(i) Eurodollar Rate Taxes. The Borrowers agree that
they will pay, prior to the date on which penalties attach thereto,
all present and future income, stamp and other taxes, levies, or
costs and charges whatsoever imposed, assessed, levied or collected
on or from the Lender on or in respect of the Borrowers' Loans from
the Lender solely as a result of the interest rate being determined
by reference to the Eurodollar Rate and/or the provisions of this
Agreement relating to the Eurodollar Rate and/or the recording,
registration, notarization or other formalization of any of the
foregoing and/or any payments of principal, interest or other
amounts made on or in respect of the Loans from the Lender when the
interest rate is determined by reference to the Eurodollar Rate
(all such taxes, levies, cost and charges being herein collectively
called "Eurodollar Rate Taxes"); provided, however, that Eurodollar
Rate Taxes shall not include taxes imposed on or measured by the
overall net income of the Lender by the United States of America or
any political subdivision or taxing authority thereof or therein,
or taxes on or measured by the overall net income by any foreign
branch or subsidiary of the Lender by any foreign country or
subdivision thereof in which that branch or subsidiary is doing
business. Promptly after the date on which payment of any such
Eurodollar Rate Tax is due pursuant to applicable law, the
Borrowers will, at the request of the Lender, furnish to the Lender
evidence, in form and substance satisfactory to the Lender, that
the Borrowers have met their obligation under this Section 3.3(i),
an addition, the Borrowers will indemnify the Lender against, and
reimburse Lender on demand for, any Eurodollar Rate Taxes for which
the Lender is or may be liable by reason of the making or
maintenance of any Eurodollar Rate Loans hereunder, as determined
by the Lender in its discretion exercised in good faith and
pursuant to standards of commercial reasonableness. The Lender
shall provide Borrowers with appropriate receipts for any payments
or reimbursements made by Borrowers pursuant to this Section
3.3(i).
(j) Booking of Eurodollar Rate Loans. The Lender may
make, carry or transfer Eurodollar Rate Loans at, to, or for the
account of, any of its branch offices or the office of any of its
Affiliates.
(k) Increased Costs. If, due to either (i) the
introduction of or any change (other than any change by way of
imposition or increase of reserve requirements included in the
Eurodollar Reserve Percentage) in or in the interpretation of any
law or regulation or (ii) the compliance with any guideline or
request from any central bank or other Public Authority (whether or
not having the force of law), there shall be any increase in the
cost to the Lender of agreeing to make or making, funding or
maintaining Eurodollar Rate Loans, then the Borrowers agree that
they shall, from time to time, upon demand by the Lender in writing
to the Borrowers, within sixty (60) days from the date of such
increased cost, pay to the Lender additional amounts sufficient to
compensate the Lender for such increased cost relating to the
outstanding Eurodollar Rate Loans made to the Borrowers. A
certificate as to the amount of such increased cost and the method
of determination thereof, submitted to the Borrowers by the Lender,
shall be rebuttably presumptive evidence of the correctness of such
amount. Notwithstanding the above, the Lender shall promptly
advise Borrowers of any increased costs covered by this paragraph
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(k) of which Lender is aware that have been made or which are
proposed to be made which may require the Borrowers to be required
to pay the increased cost under this paragraph (k) prior to or at
the time that Borrowers request additional Eurodollar Rate Loans.
3.4 Maximum Interest Rate.
(a) Notwithstanding the foregoing provisions of Sections
3.1 through 3.3 regarding the rates of interest applicable to the
Loans, if at any time the amount of such interest computed on the
basis of the Applicable Interest Rate would exceed the amount of
such interest computed upon the basis of the maximum rate of
interest permitted by applicable state or federal law in effect
from time to time hereafter, after taking into account, to the
extent required by applicable law, any and all fees, payments,
charges and calculations provided for in this Agreement or in any
other agreement between any Borrower and Lender (the "Maximum Legal
Rate"), the interest payable under this Agreement shall be computed
upon the basis of the Maximum Legal Rate, but any subsequent
reduction in the Reference Rate or the Eurodollar Rate shall not
reduce such interest thereafter payable hereunder below the amount
computed on the basis of the Maximum Legal Rate until the aggregate
amount of such interest accrued and payable under this Agreement
equals the total amount of interest which would have accrued if
such interest had been at all times computed solely on the basis of
the Applicable Interest Rate.
(b) No agreements, conditions, provisions or
stipulations contained in this Agreement or any other instrument,
document or agreement between any Borrower and the Lender or
default of any Borrower, or the exercise by the Lender of the right
to accelerate the payment of the maturity of principal and
interest, or to exercise any option whatsoever contained in this
Agreement or any other agreement between any Borrower and the
Lender, or the arising of any contingency whatsoever, shall entitle
the Lender to collect, in any event, interest exceeding the Maximum
Legal Rate and in no event shall any Borrower be obligated to pay
interest exceeding such Maximum Legal Rate and all agreements,
conditions or stipulations, if any, which may in any event or
contingency whatsoever operate to bind, obligate or compel such
Borrower to pay a rate of interest exceeding the Maximum Legal
Rate, shall be without binding force or effect, at law or in
equity, to the extent only of the excess of interest over such
Maximum Legal Rate. In the event any interest is charged in excess
of the Maximum Legal Rate ("Excess"), each Borrower acknowledges
and stipulates that any such charge shall be the result of an
accidental and bona fide error, and such Excess shall be, first,
applied to reduce the principal then unpaid hereunder; second,
applied to reduce the Obligations; and third, returned to the
Borrowers, it being the intention of the parties hereto not to
enter at any time into a usurious or otherwise illegal
relationship. Each Borrower recognizes that, with fluctuations in
the Applicable Interest Rate and the Maximum Legal Rate, such an
unintentional result could inadvertently occur. By the execution
of this Agreement, each Borrower covenants that (i) the credit or
return of any Excess shall constitute the acceptance by such
Borrower of such Excess, and (ii) the Borrower shall not seek or
pursue any other remedy, legal or equitable, against Lender, based
in whole or in part upon the charging or receiving of any interest
in excess of the maximum authorized by applicable law. For the
purpose of determining whether or not any Excess has been
contracted for, charged or received by Lender, all interest at any
time contracted for, charged or received by the Lender in
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connection with this Agreement shall be amortized, prorated,
allocated and spread in equal parts during the entire term of this
Agreement.
(c) The provisions of Section 3.4 shall be deemed to be
incorporated into every document or communication relating to the
Obligations which sets forth or prescribes any account, right or
claim or alleged account, right or claim of the Lender with respect
to the Borrowers (or any other obligor in respect of Obligations),
whether or not any provision of Section 3.4 is referred to therein.
All such documents and communications and all figures set forth
therein shall, for the sole purpose of computing the extent of the
liabilities and obligations of the Borrowers (or other obligor)
asserted by the Lender thereunder, be automatically recomputed by
any Borrower or obligor, and by any court considering the same, to
give effect to the adjustments or credits required by Section 3.4.
(d) If the applicable state or federal law is amended in
the future to allow a greater rate of interest to be charged under
this Agreement or any other Loan Documents than is presently
allowed by applicable state or federal law, then the limitation of
interest under Section 3.4 shall be increased to the maximum rate
of interest allowed by applicable state or federal law as amended,
which increase shall be effective hereunder on the effective date
of such amendment, and all interest charges owing to the Lender by
reason thereof shall be payable upon demand.
3.5 Capital Adequacy. If as a result of any regulatory
change directly or indirectly affecting Lender or any of Lender's
affiliated companies there shall be imposed, modified or deemed
applicable any tax, reserve, special deposit, minimum capital,
capital ratio, or similar requirement against or with respect to or
measured by reference to loans made or to be made to Borrowers
hereunder, or to Letters of Credit issued on behalf of Borrowers
pursuant to the Letter of Credit Agreement, and the result shall be
to increase the cost to Lender or to any of Lender's affiliated
companies of making or maintaining any Revolving Loan or Letter of
Credit hereunder, or reduce any amount receivable in respect of any
such Revolving Loan and which increase in cost, or reduction in
amount receivable, shall be the result of Lender's or Lender's
affiliated company's reasonable allocation among all affected
customers of the aggregate of such increases or reductions
resulting from such event, then, within ten (10) days after receipt
by Borrowers of a certificate from Lender containing the
information described in this Section 3.5 which shall be delivered
to Borrowers, each Borrower agrees from time to time to pay Lender
such additional amounts as shall be sufficient to compensate Lender
or any of Lender's affiliated companies for such increased costs or
reductions in amounts which Lender determines in Lender's reason-
able discretion are material. Notwithstanding the foregoing, all
such amounts shall be subject to the provisions of Section 3.4.
The certificate requesting compensation under this Section 3.5
shall identify the regulatory change which has occurred, the
requirements which have been imposed, modified or deemed
applicable, the amount of such additional cost or reduction in the
amount receivable and the way in which such amount has been
calculated.
4. PAYMENTS AND PREPAYMENTS.
4.1 Revolving Loans. The Borrowers shall repay, and be
jointly and severally liable for, the outstanding principal balance
of the Revolving Loans, plus all accrued but unpaid interest
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thereon, upon the termination of this Agreement. In addition, the
Borrowers shall pay to the Lender, on demand, the amount by which
the unpaid principal balance of the Revolving Loans at any time
exceeds the Availability at such time (with Availability for this
purpose determined as if the amount of the Revolving Loans were
zero).
4.2 Place and Form of Payments: Extension of Time. All
payments of principal, interest, and other sums due to the Lender
shall be made at the Lender's address set forth in Section 13.10.
Except for Proceeds received directly by the Lender, all such
payments shall be made in immediately available funds. If any
payment of principal, interest, or other sum to be made hereunder
becomes due and payable on a day other than a Business Day, the due
date of such payment shall be extended to the next succeeding
Business Day and interest thereon shall be payable at the
applicable interest rate during such extension.
4.3 Apportionment, Application and Reversal of Payments.
Except as otherwise expressly provided hereunder, the Lender shall
determine in its discretion the order and manner in which proceeds
and other payments that the Lender receives are applied to the
Revolving Loans, interest thereon, and the other Obligations, and
each Borrower hereby irrevocably waives the right to direct the
application of any payment or proceeds; provided, however, unless
so directed by the Borrowers, the Lender shall not apply any such
payments which it receives to any Eurodollar Rate Loan, except:
(a) on the expiration date of the Interest Period applicable to any
such Eurodollar Rate Loan; or (b) in the event, and only to the
extent, that there are not outstanding Reference Rate Loans.
Following an Event of Default that is continuing, the Lender shall
have the continuing and exclusive right to apply and reverse and
reapply any and all such proceeds and payments to any portion of
the Obligations subject to the terms of this Section 4.3 and the
Borrowers' right to direct prepayments of Eurodollar Rate Loans.
4.4 INDEMNITY FOR RETURNED PAYMENTS. IF AFTER RECEIPT
OF ANY PAYMENT OF, OR PROCEEDS APPLIED TO THE PAYMENT OF, ALL OR
ANY PART OF THE OBLIGATIONS, THE LENDER IS FOR ANY REASON REQUIRED
TO SURRENDER SUCH PAYMENT OR PROCEEDS TO ANY PERSON, BECAUSE SUCH
PAYMENT OR PROCEEDS IS INVALIDATED, DECLARED FRAUDULENT, SET ASIDE,
DETERMINED TO BE VOID OR VOIDABLE AS A PREFERENCE, OR A DIVERSION
OF TRUST FUNDS, OR FOR ANY OTHER REASON, THEN: THE OBLIGATIONS OR
PART THEREOF INTENDED TO BE SATISFIED SHALL BE REVIVED AND CONTINUE
AND THIS AGREEMENT SHALL CONTINUE IN FULL FORCE AS IF SUCH PAYMENT
OR PROCEEDS HAD NOT BEEN RECEIVED BY THE LENDER AND THE BORROWERS
SHALL BE LIABLE TO PAY TO THE LENDER, AND HEREBY DOES INDEMNIFY THE
LENDER AND HOLD THE LENDER HARMLESS FOR THE AMOUNT OF SUCH PAYMENT
OR PROCEEDS SURRENDERED. The provisions of this Section 4.4 shall
be and remain effective notwithstanding any contrary action which
may have been taken by the Lender in reliance upon such payment or
Proceeds, and any such contrary action so taken shall be without
prejudice to the Lender's rights under this Agreement and shall be
deemed to have been conditioned upon such payment or Proceeds
having become final and irrevocable. The provisions of this
Section 4.4 shall survive the termination of this Agreement.
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5. LENDER'S BOOKS AND RECORDS: MONTHLY STATEMENTS. The
Borrowers agree that the Lender's books and records showing the
Obligations and the transactions pursuant to this Agreement and the
other Loan Documents shall be admissible in any action or
proceeding arising therefrom irrespective of whether any Obligation
is also evidenced by a promissory note or other instrument, and
shall constitute presumptive proof thereof until such time as
Borrowers have reviewed the monthly statement as hereinafter
provided. The Lender will provide to the Borrowers a monthly
statement of Loans, payments, and other transactions pursuant to
this Agreement. Such statement shall be deemed correct, accurate,
and binding on the Borrowers and as an account stated and shall
constitute prima facie proof thereof (except for reversals and
reapplications of payments made as provided in Section 4.3 and
corrections of errors discovered by the Lender), unless the
Borrowers notify the Lender in writing to the contrary within
thirty (30) days after such statement is rendered. In the event a
timely written notice of objections is given by the Borrowers, only
the items to which exception is expressly made will be considered
to be disputed by the Borrowers.
6. COLLATERAL.
6.1 Grant of Security Interest.
(a) As security for the Obligations, each Borrower
hereby grants to the Lender a continuing security interest in, lien
on, and assignment of: (i) all Receivables, Inventory, Proprietary
Rights, and Proceeds, wherever located and whether now existing or
hereafter arising or acquired; (ii) all moneys, securities and
other property and the Proceeds thereof, now or hereafter held or
received by, or in transit to, the Lender from or for such
Borrower, whether for safekeeping, pledge, custody, transmission,
collection or otherwise, including, without limitation, all of such
Borrower's deposit accounts, credits and balances with the Lender
and all claims of the Borrower against the Lender at any time
existing; (iii) all of Borrower's deposit accounts containing
Collateral with any financial institutions with which Borrower
maintains deposits; and (iv) all books, records, ledger cards, data
processing records, computer software and other property and
general intangibles at any time evidencing or relating to the
Receivables, Inventory, Proprietary Rights, Proceeds, and other
property referred to above (all of the foregoing, together with all
other property in which Lender may at any time be granted a Lien,
being herein collectively referred to as the "Collateral"). The
Lender shall have all of the rights of a secured party with respect
to the Collateral under the UCC and other applicable laws.
(b) All Obligations shall constitute a single loan
secured by the Collateral. The Lender may, in its sole discretion,
(i) exchange, waive, or release any of the Collateral, (ii) after
the occurrence of an Event of Default that is continuing, apply
Collateral and direct the order or manner of sale thereof as the
Lender may determine, and (iii) after the occurrence of an Event of
Default that is continuing, settle, compromise, collect, or
otherwise liquidate any Collateral in any manner, all without
affecting the Obligations or the Lender's right to take any other
action with respect to any other Collateral.
6.2 Perfection and Protection of Security Interest.
Each Borrower shall, at its expense, perform all steps requested by
the Lender at any time to perfect, maintain, protect, and enforce
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the Security Interest in the Collateral including, without
limitation: (a) executing and recording of the Patent and Trademark
Assignments and executing and filing financing or continuation
statements, and amendments thereof, relating to the Collateral in
form and substance satisfactory to the Lender; (b) delivering to
the Lender, upon Lender's request therefor, the originals of all
instruments, documents, and chattel paper, and all other Collateral
of which the Lender determines it should have physical possession
in order to perfect and protect the Security Interest therein, duly
endorsed or assigned to the Lender without restriction; (c)
delivering to the Lender warehouse receipts covering any portion of
the Collateral located in warehouses and for which warehouse
receipts are issued; (d) after an Event of Default that is
continuing, causing notations to be placed on each Borrower's books
of account to disclose the Security Interest; (e) delivering to the
Lender, upon Lender's request therefor, all letters of credit on
which any Borrower is a named beneficiary; (f) after an Event of
Default that is continuing transferring Inventory to warehouses
designated by the Lender; and (g) taking such other steps as are
deemed necessary by the Lender to maintain the Security Interest.
The Lender may file, without any Borrower's signature, one or more
financing statements disclosing the Security Interest. Each
Borrower agrees that a carbon, photographic, photostatic, or other
reproduction of this Agreement or of a financing statement is
sufficient as a financing statement. If any Collateral is at any
time in the possession or control of any warehouseman, bailee or
any of the agents or processors of any Borrower, then such Borrower
shall notify the Lender thereof and shall notify such Person of the
Security Interest in such Collateral and, upon the Lender's request
following an Event of Default that is continuing, instruct such
Person to hold all such Collateral for the Lender's account subject
to the Lender's instructions. If at any time any Collateral is
located on any premises that are not owned by a Borrower, then the
Borrowers shall obtain written waivers, in form and substance
reasonably satisfactory to the Lender, of all present and future
Liens to which the owner or lessor of such premises may be entitled
to assert against the Collateral. From time to time, the Borrowers
shall, upon Lender's request, cause to be executed and delivered
confirmatory written instruments pledging to the Lender the
Collateral, but the Borrowers' failure to do so shall not affect or
limit the Security Interest. So long as this Agreement is in
effect and until all Obligations have been fully satisfied, the
Security Interest shall continue in full force and effect in all
Collateral (whether or not deemed eligible for the purpose of
calculating the Availability or as the basis for any advance, loan,
or other financial accommodation). Upon termination of this
Agreement and payment of all Obligations, the Lender shall release
all Security Interests held by the Lender.
6.3 Location of Collateral. Each Borrower represents
and warrants to the Lender that: (a) Exhibit D hereto is a correct
and complete List of each Borrower's chief executive office, the
location of its books and records as well as the locations of the
Collateral and the locations of all of its other places of
business; and (b) Exhibit H correctly identifies any of such
facilities and locations that are not owned by a Borrower and sets
forth the names of the owners and lessors of, and, to the best of
each Borrower's knowledge, the holders of any mortgages on such
facilities and locations. Except for Inventory that is consigned
by a Borrower to a customer or warehouse, each Borrower agrees that
it will not maintain any Collateral at any location other than
those listed on Exhibit D, and it will not otherwise change or add
to any of such locations, unless it gives the Lender at least
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thirty (30) days prior written notice and executes or has executed,
such financing statements and other documents that the Lender
requests in connection therewith.
6.4 Title to, Liens on, and Sale and Use of Collateral.
Each Borrower represents and warrants to the Lender that: (a) all
Collateral is and will continue to be owned by the Borrower free
and clear of all Liens whatsoever, except for the Security Interest
and other Permitted Liens; (b) the Security Interest will not be
subject to any prior Lien except the Permitted Liens; (c) the
Borrower will use, store, and maintain the Collateral with all
reasonable care and will use the Collateral for lawful purposes
only; and (d) the Borrower will not, without the Lender's prior
written approval, sell, or dispose of or permit the sale or
disposition of any Collateral, except for (i) sales of Inventory in
the ordinary course of business, and (ii) as otherwise provided or
allowed by this Agreement or any of the other Loan Documents. The
inclusion of Proceeds in the Collateral shall not be deemed the
Lender's consent to any sale or other disposition of the Collateral
except as expressly permitted herein.
6.5 Appraisals. Following the occurrence of an Event of
Default that is continuing, each Borrower shall, at the request of
the Lender, provide the Lender, at the Borrower's expense, with
appraisals or updates thereof of any or all of the Collateral from
an appraiser satisfactory to the Lender.
6.6 Access and Examination. The Lender may at all
reasonable times have access to, examine, audit, make extracts from
and inspect each Borrower's records, files, and books of account,
as well as the Collateral and may discuss the Borrower's affairs
with the Borrower's officers and management. The Borrower will
deliver to the Lender any instrument necessary for the Lender to
obtain records from any service bureau maintaining records for the
Borrower. The Lender may, at any time when an Event of Default
exists and at the Borrowers' expense, make copies of all of the
Borrowers' books and records, or require the Borrower to deliver
such copies to the Lender. After the occurrence of an Event of
Default that is continuing, the Lender may, without expense to the
Lender, use such of the Borrowers' personnel, supplies, and
premises as may be reasonably necessary for maintaining or
enforcing the Security Interest. Lender shall have the right, at
any time, in Lender's name or in the name of a nominee of the
Lender, to verify the validity, amount or any other matter relating
to the Accounts, by mail, telephone, or otherwise.
6.7 Insurance. Each Borrower shall insure the
Collateral and Equipment against loss or damage by fire with
extended coverage, theft, burglary, pilferage, loss in transit, and
such other hazards as the Lender shall specify, in amounts, under
policies and by insurers acceptable to the Lender. Each Borrower
shall also maintain flood insurance, in the event of a designation
of the area in which any Real Property is located as "flood prone"
or a "flood risk area," as defined by the Flood Disaster Protection
Act of 1973, in an amount to be reasonably determined by Lender,
and shall comply with the additional requirements of the National
Flood Insurance Program as set forth therein. Each Borrower shall
cause the Lender to be named in each such policy as secured party
of the Inventory that constitutes part of the Collateral and loss
payee or additional insured, in a manner acceptable to the Lender,
as to the Collateral. Each policy of insurance shall contain a
clause or endorsement requiring the insurer to give not less than
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thirty (30) days prior written notice to the Lender in the event of
cancellation of the policy for any reason whatsoever and a clause
or endorsement stating that the interest of the Lender shall not be
impaired or invalidated by any act or neglect of the Borrower or
the owner of any premises where Collateral is located nor by the
use of such premises for purposes more hazardous than are permitted
by such policy. All premiums for such insurance shall be paid by
the Borrower when due, and certificates of insurance and, if
requested, photocopies of the policies shall be delivered to the
Lender. If the Borrower fails to procure such insurance or to pay
the premiums therefor when due, the Lender may (but shall not be
required to) do so and charge the costs thereof to the Borrower's
loan account. After becoming aware of any loss, damage or
destruction to Collateral, the Borrower shall promptly notify the
Lender of any such loss, damage, or destruction that exceeds
$200,000, whether or not covered by insurance. The Lender is
hereby authorized to collect all insurance proceeds directly
following the occurrence of an Event of Default that is continuing.
After deducting from such proceeds the expenses, if any, incurred
by Lender in the collection or handling thereof, if an Event of
Default has occurred and is continuing, the Lender may apply such
proceeds to the reduction of the Obligations, in such order as
Lender determines, or at the Lender's option may permit or require
the Borrower to use such money, or any part thereof, to replace,
repair, restore or rebuild the Collateral in a diligent and
expeditious manner with materials and workmanship of substantially
the same quality as existed before the loss, damage or destruction.
If no Event of Default has occurred and is continuing, Lender
hereby authorizes Borrower to collect all such insurance proceeds
and to use such money, or any part thereof, to replace, repair,
restore or rebuild the Collateral in a diligent and expeditious
manner with materials and workmanship of substantially the same
quality as existed before the loss, damage or destruction.
6.8 Collateral Reporting. The Borrowers will provide
the Lender with the following documents at the following times in
form satisfactory to the Lender: (a) on a daily basis, a schedule
of Accounts created since the last such schedule, a schedule of
remittance advices, credit memos and reports and a schedule of
collections of Accounts since the last such schedule; (b) no later
than fifteen (15) days after the last day of each month, monthly
summary and detailed agings of Accounts aged by due date and by
invoice date; (c) no later than twenty (20) days after the last day
each month, monthly reconciliations of Accounts balances per the
aging to the general ledger accounts receivable balance and to the
financial statements provided to Lender under Section 7.2(c); (d)
no later than twenty (20) days after the last day each month,
monthly Inventory reports by category and by location; (e) no later
than twenty (20) days after the last day each month, monthly
reconciliations of the detailed Inventory reports to the general
ledger and to the financial statements provided to Lender under
Section 7.2(c); (f) upon request, copies of invoices, credit memos,
shipping and delivery documents, purchase orders; (g) such other
reports as to the Collateral as the Lender shall request from time
to time; and (h) certificates of an officer of the Borrower
certifying as to the foregoing. If any of the Borrower's records
or reports of the Collateral are prepared by an accounting service
or other agent, the Borrower hereby authorizes such service or
agent to deliver such records, reports, and related documents to
the Lender.
6.9 Accounts. The following apply to each Borrower:
(a) The Borrower hereby represents and warrants to the Lender that:
(i) each existing Account represents, and each future Account will
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represent, a bona fide sale or lease and delivery of goods by the
Borrower, or rendition of services by the Borrower, in the ordinary
course of business; (ii) each existing Account is, and each future
Account will be, for a liquidated amount payable by the Account
Debtor thereon on the terms set forth in the invoice therefor or in
the schedule thereof delivered to the Lender, without offset,
deduction, defense, or counterclaim (other than claims relating to
warranty issues); (iii) no payment will be received with respect to
any Account, and no credit, discount, or extension, or agreement
therefor will be granted to any Account, except as reported to or
otherwise agreed to by the Lender in accordance with this
Agreement; (iv) each copy of an invoice requested by and delivered
to the Lender by the Borrower will be a genuine copy of the
original invoice sent to the Account Debtor named therein; and (v)
all goods described in each invoice will have been delivered to the
Account Debtor and all services described in each invoice will have
been performed, except where the Account Debtor has previously
agreed in writing to accept billings for such goods.
(b) The Borrower shall not re-date any invoice or sale
or make sales on extended dating beyond that customary in the
business of the applicable Borrower or extend or modify any Account
which alters its eligibility status, or, with respect to ineligible
Accounts, which are inconsistent with prudent business practice and
industry standards. If any Borrower becomes aware of any matter
adversely affecting any Account in an amount in excess of $100,000,
including information regarding the Account Debtor's
creditworthiness, the Borrower will promptly so advise the Lender.
(c) The Borrower shall not accept any note or other
instrument (except a check or other instrument for the immediate
payment of money) with respect to any Eligible Account without the
Lender's written consent. If the Lender consents to the acceptance
of any such instrument, it shall be considered as evidence of the
Account and not payment thereof and the Borrower will upon Lender's
request, promptly deliver such instrument to the Lender
appropriately endorsed. Regardless of the form of presentment,
demand, notice of dishonor, protest, and notice of protest with
respect thereto, the Borrower will remain liable thereon until such
instrument is paid in full.
(d) The Borrower shall notify the Lender promptly of all
disputes and claims with an Account Debtor relating to an Eligible
Account that exceeds $100,000 and when no Event of Default exists
hereunder, may settle or adjust them at no expense to the Lender,
but no discount, credit or allowance in excess of $100,000 shall be
granted to any Account Debtor without the Lender's consent, except
for discounts, credits and allowances made or given in the ordinary
course of the business of the applicable Borrower. The Borrower
shall send the Lender a copy of each credit memorandum in excess of
$100,000 as soon as issued. The Lender may, at all times when an
Event of Default exists hereunder, settle or adjust disputes and
claims directly with Account Debtors for amounts and upon terms
which the Lender considers advisable and, in all cases, the Lender
will credit the Borrower's loan account with only the net amounts
received by the Lender in payment of any Accounts.
6.10 Collection of Accounts. (a) Until the occurrence of
an Event of Default that is continuing, each Borrower shall collect
all Accounts, shall receive all payments relating to Accounts, and
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shall promptly deposit all such collections into a Payment Account
established for the account of the Borrowers at a bank acceptable
to the Borrowers and the Lender. All collections relating to
Accounts received in any such Payment Account or directly by the
Borrowers or the Lender, and all funds in any Payment Account or
other account to which such collections are deposited, shall be the
sole property of the Lender and subject to the Lender's sole
control. After the occurrence of an Event of Default that is
continuing, the Lender may, at any time, notify obligors that the
Accounts have been assigned to the Lender and of the Security
Interest therein, and may collect them directly and charge the
collection costs and expenses to the Borrowers' loan account.
After the occurrence of an Event of Default that is continuing,
each Borrower, at Lender's request, shall execute and deliver to
the Lender such documents as the Lender shall require to grant the
Lender access to any post office box in which collections of
Accounts are received.
(a) If sales of Inventory are made for cash, each
Borrower shall immediately deliver to the Lender the identical
checks, cash, or other forms of payment which the Borrower
receives.
(b) All payments received by the Lender on account of
Accounts or as Proceeds of other Collateral will be the Lender's
sole property and will be credited to the Borrowers' loan account
(conditional upon final collection) after allowing one (1) Business
Day for collection.
(c) In the event the Borrowers repay all of the
Obligations upon the termination of this Agreement, other than
through the Lender's receipt of payments on account of Accounts or
Proceeds of other Collateral, such payment will be credited
(conditional upon final collection) to the Borrowers' loan account
one (1) Business Day after the Lender's receipt thereof.
6.11 Inventory. Each Borrower represents and warrants to
the Lender that all of the Inventory is and will be held for sale
or lease, or to be furnished in connection with the rendition of
services, in the ordinary course of business, and is and will be
fit for such purposes. The Borrowers will cause the Inventory to
be kept in good and marketable condition, at their own expense.
Each Borrower agrees that all Inventory produced by the Borrowers
in the United States will be produced in accordance with the
Federal Fair Labor Standards Act of 1938. The Borrowers will
conduct a physical count of the Inventory at least once per Fiscal
Year, except as otherwise agreed to between the Lender and the
Borrowers, and will, upon request of the Lender, supply the Lender
with a copy of such count accompanied by a report of the value of
such Inventory (valued at the lower or cost, on a first-in,
first-out basis, or market value). The Borrowers will not, without
the Lender's written consent, allow any Inventory to be sold on a
bill and hold basis (except as provided in subsection (xiii) of the
definition of Eligible Accounts set forth in this Agreement),
guaranteed sale, sale and return, sale on approval, consignment, or
other repurchase or return basis.
6.12 Documents and Instruments. Each Borrower represents
and warrants to the Lender that: (a) all Documents and Instruments
describing, evidencing, or constituting Collateral, and all
signatures and endorsements thereon, are and will be complete,
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valid, and genuine and (b) all goods evidenced by such Documents
and Instruments were, at the time of their sale, owned by the
Borrower free and clear of all Liens other than Permitted Liens.
6.13 Right to Cure. The Lender may in its sole
discretion pay any amount or do any act required of any Borrower
hereunder in order to preserve, protect, maintain or enforce the
Obligations, the Collateral or the Security Interest, and which the
Borrower fails to pay or do, including, without limitation,
payment of any judgment against the Borrower, any insurance
premium, any warehouse charge, processing charge, any landlord's
claim, and any other Lien upon the Collateral. All payments that
the Lender makes under this Section 6.13 and all out-of-pocket
costs and expenses that the Lender pays or incurs in connection
with any action, taken by it hereunder shall be charged to the
Borrowers' loan account; provided that Lender will make a good
faith effort to notify the Borrowers and provide the Borrowers with
a written, itemized invoice covering such charge. Any payment made
or other action taken by the Lender under this Section 6.13 shall
be without prejudice to any right Lender may have to assert an
Event of Default hereunder and to proceed accordingly.
6.14 Power of Attorney. Each Borrower appoints the
Lender and the Lender's designees as the Borrower's attorney, with
power: (a) to endorse the Borrower's name on any checks, notes,
acceptances, money orders, or other forms of payment or security
that come into the Lender's possession; (b) to sign the Borrower's
name on any invoice, bill of lading, or other document of title
relating to any Collateral, on drafts against customers, on
assignments of Accounts, on notices of assignment, financing
statements and other public records and on verifications of
Accounts to Account Debtors; (c) to notify the post office
authorities, when an Event of Default exists, to change the address
for delivery of the Borrower's mail to an address designated by the
Lender and to receive, open and dispose of all mail addressed to
the Borrower; (d) to send requests for verification of Accounts to
Account Debtors; and (e) to do all things necessary to carry out
this Agreement. The Borrower ratifies and approves all acts of
such attorney. Neither the Lender nor the attorney will be liable
for any acts or omissions or for any error of judgment or mistake
of fact or law. This power, being coupled with an interest, is
irrevocable until this Agreement has been terminated and the
Obligations have been fully satisfied.
6.15 Lender's Rights, Duties, and Liabilities. Each
Borrower assumes all responsibility and liability arising from or
relating to the use, sale or other disposition of the Collateral.
Neither the Lender nor any of its officers, directors, employees,
and agents shall be liable or responsible in any way for the
safekeeping of any of the Collateral, or for any act or failure to
act with respect to the Collateral, or for any loss or damage
thereto, or for any diminution in the value thereof, or for any act
of default by any warehouseman, carrier, forwarding agency or,
other person whomsoever, all of which shall be at the Borrower's
sole risk. The Obligations shall not be affected by any failure of
the Lender to take any steps to perfect the Security Interest or to
collect or realize upon the Collateral, nor shall loss of or damage
to the Collateral release the Borrower from any of the Obligations.
After the occurrence of an Event of Default that has not been cured
or otherwise waived by Lender, the Lender may (but shall not be
required to), without notice to or consent from any Borrower, sue
upon or otherwise collect, extend the time for payment of, modify
or amend the terms of, compromise or settle for cash or credit,
grant other indulgences, extensions, renewals, compositions, or
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releases, and take or omit to take other action with respect to the
Collateral, any security therefor, any agreement relating thereto,
any insurance applicable thereto, or any Person liable directly or
indirectly in connection with any of the foregoing, without
discharging or otherwise affecting the liability of the Borrower
for the Obligations.
6.16 Release of Collateral and Borrower.
(a) If LSB sells any LSB Borrower Subsidiary or any LSB Borrower
Subsidiary sells all or substantially all of its assets, then such LSB
Borrower
Subsidiary shall be allowed to prepay, without penalty or prepayment premium,
all of the outstanding Revolving Loans applicable to such LSB Borrower
Subsidiary, plus the accrued interest relating to such Revolving Loans, and
upon payment of such Revolving Loans, the Lender shall release and terminate
its Security Interest as to the Collateral of such LSB Borrower Subsidiary
and release such LSB Borrower Subsidiary from any further liability and
responsibility under the Loan Documents.
(b) If LSB or any LSB Borrower Subsidiary obtains alternative
financing for its working capital needs at any time during the term of this
Agreement and indefeasibly repays all Loans and Letter of Credit obligations
applicable to LSB or such LSB Borrower Subsidiary under this Agreement, then
Lender will release and terminate its Security Interest as to the Collateral
of LSB or such LSB Borrower Subsidiary and will release LSB or the LSB
Borrower Subsidiary from all Obligations arising under the Loan Documents with
the exception that LSB shall remain liable under its Continuing Guaranty with
Security Agreement dated as of November 21, 1997, provided, however, that
Lender shall release any and all Collateral pledged by LSB pursuant to such
Guaranty.
(c) Upon payment in full of all Obligations, Lender shall
immediately release its Security Interest in and to all of the Collateral.
7. BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES.
7.1 Books and Records. Each Borrower shall maintain, at
all times, correct and complete books, records and accounts in
which complete, correct and timely entries are made of its
transactions in accordance with GAAP. The Borrower shall, by means
of appropriate entries, reflect in such accounts and in all
Financial Statements proper liabilities and reserves for all taxes
and proper provision for depreciation and amortization of Property
and bad debts, all in accordance with GAAP. The Borrower shall
maintain at all times books and records pertaining to the
Collateral in such detail, form, and scope as the Lender shall
reasonably require, including without limitation records of: (a)
all payments received and all credits and extensions granted with
respect to the Accounts; (b) the return, repossession, stoppage in
transit, loss, damage, or destruction of any Inventory; and (c) all
other dealings affecting the Collateral.
7.2 Financial Information. Each Borrower shall promptly
furnish to the Lender all such financial information as the Lender
shall reasonably request, and notify its auditors and accountants
that the Lender is authorized to obtain such information directly
from them. Without limiting the foregoing, Borrower will furnish
to the Lender, in such detail as the Lender shall request, the
following:
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(a) As soon as available, but in any event not later
than ninety (90) days after the close of each Fiscal Year, audited
consolidated and unaudited consolidating balance sheet, statement
of income and expense, retained earnings, and statement of cash
flows and stockholders' equity for the LSB Consolidated Borrowing
Group for such Fiscal Year, and the accompanying notes thereto,
setting forth in each case in comparative form figures for the
previous Fiscal Year, all in reasonable detail, fairly presenting
the financial position and the results of operations of the LSB
Consolidated Borrowing Group as at the date thereof and for the
Fiscal Year then ended, and prepared in accordance with GAAP. The
audited statements shall be examined in accordance with generally
accepted auditing standards by, and accompanied by a report thereon
unqualified as to scope of, independent certified public
accountants selected by LSB and reasonably satisfactory to the
Lender.
(b) As soon as available, but in any event not later
than forty-five (45) days after the close of each Fiscal Quarter
other than the fourth quarter of a Fiscal Year, unaudited
consolidated and consolidating balance sheets of the LSB
Consolidated Borrowing Group as at the end of such quarter, and
consolidated and consolidating unaudited statements of income and
expense and consolidated statements of cash flows for the LSB
Consolidated Borrowing Group for such quarter and for the period
from the beginning of the Fiscal Year to the end of such quarter,
together with a report of Capital Expenditures for such Fiscal
Quarter, all in reasonable detail, fairly presenting the financial
position and results of operation of the LSB Consolidated Borrowing
Group as at the date thereof and for such periods, prepared in
accordance with GAAP consistent with the audited Financial
Statements required pursuant to Section 7.2(a). Such statements
shall be certified to be correct by the chief financial officer or
an executive officer of LSB, subject to normal year-end
adjustments.
(c) As soon as available, but in any event not later
than thirty (30) days after the end of each month, unaudited
consolidated balance sheets of the LSB Consolidated Borrowing Group
as at the end of such month, and consolidated and consolidating
unaudited statements of income and expenses for the LSB
Consolidated Borrowing Group for such month and for the period from
the beginning of the Fiscal Year to the end of such month, all in
reasonable detail (although not as detailed as the reports required
under Sections 7.2(a) and 7.2(b), fairly presenting the financial
position and results of operation of the LSB Consolidated Borrowing
Group as at the date thereof and for such periods, and prepared in
accordance with GAAP consistent with the audited Financial
Statements required pursuant to Section 7.2(a). Such statements
shall be certified to be correct by the chief financial officer,
treasurer or chief accounting officer of LSB, subject to normal
year end adjustments.
(d) With each of the audited Financial Statements
delivered pursuant to Section 7.2(a), a certificate of the
independent certified public accountants that examined such
statements to the effect that they have reviewed and are familiar
with the Loan Documents and that, in examining such Financial
Statements, they did not become aware of any fact or condition
which then constituted an Event of Default, except for those, if
any, described in reasonable detail in such certificate.
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(e) With each of the annual audited and quarterly
unaudited Financial Statements delivered pursuant to Sections
7.2(a) and 7.2(b), a certificate of the chief financial officer,
treasurer or chief accounting officer of the Borrower (i) setting
forth in reasonable detail the calculations required to establish
(i) that the LSB Consolidated Borrowing Group was in compliance
with the covenants set forth in Sections 9.16 and 9.17 hereof and
(ii) that Summit was in compliance with the covenants set forth in
Sections 9.18 and 9.19 hereof, in each instance as of the end of
the Fiscal Year and most recent Fiscal Quarter covered in such
Financial Statements; and, (ii) stating that, except as explained
in reasonable detail in such certificate, (A) nothing has come to
the attention of such officer that would lead such officer to
believe that all of the representations, warranties and covenants
of the Borrowers contained in this Agreement and the other Loan
Documents are not correct and complete as of the date of such
certificate and (B) no Event of Default then exists or existed
during the period covered by such Financial Statements. If such
certificate discloses that a representation or warranty is not
correct or complete, or that a covenant has not been complied with,
or that an Event of Default existed or exists, such certificate
shall set forth what action the Borrower has taken or proposes to
take with respect thereto.
(f) No sooner than ninety (90) days and no less than
thirty (30) days prior to the beginning of each Fiscal Year,
projected consolidated and consolidating balance sheets, statements
of income and expense, and statements of cash flow for the
Borrowers and Subsidiaries as at the end of and for each Fiscal
Quarter of such Fiscal Year.
(g) Promptly upon their becoming available, copies of
each proxy statement, financial statement and report which LSB
sends to its stockholders or files with the Securities and Exchange
Commission.
(h) Promptly after filing with the PBGC and the IRS a
copy of each annual report or other filing filed with respect to
each Plan of the Borrower or any Related Company.
(i) Such additional, reasonable information as the
Lender may from time to time reasonably request regarding the
financial and business affairs of the Borrowers or the
Subsidiaries.
7.3 Notices to Lender. Each Borrower shall notify the
Lender in writing of the following matters at the following times:
(a) Within two Business Days after becoming aware of the
existence of any Event of Default.
(b) Within two Business Days after becoming aware that
the holder of any Debt in excess of $1,000,000 has given notice or
taken any action with respect to a claimed default.
(c) Within five Business Days after a responsible
officer of LSB becomes aware of any change which LSB deems to be a
material adverse change in the Borrower's Property, business,
operations, or condition (financial or otherwise).
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(d) Within five Business Days after a responsible
officer of LSB becomes aware of any pending or threatened action,
proceeding, or counterclaim by any Person, or any pending or
threatened investigation by a Public Authority, which, in the
opinion of such officer, would materially and adversely affect the
Collateral, the repayment of the Obligations, the Lender's rights
under the Loan Documents, or the Borrower's Property, business,
operations, or condition (financial or otherwise).
(e) Within two Business Days after becoming aware of any
pending or threatened strike, work stoppage, material unfair labor
practice claim, or other material labor dispute affecting the
Borrower.
(f) Within five Business Days after a responsible
officer of LSB becomes aware of any violation of any law, statute,
regulation, or ordinance of a Public Authority applicable to
Borrower, which, in the opinion of such officer, would materially
and adversely affect the Collateral, the repayment of the
Obligations, the Lender's rights under the Loan Documents, or the
Borrower's Property, business, operations, or condition (financial
or otherwise).
(g) Within five Business Days after a responsible
officer of LSB becomes aware of any violation or any investigation
of a violation by the Borrower of Environmental Laws which, in the
opinion of such officer, would materially and adversely affect the
Borrower's Property, Collateral, business, operation or condition
(financial or otherwise).
(h) Within five Business Days after a responsible
officer of LSB becomes aware of any Termination Event, accompanied
by any materials required to be filed with the PBGC with respect
thereto; immediately after the Borrower's receipt of any notice
concerning the imposition of any withdrawal liability under Section
4042 of ERISA with respect to a Plan; immediately upon the
establishment of any Pension Plan not existing at the Closing Date
or the commencement of contributions by the Borrower to any Pension
Plan to which the Borrower was not contributing at the Closing
Date; and immediately upon becoming aware of any other event or
condition regarding a Plan or the Borrower's or a Related Company's
compliance with ERISA, which, in the opinion of such officer, would
materially and adversely affect the Borrower's Property, business,
operation or condition (financial or otherwise).
(i) Thirty (30) days prior to the Borrower changing its
name.
Each notice given under this Section 7.3 shall describe the subject
matter thereof in reasonable detail and shall set forth the action
that the Borrower has taken or proposes to take with respect
thereto.
8. GENERAL WARRANTIES AND REPRESENTATIONS.
EACH BORROWER continuously warrants and represents to the
Lender, at all times during the term of this Agreement and until
all Obligations have been satisfied, that, except as hereafter
disclosed to and accepted by the Lender in writing in the exercise
of its reasonable discretion:
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8.1 Authorization, Validity, and Enforceability of this
Agreement and the Loan Documents. The Borrower has the corporate
power and authority to execute, deliver and perform this Agreement
and the other Loan Documents, to incur the Obligations, and to
grant the Security Interest. The Borrower has taken all necessary
corporate action to authorize its execution, delivery, and
performance of this Agreement and the other Loan Documents. No
consent, approval, or authorization of, or filing with, any Public
Authority, and no consent of, any other Person, is required in
connection with the Borrower's execution, delivery, and performance
of this Agreement and the other Loan Documents, except for (a)
those already duly obtained, (b) those required to perfect the
Lender's Security Interest, and (c) the compliance with any of the
conditions precedent set forth in Sections 10.4 and 10.10 hereof.
This Agreement and the other Loan Documents have been duly executed
and delivered by the Borrower and constitute the legal, valid and
binding obligation of the Borrower, enforceable against it in
accordance with its terms without defense, setoff, or counterclaim.
The Borrower's execution, delivery, and performance of this
Agreement and the other Loan Documents do not and will not conflict
with, or constitute a violation or breach of, or constitute a
default under, or result in the creation or imposition of any Lien
upon the Property of the Borrower (except as contemplated by this
Agreement and the other Loan Documents) by reason of the terms of
(a) any material mortgage, lease, agreement, or instrument to which
the Borrower is a party or which is binding upon it, (b) any judg-
ment, law, statute, rule or governmental regulation applicable to
the Borrower, or (c) the Certificate or Articles of Incorporation
or By-Laws of the Borrower.
8.2 Validity and Priority of Security Interest. The
provisions of this Agreement and the other Loan Documents create
legal and valid Liens on all the Collateral in the Lender's favor
and when all proper filings, recordings, and other actions
necessary to perfect such Liens have been made or taken such Liens
will constitute perfected and continuing Liens on all the
Collateral, having priority over all other Liens on the Collateral,
except for Permitted Liens, securing all the Obligations and
enforceable against the Borrower and all third parties.
8.3 Organization and Qualification. Borrower is duly
incorporated and organized and validly existing in good standing
under the laws of the state of its incorporation; (ii) is qualified
to do business as a foreign corporation and is in good standing in
each state where, because of the nature of its activities or
properties, such qualification is required, except where the
failure to so qualify would not have a material adverse effect on
the Borrower; and (iii) has all requisite corporate power and
authority to conduct its business and to own its Property.
8.4 Corporate Name; Prior Transactions. The Borrower
has not, during the past five years, been known by or used any
other corporate or fictitious name, or been a party to any merger
or consolidation, or acquired all or substantially all of the
assets of any Person, or acquired any of its Property out of the
ordinary course of business, except as set forth on Exhibit E.
8.5 Subsidiaries and Affiliates. Exhibit F is a correct
and complete list of the name and relationship to the Borrower of
each and all of the Borrower's Subsidiaries and other Affiliates,
which list may be amended by Borrower from time to time as LSB adds
new or additional Subsidiaries or Affiliates. Each Subsidiary is
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(a) duly incorporated and organized and validly existing in good
standing under the laws of its state of incorporation set forth on
Exhibit F and (b) qualified to do business as a foreign corporation
and in good standing in the states set forth opposite its name on
Exhibit F, which are the only states in which such qualification is
necessary in order for it to own or lease its Property and conduct
its business, except where the failure to so qualify would not have
a material adverse effect on the LSB Borrowing Group taken as a
whole.
8.6 Financial Statements and Projections.
(a) LSB has delivered to the Lender the audited
consolidated balance sheet and related statements of income,
retained earnings, statements of cash flows, and changes in
stockholders' equity for LSB, as of December 31, 1998 and for the
Fiscal Year then ended, accompanied by the report thereon of LSB's
independent certified public accountants. LSB has also delivered
to the Lender the unaudited consolidated balance sheets and related
statements of income and cash flows for LSB, as at _______________,
1999 and for the _____ months then ended. Such financial
statements are attached hereto as Exhibit G-1. All such financial
statements have been prepared in accordance with GAAP and present
accurately and fairly the Borrower's financial position as at the
dates thereof and its results of operations for the periods then
ended.
(b) The Latest Forecasts, attached hereto as Exhibit G-
2, represent the Borrower's best estimate of the Borrower's future
financial performance for the periods set forth therein. The
Latest Forecasts have been or will be prepared on the basis of
certain assumptions, which the Borrower believes are fair and
reasonable in light of current and reasonably foreseeable business
conditions; provided, however, that although such forecasts repre-
sent the Borrower's best estimate, the Borrower makes no
representation that it will achieve such forecasts.
8.7 Capitalization. LSB's authorized capital stock
consists of (i) 75,000,000 shares of Common Stock, par value $.10
per share; (ii) 250,000 shares of Preferred Stock, par value $100
per share; and (iii) 5,000,000 shares of Class C Preferred Stock,
no par value.
8.8 Solvency. Each Borrower is solvent prior to and
after giving effect to the making of the Revolving Loans, and after
taking into account Intercompany Accounts. If at any time any
Borrower, other than LSB, becomes insolvent, LSB shall have a
period of up to ten (10) Business Days after LSB learns of
Borrower's insolvency within which to recapitalize Borrower in
order to restore Borrower to a solvent state.
8.9 Title to Property. Except for Permitted Liens, and
except for Property which the Borrower leases, the Borrower has, to
its knowledge, good and marketable title in fee simple to the real
property listed in Exhibit H and good, indefeasible, and
merchantable title to all of its other Property free of all Liens
except Permitted Liens.
8.10 Real Property; Leases. Exhibit H hereto is a
correct and complete list of all real property owned by the
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Borrower, and all leases and subleases of real property by the
Borrower as lessee or sublessee where Collateral is located. Each
of such leases and subleases is valid and enforceable in accordance
with its terms and is in full force and effect and no material
default by any party to any such lease or sublease exists.
8.11 Proprietary Rights. Exhibit B hereto is a correct
and complete list of all of the Proprietary Rights owned by
Borrower. None of the Proprietary Rights is subject to any
licensing agreement or similar arrangement except as set forth on
Exhibit B. To the Borrower's knowledge, none of the Proprietary
Rights infringes on or conflicts with any other Person's Property.
The Proprietary Rights described on Exhibit B constitute all of the
Property of such type necessary to the current and anticipated
future conduct of the Borrower's business.
8.12 Trade Names and Terms of Sale. All trade names or
styles under which the Borrower will sell Inventory or create
Accounts, or to which instruments in payment of Accounts may be
made payable, are listed on Exhibit I hereto. The terms of sale on
which such sales of Inventory will be made are set forth on Exhibit
I.
8.13 Litigation. Except as set forth on Exhibit J or as
described in the reports filed by LSB with the Securities and
Exchange Commission or in the Offering Memorandum, there is no
pending or, to the Borrower's knowledge, threatened suit,
proceeding, or counterclaim by any Person, or investigation by any
Public Authority, or any basis for any of the foregoing, which
would have a material adverse effect on the LSB Consolidated
Borrowing Group, taken as a whole, or (ii) involve damages or a
claim for damages in excess of $1,000,000 and not fully covered by
insurance.
8.14 Labor Disputes. Except as set forth on Exhibit K or
as described in reports filed by LSB with the Securities and
Exchange Commission: (a) there is no collective bargaining
agreement or other labor contract covering employees of the
Borrower; (b) no such collective bargaining agreement or other
labor contract is scheduled to expire during the term of this
Agreement; (c) no union or other labor organization is seeking to
organize, or to be recognized as, a collective bargaining unit of
employees of the Borrower; and (d) there is no pending or, to the
Borrower's knowledge, threatened strike, work stoppage, material
unfair labor practice claims, or other material labor dispute which
would have a material adverse effect on the LSB Consolidated
Borrowing Group, taken as a whole.
8.15 Environmental Laws. Except as disclosed on Exhibit
M hereto, and or as described in reports filed by LSB prior to the
Closing Date with the Securities and Exchange Commission or in the
Offering Memorandum, and as hereafter disclosed by Borrower to
Lender in writing, and to the Borrower's knowledge:
(a) All environmental permits, certificates, licenses,
approvals, registrations and authorizations ("Permits") required
under all Environmental Laws in connection with the business of the
Borrower have been obtained, unless the failure to obtain such
Permits would not have a material adverse effect on the LSB
Borrower Subsidiaries, taken as a whole;
(b) No notice, citation, summons or order has been
issued, no complaint has been filed, no penalty has been assessed
and no investigation or review is pending or threatened by any
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governmental entity with respect to any generation, treatment,
storage, recycling, transportation or disposal of any hazardous or
toxic waste (including petroleum products and radioactive
materials) generated or used ("Hazardous Substances") by the
Borrower, which would have a material adverse effect on the LSB
Borrower Subsidiaries, taken as a whole;
(c) No Borrower has received any request for information
that is likely to lead to a claim, any notice of claim, demand or
other notification that the Borrower is or may be potentially
responsible with respect to any clean up of any threatened or
actual release of any Hazardous Substance;
(d) There are no underground storage tanks, active or
abandoned, at any property now owned, operated or leased by the
Borrower.
(e) Borrower has not knowingly transported any Hazardous
Substances to any location which is listed on the National Priority
List under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), which is the
subject of any federal or state enforcement actions which may lead
to claims against Borrower for clean up costs, remedial work,
damages to natural resources or for personal injury claims,
including, but not limited to, claims under CERCLA which would have
a material adverse effect on the LSB Borrower Subsidiaries, taken
as a whole.
(f) No written notification of a release of Hazardous
Substance has been filed by or on behalf of the Borrower or in
relation to any Property now owned, operated or leased by the
Borrower or previously owned, operated or leased by the Borrower at
the time such property was so owned, operated or leased. No such
Property is listed or proposed for listing on the National Priority
List promulgated pursuant to CERCLA, or on any similar state list
of sites requiring investigation or clean up.
(g) There are no environmental Liens on any material
properties owned or leased by the Borrower and no governmental
actions have been taken or are in process or pending which could
subject any of such Properties to such Liens.
(h) The Borrower shall promptly forward a copy to Lender
of any environmental written inspections, investigations or studies
prepared by or to be prepared by the Borrower relating to
Properties now owned, operated or leased by the Borrower; provided,
however, that Borrower makes no representation or warranty with
respect to environmental inspections, investigations, studies,
audits, tests, reviews or other analyses conducted by or on behalf
of Lender.
8.16 No Violation of Law. Except as disclosed in Exhibit
J or in reports filed by LSB prior to the Closing Date with the
Securities and Exchange Commission or in the Offering Memorandum,
to the Borrower's knowledge, the Borrower is not in violation of
any law, statute, regulation, ordinance, judgment, order, or decree
applicable to it which violation would have a material adverse
effect on the LSB Borrower Subsidiaries, taken as a whole.
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8.17 No Default. The Borrower is not in default with
respect to any note, loan agreement, mortgage, lease, or other
agreement to which the Borrower is a party or bound, where the
amount owed by Borrower under such note, loan agreement, mortgage,
lease, or other agreement exceeds $750,000.
8.18 Plans. Each Plan has been maintained at all times
in compliance, in all material respects, with its provisions and
applicable law, including, without limitation, compliance with the
applicable provisions of ERISA and the Code. All Pension Plans are
listed on Exhibit L, and those, if any, which are a Multi-employer
Plan are designated as such, and a copy of each such Pension Plan
which has been requested in writing by Lender has been furnished to
Lender. Except as set forth on Exhibit L, no Pension Plan has
incurred any accumulated funding deficiency, as defined in Section
302(a)(2) of ERISA and Section 412(a) of the Code, whether or not
waived, which would have a material adverse effect on the LSB
Borrowing Group, taken as a whole. Except as set forth on Exhibit
L, each Pension Plan, which is intended to be a qualified Pension
Plan under Section 401(a) of the Code, as currently in effect has
received a favorable determination letter from the Internal Revenue
Service finding that the current form of the Plan is qualified
under Section 401(a) of the Code and the trust related thereto is
exempt from federal income tax under Section 501(a) of the Code.
The Borrower has not incurred any liability to the PBGC other than
the payment of premiums, and there are no premium payments which
have become due, are unpaid, and the non-payment of which would
have a material adverse effect on the LSB Borrower Subsidiaries,
taken as a whole. Neither LSB nor any of its Subsidiaries, nor any
fiduciary of or trustee to any Plan has breached any of the
responsibilities, obligations or duties imposed on it under the
terms of the Plan or by ERISA with respect to any Plan the breach
of which would have a material adverse effect on the LSB Borrower
Subsidiaries, taken as a whole. LSB has established reserves on
its books to provide for the benefits earned and other liabilities
accrued under each such Plan in amounts sufficient to substantially
provide for such benefits and liabilities which have not been
funded through the trust, if any, established for such Plan.
8.19 Taxes. The Borrower has filed all tax returns and
other reports which it was required by law to file on or prior to
the date hereof and has paid all taxes, assessments, fees, and
other governmental charges, and penalties and interest, if any,
against it or its Property, income, or franchise, that are due and
payable, except such Taxes which are being contested in good faith
and for which appropriate reserves have been established in
connection therewith, or for which an extension as to the date of
filing has been authorized.
8.20 Use of Proceeds. None of the transactions
contemplated in this Agreement (including, without limitation, the
use of certain proceeds from such loans) will violate or result in
the violation of Section 7 of the Securities Exchange Act of 1934,
as amended, or any regulations issued pursuant thereto, including,
without limitation, Regulations T, U and X of the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"),
12 C.F.R., Chapter II. Borrower does not own or intend to carry or
purchase any "margin stock" within the meaning of said Regulation
U. None of the proceeds of the loans will be used, directly or
indirectly, to purchase or carry (or refinance any borrowing, the
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proceeds of which were used to purchase or carry) any "security"
within the meaning of the Securities Exchange Act of 1934, as
amended.
8.21 Private Offerings. Borrower has not, directly or
indirectly, offered the Revolving Loans for sale to, or solicited
offers to buy part thereof from, or otherwise approached or
negotiated with respect thereto with, any prospective purchaser
other than Lender. Borrower hereby agrees that neither it nor
anyone acting on its behalf has offered or will offer the Revolving
Loan or any part thereof or any similar securities for issue or
sale to or solicit any offer to acquire any of the same from anyone
so as to bring the issuance thereof within the provisions of
Section 5 of the Securities Act of 1933, as amended.
8.22 Broker's Fees. Borrower represents and warrants to
Lender that, with respect to the financing transaction herein
contemplated, no Person is entitled to any brokerage fee or other
commission as a result of acts by the Borrower and Borrower agrees
to indemnify and hold Lender harmless against any and all such
claims if such claim is due to the acts of the Borrower.
8.23 No Material Adverse Change. No material adverse
change has occurred in the Property, business, operations, or
conditions (financial or otherwise) of the LSB Consolidated
Borrowing Group, taken as a whole, since the date of the most
recent Financial Statements delivered to the Lender, except as
otherwise disclosed in the reports filed by LSB with the Securities
and Exchange Commission, if any.
8.24 Debt. After giving effect to the making of each
Revolving Loan, the Borrower has no Debt except Permitted Debt.
9. AFFIRMATIVE AND NEGATIVE COVENANTS. EACH BORROWER
covenants that, so long as any of the Obligations remain
outstanding or this Agreement is in effect:
9.1 Taxes and Other Obligations. The Borrower, no later
than ten days after such payments become due, shall: (a) file when
due (including extensions) all tax returns and other reports which
it is required to file, pay when due all taxes, fees, assessments
and other governmental charges against it or upon its Property,
income, and franchises, make all required withholding and other tax
deposits, and establish adequate reserves for the payment of all
such items, and shall provide to the Lender, upon request,
satisfactory evidence of its timely compliance with the foregoing;
and (b) pay all Debt owed by it within normal business terms and
consistent with past practices; provided, however, that the
Borrower need not pay any tax, fee, assessment, governmental
charge, or Debt, or perform or discharge any other obligation, that
it is contesting in good faith by appropriate proceedings
diligently pursued.
9.2 Corporate Existence and Good Standing. The Borrower
shall maintain its corporate existence and its qualification and
good standing in all states necessary to conduct its business and
own its Property, except where the failure to so qualify would not
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have a material adverse effect on the Borrower, and shall obtain
and maintain all licenses, permits, franchises and governmental
authorizations necessary to conduct its business and own its
Property.
9.3 Maintenance of Property and Insurance. The Borrower
shall: (a) maintain all of its Property necessary and material in
its business in good operating condition and repair, ordinary wear
and tear excepted, provided, however, that Borrower shall have a
period of ten (10) days after learning that repair is necessary
within which to repair any Property which has not been so
maintained before an Event of Default shall be deemed to have
occurred; and (b) in addition to the insurance required by Section
6.7, maintain with financially sound and reputable insurers such
other insurance with respect to its Property and business against
casualties and contingencies of such types (including, without
limitation, business interruption, public liability, product
liability, and larceny, embezzlement or other criminal
misappropriation), and in such amounts as is customary for Persons
of established reputation engaged in the same or a similar business
and similarly situated, naming the Lender, at its request, as
additional insured under each such policy as to the Collateral.
9.4 Environmental Laws. Except as disclosed to Lender
in writing prior to the Closing Date in connection with Section
8.15, the Borrower will use all reasonable efforts to conduct its
business in substantial compliance with all Environmental Laws
applicable to it, including, without limitation, those relating to
the generation, handling, use, storage, and disposal of hazardous
and toxic wastes and substances. The Borrower shall take prompt
and appropriate action to respond to any noncompliance with
Environmental Laws and shall regularly report to the Lender on such
response. Without limiting the generality of the foregoing,
whenever there is potential noncompliance with any Environmental
Laws, the Borrower shall, at the Lender's request and the
Borrower's expense: (a) cause an independent environmental
engineer acceptable to the Lender to conduct such tests of the site
where the Borrower's noncompliance or alleged noncompliance with
Environmental Laws has occurred and prepare and deliver to the
Lender a report setting forth the results of such tests, a proposed
plan for responding to any environmental problems described
therein, and an estimate of the costs thereof; and (b) provide to
the Lender a Supplemental report of such engineer whenever the
scope of the environmental problems, or the Borrower's response
thereto or the estimated costs thereof, shall materially change.
9.5 Mergers, Consolidations, Acquisitions, or Sales.
The Borrower shall not enter into any transaction of merger,
reorganization, or consolidation in which Borrower is not the
survivor, or transfer, sell, assign, lease, or otherwise dispose of
all or substantially all of its Property, or wind up, liquidate or
dissolve, or agree to do any of the foregoing, except (i) sales of
Inventory in the ordinary course of its business, or (ii) after
thirty (30) days prior written notice to Lender, mergers or
consolidations of the Borrower into any of the Borrower
Subsidiaries or a merger of a Borrower Subsidiary into the Borrower
or the sale of all or substantially all of the assets of the
Borrower to any of the Borrower Subsidiaries or the sale of all or
substantially all of the assets of a Borrower Subsidiary to the
Borrower.
9.6 Guaranties. The Borrower shall not make, issue, or
become liable on any secured Guaranty, except Guaranties in favor
of the Lender and endorsements of instruments for deposit.
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9.7 Debt. Borrower shall not incur or maintain any Debt
other than Permitted Debt.
9.8 Prepayment. The Borrower shall not voluntarily
prepay any Debt, except the Obligations in accordance with the
terms of this Agreement and as provided in Section 10.8 hereof.
9.9 Transactions with Affiliates. Except (a) as set
forth below, or (b) as set forth in Section 9.14 hereof, or (c)
transactions described in the "Certain Relationships and Related
Transactions" section of the Offering Memorandum, or (d) as
otherwise provided in this Agreement, the Borrower shall not sell,
transfer, distribute, or pay any money or Property to any
Affiliate, or lend or advance money or Property to any Affiliate,
or invest in (by capital contribution or otherwise) or purchase or
repurchase any stock or indebtedness, or any Property, of any
Affiliate, or become liable on any secured Guaranty of the
indebtedness, dividends, or other obligations of any Affiliate,
except nothing contained herein shall limit or restrict the
Borrower from (i) performing any agreements entered into with an
Affiliate prior to the date hereof, or (ii) engaging in other
transactions with Affiliates in the normal course of business, in
amounts and upon terms disclosed to the Lender, and which are no
less favorable to the Borrower than would be obtainable in a
comparable arm's length transaction with a third party who is not
an Affiliate. Subject to applicable law, Borrowers may borrow any
amounts from each other and repay such amounts on terms agreed to
between them without limitations.
9.10 Plans and Compensation. The Borrower shall not take
any action, or shall fail to take any action, that will cause or be
reasonably expected to cause any representation or warranty
contained in Section 8.18 (other than the listing of Pension Plans
on Exhibit L), if made on and again as of any date on or after the
date of this Agreement, to not be true and, without limitation and
without excusing such violation, if such a prohibited action or
inaction occurs or fails to occur, Borrower shall notify Lender in
writing of the nature of the resulting consequences or expected
consequences, and a description of the action Borrower is taking or
proposing to take with respect thereto and, when known, any action
taken by the Internal Revenue Service of the Department of Labor,
or the PBGC, with respect thereto.
9.11 Reserved.
9.12 Liens. The Borrower shall not create, incur,
assume, or permit to exist any Lien on any Property now owned or
hereafter acquired by the Borrower, except Permitted Liens.
9.13 New Subsidiaries. The Borrower shall not, directly
or indirectly, organize or acquire any new subsidiary which would
have an interest in the Collateral.
9.14 Distributions and Restricted Investments. No Borrower
shall (a) directly or indirectly declare or make, or incur any liability to
make, any Distribution, or (b) make any Restricted Investments, except:
(i) Borrowers may make Distributions and Restricted Investments to CCI and
the other members of the LSB Consolidated Borrowing Group; (ii) so long
as no Event of Default has occurred and is continuing, currently scheduled
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Dividends by LSB and performance of all of the terms, provisions and
conditions by LSB, relating to or in connection with or arising out of any
and all series of LSB's preferred stock issued and outstanding as of the date
hereof and the payments of an annual cash dividend on its Common Stock in an
amount equal to $.06 a share payable on a semi-annual basis; (iii) in addition
to (i) above, Borrowers may make Restricted Investments to any Subsidiary of
LSB other than to CCI and the members of the LSB Consolidated Borrowing Group,
provided, however, that the sum of all such Restricted Investments from
Borrowers and all other members of the LSB Consolidated Borrowing Group shall
not exceed $200,000 in the aggregate per annum; (iv) Borrowers may make
Restricted Investments in Affiliates outstanding as of the date hereof;
(v) Borrowers may make other Restricted Investments constituting Acquisitions
not otherwise permitted above in this Section as long as such Restricted
Investments when aggregated with all other Restricted Investments for the same
Acquisition from all members of the LSB Consolidated Borrowing Group do not
exceed $2,000,000 in cash investments and issued and/or assumed interest-
bearing debt per Acquisition and $10,000,000 in cash investments and issued
and/or assumed interest-bearing debt in the aggregate for all such
Acquisitions per annum; provided, however, that interest-bearing debt of the
acquired company which Lender in its sole and absolute discretion agrees to
refinance as a working capital facility shall not be included in the $2,000,000
and the $10,000,000 limitations; and further provided that nothing in this
subsection (v) shall be construed to imply Lender's willingness in advance
to provide any such refinancing; (vi) CCI may make the Distributions
described on Schedule 10.8; and (vii) LSB may purchase up to $6,000,000 in
the aggregate of its treasury stock from January 1, 1998 through the
termination of this Agreement provided that, at the time of and immediately
following any such purchase thereof Borrower Subsidiaries' aggregate
Availability is at least $3,000,000. Notwithstanding any provision to the
contrary contained herein, the Account currently owing to EDC by its Affiliate,
TES, may be converted to preferred stock to be owned and controlled by EDC.
9.15 Capital Expenditures. No Borrower shall make or incur any
Capital Expenditure if, after giving effect thereto, the aggregate amount of
all Capital Expenditures by the LSB Consolidated Borrowing Group during the
Fiscal Year would exceed $10,000,000.
9.16 LSB Adjusted Tangible Net Worth. At all times after 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:
The LSB Adjusted Tangible Net Worth increased by an amount equal to the
purchase price paid by LSB 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
Fiscal Quarter during
Fiscal Year Ending
December 31, 1999 $21,300,000 $23,600,000 $24,000,000 $23,500,000
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First Fiscal Quarter The LSB Adjusted Tangible Net Worth as of
during Fiscal Year Ending December 31, 1999 less $4,500,000 and less all
dividends paid by LSB in cash from January 1,
December 31, 2000 2000 until the date of calculation.
Second Fiscal Quarter The LSB Adjusted Tangible Net Worth as of
during Fiscal Year Ending March 31, 2000 plus fifty percent (50%) of
the profits for the fiscal quarter then
ending, if any, with no
December 31, 2000 deductions for losses, less all dividends paid by
LSB in cash from January 1, 2000 until the date
of calculation
Third Fiscal Quarter The LSB Adjusted Tangible Net Worth as of
during Fiscal Year Ending June 30, 2000 plus fifty percent (50%) of
the profits for the fiscal quarter then
ending, if any, with no
December 31, 2000 and deductions for losses, less all dividends paid by
each Fiscal Quarter during LSB in cash from January 1, 2000 until the
each Fiscal Quarter ending date of calculation
thereafter:
9.17 LSB Debt Ratio. At all times after 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:
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 LSB 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
Fiscal Year Ending
December 31, 1999 9.3:1 8.4:1 8.1:1 8.1:1
Fiscal Year Ending
December 31, 2000 8.1:1 8.1:1 8.1:1 8.1:1
Each Fiscal Quarter during each Fiscal Year ending thereafter: 8.1:1
9.18 Summit Adjusted Tangible Net Worth. At all times after a
Springing Covenant Event has occurred whereafter such financial
covenant shall remain in effect until the termination of this
Agreement, the Summit Adjusted Tangible Net Worth (without taking
into account any purchases of treasury stock) will not be less
than $7,200,000 at the end of each Fiscal Quarter during each
Fiscal Year.
9.19 Summit Debt Ratio. At all times after a Springing
Covenant Event has occurred whereafter such financial covenant
shall remain in effect until the termination of this Agreement,
the ratio of Debt of Summit to the Summit Adjusted Tangible Net
Worth will not be greater than 1.0 to 1.0 at the end of each
Fiscal Quarter during each Fiscal Year.
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9.20 Further Assurances. The Borrowers shall execute and
deliver, or cause to be executed and delivered, to the Lender such
documents and agreements, and shall take or cause to be taken such
actions, as the Lender may, from time to time, reasonably request
to carry out the terms and conditions of this Agreement and the
other Loan Documents.
10. CONDITIONS PRECEDENT TO EACH LOAN. The obligation of the
Lender to make each Revolving Loan or to provide for the issuance
of any Letter of Credit shall be subject to the conditions
precedent that on the date of any such extension of credit, the
following statements shall be true, and the acceptance by any
Borrower of any extension of credit shall be deemed to be a
statement to the effect set forth in clauses (i) and (ii), with the
same effect as the delivery to the Lender of a certificate signed
by the chief executive officer and chief financial officer of the
Borrower, dated the date of such extension of credit, stating that:
(i) The representations and warranties contained in
this Agreement and the other Loan Documents are correct in all
material respects on and as of the date of such extension of
credit as though made on and as of such date, except to the
extent the Lender has been notified by the Borrower that any
representation or warranty is no longer correct and the reason
therefor and the Lender has explicitly accepted in writing
such disclosure in the exercise of its reasonable discretion;
and
(ii) No Event has occurred and is continuing, or
would result from such extension of credit, which constitutes
an Event of Default.
11. DEFAULT; REMEDIES.
11.1 Events of Default. It shall constitute an event of
default ("Event of Default") if any one or more of the following
shall occur for any reason:
(a) any failure by any Borrower to make payment of
principal, interest, fees or premium on any of the Obligations when
due;
(b) any representation or warranty made by any Borrower
in this Agreement, any of the other Loan Documents, any Financial
Statement, or any certificate furnished by any Borrower at any time
to the Lender shall prove to be untrue in any material respect as
of the date when made or furnished;
(c) default shall occur in the observance or performance
of any of the covenants and agreements contained in this Agreement,
or in any of the other Loan Documents, or if any such agreement or
document shall terminate (other than in accordance with its terms
or the terms hereof or with the written consent of the Lender) or
become void or unenforceable without the written consent of the
Lender other than as a direct result of any conduct solely on the
part of the Lender;
(d) any default by any Borrower under any material
agreement or instrument (other than an agreement or instrument
evidencing the lending of money), which default would have a
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material adverse effect on the LSB Borrower Subsidiaries, taken as
a whole, and such default continues for thirty (30) days after such
breach first occurs; provided, however, that such grace period
shall not apply, and an Event of Default shall exist, promptly upon
such breach, if such breach may not, in Lender's reasonable
determination, be cured by Borrower during such thirty (30) day
grace period;
(e) any default by any Borrower in any payment of
principal of or interest on any indebtedness (other than the
Obligations) for borrowed money where the then outstanding amount
exceeds $500,000 beyond any period of grace provided with respect
thereto or in the performance of any other agreement, term or
condition contained in any agreement under which any such
obligation is created if (i) the effect of such default is to cause
or permit the holder or holders of such obligation to cause, such
obligation to become due prior to its stated maturity, and (ii) the
effect of such default would have a material adverse effect on the
Borrower.
(f) any Borrower shall make a general assignment for
benefit of creditors; or any proceeding shall be instituted by any
Borrower seeking to adjudicate it a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors or seeking entry of an order for relief or the
appointment of a receiver, trustee or other similar official for it
or for any substantial part of its property or any Borrower shall
take any corporate action to authorize any of the actions set forth
above in this Subsection 11.1(f).
(g) an involuntary petition shall be filed or an action
or proceeding otherwise commenced against any Borrower seeking
reorganization, arrangement or readjustment of the Borrower's debts
or for any other relief under the Federal Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency act or law,
state or federal, now or hereafter existing and remain undismissed
or unvacated for a period of sixty (60) days;
(h) a receiver, assignee, liquidator, trustee or similar
officer for any Borrower for all or substantially all of its
Property shall be appointed involuntarily;
(i) any Borrower shall file a certificate of dissolution
under applicable state law or shall be liquidated, dissolved or
wound-up or shall commence or have commenced against it any action
or proceeding for dissolution, winding-up or liquidation, or shall
take any corporate action in furtherance thereof, except if one
Borrower merges or consolidates with another Borrower;
(j) any guaranty of the Obligations shall be terminated,
revoked or declared void or invalid other than by an action
undertaken by Lender;
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(k) one or more final judgments for the payment of money
aggregating in excess of $1,000,000 (not covered by insurance)
shall be rendered against any of the LSB Borrower Subsidiaries, and
LSB or any Borrower shall fail to discharge the same within thirty
(30) days from the date of notice of entry thereof or to appeal
therefrom or reach a negotiated settlement in connection therewith;
(l) any loss, theft, damage or destruction of any item
or items of Collateral occurs which: (i) materially and adversely
affects the operation of the Borrowers' business taken as a whole;
or (ii) is material in amount and is not adequately covered by
insurance;
(m) any event or condition shall occur, or exist with
respect to a Plan that would, in the Lender's reasonable judgment,
subject the Borrower or any Subsidiary to any tax, penalty or other
liabilities under the terms of the Plan, under ERISA or under the
Code which in the aggregate are material in relation to the
business, operations, Property or financial or other condition of
the LSB Borrower Subsidiaries taken as a whole;
(n) there occurs after the date hereof an Ownership
Change (as defined below) in LSB. For purposes of this Agreement,
an "Ownership Change" in LSB is deemed to have occurred if any
Person (except Jack E. Golsen, members of his Immediate Family [as
defined below] and any entity controlled by Jack E. Golsen or
members of his Immediate Family), together with such Person's
affiliates and associates, is or becomes the beneficial owner,
directly or indirectly, of more than fifty percent (50%) of the
outstanding Common Stock of LSB. The term "Immediate Family" of
any Person means the spouse, siblings, children, mothers and
mothers-in-law, fathers and fathers-in-law, sons and daughters-in-
law, daughters and sons-in-law, nieces, nephews, brothers and
sisters-in-law, sisters and brothers -in-law;
(o) an event of default exists under any of the other
LSB-Related Loan Agreements or under any of the Loan Documents;
(p) any "event of default" (as such term is defined in
the Bond Indenture) occurs under the Bond Indenture or any of the
Notes issued in connection therewith; and
(q) if any one or more of the LSB-Related Loan
Agreements terminates prior to the termination of the other LSB-
Related Loan Agreements without the Lender's prior consent thereto,
unless as otherwise provided in Section 6.16.
11.2 Remedies.
(a) If an Event of Default exists, the Lender may,
without notice to or demand on any Borrower, do one or more of the
following at any time or times and in any order: (i) reduce the
amount of or refuse to make Revolving Loans and restrict or refuse
to arrange for Letters of Credit; (ii) terminate this Agreement;
(iii) declare any or all Obligations to be immediately due and
payable (provided however that upon the occurrence of any Event of
Default described in Sections 11.1(f), 11.1(g), or 11.1(h), all
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Obligations shall automatically become immediately due and
payable); and (iv) pursue its other rights and remedies under the
Loan Documents and applicable law. The foregoing shall not be
construed to limit the Lender's discretion to take the actions
described in clause (i) of this subparagraph (a) at any other time.
(b) If an Event of Default exists: (i) the Lender shall
have, in addition to all other rights, the rights and remedies of
a secured party under the UCC; (ii) the Lender may, at any time,
take possession of the Collateral and keep it on the Borrower's
premises, at no cost to the Lender, or remove any part of it to
such other place or places as the Lender may desire, or, the
Borrower shall, upon the Lender's demand, at the Borrower's cost,
assemble the Collateral and make it available to the Lender at a
place reasonably convenient to the Lender; and (iii) the Lender may
sell and deliver any Collateral at public or private sales, for
cash, upon credit or otherwise, at such prices and upon such terms
as the Lender deems advisable, in its sole discretion, and may, if
the Lender deems it reasonable, postpone or adjourn any sale of the
Collateral by an announcement at the time and place of sale or of
such postponed or adjourned sale without giving a new notice of
sale. Without in any way requiring notice to be given in the
following manner, each Borrower agrees that any notice by the
Lender of sale, disposition or other intended action hereunder or
in connection herewith, whether required by the UCC or otherwise,
shall constitute reasonable notice to the Borrowers if such notice
is mailed by registered or certified mail, return receipt
requested, postage prepaid, or is delivered personally against
receipt, at least five (5) days prior to such action to the
Borrower's address specified in or pursuant to Section 13.10. If
any Collateral is sold on terms other than payment in full at the
time of sale, no credit shall be given against the Obligations
until the Lender receives payment, and if the buyer defaults in
payment, the Lender may resell the Collateral without further
notice to the Borrowers. In the event the Lender seeks to take
possession of all or any portion of the Collateral by judicial
process, each Borrower irrevocably waives: (a) the posting of any
bond, surety or security with respect thereto which might otherwise
be required; (b) any demand for possession prior to the
commencement of any suit or action to recover the Collateral; and
(c) any requirement that the Lender retain possession and not
dispose of any Collateral until after trial or final judgment.
Each Borrower agrees that the Lender has no obligation to preserve
rights to the Collateral or marshal any Collateral for the benefit
of any Person. Following the occurrence of an Event of Default
that is continuing, the Lender is hereby granted a license or other
right to use, without charge, each Borrower's labels, patents,
copyrights, name, trade secrets, trade names, trademarks, and
advertising matter or any similar property, in completing
production of, advertising or selling any Collateral, and the
Borrower's rights under all licenses and all franchise agreements
shall inure to the Lender's benefit, as long as such does not
violate in any manner such other loan agreements that may be in
place at such time. The proceeds of sale shall be applied first to
all expenses of sale, including attorneys' fees, and second, in
whatever order the Lender elects, to all Obligations. The Lender
will return any excess to the Borrowers and the Borrowers shall
remain liable for any deficiency.
(c) If an Event of Default occurs and is continuing,
each Borrower hereby waives: (i) all rights to notice and hearing
prior to the exercise by the Lender of the Lender's rights to
repossess the Collateral without judicial process or to replevy,
attach or levy upon the Collateral without notice or hearing, and
(ii) all rights of set-off and counterclaim against Lender.
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(d) If the Lender terminates this Agreement upon an
Event of Default that has not been cured or otherwise waived to
Lender's satisfaction, the Borrowers shall pay the Lender,
immediately upon termination, an early termination penalty equal to
the early termination fee that would have been payable under
Article 12 if this Agreement had been terminated on that date
pursuant to the Borrower's election.
12. TERM AND TERMINATION. The term of this Agreement shall
extend until December 31, 2000 (the "Termination Date"). This
Agreement shall automatically be renewed thereafter for successive
terms of thirteen (13) months each, unless this Agreement is
terminated as provided below. The Lender and the Borrowers shall
each have the right to terminate this Agreement, without premium or
penalty, (i) at the end of the initial term or at the end of any
renewal term by giving the other written notice not less than sixty
(60) days prior to the end of such term by registered or certified
mail, or (ii) as provided in Section 6.16. The Borrowers may also
terminate this Agreement at any time during its initial term or any
renewal periods if: (a) they give the Lender sixty (60) days prior
written notice of termination by registered or certified mail; (b)
they pay all Revolving Loans and reimburse Lender for all Letter of
Credit obligations under this Agreement on or prior to the
effective date of termination; and (c) except as otherwise provided
herein, they pay the Lender, on or prior to the effective date of
termination, the Early Termination Fee if such termination is made
prior to the Termination Date. The Lender may also terminate this
Agreement without notice upon an Event of Default that has not been
cured or otherwise waived to Lender's satisfaction. Upon the
effective date of termination of this Agreement for any reason
whatsoever, all Obligations shall become immediately due and
payable. Notwithstanding the termination of this Agreement, until
all Obligations are paid and performed in full, the Lender shall
retain all its rights and remedies hereunder (including, without
limitation, in all then existing and after-arising Collateral)
except as otherwise provided in Section 6.16 of this Agreement.
13. MISCELLANEOUS.
13.1 Cumulative Remedies; No Prior Recourse to
Collateral. The enumeration herein of the Lender's rights and
remedies is not intended to be exclusive, and such rights and
remedies are in addition to and not by way of limitation of any
other rights or remedies that the Lender may have under the UCC or
other applicable law. The Lender shall have the right, in its sole
discretion, to determine which rights and remedies are to be
exercised and in which order. The exercise of one right or remedy
shall not preclude the exercise of any others, all of which shall
be cumulative. The Lender may, without limitation, proceed
directly against the Borrower to collect the Obligations without
any prior recourse to the Collateral.
13.2 No Implied Waivers. No act, failure or delay by the
Lender shall constitute a waiver of any of its rights and remedies.
No single or partial waiver by the Lender of any provision of this
Agreement, or any other Loan Document, or of breach or default
hereunder or thereunder, or of any right or remedy which the Lender
54
<PAGE>
may have, shall operate as a waiver of any other provision, breach,
default, right or remedy or of the same provision, breach, default,
right or remedy on a future occasion. No waiver by the Lender
shall affect its rights to require strict performance of this
Agreement.
13.3 Severability. If any provision of this Agreement
shall be prohibited or invalid, under applicable law, it shall be
effective only to such extent, without invalidating the remainder
of this Agreement.
13.4 Governing Law. THIS AGREEMENT SHALL BE DEEMED TO
HAVE BEEN MADE IN THE STATE OF OKLAHOMA AND SHALL BE GOVERNED BY
AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF SUCH STATE EXCEPT
THAT NO DOCTRINE OF CHOICE OF LAW SHALL BE USED TO APPLY THE LAWS
OF ANY OTHER STATE OR JURISDICTION.
13.5 Consent to Jurisdiction and Venue; Service of
Process. Each Borrower agrees that, in addition to any other
courts that may have jurisdiction under applicable laws, any action
or proceeding to enforce or arising out of this Agreement or any of
the other Loan Documents may be commenced in the appropriate court
of the State of Oklahoma for Oklahoma County, or in the United
States District Court for the Western District of Oklahoma, and
each Borrower consents and submits in advance to such jurisdiction
and agrees that venue will be proper in such courts on any such
matter. Each Borrower hereby waives personal service of process
and agrees that a summons and complaint commencing an action or
proceeding in any such court shall be properly served and shall
confer personal jurisdiction if served by registered or certified
mail to the Borrower. Should the Borrower fail to appear or answer
any summons, complaint, process or papers so served within thirty
(30) days after the mailing or other service thereof, it shall be
deemed in default and an order or judgment may be entered against
it as demanded or prayed for in such summons, complaint, process or
papers. The choice of forum set forth in this section shall not be
deemed to preclude the enforcement of any judgment obtained in such
forum, or the taking of any action under this Agreement to enforce
the same, in any appropriate jurisdiction.
13.6 Survival of Representations and Warranties. All of
each Borrower's representations and warranties contained in this
Agreement shall survive the execution, delivery, and acceptance
thereof by the parties, notwithstanding any investigation by the
Lender or its agents, but after the Closing Date it is recognized
that such representations and warranties may be amended from time
to time during the term of this Agreement by written agreement
between the Borrowers to the Lender due to changes in
circumstances.
13.7 Indemnification. EACH BORROWER HEREBY INDEMNIFIES,
DEFENDS AND HOLDS LENDER, AND ITS DIRECTORS, OFFICERS, AGENTS,
EMPLOYEES AND COUNSEL, HARMLESS FROM AND AGAINST ANY AND ALL
LOSSES, CLAIMS, DAMAGES, LIABILITIES, DEFICIENCIES, JUDGMENTS,
PENALTIES OR EXPENSES IMPOSED ON, INCURRED BY OR ASSERTED AGAINST
ANY OF THEM, WHETHER DIRECT, INDIRECT OR CONSEQUENTIAL ARISING OUT
OF OR BY REASON OF ANY LITIGATION, INVESTIGATIONS, CLAIMS, OR
55
<PAGE>
PROCEEDINGS (WHETHER BASED ON ANY FEDERAL, STATE OR LOCAL LAWS OR
OTHER STATUTES OR REGULATIONS, INCLUDING, WITHOUT LIMITATION,
SECURITIES, ENVIRONMENTAL, OR COMMERCIAL LAWS AND REGULATIONS,
UNDER COMMON LAW OR AT EQUITABLE CAUSE, OR ON CONTRACT OR
OTHERWISE) COMMENCED OR THREATENED, WHICH ARISE OUT OF OR ARE IN
ANY WAY BASED UPON THE NEGOTIATION, PREPARATION, EXECUTION,
DELIVERY, ENFORCEMENT, PERFORMANCE OR ADMINISTRATION OF THIS
AGREEMENT, ANY OTHER LOAN DOCUMENT, OR ANY UNDERTAKING OR
PROCEEDING RELATED TO ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY
OR ANY ACT, OMISSION TO ACT, EVENT OR TRANSACTION RELATED OR
ATTENDANT THERETO, INCLUDING, WITHOUT LIMITATION, AMOUNTS PAID IN
SETTLEMENT, COURT COSTS, AND THE FEES AND EXPENSES OF COUNSEL
REASONABLY INCURRED IN CONNECTION WITH ANY SUCH LITIGATION,
INVESTIGATION, CLAIM OR PROCEEDING, EXCEPT THAT THIS
INDEMNIFICATION SHALL NOT APPLY TO ANY LOSSES, CLAIMS, DAMAGES,
LIABILITIES, JUDGMENTS, PENALTIES OR EXPENSES IMPOSED ON, INCURRED
BY OR ASSERTED AGAINST THE LENDER, AND ITS DIRECTORS, OFFICERS,
AGENTS, EMPLOYEES, OR COUNSEL IF SUCH IS DUE TO AND ARISES FROM OR
IN CONNECTION WITH THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF
ANY OF THEM OR THE INTENTIONAL AND WRONGFUL BREACH OF THIS
AGREEMENT BY LENDER. Without limiting the foregoing, if, by reason
of any suit or proceeding of any kind, nature, or description
against any Borrower, or by Borrower or any other party against
Lender, which in Lender's sole discretion makes it advisable for
Lender to seek counsel for protection and preservation of its liens
and security assets, or to defend its own interest, such reasonable
expenses and counsel fees shall be allowed to Lender. To the
extent that the undertaking to indemnify, pay and hold harmless set
forth in this Section 13.7 may be unenforceable because it is
violative of any law or public policy, Borrower shall contribute
the maximum portion which it is permitted to pay and satisfy under
applicable law, to the payment and satisfaction of all indemnified
matters incurred by Lender. The foregoing indemnity shall survive
the payment of the Obligations and the termination of this
Agreement. All of the foregoing costs and expenses shall be part
of the Obligations and secured by the Collateral.
13.8 Other Security and Guaranties. The Lender may,
without, notice or demand and without affecting any Borrower's
obligations hereunder, from time to time: (a) take from any Person
and hold collateral (other than the Collateral) for the payment of
all or any part of the Obligations and exchange, enforce or release
such collateral or any part thereof; and (b) accept and hold any
endorsement or guaranty of payment of all or any part of the
Obligations and release any such endorser or guarantor, or any
Person who has given any Lien in any other collateral as security
for the repayment of all or any part of the Obligations, or any
other Person in any way obligated to pay all or any part of the
Obligations.
13.9 Fees and Expenses. The Borrowers shall pay to the
Lender on demand all costs and expenses that the Lender pays or
incurs in connection with the negotiation, preparation,
consummation, administration, enforcement, and termination of this
Agreement and the other Loan Documents, including, without
limitation: (a) attorneys' and paralegals' fees and disbursements
56
<PAGE>
of counsel to the Lender (including, without limitation, a
reasonable estimate of the allocable cost of in-house counsel); (b)
costs and expenses (including attorneys' and paralegals' fees and
disbursements, including, without limitation, a reasonable estimate of the
allocable cost of in-house counsel) for any amendment, supplement, waiver,
consent, or subsequent closing in connection with the Loan Documents and
the transactions contemplated thereby; (c) costs and expenses of lien
and title searches and title insurance; (d) fees and other charges
for recording and filing financing statements and continuations,
and other actions to perfect, protect, and continue the Security
Interest; (e) sums paid or incurred to pay any amount or take any
action required of the Borrowers under the Loan Documents that any
Borrower was obligated to pay or take under the Loan Documents but
failed to pay or take; (f) the expenses of $500 per Lender's
auditor per audit day plus actual costs of appraisals, inspections,
and verifications of the Collateral, including, without limitation,
travel, lodging, and meals, for inspections of the Collateral and
the Borrower's operations by the Lender's agents up to three times
per year and whenever an Event of Default exists; (g) costs and
expenses of forwarding loan proceeds, collecting checks and other
items of payment, and establishing and maintaining Payment Accounts
and lock boxes; (h) all amounts that any Borrower is required to
pay under the Letter of Credit Agreement; (i) costs and expenses of
preserving and protecting the Collateral; and (j) costs and
expenses (including attorneys' and paralegals' fees and
disbursements and including, without limitation, a reasonable
estimate of the allocable cost of in-house counsel) paid or
incurred to obtain payment of the Obligations, enforce the Security
Interest, sell or otherwise realize upon the Collateral, and
otherwise enforce the provisions of the Loan Documents, or to
defend any claims made or threatened against the Lender arising out
of the transactions contemplated hereby (including without
limitation, preparations for and consultations concerning any such
matters). The foregoing shall not be construed to limit any other
provisions of the Loan Documents regarding costs and expenses to be
paid by the Borrower. All of the foregoing costs and expenses
shall be charged to the Borrowers' loan account as Revolving Loans.
13.10 Notices. All notices, demands and requests
that either party is required or elects to give to the other shall
be in writing, shall be delivered personally against receipt, or
sent by recognized overnight courier service, or mailed by
registered or certified mail, return receipt requested, postage
prepaid, and shall be addressed to the party to be notified as
follows:
If to the Lender: Bank of America National Trust and
Savings Association
55 South Lake Avenue, Suite 900
Pasadena, California 91101
Attn: Ms. Joyce White
Executive Vice President, West Division
Manager
with a copy to: Bank of America National Trust and
Savings Association
10124 Old Grove Road
San Diego, California 92131
Attn: Thomas G. Montgomery, Esq.
Assistant General Counsel
57
<PAGE>
and with a copy to: Jenkens & Gilchrist, A
Professional Corporation
1445 Ross Avenue, Suite 3200
Dallas, Texas 75201
Attn: Linda D. Sartin, Esq.
If to the Borrower: LSB Industries, Inc.
Post Office Box 754
Oklahoma City, Oklahoma 73101
Attn: Mr. Jack E. Golsen
President
with a copy to: LSB Industries, Inc.
Post Office Box 754
Oklahoma City, Oklahoma 73101
Attn: Mr. Tony M. Shelby
Senior Vice President
with a copy to: LSB Industries, Inc.
Post Office Box 754
Oklahoma City, Oklahoma 73101
Attn: David M. Shear, Esq.
General Counsel
and with a copy to: Conner & Winters
One Leadership Square
211 North Robinson, Suite 1700
Oklahoma City, Oklahoma 73102-7101
Attn: Irwin H. Steinhorn, Esq.
or to such other address as each party may designate for itself by
like notice. Any such notice, demand, or request shall be deemed
given when received if personally delivered or sent by overnight
courier, or when deposited in the United States mails, postage
paid, if sent by registered or certified mail.
13.11 Waiver of Notices. Unless otherwise expressly
provided herein, each Borrower waives presentment, protest and
notice of demand or dishonor and protest as to any instrument,
notice of intent to accelerate and notice of acceleration, as well
as any and all other notices to which it might otherwise be
entitled. No notice to or demand on the Borrower which the Lender
may elect to give shall entitle the Borrower to any further notice
or demand in the same, similar or other circumstances.
13.12 Binding Effect; Assignment; Disclosure. The
provisions of this Agreement shall be binding upon and inure to the
benefit of the respective representatives, successors and assigns
of the parties hereto: provided, however, that no interest herein
may be assigned by any Borrower without the prior written consent
of the Lender. The rights and benefits of the Lender hereunder
shall, if the Lender so agrees, inure to any party acquiring any
58
<PAGE>
interest in the Obligations or any part thereof. Each Borrower
agrees that the Lender may use the Borrower's name in advertising
and promotional materials and in conjunction therewith disclose the
general terms of this Agreement.
13.13 Modification. THIS AGREEMENT IS INTENDED BY
EACH BORROWER AND THE LENDER TO BE THE FINAL, COMPLETE, AND
EXCLUSIVE EXPRESSION OF THE AGREEMENT BETWEEN THEM. THIS AGREEMENT
SUPERSEDES ANY AND ALL PRIOR ORAL OR WRITTEN AGREEMENTS RELATING TO
THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES. NO MODIFICATION, RESCISSION, WAIVER, RELEASE, OR
AMENDMENT OF ANY PROVISION OF THIS AGREEMENT SHALL BE MADE, EXCEPT
BY A WRITTEN AGREEMENT SIGNED BY SUCH BORROWER AND A DULY
AUTHORIZED OFFICER OF THE LENDER.
13.14 Counterparts. This Agreement may be executed
in any number of counterparts, and by the Lender and the Borrowers
in separate counterparts, each of which shall be an original, but
all of which shall together constitute one and the same agreement.
13.15 Captions. The captions contained in this
Agreement are for convenience only, are without substantive meaning
and should not be construed to modify, enlarge, or restrict any
provision.
13.16 Right of Set-Off. Whenever an Event of Default
exists the Lender is hereby authorized at any time and from time to
time, to set-off and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held by
Lender or any affiliate of the Lender and other indebtedness at any
time owing by the Lender or any affiliate of the Lender to or for
the credit or the account of the Borrowers against any and all of
the Obligations, whether or not then due and payable. Lender
agrees promptly to notify Borrowers after any such set-off and
application made by Lender, provided that the failure to give such
notice shall not affect the validity of such set-off and
application.
13.17 Participating Lender's Security Interests. If
a Participating Lender shall at any time with the Borrowers'
knowledge participate with the Lender in the Loans, each Borrower
hereby grants to such Participating Lender, and the Lender and such
Participating Lender shall have and are hereby given, a continuing
lien on and security interest in any money, securities and other
property of the Borrower in the custody or possession of the
Participating Lender, including, the right of set-off, to the
extent of the Participating Lender's participation in the
Obligations, and such Participating Lender shall be deemed to have
the, same right of set-off, to the extent of the Participating
Lender's participation in the Obligations under this Agreement, as
it would have if it were a direct lender.
13.18 WAIVER OF JURY TRIAL. LENDER AND EACH BORROWER
ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER
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THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREBY WOULD BE
BASED UPON DIFFICULT AND COMPLEX ISSUES, AND THEREFORE, THE PARTIES
AGREE THAT ANY LAWSUIT GROWING OUT OF ANY SUCH CONTROVERSY WILL BE
TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING
WITHOUT JURY. TRIAL BY A JUDGE SITTING WITHOUT A JURY WILL FURTHER
RESULT IN THE AVOIDANCE OF DELAYS, A STREAMLINING OF THE
PROCEEDINGS INVOLVED AND, AS A RESULT, WILL MINIMIZE THE EXPENSE OF
ANY SUCH LAWSUIT FOR THE BENEFIT OF BORROWERS AND LENDER. EACH
BORROWER HEREBY WAIVES TRIAL BY JURY, RIGHTS OF SET-OFF, AND THE
RIGHT TO IMPOSE COUNTERCLAIMS (EXCEPT FOR COMPULSORY COUNTERCLAIMS)
IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH,
OR ARISING OUT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE
OBLIGATIONS OR THE COLLATERAL, OR ANY INSTRUMENT OR DOCUMENT
DELIVERED PURSUANT HERETO OR THERETO, OR ANY OTHER CLAIM OR DISPUTE
HOWSOEVER ARISING, BETWEEN THE BORROWER, AND THE LENDER. EACH
BORROWER HEREBY CONFIRMS THAT THE FOREGOING WAIVERS ARE INFORMED
AND FREELY MADE.
13.19 AMENDMENT AND RESTATEMENT; LIMITATIONS OF
SUBSIDIARY LIABILITY; WAIVERS OF CLAIMS. THIS AGREEMENT AMENDS,
EXTENDS AND RESTATES IN ITS ENTIRETY THE FIRST AMENDED LSB LOAN
AGREEMENT AND THE FIRST AMENDED SUMMIT LOAN AGREEMENT. THE
EXECUTION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS EXECUTED
IN CONNECTION HEREWITH DOES NOT EXTINGUISH THE INDEBTEDNESS
OUTSTANDING IN CONNECTION THEREWITH NOR DOES IT CONSTITUTE A
NOVATION WITH RESPECT TO THE INDEBTEDNESS OUTSTANDING IN CONNECTION
WITH THE FIRST AMENDED LSB LOAN AGREEMENT OR THE FIRST AMENDED
SUMMIT LOAN AGREEMENT. EACH BORROWER REPRESENTS AND WARRANTS THAT
AS OF THE CLOSING DATE THERE ARE NO CLAIMS OR OFFSETS AGAINST OR
DEFENSES OR COUNTERCLAIMS TO ITS OBLIGATIONS UNDER THE FIRST
AMENDED LSB LOAN AGREEMENT AND THE FIRST AMENDED SUMMIT LOAN
AGREEMENT OR ANY OTHER LOAN DOCUMENTS. EACH BORROWER WAIVES ANY
AND ALL SUCH CLAIMS, OFFSETS, DEFENSES OR COUNTERCLAIMS, WHETHER
KNOWN OR UNKNOWN, ARISING PRIOR TO THE CLOSING DATE.
13.20 CROSS-COLLATERALIZATION AND CROSS-GUARANTIES.
EACH BORROWER UNDER THIS AGREEMENT HEREBY IRREVOCABLY, ABSOLUTELY,
AND UNCONDITIONALLY GUARANTEES THE FULL AND PROMPT PAYMENT TO
LENDER WHEN DUE, WHETHER BY ACCELERATION OR OTHERWISE, OF ANY AND
ALL OBLIGATIONS OF EACH OTHER BORROWER UNDER THIS AGREEMENT,
WHETHER SUCH OBLIGATIONS EXIST NOW OR ARE HEREAFTER INCURRED. IN
ADDITION ALL INDEBTEDNESS, OBLIGATIONS, AND LIABILITIES OWING AND
60
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WHICH MAY HEREAFTER BE OWING TO LENDER UNDER THIS AGREEMENT, BY ANY
OF THE LSB BORROWER SUBSIDIARIES, JOINTLY AND SEVERALLY OR BY ANY
INDIVIDUAL MEMBER OF THE LSB BORROWER SUBSIDIARIES UNDER THIS
AGREEMENT, SHALL BE SECURED BY ALL OF THE COLLATERAL FROM TIME TO
TIME GRANTED TO LENDER PURSUANT TO THIS AGREEMENT OR ANY OTHER
DOCUMENT OR INSTRUMENT EXECUTED AND/OR DELIVERED IN CONNECTION
HEREWITH, AND LENDER MAY HOLD AND APPLY AND REAPPLY ALL MONEY,
PROPERTY AND OTHER SUCH COLLATERAL AT ANY TIME RECEIVED BY LENDER
IN PAYMENT OF ANY INDEBTEDNESS, OBLIGATIONS OR LIABILITIES OF THE
LSB BORROWER SUBSIDIARIES OR ANY MEMBER THEREOF UNDER THIS
AGREEMENT OR UNDER ANY OTHER DOCUMENT OR INSTRUMENT EXECUTED AND/OR
DELIVERED IN CONNECTION HEREWITH TO ANY INDEBTEDNESS OWING BY ANY
OF THE LSB BORROWER SUBSIDIARIES.
IN WITNESS WHEREOF, the parties have entered into this
Agreement on the date first above written.
"BORROWERS":
LSB INDUSTRIES, INC.
By:
______________________________
Name:
____________________________
Title:
___________________________
SUMMIT MACHINE TOOL MANUFACTURING CORP.
By:
_______________________________
Name:
_____________________________
Title:
____________________________
MOREY MACHINERY MANUFACTURING
CORPORATION
By:
_______________________________
Name:
_____________________________
Title:
____________________________
61
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"LENDER":
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION
By:
_______________________________
Name:
_____________________________
Title:
____________________________
62
<PAGE>
<PAGE>
EXHIBITS TO LOAN AGREEMENT
EXHIBIT A - Permitted Liens
EXHIBIT B - Proprietary Rights
EXHIBIT D - List of Borrowers' Locations
EXHIBIT F - Subsidiaries and Affiliates
EXHIBIT G-1 - Financial Statements
EXHIBIT G-2 - Pro Forma Financial Statements
EXHIBIT H - Real Property Descriptions: Premises
EXHIBIT I - Trade Names, Trade Styles, Terms of Sale
EXHIBIT J - Pending Litigation
EXHIBIT K - Labor Matters
EXHIBIT L - ERISA Matters
EXHIBIT M - Schedule of Environmental Matters
EXHIBIT O - Letter of Credit Financing
Agreement - Supplement to Second Amended
and Restated Loan and Security Agreement
EXHIBIT P - Notice of Borrowing
SCHEDULE 10.8 Use of Bond Proceeds
63
Loan and Security Agreement
by and between
CONGRESS FINANCIAL CORPORATION (SOUTHWEST)
as Lender
and
L&S AUTOMOTIVE PRODUCTS CO.
TRIBONETICS CORPORATION
L&S BEARING CO.
LSB EXTRUSION CO.
ROTEX CORPORATION
AND
INTERNATIONAL BEARINGS, INC.
as Borrowers
Dated: May 7, 1999
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. DEFINITIONS 1
SECTION 2. CREDIT FACILITIES 11
2.1 Revolving Loans 11
2.2 Letter of Credit Accommodations 13
2.3 Term Loan 15
2.4 Availability Reserves 16
2.5 Joint and Several Liability; Rights of Contribution 16
2.6 Structure of Credit Facility 17
2.7 Right of First Refusal 18
SECTION 3. INTEREST AND FEES 19
3.1 Interest 19
3.2 Closing Fee 21
3.3 Servicing Fee 21
3.4 Unused Line Fee 21
3.5 Changes in Laws and Increased Costs of Loans 21
SECTION 4. CONDITIONS PRECEDENT 22
4.1 Conditions Precedent to Initial Loans and Letter
of Credit Accommodations 22
4.2 Conditions Precedent to All Loans and Letter of
Credit Accommodations 24
SECTION 5. GRANT OF SECURITY INTEREST 24
SECTION 6. COLLECTION AND ADMINISTRATION 25
6.1 Borrowers' Loan Account 25
6.2 Statements 26
6.3 Collection of Accounts 26
6.4 Payments 27
6.5 Authorization to Make Loans 28
6.6 Use of Proceeds 28
SECTION 7. COLLATERAL REPORTING AND COVENANTS 28
7.1 Collateral Reporting 28
7.2 Accounts Covenants 29
<PAGE>
7.3 Inventory Covenants 31
7.4 Equipment Covenants 31
7.5 Power of Attorney 32
7.6 Right to Cure 33
7.7 Access to Premises 33
SECTION 8. REPRESENTATIONS AND WARRANTIES 33
8.1 Corporate Existence, Power and Authority;
Subsidiaries 34
8.2 Financial Statements; No Material Adverse Change 34
8.3 Chief Executive Office; Collateral Locations 34
8.4 Priority of Liens; Title to Properties 35
8.5 Tax Returns 35
8.6 Litigation 35
8.7 Compliance with Other Agreements and
Applicable Laws 35
8.8 Employee Benefits 36
8.9 Bank Accounts 36
8.10 Environmental Compliance 37
8.11 Accuracy and Completeness of Information 37
8.12 Survival of Warranties; Cumulative 38
8.13 Year 2000 Issues 38
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS 38
9.1 Maintenance of Existence 38
9.2 New Collateral Locations 39
9.3 Compliance with Laws, Regulations, Etc. 39
9.4 Payment of Taxes and Claims 40
9.5 Insurance 40
9.6 Financial Statements and Other Information 41
9.7 Sale of Assets, Consolidation, Merger,
Dissolution, Etc. 42
9.8 Encumbrances 43
9.9 Indebtedness 44
9.10 Loans, Investments, Guarantees, Etc. 45
9.11 Dividends and Redemptions 46
9.12 Transactions with Affiliates 46
9.13 Additional Bank Accounts 47
9.14 Compliance with ERISA 47
9.15 Net Worth 48
9.16 Costs and Expenses 48
9.17 Further Assurances 48
SECTION 10. EVENTS OF DEFAULT AND REMEDIES 49
10.1 Events of Default 49
10.2 Remedies 51
2
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SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS;
GOVERNING LAW 53
11.1 Governing Law; Choice of Forum; Service of
Process; Jury Trial Waiver 53
11.2 Waiver of Notices 54
11.3 Amendments and Waivers 54
11.4 Indemnification 54
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS 55
12.1 Term 55
12.2 Notices 57
12.3 Partial Invalidity 57
12.4 Successors 57
12.5 Entire Agreement 58
12.6 NONAPPLICABILITY OF ARTICLE 5069-15.01 ET SEQ. 58
12.7 WAIVER OF CONSUMER RIGHTS 58
12.8 ORAL AGREEMENTS INEFFECTIVE 59
3
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INDEX TO
EXHIBITS AND SCHEDULES
Exhibit A Information Certificate
Exhibit B Collateral Letter of Credit
Exhibit C Term Note
Schedule 1.9 Distribution Agreement
Schedule 8.3 Mortgages
Schedule 8.4 Existing Liens
Schedule 8.9 Bank Accounts
Schedule 8.10 Environmental Matters
Schedule 9.5 Insurance
Schedule 9.9 Existing Indebtedness
Schedule 9.10 Existing Loans, Advances and
Guarantees
Schedule 9.12 Transactions With Affiliates
Attachment I Excluded Equipment
4
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<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT dated May 7, 1999,is entered
into by and between Congress Financial Corporation (Southwest), a
Texas corporation ("Lender") and L&S Automotive Products Co.
("LSAP"), a Delaware corporation, International Bearings, Inc.
("IBI"), an Oklahoma corporation, L&S Bearing Co. ("L&SB"), an
Oklahoma corporation, LSB Extrusion Co. ("LSBE"), an Oklahoma
corporation, Rotex Corporation ("Rotex"), an Oklahoma corporation,
and Tribonetics Corporation ("Tribonetics"), an Oklahoma
corporation (LSAP, IBI, L&SB, LSBE, Rotex and Tribonetics are
individually, collectively and jointly and severally herein
referred to as "Borrower" or the "Borrowers").
W I T N E S S E T H:
WHEREAS, Borrowers have requested that Lender enter into
certain financing arrangements with Borrowers pursuant to which
Lender may make loans and provide other financial accommodations to
each Borrower; on the terms and conditions set forth herein; and
WHEREAS, Lender is willing to make such loans and provide such
financial accommodations on the terms and conditions set forth
herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. DEFINITIONS
All terms used herein which are defined in Article 1 or
Article 9 of the Uniform Commercial Code shall have the meanings
given therein unless otherwise defined in this Agreement. All
references to the plural herein shall also mean the singular and to
the singular shall also mean the plural unless the context
otherwise requires. All references to Borrowers and Lender
pursuant to the definitions set forth in the recitals hereto, or to
any other person herein, shall include their respective successors
and assigns. The words "hereof", "herein", "hereunder", "this
Agreement" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not any particular
provision of this Agreement. Any reference to this Agreement or
any other Financing Agreement shall mean such agreement as now
exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced. The word "including" when
used in this Agreement shall mean "including, without limitation".
An Event of Default shall exist or continue or be continuing until
such Event of Default is waived in accordance with Section 11.3, is
cured pursuant to the terms of this Agreement, or is cured in a
manner satisfactory to Lender, if such Event of Default is capable
of being cured as determined by Lender. Any accounting term used
herein unless otherwise defined in this Agreement shall have the
meanings customarily given to such term in accordance with GAAP.
For purposes of this Agreement, the following terms shall have the
respective meanings given to them below:
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1.1 "Accounts" shall mean all present and hereafter arising
rights of each Borrower to payment for goods sold or leased or for
services rendered, which are not evidenced by instruments or
chattel paper, and whether or not earned by performance.
1.2 "Adjusted Eurodollar Rate" shall mean, with respect to
each Interest Period for any Eurodollar Rate Loan, the rate per
annum (rounded upwards, if necessary, to the next one-sixteenth
(1/16) of one (1%) percent) determined by dividing (a) the
Eurodollar Rate for such Interest Period by (b) a percentage equal
to: (i) one (1) minus (ii) the Reserve Percentage. For purposes
hereof, "Reserve Percentage" shall mean the reserve percentage,
expressed as a decimal, prescribed by any United States or foreign
banking authority for determining the reserve requirement which is
or would be applicable to deposits of United States dollars in a
non-United States or an international banking office of Reference
Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate
Loan made with the proceeds of such deposit, whether or not the
Reference Bank actually holds or has made any such deposits or
loans. The Adjusted Eurodollar Rate shall be adjusted on and as of
the effective day of any change in the Reserve Percentage.
1.3 "Availability Reserves" shall mean, as of any date of
determination, such amounts as Lender may from time to time
establish and revise in good faith reducing the amount of Revolving
Loans and Letter of Credit Accommodations which would otherwise be
available to Borrowers under the lending formula(s) provided for
herein: (a) to reflect events, conditions, contingencies or risks
which, as determined by Lender in good faith, adversely affect or
may adversely affect either (i) the Collateral or any other
property which is security for the Obligations or its value, (ii)
the assets or business of Borrowers or any Obligor when taken as a
whole, or (iii) the security interests and other rights of Lender
in the Collateral (including the enforceability, perfection and
priority thereof) or (b) to reflect Lender's good faith belief that
any collateral report or financial information furnished by or on
behalf of Borrowers or any Obligor to Lender is or may have been
incomplete, inaccurate or misleading in any material respect or (c)
to reflect outstanding Letter of Credit Accommodations as provided
in Section 2.2 hereof or (d) in respect of any state of facts which
Lender determines in good faith constitutes an Event of Default, or
may, with notice or passage of time or both, constitute an Event of
Default.
1.4 "Blocked Accounts" shall have the meaning set forth in
Section 6.3 hereof.
1.5 "Business Day" shall mean any day other than a Saturday,
Sunday, or other day on which commercial banks are authorized or
required to close under the laws of the State of New York or the
State of North Carolina, and a day on which the Reference Bank and
Lender are open for the transaction of business, except that if a
determination of a Business Day shall relate to any Eurodollar Rate
Loans, the term Business Day shall also exclude any day on which
banks are closed for dealings in dollar deposits in the London
interbank market or other applicable Eurodollar Rate market.
1.6 "Code" shall mean the Internal Revenue Code of 1986, as
the same now exists or may from time to time hereafter be amended,
modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.
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1.7 "Collateral" shall have the meaning set forth in Section
5 hereof.
1.8 "Collateral Letter of Credit" shall mean the standby
letter of credit dated on or about the date hereof issued for the
account of LSB Industries, Inc. ("LSB") by Bank America Los
Angeles (or another issuer acceptable to Lender) in the amount of
$1,000,000 for the benefit of Lender substantially in the form of
Exhibit B.
1.9 "Distribution Agreement" shall mean (a) a fully executed
Distribution Agreement substantially in the form of the draft of
Distribution Agreement attached hereto as Schedule 1.9 between
Guarantor and LSB, and (b) all attachments and exhibits to such
agreement and all other agreements, leases and other documents,
executed in connection therewith in substantially the same form as
the attachments, exhibits, agreements, leases and other documents
attached hereto as Schedule 1.9.
1.10 "Eligible Accounts" shall mean Accounts created by any
Borrower which are and continue to be acceptable to Lender based on
the criteria set forth below. In general, Accounts shall be
Eligible Accounts if:
(a) such Accounts arise from the actual and bona fide
sale and delivery of goods by Borrowers or rendition of services by
Borrowers in the ordinary course of their business which
transactions are completed in accordance with the terms and
provisions contained in any documents related thereto;
(b) such Accounts (i) are Accounts of Advance Stores
Co., Inc. ("Advance"), Western Auto Supply Co., Inc. ("Western"),
or other account debtors approved by Lender (such Accounts being
hereinafter collectively referred to as the "Advance Auto
Accounts") which are not unpaid more than one-hundred eighty (180)
days after the date of the original invoice for them or thirty (30)
days after the due date for them, whichever is earlier, or (ii)
such Accounts are not Advance Accounts and are not unpaid more than
one-hundred twenty (120) days after the date of the original
invoice for them or sixty (60) days after the due date for them,
whichever is earlier;
(c) such Accounts do not arise from sales on
consignment, guaranteed sale, sale and return, sale on approval, or
other terms under which payment by the account debtor may be
conditional or contingent;
(d) the chief executive office of the account debtor
with respect to such Accounts is located in the United States of
America, Puerto Rico or Canada; or, if the chief executive office
of account debtor is located outside the United States of America,
Puerto Rico or Canada either: (i) the account debtor has delivered
to Borrower an irrevocable letter of credit issued or confirmed by
a bank satisfactory to Lender and payable only in the United States
of America and in U.S. dollars, sufficient to cover such Account,
in form and substance satisfactory to Lender and, if required by
Lender, the original of such letter of credit has been delivered to
Lender or Lender's agent and the issuer thereof notified of the
assignment of the proceeds of such letter of credit to Lender, or
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(ii) such Account is subject to credit insurance payable to Lender
issued by an insurer and on terms and in an amount acceptable to
Lender, or (iii) such Account is otherwise acceptable in all
respects to Lender (subject to such lending formula with respect
thereto as Lender may determine);
(e) such Accounts do not consist of progress billings,
bill and hold invoices or retainage invoices, except as to bill and
hold invoices, if Lender shall have received an agreement in
writing from the account debtor, in form and substance satisfactory
to Lender, confirming the unconditional obligation of the account
debtor to take the goods related thereto and pay such invoice;
(f) the account debtor with respect to such Accounts has
not asserted a counterclaim, defense or dispute and does not have
any right of setoff against such Accounts (but the portion of the
Accounts of such account debtor in excess of the amount at any time
and from time to time owed by Borrower to such account debtor or
claimed owed by such account debtor may be deemed Eligible
Accounts);
(g) there are no facts, events or occurrences which
would impair the validity, enforceability or collectability of such
Accounts or reduce the amount payable or delay payment thereunder;
(h) such Accounts are subject to the first priority,
valid and perfected security interest of Lender and any goods
giving rise thereto are not, and were not at the time of the sale
thereof, subject to any liens except those permitted in this
Agreement;
(i) the account debtor with respect to such Accounts is
not affiliated with any Borrower directly or indirectly by virtue
of family membership, ownership, control, management or otherwise;
(j) the account debtors with respect to such Accounts
are not any foreign government, the United States of America, any
State, political subdivision, department, agency or instrumentality
thereof, unless, if the account debtor is the United States of
America, any State, political subdivision, department, agency or
instrumentality thereof, upon Lender's request, the Federal
Assignment of Claims Act of 1940, as amended or any similar State
or local law, if applicable, has been complied with in a manner
satisfactory to Lender;
(k) there are no proceedings or actions to the knowledge
of Borrowers or Lender which are threatened or pending against the
account debtors with respect to such Accounts which might result in
any material adverse change in any such account debtor's financial
condition;
(l) (i) for Accounts which are not Advance Auto Accounts
or Accounts described in subsection (iii) hereof, such Accounts of
a single account debtor or its affiliates do not constitute more
than ten percent (10%) percent of all otherwise Eligible Accounts
(but the portion of the Accounts not in excess of such percentage
may be deemed Eligible Accounts, in Lender's discretion); (ii) for
Accounts which are Advance Auto Accounts, such Accounts do not
constitute more than fifty percent (50%) of all otherwise Eligible
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Accounts (but the portion of the Accounts not in excess of such
percentage may be deemed Eligible Accounts, in Lender's
discretion); and (iii) for Accounts of Dexter Axle, a division of
Tomkins Industries, and FMC Corporation, the Accounts of each such
account debtor do not constitute more than fifteen percent (15%) of
all otherwise Eligible Accounts (but the portion of the Accounts
not in excess of such percentage may be deemed Eligible Accounts,
in Lender's discretion);
(m) (i) for Accounts which are not Advance Auto
Accounts, such Accounts are not owed by an account debtor who has
Accounts unpaid more than one hundred twenty (120) days after the
date of the original invoice for them or sixty (60) days after the
due date for them, whichever is earlier and which such Accounts
constitute more than fifty percent (50%) of the total Accounts of
such account debtor; (ii) for Advance Auto Accounts, such Accounts
are not owed by an account debtor who has Accounts unpaid more than
one-hundred eighty (180) days after the date of the original
invoice for them or thirty (30) days after the due date for them,
whichever is earlier and which such Accounts constitute more than
twenty-five percent (25%) of the total Accounts of such account
debtor;
(n) such Accounts are owed by account debtors whose
total indebtedness to Borrower does not exceed the credit limit
with respect to such account debtors as determined by Lender from
time to time (but the portion of the Accounts not in excess of such
credit limit may be deemed Eligible Accounts);
(o) such Accounts are owed by account debtors deemed
creditworthy at all times by Lender, as determined by Lender; and
(p) the principal office, assets or place of business of
the account debtors with respect to such Accounts are not outside
the United States, Puerto Rico or Canada (or as otherwise provided
in the Section 1.11(d)).
General criteria for Eligible Accounts may be established and
revised from time to time by Lender in good faith. Any Accounts
which are not Eligible Accounts shall nevertheless be part of the
Collateral.
1.11 "Eligible Inventory" shall mean Inventory consisting of
finished goods held for resale in the ordinary course of the
business of any Borrower and raw materials for such finished goods,
(including raw materials stored or held by any Borrower in the work
in progress area of such Borrower but which are not characterized
as work in progress for accounting purposes) which are acceptable
to Lender based on the criteria set forth below. In general,
Eligible Inventory shall not include (a) work-in-process; (b)
components which are not part of finished goods and which are not
otherwise acceptable to Lender; (c) spare parts for Equipment; (d)
packaging and shipping materials; (e) supplies used or consumed in
Borrower's business; (f) Inventory at premises other than those
owned and controlled by any Borrower, except if Lender shall have
received an agreement in writing from the person in possession of
such Inventory and/or the owner or operator of such premises in
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form and substance satisfactory to Lender acknowledging Lender's
first priority security interest in the Inventory, waiving security
interests and claims by such person against the Inventory and
permitting Lender access to, and the right to remain on, for a
reasonable period of time, the premises so as to exercise Lender's
rights and remedies and otherwise deal with the Collateral; (g)
Inventory subject to a security interest or lien in favor of any
person other than Lender except those permitted in this Agreement;
(h) bill and hold goods; (i) unserviceable, obsolete or slow moving
Inventory; (j) Inventory which is not subject to the first
priority, valid and perfected security interest of Lender; (k)
defective returned, damaged and/or defective Inventory; and (l)
Inventory purchased or sold on consignment. General criteria for
Eligible Inventory may be established and revised from time to time
by Lender in good faith. Any Inventory which is not Eligible
Inventory shall nevertheless be part of the Collateral.
1.12 "Environmental Laws" shall mean all foreign, Federal,
State and local laws (including common law), legislation, rules,
codes, licenses, permits (including any conditions imposed
therein), authorizations, judicial or administrative decisions,
injunctions or agreements between any Borrower and any governmental
authority, (a) relating to pollution and the protection,
preservation or restoration of the environment (including air,
water vapor, surface water, ground water, drinking water, drinking
water supply, surface land, subsurface land, plant and animal life
or any other natural resource), or to human health or safety,
(b) relating to the exposure to, or the use, storage, recycling,
treatment, generation, manufacture, processing, distribution,
transportation, handling, labeling, production, release or
disposal, or threatened release, of Hazardous Materials, or
(c) relating to all laws with regard to recordkeeping,
notification, disclosure and reporting requirements respecting
Hazardous Materials. The term "Environmental Laws" includes
(i) the Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, the Federal Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of
1972, the Federal Clean Water Act, the Federal Clean Air Act, the
Federal Resource Conservation and Recovery Act of 1976 (including
the Hazardous and Solid Waste Amendments thereto), the Federal
Solid Waste Disposal and the Federal Toxic Substances Control Act,
the Federal Insecticide, Fungicide and Rodenticide Act, and the
Federal Safe Drinking Water Act of 1974, (ii) applicable state
counterparts to such laws, and (iii) any common law or equitable
doctrine that may impose liability or obligations for injuries or
damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Materials.
1.13 "Equipment" shall mean all of each Borrower's now owned
and hereafter acquired equipment, machinery, computers and computer
hardware and software (whether owned or licensed), vehicles, tools,
furniture, fixtures, all attachments, accessions and property now
or hereafter affixed thereto or used in connection therewith, and
substitutions and replacements thereof, wherever located.
1.14 "ERISA" shall mean the United States Employee Retirement
Income Security Act of 1974, as the same now exists or may
hereafter from time to time be amended, modified, recodified or
supplemented, together with all rules, regulations and
interpretations thereunder or related thereto.
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1.15 "ERISA Affiliate" shall mean any person required to be
aggregated with any Borrower or any of its subsidiaries under
Sections 414(b), 414(c), 414(m) or 414(o) of the Code.
1.16 "Eurodollar Rate Loans" shall mean any Loans or portion
thereof on which interest is payable based on the Adjusted
Eurodollar Rate in accordance with the terms hereof.
1.17 "Eurodollar Rate" shall mean with respect to the Interest
Period for a Eurodollar Rate Loan, the interest rate per annum
equal to the arithmetic average of the rates of interest per annum
(rounded upwards, if necessary, to the next one-sixteenth (1/16) of
one percent (1%)) at which Reference Bank is offered deposits of
United States dollars in the London interbank market (or other
Eurodollar Rate market selected by Borrowers and approved by
Lender) on or about 9:00 a.m. (New York time) two (2) Business Days
prior to the commencement of such Interest Period in amounts
substantially equal to the principal amount of the Eurodollar Rate
Loans requested by and available to Borrowers in accordance with
this Agreement, with a maturity of comparable duration to the
Interest Period selected by Borrowers.
1.18 "Event of Default" shall mean the occurrence or existence
of any event or condition described in Section 10.1 hereof.
1.19 "Excess Availability" shall mean the amount, as
determined by Lender, calculated at any time, equal to: (a) the
lesser of: (i) the amount of the Revolving Loans available to
Borrowers as of such time based on the applicable lending formulas
multiplied by the Net Amount of Eligible Accounts and the Value of
Eligible Inventory, as determined hereunder, and subject to the
sublimits and Availability Reserves from time to time established
by Lender hereunder, and (ii) the Maximum Credit (less the then
outstanding principal amount of the Term Loan), minus (b) the sum
of: (i) the amount of all then outstanding and unpaid Obligations
(but not including for this purpose the then outstanding principal
amount of the Term Loan), plus (ii) the aggregate amount of all
then outstanding and unpaid trade payables of Borrowers which are
more than sixty (60) days past due as of such time, plus (iii) the
amount of checks issued by Borrowers to pay trade payables, but not
yet sent, plus (iv) the book overdraft of Borrowers (in the
aggregate), in excess of $750,000.
1.20 "Financing Agreements" shall mean, collectively, this
Agreement and all notes, guarantees, security agreements and other
agreements, documents and instruments now or at any time hereafter
executed and/or delivered by Borrowers or any Obligor in connection
with this Agreement, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, restated or
replaced.
1.21 "GAAP" shall mean generally accepted accounting
principles in the United States of America as in effect from time
to time as set forth in the opinions and pronouncements of the
Accounting Principles Board and the American Institute of Certified
Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied,
except that, for purposes of Section 9.15 hereof, GAAP shall be
determined on the basis of such principles in effect on the date
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hereof and consistent with those used in the preparation of the
audited financial statements delivered to Lender prior to the date
hereof.
1.22 "Guarantor" shall mean LSA Technologies Inc., a Delaware
corporation.
1.23 "Guaranty" shall mean that certain Guarantee, of even
date with this Agreement, from the Guarantor guaranteeing the
Obligations of each and every Borrower to the Lender, as amended,
modified, supplemented, extended, renewed, restated or replaced.
1.24 "Hazardous Materials" shall mean any hazardous, toxic or
dangerous substances, materials and wastes, including hydrocarbons
(including naturally occurring or man-made petroleum and
hydrocarbons), flammable explosives, asbestos, urea formaldehyde
insulation, radioactive materials, biological substances,
polychlorinated biphenyls, pesticides, herbicides and any other
kind and/or type of pollutants or contaminants (including materials
which include hazardous constituents), sewage, sludge, industrial
slag, solvents and/or any other similar substances, materials, or
wastes and including any other substances, materials or wastes that
are or become regulated under any Environmental Law (including any
that are or become classified as hazardous or toxic under any
Environmental Law).
1.25 "Information Certificate" shall mean the Information
Certificate of Borrowers constituting Exhibit A hereto containing
material information with respect to Borrowers, their business and
assets provided by or on behalf of Borrowers to Lender in
connection with the preparation of this Agreement and the other
Financing Agreements and the financing arrangements provided for
herein.
1.26 "Interest Period" shall mean for any Eurodollar Rate
Loan, a period of approximately one (1), two (2), or three (3)
months duration as Borrowers may elect, the exact duration to be
determined in accordance with the customary practice in the
applicable Eurodollar Rate market; provided, that, Borrowers may
not elect an Interest Period which will end after the last day of
the then-current term of this Agreement.
1.27 "Interest Rate" shall mean, as to Prime Rate Loans, a
rate of one percent (1%) per annum in excess of the Prime Rate and,
as to Eurodollar Rate Loans, a rate of two and three-quarters
percent (2.75%) per annum in excess of the Adjusted Eurodollar Rate
(based on the Eurodollar Rate applicable for the Interest Period
selected by Borrowers as in effect three (3) Business Days after
the date of receipt by Lender of the request of Borrowers for such
Eurodollar Rate Loans in accordance with the terms hereof, whether
such rate is higher or lower than any rate previously quoted to
Borrowers); provided, that, the Interest Rate shall mean the rate
of three percent (3%) per annum in excess of the Prime Rate as to
Prime Rate Loans and the rate of four and three-quarters percent
(4.75%) per annum in excess of the Adjusted Eurodollar Rate as to
Eurodollar Rate Loans, at Lender's option, without notice, (a) for
the period (i) from and after the date of termination until Lender
has received full and final payment of all Obligations
(notwithstanding entry of a judgment against Borrowers) and (ii)
from and after the date of the occurrence of an Event of Default
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for so long as such Event of Default is continuing as determined by
Lender, and (b) on the Revolving Loans at any time outstanding in
excess of the amounts available to Borrowers under Section 2
(whether or not such excess(es), arise or are made with or without
Lender's knowledge or consent and whether made before or after an
Event of Default).
1.28 "Inventory" shall mean all of each Borrower's now owned
and hereafter existing or acquired raw materials, work in process,
finished goods and all other inventory of whatsoever kind or
nature, wherever located.
1.29 "LSB" shall mean LSB Industries, Inc., a Delaware
corporation.
1.30 "Letter of Credit Accommodations" shall mean the letters
of credit, merchandise purchase or other guaranties which are from
time to time either (a) issued or opened by Lender for the account
of any Borrower or Borrowers or any Obligor or (b) with respect to
which Lender has agreed to indemnify the issuer or guaranteed to
the issuer the performance by any Borrower or Borrowers of its or
their obligations to such issuer.
1.31 "Loans" shall mean the Revolving Loans and the Term Loan.
1.32 "Maximum Credit" shall mean the amount of $18,550,000.
1.33 "Maximum Legal Rate" shall have the meaning set forth in
Section 3.1 hereof.
1.34 "Net Amount of Eligible Accounts" shall mean the gross
amount of Eligible Accounts less (a) sales, excise or similar taxes
included in the amount thereof and (b) returns, discounts, claims,
credits (including unissued credits) and allowances of any nature
at any time issued, owing, granted, outstanding, available or
claimed with respect thereto.
1.35 "Net Worth" shall mean as to any Person, at any time, in
accordance with GAAP (except as otherwise specifically set forth
below), on a consolidated basis for such Person and its
subsidiaries (if any), the amount equal to: (a) the difference
between: (i) the aggregate net book value of all assets of such
Person and its subsidiaries, calculating the book value of
inventory for this purpose on a first-in-first-out basis, after
deducting from such book values all appropriate reserves in
accordance with GAAP (including all reserves for doubtful
receivables, obsolescence, depreciation and amortization) and (ii)
the aggregate amount of the indebtedness and other liabilities of
such Person and its subsidiaries (including tax and other proper
accruals) less (b) the value of any asset of such Person arising
from the conversion of any indebtedness or other liability of such
Person to equity.
1.36 "Obligations" shall mean any and all Revolving Loans, the
Term Loan, Letter of Credit Accommodations and all other
obligations, liabilities and indebtedness of every kind, nature and
description owing by each and every Borrower to Lender and/or its
affiliates, including principal, interest, charges, fees, costs and
expenses, however evidenced, whether as principal, surety,
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endorser, guarantor or otherwise, whether arising under the
Financing Agreements, whether now existing or hereafter arising,
whether arising before, during or after the initial or any renewal
term of this Agreement or after the commencement of any case with
respect to any such Borrower under the United States Bankruptcy
Code or any similar statute (including the payment of interest and
other amounts which would accrue and become due but for the
commencement of such case, whether or not such amounts are allowed
or allowable in whole or in part in such case), whether direct or
indirect, absolute or contingent, joint or several, due or not due,
primary or secondary, liquidated or unliquidated, secured or
unsecured.
1.37 "Obligor" shall mean any guarantor, endorser, acceptor,
surety or other person liable on or with respect to the Obligations
or who is the owner of any property which is security for the
Obligations, other than any Borrower.
1.38 "Payment Account" shall have the meaning set forth in
Section 6.3 hereof.
1.39 "Person" or "person" shall mean any individual, sole
proprietorship, partnership, corporation (including any corporation
which elects subchapter S status under the Internal Revenue Code of
1986, as amended), limited liability company, limited liability
partnership, business trust, unincorporated association, joint
stock corporation, trust, joint venture or other entity or any
government or any agency or instrumentality or political
subdivision thereof.
1.40 "Prime Rate" shall mean the rate from time to time
publicly announced by First Union National Bank or its successors,
at its office in Charlotte, North Carolina, as its prime rate,
whether or not such announced rate is the best rate available at
such bank.
1.41 "Prime Rate Loans" shall mean any Loans or portion
thereof on which interest is payable based on the Prime Rate in
accordance with the terms thereof.
1.42 "Records" shall mean all of each Borrower's present and
future books of account of every kind or nature, purchase and sale
agreements, invoices, ledger cards, bills of lading and other
shipping evidence, statements, correspondence, memoranda, credit
files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data
and software storage media and devices, file cabinets or containers
in or on which the foregoing are stored (including any rights of
such Borrower with respect to the foregoing maintained with or by
any other person).
1.43 "Reference Bank" shall mean First Union National Bank, or
such other bank as Lender may from time to time designate.
1.44 "Revolving Loans" shall mean the loans now or hereafter
made by Lender to or for the benefit of each Borrower on a
revolving basis (involving advances, repayments and readvances) as
set forth in Section 2.1 hereof.
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1.45 "Subordination Agreements" shall mean the Subordination
Agreement, of even date herewith, between LSB, Guarantor and
Borrowers, as amended, modified, supplemented, extended, renewed,
restated or replaced, subordinating the obligations owed by and
among Borrowers to Guarantor and LSB, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.
1.46 "Term Loan" shall mean the term loan made by Lender to
Borrowers as provided for in Section 2.3 hereof.
1.47 "Term Promissory Note" shall have the meaning set
forth in Section 2.3 hereof.
1.48 "Value" shall mean, as determined by Lender in good
faith, with respect to Inventory, the lower of (a) cost computed on
a first-in-first-out basis in accordance with GAAP or (b) market
value.
SECTION 2. CREDIT FACILITIES
2.1 Revolving Loans.
(a) Subject to and upon the terms and conditions
contained herein, Lender agrees to make Revolving Loans to
Borrowers from time to time in amounts requested by such Borrower
or Borrowers up to the amount equal to the sum of:
(i) eighty-five percent (85%) of the Net Amount of
Eligible Accounts of such Borrower or Borrowers; provided,
however, the amount of Revolving Loans outstanding with
respect to Advance Auto Accounts which are not fully insured
by credit insurance payable to Lender issued by an insurer and
on terms and in an amount acceptable to Lender shall not
exceed $3,000,000, and provided further, subject to the
provisions of Section 9.7, with respect to IBI, the amount of
Revolving Loans outstanding at any time with respect to
Eligible Accounts shall not exceed $1,600,000; plus
(ii) the lesser of: (A) the sum of forty percent
(40%) of the Value of Eligible Inventory consisting of
finished goods plus thirty percent and (30%) of the Value of
Eligible Inventory consisting of raw materials for such
finished goods or (B) $7,500,000; provided, however, subject
to the provisions of Section 9.7, with respect to IBI, the
amount of Revolving Loans outstanding at any time with respect
to Eligible Inventory shall not exceed $1,000,000.; less
(iii) any Availability Reserves.
The unused portion of the sublimits available to IBI may be
utilized by the other Borrowers.
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(b) Lender may, in its discretion, from time to time,
upon not less than five (5) days prior notice to Borrowers, (i)
reduce the lending formula for with respect to Eligible Accounts to
the extent that Lender determines in good faith that: (A) the
dilution with respect to the Accounts for any period (based on the
ratio of (1) the aggregate amount of reductions in Accounts other
than as a result of payments in cash to (2) the aggregate amount
of total sales) has increased in any material respect or may
reasonably be anticipated to increase in any material respect,
above historical levels or (B) the general creditworthiness of
account debtors of Borrowers has declined or (ii) adjust the
lending formula(s) for Borrowers with respect to Eligible Inventory
to the extent that Lender determines that: (A) the number of days
of the turnover of the Inventory for any period has changed in any
material respect or (B) the liquidation value of the Eligible
Inventory, or any category thereof, has decreased, or (C) the
nature and quality of the Inventory has deteriorated. In
determining whether to reduce the lending formula(s), Lender may
consider events, conditions, contingencies or risks which are also
considered in determining Eligible Accounts, Eligible Inventory or
in establishing Availability Reserves.
(c) Except in Lender's discretion, the aggregate amount
of the Loans and the Letter of Credit Accommodations outstanding to
all Borrowers at any time shall not exceed the Maximum Credit. In
the event that the outstanding amount of any component of the
Loans, or the aggregate amount of the outstanding Loans and Letter
of Credit Accommodations, exceed the amounts available under the
lending formulas, the sublimits for Letter of Credit Accommodations
set forth in Section 2.2(d) or the Maximum Credit, as applicable,
such event shall not limit, waive or otherwise affect any rights of
Lender in that circumstance or on any future occasions and any
Borrower shall, upon demand by Lender, which may be made at any
time or from time to time, immediately repay to Lender the entire
amount of any such excess(es) for which payment is demanded.
(d) For purposes only of applying the sublimit on
Revolving Loans based on Eligible Inventory pursuant to
Section 2.1(a)(ii)(B), Lender may treat the then undrawn amounts of
outstanding Letter of Credit Accommodations for the purpose of
purchasing Eligible Inventory as Revolving Loans to the extent
Lender is in effect basing the issuance of the Letter of Credit
Accommodations on the Value of the Eligible Inventory being
purchased with such Letter of Credit Accommodations. In
determining the actual amounts of such Letter of Credit
Accommodations to be so treated for purposes of the sublimit, the
outstanding Revolving Loans and Availability Reserves shall be
attributed first to any components of the lending formulas in
Section 2.1(a) that are not subject to such sublimit, before being
attributed to the components of the lending formulas subject to
such sublimit.
2.2 Letter of Credit Accommodations.
(a) Subject to and upon the terms and conditions
contained herein, at the request of any Borrower, Lender agrees to
provide or arrange for Letter of Credit Accommodations for the
account of Borrowers containing terms and conditions acceptable to
Lender and the issuer thereof. Any payments made by Lender to any
issuer thereof and/or related parties in connection with the Letter
of Credit Accommodations shall constitute additional Revolving
Loans to Borrowers pursuant to this Section 2.
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(b) In addition to any charges, fees or expenses charged
by any bank or issuer in connection with the Letter of Credit
Accommodations, Borrowers shall pay to Lender a letter of credit
fee at a rate equal to one and one-half percent (1.5%) per annum on
the daily outstanding balance of the Letter of Credit
Accommodations for the immediately preceding month (or part
thereof), payable in arrears as of the first day of each succeeding
month, except that Borrowers shall pay to Lender such letter of
credit fee, at Lender's option, without notice, at a rate equal to
three and one-half percent (3 1/2%) per annum on such daily
outstanding balance for: (i) the period from and after the date of
termination hereof until Lender has received full and final payment
of all Obligations (notwithstanding entry of a judgment against any
Borrower) and (ii) the period from and after the date of the
occurrence of an Event of Default for so long as such Event of
Default is continuing as determined by Lender. Such letter of
credit fee shall be calculated on the basis of a three hundred
sixty (360) day year and actual days elapsed and the obligation of
Borrowers to pay such fee shall survive the termination or non-
renewal of this Agreement.
(c) No Letter of Credit Accommodations shall be
available unless on the date of the proposed issuance of any Letter
of Credit Accommodations, the Revolving Loans available to any
Borrowers (subject to the Maximum Credit and any Availability
Reserves) are equal to or greater than: (i) if the proposed Letter
of Credit Accommodation is for the purpose of purchasing Eligible
Inventory, the sum of (A) seventy percent (70%) of the cost of such
Eligible Inventory, plus (B) freight, taxes, duty and other amounts
which Lender estimates must be paid in connection with such
Inventory upon arrival and for delivery to one of such Borrower's
locations for Eligible Inventory within the United States of
America and (ii) if the proposed Letter of Credit Accommodation is
for any other purpose, an amount equal to one hundred (100%)
percent of the face amount thereof and all other commitments and
obligations made or incurred by Lender with respect thereto.
Effective on the issuance of each Letter of Credit Accommodation,
an Availability Reserve shall be established in the applicable
amount set forth in Section 2.2(c)(i) or Section 2.2(c)(ii).
(d) Except in Lender's discretion, the amount of all
outstanding Letter of Credit Accommodations and all other
commitments and obligations made or incurred by Lender in
connection therewith shall not at any time exceed $3,000,000 with
respect to all Borrowers; provided, however, that no Letter of
Credit Accommodations shall be made with respect to IBI. At any
time an Event of Default exists or has occurred and is continuing,
upon Lender's request, Borrowers will either furnish cash
collateral to secure the reimbursement obligations to the issuer in
connection with any Letter of Credit Accommodations or furnish cash
collateral to Lender for the Letter of Credit Accommodations, and
in either case, the Revolving Loans otherwise available to
Borrowers shall not be reduced as provided in Section 2.2(c) to the
extent of such cash collateral.
(e) Each Borrower shall jointly and severally indemnify
and hold Lender harmless from and against any and all losses,
claims, damages, liabilities, costs and expenses which Lender may
suffer or incur in connection with any Letter of Credit
Accommodations and any documents, drafts or acceptances relating
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thereto, including any losses, claims, damages, liabilities, costs
and expenses due to any action taken by any issuer or correspondent
with respect to any Letter of Credit Accommodation. Each Borrower
assumes all risks with respect to the acts or omissions of the
drawer under or beneficiary of any Letter of Credit Accommodation
and for such purposes the drawer or beneficiary shall be deemed
such Borrower's agent. Each Borrower assumes all risks for, and
agrees to pay, all foreign, Federal, State and local taxes, duties
and levies relating to any goods subject to any Letter of Credit
Accommodations or any documents, drafts or acceptances thereunder.
Each Borrower hereby releases and holds Lender harmless from and
against any acts, waivers, errors, delays or omissions, whether
caused by any Borrower, by any issuer or correspondent or otherwise
with respect to or relating to any Letter of Credit Accommodation.
The provisions of this Section 2.2(e) shall survive the payment of
Obligations and the termination of this Agreement.
(f) Nothing contained herein shall be deemed or
construed to grant any Borrower any right or authority to pledge
the credit of Lender in any manner. Lender shall have no liability
of any kind with respect to any Letter of Credit Accommodation
provided by an issuer other than Lender unless Lender has duly
executed and delivered to such issuer the application or a
guarantee or indemnification in writing with respect to such Letter
of Credit Accommodation. Each Borrower shall be bound by any
reasonable interpretation made in good faith by Lender, or any
other issuer or correspondent under or in connection with any
Letter of Credit Accommodation or any documents, drafts or
acceptances thereunder, notwithstanding that such interpretation
may be inconsistent with any instructions of such or any Borrower.
Lender shall have the sole and exclusive right and authority to:
(i) at any time an Event of Default exists or has occurred and is
continuing, (A) approve or resolve any questions of non-compliance
of documents, (B) give any instructions as to acceptance or
rejection of any documents or goods or (C) execute any and all
applications for steamship or airway guaranties, indemnities or
delivery orders, and (ii) at all times, (A) grant any extensions of
the maturity of, time of payment for, or time of presentation of,
any drafts, acceptances, or documents, and (B) agree to any
amendments, renewals, extensions, modifications, changes or
cancellations of any of the terms or conditions of any of the
applications, Letter of Credit Accommodations, or documents, drafts
or acceptances thereunder or any letters of credit included in the
Collateral. Lender may take such actions either in its own name or
in any Borrower's name.
(g) Any rights, remedies, duties or obligations granted
or undertaken by any Borrower to any issuer or correspondent in any
application for any Letter of Credit Accommodation, or any other
agreement in favor of any issuer or correspondent relating to any
Letter of Credit Accommodation, shall be deemed to have been
granted or undertaken by any Borrower to Lender. Any duties or
obligations undertaken by Lender to any issuer or correspondent in
any application for any Letter of Credit Accommodation, or any
other agreement by Lender in favor of any issuer or correspondent
relating to any Letter of Credit Accommodation, shall be deemed to
have been undertaken by any Borrower to Lender and to apply in all
respects to such Borrower.
2.3 Term Loan.
(a) Lender is making a Term Loan to Borrowers in the
original principal amount of $2,550,000. The Term Loan is (i)
evidenced by a Term Promissory Note, substantially in the form of
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Exhibit C attached hereto, in such original principal amount (the
"Term Promissory Note") duly executed and delivered by Borrowers to
Lender concurrently herewith; (ii) to be repaid, together with
interest and other amounts, in accordance with this Agreement, the
Term Promissory Note, and the other Financing Agreements and (a)
secured by all of the Collateral; provided, however, no amount of
the Term Loan shall be made available to IBI.
(b) Lender shall on at least thirty (30) days prior
written request (the "Release Request") from Borrowers and at
Borrowers' expense, release Lender's security interest in the
Equipment upon the payment in full of the Term Loan and
satisfaction of all of the following terms and conditions:
(i) Borrowers, on a consolidated basis, shall have net
income (exclusive of extraordinary gains and losses) in an
aggregate amount of not less than $2,000,000 for the fiscal
year of Borrowers immediately preceding the date of the
Release Request as shown on the financial statements of
Borrowers furnished to Lender pursuant to Section 9.6(a)(ii)
hereof and there shall not have been any material adverse
change since the date of such statement;
(ii) Excess Availability at the date of the Release
Request and at the time of the final release agreement shall
be in an amount of not less than $5,000,000;
(iii) Borrowers shall have received a bonafide
written offer from a third party financial institution with
respect to such Equipment to provide secured refinancing of
the Equipment;
(iv) No Event of Default or any Event which with notice
or lapse of time, will constitute an Event of Default shall
have occurred and be continuing at the Release Date; and
(v) Borrowers shall provide a certificate from an
officer of each Borrower representing that all the foregoing
conditions are satisfied on the Release Date;
(vi) Notwithstanding that Borrowers have satisfied the
foregoing conditions, Lender shall have the right (but not the
obligation) to exercise a right of first refusal to finance
such Equipment in accordance with the provisions of Section
2.7 hereof as if such Equipment were "Option Equipment"
thereunder. The Release Request shall be treated as the
Option Notice for purposes of applying the provisions of
Section 2.7 hereof.
2.4 Availability Reserves. All Revolving Loans otherwise
available to any Borrower pursuant to the lending formulas and
subject to the Maximum Credit and other applicable limits hereunder
shall be subject to Lender's continuing right to establish and
revise Availability Reserves as provided herein.
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2.5 Joint and Several Liability; Rights of Contribution.
(a) Each Borrower states and acknowledges that: (i)
pursuant to this Agreement, such Borrower desires to utilize its
borrowing potential on a consolidated basis to the same extent
possible if it was merged into a single corporate entity with all
other Borrowers and that this Agreement reflects the establishment
of credit facilities which would not otherwise be available to such
Borrower if such Borrower were not jointly and severally liable for
payment of all of the Obligations; (ii) it has determined that it
will benefit specifically and materially from the advances of
credit contemplated by this Agreement; (iii) it is both a condition
precedent to the obligations of Lender hereunder and a desire of
the Borrowers that each Borrower execute and deliver to Lender this
Agreement; and (iv) Borrowers have requested and bargained for the
structure and terms of and security for the advances contemplated
by this Agreement.
(b) Each Borrower hereby irrevocably and
unconditionally: (i) agrees that it is jointly and severally liable
to Lender for the full and prompt payment of the Obligations and
the performance by each Borrower of its obligations hereunder in
accordance with the terms hereof; (ii) to the extent provided
herein agrees to fully and promptly perform all of its obligations
hereunder with respect to each advance of credit hereunder as if
such advance had been made directly to it; and (iii) agrees as a
primary obligation to indemnify Lender on demand for and against
any loss incurred by Lender as a result of any of the Obligations
of any one or more of the Borrowers being or becoming void,
voidable, unenforceable or ineffective for any reason whatsoever,
whether or not known to Lender or any Person, the amount of such
loss being the amount which Lender would otherwise have been
entitled to recover, without duplication, from any one or more of
the Borrowers.
(c) It is the intent of each Borrower that the
indebtedness, obligations and liability hereunder of no one of them
be subject to challenge on any basis, including, without
limitation, pursuant to any applicable fraudulent conveyance or
fraudulent transfer laws. Accordingly, as of the date hereof, the
liability of each Borrower under this section, together with all of
its other liabilities to all Persons as of the date hereof and as
of any other date on which a transfer or conveyance is deemed to
occur by virtue of this Agreement, calculated in amount sufficient
to pay its probable net liabilities on its existing indebtedness as
the same become absolute and matured ("Dated Liabilities") is, and
is to be, less than the amount of the aggregate of a fair valuation
of its property as of such corresponding date ("Dated Assets"). To
this end, each Borrower under this section, (i) grants to and
recognizes in each other Borrower, ratably, rights of subrogation
and contribution in the amount, if any, by which the Dated Assets
of such Borrower, but for the aggregate of subrogation and
contribution in its favor recognized herein, would exceed the Dated
Liabilities of such Borrower or, as the case may be, (ii)
acknowledges receipt of and recognizes its right to subrogation and
contribution ratably from each of the other Borrowers in the
amount, if any, by which the Dated Liabilities of such Borrower,
but for the aggregate of subrogation and contribution in its favor
recognized herein, would exceed the Dated Assets of such Borrower
under this section. In recognizing the value of the Dated Assets
and the Dated Liabilities, it is understood that Borrowers will
recognize, to at least the same extent of their aggregate
recognition of liabilities hereunder, their rights to subrogation
and contribution hereunder. It is a material objective of this
section that each Borrower recognizes rights to subrogation and
contribution rather than be deemed to be insolvent (or in
contemplation thereof) by reason of an arbitrary interpretation of
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its joint and several obligations hereunder. In addition to and
not in limitation of the foregoing provisions of this section, the
Borrowers and Lender hereby agree and acknowledge that it is the
intent of each Borrower and of Lender that the obligations of each
Borrower hereunder be in all respects in compliance with, and not
be voidable pursuant to, applicable fraudulent conveyance and
fraudulent transfer laws.
2.6 Structure of Credit Facility. Each Borrower agrees and
acknowledges that the present structure of the credit facilities
detailed in this Agreement is based in part upon the financial and
other information presently known to Lender regarding each
Borrower, the corporate structure of Borrowers, and the present
financial condition of each Borrower. Each Borrower hereby agrees
that Lender shall have the right, in Lender's good faith credit
judgment, to require that any or all of the following changes be
made to these credit facilities: (i) restrict loans and advances
between Borrowers, (ii) establish separate lockbox and dominion
accounts for each Borrower, and (iii) establish such other
procedures as shall be reasonably deemed by Lender to be useful in
tracking where the Revolving Loans are made under this Agreement
and the source of payments received by Lender on such Revolving
Loans.
2.7 Right of First Refusal. Pursuant to the provisions of
Section 9.9(e), each time any Borrower proposes to refinance all or
any part of its Equipment listed on Attachment I hereto (the
"Option Equipment"), Lender shall have the right (but not the
obligation) to exercise a right of first refusal to finance such
Option Equipment in accordance with the following provisions:
(a) Option Notice. Such Borrower shall deliver a
written notice ("Option Notice") to Lender stating (i) such
Borrower's bona fide intention to obtain financing for the Option
Equipment from a third party (each an "Equipment Lender") (which
may be a party existing and providing financing on the date hereof)
with respect to such Option Equipment (each such financing by any
financing party including the Lender being a "Refinancing"), (ii)
the terms and conditions of the proposed financing in reasonable
detail, including, without limitation, (A) the applicable interest
or other pricing, including financing fees, (B) the term of the
financing, and (C) and any covenants affecting such Borrower, and
(iii) the name and address of the proposed Equipment Lender and
other information reasonably requested by Lender (including an
executed copy of a written proposal or commitment of the proposed
Equipment Lender).
(b) Lender Financing Right. Within twenty (20) days
after receipt of the Option Notice, Lender shall have the right,
but not the obligation, to elect to provide financing for the
Option Equipment upon the price and terms of the applicable
Refinancing designated in the Option Notice, by providing a written
term sheet in a customary form for Lender containing terms
substantially identical to the terms provided to such Borrower by
the Equipment Lender for such Refinancing.
(c) Closing of Transfer. If Lender elects to provide
the Refinancing in place of the Equipment Lender as set forth in
the Option Notice, then the closing of such purchase shall occur as
soon as practicable, but in any event thirty (30) days after
receipt of such notice, and such Borrower, each other Borrower, the
Guarantor and other parties to the Financing Agreements which may
be affected thereby and Lender shall execute such documents and
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instruments, provide such due diligence, take such actions and make
such deliveries as may be reasonably required by Lender to close
and fund such Refinancing.
(d) Equipment Lender's Refinancing Right. If Lender
elects not to provide the Refinancing designated in the Option
Notice, then such Borrower may complete the such proposed
Refinancing within sixty (60) days after the expiration of Lender's
right described in clause (b) above to provide such Refinancing
with the Equipment Lender on the terms presented to Lender under
this section. If such Refinancing by the Equipment Lender is not
completed within such sixty (60) day period, then the procedures
set forth in this section must be followed again as if any prior
Option Notice had not been given with respect to such Refinancing
or the Option Equipment.
SECTION 3. INTEREST AND FEES
3.1 Interest.
(a) Each Borrower shall pay to Lender interest on the
outstanding principal amount of the non-contingent Obligations at
the Interest Rate. All interest accruing hereunder on and after
the date of any Event of Default or termination hereof shall be
payable on demand.
(b) Borrowers may from time to time request that Prime
Rate Loans be converted to Eurodollar Rate Loans or that any
existing Eurodollar Rate Loans continue for an additional Interest
Period. Such request from Borrowers shall specify the amount of
the Prime Rate Loans which will constitute Eurodollar Rate Loans
(subject to the limits set forth below) and the Interest Period to
be applicable to such Eurodollar Rate Loans. Subject to the terms
and conditions contained herein, three (3) Business Days after
receipt by Lender of such a request from Borrowers, such Prime Rate
Loans shall be converted to Eurodollar Rate Loans or such
Eurodollar Rate Loans shall continue, as the case may be, provided,
that, (i) no Event of Default, or event which with notice or
passage of time or both would constitute an Event of Default exists
or has occurred and is continuing, (ii) no party hereto shall have
sent any notice of termination or non-renewal of this Agreement,
(iii) Borrowers shall have complied with such customary procedures
as are established by Lender and specified by Lender to Borrowers
from time to time for requests by Borrowers for Eurodollar Rate
Loans, (iv) no more than four (4) Interest Periods may be in effect
at any one time, (v) the aggregate amount of the Eurodollar Rate
Loans must be in an amount not less than $5,000,000 or an integral
multiple of $1,000,000 in excess thereof, (vi) the maximum amount
of the Eurodollar Rate Loans at any time requested by Borrowers
shall not exceed the amount equal to (A) the principal amount of
the Term Loan which it is anticipated will be outstanding as of the
last day of the applicable Interest Period plus (B) eighty percent
(80%) of the lowest principal amount of the Revolving Loans which
it is anticipated will be outstanding during the applicable
Interest Period, in each case as determined by Lender (but with no
obligation of Lender to make such Revolving Loans) and (vii) Lender
shall have determined that the Interest Period or Adjusted
Eurodollar Rate is available to Lender through the Reference Bank
and can be readily determined as of the date of the request for
such Eurodollar Rate Loan by Borrowers. Any request by Borrowers
to convert Prime Rate Loans to Eurodollar Rate Loans or to continue
any existing Eurodollar Rate Loans shall be irrevocable.
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Notwithstanding anything to the contrary contained herein, Lender
and Reference Bank shall not be required to purchase United States
Dollar deposits in the London interbank market or other applicable
Eurodollar Rate market to fund any Eurodollar Rate Loans, but the
provisions hereof shall be deemed to apply as if Lender and
Reference Bank had purchased such deposits to fund the Eurodollar
Rate Loans.
(c) Any Eurodollar Rate Loans shall automatically
convert to Prime Rate Loans upon the last day of the applicable
Interest Period, unless Lender has received and approved a request
to continue such Eurodollar Rate Loan at least three (3) Business
Days prior to such last day in accordance with the terms hereof.
Any Eurodollar Rate Loans shall, at Lender's option, upon notice by
Lender to Borrowers, convert to Prime Rate Loans in the event that
(i) an Event of Default or event which, with the notice or passage
of time, or both, would constitute an Event of Default, shall
exist, (ii) this Agreement shall terminate, or (iii) the aggregate
principal amount of the Prime Rate Loans which have previously been
converted to Eurodollar Rate Loans or existing Eurodollar Rate
Loans continued, as the case may be, at the beginning of an
Interest Period shall at any time during such Interest Period
exceed either (A) the aggregate principal amount of the Loans then
outstanding, or (B) the sum of the then outstanding principal
amount of the Term Loan plus the Revolving Loans then available to
Borrowers under Section 2 hereof. Borrowers shall pay to Lender,
upon demand by Lender (or Lender may, at its option, charge any
loan account of Borrowers) any amounts required to compensate
Lender, the Reference Bank or any participant with Lender for any
loss (including loss of anticipated profits), cost or expense
incurred by such person, as a result of the conversion of
Eurodollar Rate Loans to Prime Rate Loans pursuant to any of the
foregoing.
(d) Interest shall be payable by Borrowers to Lender
monthly in arrears not later than the first day of each calendar
month and shall be calculated on the basis of a three hundred sixty
(360) day year and actual days elapsed. The interest rate on non-
contingent Obligations (other than Eurodollar Rate Loans) shall
increase or decrease by an amount equal to each increase or
decrease in the Prime Rate effective on the first day of the month
after any change in such Prime Rate is announced based on the Prime
Rate in effect on the last day of the month in which any such
change occurs.
(e) No agreements, conditions, provisions or
stipulations contained in this Agreement or any other instrument,
document or agreement between one or more Borrowers and Lender or
default of such Borrower(s), or the exercise by Lender of the right
to accelerate the payment of the maturity of principal and
interest, or to exercise any option whatsoever contained in this
Agreement or any other Financing Agreement, or the arising of any
contingency whatsoever, shall entitle Lender to contract for,
charge, or receive, in any event, interest exceeding the maximum
rate of interest permitted by applicable state or federal law in
effect from time to time (hereinafter "Maximum Legal Rate"). In no
event shall any Borrower be obligated to pay interest exceeding
such Maximum Legal Rate and all agreements, conditions or
stipulations, if any, which may in any event or contingency
whatsoever operate to bind, obligate or compel such Borrower to pay
a rate of interest exceeding the Maximum Legal Rate, shall be
without binding force or effect, at law or in equity, to the extent
only of the excess of interest over such Maximum Legal Rate. In
the event any interest is contracted for, charged or received in
excess of the Maximum Legal Rate ('"Excess"), each Borrower
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acknowledges and stipulates that any such contract, charge, or
receipt shall be the result of an accident and bona fide error, and
that any Excess received by Lender shall be applied, first, to
reduce the principal then unpaid hereunder; second, to reduce the
other Obligations; and third, returned to such Borrower, it being
the intention of the parties hereto not to enter at any time into
a usurious or otherwise illegal relationship. Each Borrower
recognizes that, with fluctuations in the Prime Rate, the LIBOR
Rate and the Maximum Legal Rate, such a result could inadvertently
occur. By the execution of this Agreement, each Borrower covenants
that (i) the credit or return of any Excess shall constitute the
acceptance by such Borrower of such Excess, and (ii) such Borrower
shall not seek or pursue any other remedy, legal or equitable,
against Lender, based in whole or in part upon contracting for,
charging or receiving of any interest in excess of the maximum
authorized or receiving of any interest in excess of the maximum
authorized by applicable law (so long as any Excess is returned to
Borrower). For the purpose of determining whether or not any
Excess has been contracted for, charged or received by Lender, all
interest at any time contracted for, charged or received by Lender
in connection with this Agreement shall be amortized, prorated,
allocated and spread in equal parts during the entire term of this
Agreement.
3.2 Closing Fee. Borrowers shall pay to Lender as a closing
fee the amount of $135,000, which shall be fully earned as of and
payable on the date hereof.
3.3 Servicing Fee. Borrowers shall pay to Lender monthly a
servicing fee in an amount equal to $3,000 in respect of Lender's
services for each month (or part thereof) while this Agreement
remains in effect and for so long thereafter as any of the
Obligations are outstanding, which fee shall be fully earned as of
and payable in advance on the date hereof and on the first day of
each month hereafter.
3.4 Unused Line Fee. Borrowers shall pay to Lender monthly
an unused line fee at a rate equal to one-half percent (.5%) per
annum calculated upon the amount by which $16,000,000 exceeds the
average daily principal balance of the outstanding Revolving Loans
and Letter of Credit Accommodations during the immediately
preceding month (or part thereof) while this Agreement is in effect
and for so long thereafter as any of the Obligations are
outstanding, which fee shall be payable on the first day of each
month in arrears.
3.5 Changes in Laws and Increased Costs of Loans.
(a) Notwithstanding anything to the contrary contained
herein, all Eurodollar Rate Loans shall, upon notice by Lender to
Borrowers, convert to Prime Rate Loans in the event that (i) any
change in applicable law or regulation (or the interpretation or
administration thereof) shall either (A) make it unlawful for
Lender, Reference Bank or any participant to make or maintain
Eurodollar Rate Loans or to comply with the terms hereof in
connection with the Eurodollar Rate Loans, or (B) shall result in
the increase in the costs to Lender, Reference Bank or any
participant of making or maintaining any Eurodollar Rate Loans by
an amount deemed by Lender to be material, or (C) reduce the
amounts received or receivable by Lender in respect thereof, by an
amount deemed by Lender to be material or (ii) the cost to Lender,
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Reference Bank or any participant of making or maintaining any
Eurodollar Rate Loans shall otherwise increase by an amount deemed
by Lender to be material. Each Borrower shall pay to Lender, upon
demand by Lender (or Lender may, at its option, charge any loan
account of such Borrower) any amounts required to compensate
Lender, the Reference Bank or any participant with Lender for any
loss (including loss of anticipated profits), cost or expense
incurred by such person as a result of the foregoing, including,
without limitation, any such loss, cost or expense incurred by
reason of the liquidation or reemployment of deposits or other
funds acquired by such person to make or maintain the Eurodollar
Rate Loans or any portion thereof. A certificate of Lender setting
forth the basis for the determination of such amount necessary to
compensate Lender as aforesaid shall be delivered to Borrowers and
shall be conclusive, absent manifest error.
(b) If any payments or prepayments in respect of the
Eurodollar Rate Loans are received by Lender other than on the last
day of the applicable Interest Period (whether pursuant to
acceleration, upon maturity or otherwise), including any payments
pursuant to the application of collections under Section 6.3 or any
other payments made with the proceeds of Collateral, each affected
Borrower shall pay to Lender upon demand by Lender (or Lender may,
at its option, charge any loan account of such Borrower) any
amounts required to compensate Lender, the Reference Bank or any
participant with Lender for any additional loss (including loss of
anticipated profits), cost or expense incurred by such person as a
result of such prepayment or payment, including, without
limitation, any loss, cost or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by
such person to make or maintain such Eurodollar Rate Loans or any
portion thereof.
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions Precedent to Initial Loans and Letter of
Credit Accommodations. Each of the following is a condition
precedent to Lender making the initial Loans and providing the
initial Letter of Credit Accommodations hereunder:
(a) Lender shall have received evidence, in form and
substance satisfactory to Lender, that Lender has valid perfected
and first priority security interests in and liens upon the
Collateral, subject only to the security interests and liens
permitted herein or in the other Financing Agreements;
(b) all requisite corporate action and proceedings in
connection with this Agreement and the other Financing Agreements
shall be satisfactory in form and substance to Lender, and Lender
shall have received all information and copies of all documents,
including records of requisite corporate action and proceedings
which Lender may have reasonably requested in connection therewith,
such documents where requested by Lender or its counsel to be
certified by appropriate corporate officers or governmental
authorities;
(c) no material adverse change shall have occurred in
the assets, business or prospects of Borrowers as taken as a whole
since the date of Lender's latest field examination and no change
or event shall have occurred which would materially impair the
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ability of the Borrowers when taken as a whole to perform their
obligations hereunder or under any of the other Financing
Agreements to which they are a party or of Lender to enforce the
Obligations or realize upon the Collateral;
(d) Lender shall have completed a field review of the
Records and such other information with respect to the Collateral
as Lender may require to determine the amount of Revolving Loans
available to Borrowers, the results of which shall be satisfactory
to Lender, not more than three (3) Business Days prior to the date
hereof;
(e) Lender shall have received, in form and substance
satisfactory to Lender, all consents, waivers, acknowledgments and
other agreements from third persons which Lender may deem necessary
or desirable in order to permit, protect and perfect its security
interests in and liens upon the Collateral or to effectuate the
provisions or purposes of this Agreement and the other Financing
Agreements, including acknowledgments by lessors, mortgagees and
warehousemen of Lender's security interests in the Collateral,
waivers by such persons of any security interests, liens or other
claims by such persons to the Collateral and agreements permitting
Lender access to, and the right to remain on for a reasonable
period of time, the premises to exercise its rights and remedies
and otherwise deal with the Collateral;
(f) Lender shall have received evidence of insurance
(including credit insurance on Advance Auto Accounts in amounts
satisfactory to Lender) and loss payee endorsements required
hereunder and under the other Financing Agreements, in form and
substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(g) Lender shall have received, in form and substance
satisfactory to Lender, such opinion letters of in-house counsel to
Borrowers with respect to the Financing Agreements and such other
matters as Lender may request;
(h) the other Financing Agreements and all instruments
and documents hereunder and thereunder shall have been duly
executed and delivered to Lender, in form and substance
satisfactory to Lender; and
(i) the Excess Availability as determined by Lender, as
of the date hereof, shall be not less than $3,500,000 after giving
effect to the initial Loans made or to be made and Letter of Credit
Accommodations issued or to be issued in connection with the
initial transactions hereunder.
(j) the Lender shall have received in form and substance
satisfactory to Lender, an appraisal of the Collateral;
(k) Lender shall have received the Collateral Letter of
Credit;
(l) Lender shall have received, in form and substance
satisfactory to Lender, the Subordination Agreement;
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(m) Lender shall have received, in form and substance
satisfactory to Lender, a Guaranty from Guarantor of the
Obligations;
(n) Lender shall have received a payment in cash in the
amount of $550,000.00, in the form of a wire transfer from Borrower
or any affiliate of Borrower for the credit of Borrower; and
(o) Lender shall have received such other agreements and
documents which Lender shall requested.
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations. Each of the following is an additional condition
precedent to Lender making Loans and/or providing Letter of Credit
Accommodations to Borrowers, including the initial Loans and Letter
of Credit Accommodations and any future Loans and Letter of Credit
Accommodations:
(a) all representations and warranties contained herein
and in the other Financing Agreements shall be true and correct in
all material respects with the same effect as though such
representations and warranties had been made on and as of the date
of the making of each such Loan or providing each such Letter of
Credit Accommodation and after giving effect thereto; and
(b) no Event of Default and no event or condition which,
with notice or passage of time or both, would constitute an Event
of Default, shall exist or have occurred and be continuing on and
as of the date of the making of such Loan or providing each such
Letter of Credit Accommodation and after giving effect thereto.
SECTION 5. GRANT OF SECURITY INTEREST
To secure payment and performance of all Obligations, each
Borrower hereby grants to Lender a continuing security interest in,
a lien upon, and a right of set off against, and hereby assigns to
Lender as security, the following property and interests in
property of any Borrower, whether now owned or hereafter acquired
or existing, and wherever located (collectively, the "Collateral"):
5.1 Accounts;
5.2 all present and future contract rights, general
intangibles (including tax and duty refunds), registered and
unregistered patents, patent rights, patent applications,
trademarks, trademark registrations, trademark applications,
service marks, copyrights, trade names, applications for the
foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or
licensee, chooses in action and other claims and existing and
hereinafter arising leasehold interests in equipment, real estate
and fixtures), chattel paper, documents, instruments, securities
and other investment property (other than the equity shares of
stock of any of the Borrowers), letters of credit, bankers'
acceptances and guaranties;
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5.3 all present and future monies, securities, credit
balances, deposits, deposit accounts and other property of such
Borrower now or hereafter held or received by or in transit to
Lender or its affiliates or at any other depository or other
institution from or for the account of such Borrower, whether for
safekeeping, pledge, custody, transmission, collection or
otherwise, and all present and future liens, security interests,
rights, remedies, title and interest in, to and in respect of
Accounts and other Collateral, including (a) rights and remedies
under or relating to guaranties, contracts of suretyship, letters
of credit and credit and other insurance related to the Collateral,
(b) rights of stoppage in transit, replevin, repossession,
reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, (c) goods described in invoices,
documents, contracts or instruments with respect to, or otherwise
representing or evidencing, Accounts or other Collateral, including
returned, repossessed and reclaimed goods, and (d) rights of
Borrowers in deposits by and property of account debtors or other
persons securing the obligations of account debtors to Borrowers or
any Borrower;
5.4 Inventory;
5.5 Equipment, excluding the Equipment identified on
Attachment I attached hereto and incorporated herein by this
reference if and to the extent a lien has been granted by any
Borrower in respect of such Equipment and obligations remain
outstanding with respect to such lien and Equipment).
5.6 Records; and
5.7 all products and proceeds of the foregoing, in any form,
including insurance proceeds and all claims and proceeds of any
claims against third parties for loss or damage to or destruction
of any or all of the foregoing.
SECTION 6. COLLECTION AND ADMINISTRATION
6.1 Borrowers' Loan Account. With respect to all Borrowers
other than IBI, Lender shall maintain one or more loan account(s)
on its books as it deems appropriate in which shall be recorded (a)
all Loans, Letter of Credit Accommodations and other Obligations
and the Collateral, (b) all payments made by or on behalf of
Borrowers and (c) all other appropriate debits and credits as
provided in this Agreement, including fees, charges, costs,
expenses and interest. With respect to IBI, Lender shall use
reasonable efforts to maintain one or more loan account(s) on its
books in which shall be recorded (d) all Loans, Letter of Credit
Accommodations and other Obligations and the Collateral of IBI
reflecting sublimits imposed herein on Loans or Letter of Credit
Accommodations that may be made to IBI, (e) all payments made by or
on behalf of IBI, and (f) all other appropriate debits and credits
as provided in this Agreement, including fees, charges, costs,
expenses and interest or IBI. All entries in the loan account(s)
shall be made in accordance with Lender's customary practices as in
effect from time to time.
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6.2 Statements. Lender shall render to Borrowers each month
a statement setting forth the balance in the Borrowers' loan
account(s) maintained by Lender for Borrowers pursuant to the
provisions of this Agreement, including principal, interest, fees,
costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors
or omissions, be considered correct and deemed accepted by
Borrowers and conclusively binding upon any Borrower as an account
stated except to the extent that Lender receives a written notice
from any Borrower of any specific exceptions of any Borrower
thereto within one hundred eighty (180) days after the date such
statement has been mailed by Lender. Until such time as Lender
shall have rendered to Borrowers a written statement as provided
above, the balance in Borrowers' loan account(s) shall be
presumptive evidence of the amounts due and owing to Lender by
Borrowers.
6.3 Collection of Accounts.
(a) LSAP shall establish and maintain, at its expense,
blocked accounts or lockboxes and related blocked accounts (in
either case, "Blocked Accounts"), as Lender may specify, with such
banks as are acceptable to Lender into which Borrowers shall
promptly deposit and direct their account debtors to directly remit
all payments on Accounts and all payments constituting proceeds of
Inventory or other Collateral in the identical form in which such
payments are made, whether by cash, check or other manner. The
banks at which the Blocked Accounts are established shall enter
into an agreement, in form and substance satisfactory to Lender,
providing that all items received or deposited in the Blocked
Accounts are the property of Lender, that the depository bank has
no lien upon, or right to setoff against, the Blocked Accounts, the
items received for deposit therein, or the funds from time to time
on deposit therein and that the depository bank will wire, or
otherwise transfer, in immediately available funds, on a daily
basis, all funds received or deposited into the Blocked Accounts to
such bank account of Lender as Lender may from time to time
designate for such purpose ("Payment Account"). Borrowers agree
that all payments made to such Blocked Accounts or other funds
received and collected by Lender, whether on the Accounts or as
proceeds of Inventory or other Collateral shall be the property of
Lender.
(b) For purposes of calculating the amount of the Loans
available to Borrowers, such payments will be applied (conditional
upon final collection) to the Obligations on the Business Day of
receipt by Lender of immediately available funds in the Payment
Account provided such payments and notice thereof are received in
accordance with Lender's usual and customary practices as in effect
from time to time and within sufficient time to credit Borrower's
loan account on such day, and if not, then on the next Business
Day. For the purposes of calculating interest on the Obligations,
such payments or other funds received will be applied (conditional
upon final collection) to the Obligations one (1) Business Day
following the date of receipt of immediately available funds by
Lender in the Payment Account provided such payments or other funds
and notice thereof are received in accordance with Lender's usual
and customary practices as in effect from time to time and within
sufficient time to credit Borrowers' loan account on such day, and
if not, then on the next Business Day.
(c) Each Borrower and all of its affiliates,
subsidiaries, shareholders, directors, employees or agents shall,
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acting as trustee for Lender, receive, as the property of Lender,
any monies, checks, notes, drafts or any other payment relating to
and/or proceeds of Accounts or other Collateral which come into its
possession or under its control and immediately upon receipt
thereof, shall deposit or cause the same to be deposited in the
Blocked Accounts of such Borrower, or remit the same or cause the
same to be remitted, in kind, to Lender. In no event shall the
same be commingled with such Borrower's own funds. Each Borrower
agrees to reimburse Lender on demand for any amounts owed or paid
to any bank at which a Blocked Account is established or any other
bank or person involved in the transfer of funds to or from the
Blocked Accounts arising out of Lender's payments to or
indemnification of such bank or person. The obligation of each
Borrower to reimburse Lender for such amounts pursuant to this
Section 6.3 shall survive the termination or non-renewal of this
Agreement.
6.4 Payments. All Obligations shall be payable to the
Payment Account as provided in Section 6.3 or such other place as
Lender may designate from time to time. Lender may apply payments
received or collected from any Borrower or for the account of
Borrowers (including the monetary proceeds of collections or of
realization upon any Collateral) to such of the Obligations,
whether or not then due, in such order and manner as Lender
determines. At Lender's option, all principal, interest, fees,
costs, expenses and other charges provided for in this Agreement or
the other Financing Agreements may be charged directly to the loan
account(s) of Borrowers. Each Borrower shall make all payments to
Lender on the Obligations free and clear of, and without deduction
or withholding for or on account of, any setoff, counterclaim,
defense, duties, taxes, levies, imposts, fees, deductions,
withholding, restrictions or conditions of any kind. If after
receipt of any payment of, or proceeds of Collateral applied to the
payment of, any of the Obligations, Lender is required to surrender
or return such payment or proceeds to any Person for any reason,
then the Obligations intended to be satisfied by such payment or
proceeds shall be reinstated and continue and this Agreement shall
continue in full force and effect as if such payment or proceeds
had not been received by Lender. Each Borrower shall be liable to
pay to Lender, and does hereby indemnify and hold Lender harmless
for the amount of any payments or proceeds surrendered or returned.
This Section 6.4 shall remain effective notwithstanding any
contrary action which may be taken by Lender in reliance upon such
payment or proceeds. This Section 6.4 shall survive the payment of
the Obligations and the termination or non-renewal of this
Agreement.
6.5 Authorization to Make Loans. Lender is authorized to
make the Loans and provide the Letter of Credit Accommodations to
any Borrower based upon telephonic or other instructions received
from anyone purporting to be an authorized officer of such Borrower
or other authorized person or, at the discretion of Lender, if such
Loans are necessary to satisfy any Obligations. All requests for
Loans or Letter of Credit Accommodations hereunder shall specify
the date on which the requested advance is to be made or Letter of
Credit Accommodations established (which day shall be a Business
Day) and the amount of the requested Loan. Requests received after
11:30 a.m. Dallas, Texas time on any day shall be deemed to have
been made as of the opening of business on the immediately
following Business Day. All Loans and Letter of Credit
Accommodations under this Agreement shall be conclusively presumed
to have been made to, and at the request of and for the benefit of,
Borrowers when deposited to the credit of Borrowers or otherwise
disbursed or established in accordance with the instructions of any
Borrower or in accordance with the terms and conditions of this
Agreement.
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6.6 Use of Proceeds. Borrowers shall use the initial
proceeds of the Loans provided by Lender to Borrowers hereunder
only for: (a) payments to each of the persons listed in the
disbursement direction letter furnished by LSAP to Lender on or
about the date hereof and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and
delivery of this Agreement and the other Financing Agreements. All
other Loans made or Letter of Credit Accommodations provided by
Lender to Borrowers pursuant to the provisions hereof shall be used
by any Borrower only for general operating, working capital and
other proper corporate purposes of any Borrower not otherwise
prohibited by the terms hereof. None of the proceeds will be used,
directly or indirectly, for the purpose of purchasing or carrying
any margin security or for the purposes of reducing or retiring any
indebtedness which was originally incurred to purchase or carry any
margin security or for any other purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of
Regulation U or X of the Board of Governors of the Federal Reserve
System, as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 Collateral Reporting. LSAP shall provide Lender with the
following documents in a form satisfactory to Lender: (a) on a
regular basis as required by Lender, a schedule of Accounts, sales
made, credits issued and cash received; (b) on a monthly basis (or
after a Default or Event of Default more frequently as Lender may
request), (i) perpetual inventory reports by mix, category and
locations, (ii) agings of accounts receivable, and (ii) agings of
accounts payable, (c) within sixty (60) days after the end of each
fiscal quarter of Advance quarterly financial statements of Advance
(including in each case balance sheets, statements of income and
loss, statements of cash flow, and statements of shareholders'
equity), all in reasonable detail, fairly presenting the financial
position and the results of the operations of Advance and its
subsidiaries as of the end of and through such period, the Lender
acknowledging that such financial statements of Advance shall be
obtained through industry sources, such as MEMA Financial Services
Group, Inc. or any regular securities filings of Advance, to the
extent such filings are available, (d) upon Lender's request, (i)
copies of customer statements and credit memos, remittance advices
and reports, and copies of deposit slips and bank statements, (ii)
copies of shipping and delivery documents, and (iii) copies of
purchase orders, invoices and delivery documents for Inventory and
Equipment acquired by any Borrower; and (d) such other reports as
to the Collateral as Lender shall reasonably request from time to
time.
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7.2 Accounts Covenants.
(a) Each Borrower shall notify Lender promptly of (i)
any material delay in such Borrower's performance of any of its
obligations to any account debtor or the assertion of any claims,
offsets, defenses or counterclaims by any account debtor for an
amount in excess of $100,000, or any disputes with account debtors
for an amount in excess of $100,000, or any settlement, adjustment
or compromise thereof for an amount in excess of $100,000, (ii) all
material adverse information relating to the financial condition of
any account debtor and (iii) any event or circumstance which, to
such Borrower's knowledge would cause Lender to consider any then
existing Accounts as no longer constituting Eligible Accounts. No
credit, discount, allowance or extension or agreement for any of
the foregoing shall be granted to any account debtor without
Lender's consent, except in the ordinary course of such Borrower's
business in accordance with practices and policies previously
disclosed in writing to Lender (if applicable). So long as no
Event of Default exists or has occurred and is continuing,
Borrowers shall settle, adjust or compromise any claim, offset,
counterclaim or dispute with any account debtor. At any time that
an Event of Default exists or has occurred and is continuing,
Lender shall, at its option, have the exclusive right to settle,
adjust or compromise any claim, offset, counterclaim or dispute
with account debtors or grant any credits, discounts or allowances.
(b) Without limiting the obligation of any Borrower to
deliver any other information to Lender, Borrowers shall promptly
report to Lender any return of Inventory by any one account debtor
if either the Inventory so returned in such case has a value in
excess of $75,000 for all Borrowers in the aggregate or if the
Inventory so returned is not an exchange of substantially similar
and merchantable Inventory for other merchantable Inventory of a
similar value. At any time that Inventory is returned, reclaimed
or repossessed, the portion of the Account which arose from the
sale of such returned, reclaimed or repossessed Inventory shall not
be deemed an Eligible Account. In the event any account debtor
returns Inventory when an Event of Default exists or has occurred
and is continuing, each Borrower shall, upon Lender's request, (i)
hold the returned Inventory in trust for Lender, (ii) segregate all
returned Inventory from all of its other property, (iii) dispose of
the returned Inventory solely according to Lender's instructions,
and (iv) not issue any credits, discounts or allowances with
respect thereto without Lender's prior written consent.
(c) With respect to each Account: (i) the amounts shown
on any invoice delivered to Lender or schedule thereof delivered to
Lender shall be true and complete, (ii) no payments shall be made
thereon except payments immediately delivered to Lender pursuant to
the terms of this Agreement, (iii) no credit, discount, allowance
or extension or agreement for any of the foregoing shall be granted
to any account debtor except as reported to Lender in accordance
with this Agreement and except for credits, discounts, allowances
or extensions made or given in the ordinary course of any
Borrower's business in accordance with practices and policies
previously disclosed to Lender, (iv) there shall be no setoffs,
deductions, contras, defenses, counterclaims or disputes existing
or asserted with respect thereto except as reported to Lender or in
accordance with the terms of this Agreement, (v) none of the
transactions giving rise thereto will violate any applicable State
or Federal laws or regulations, all documentation relating thereto
will be legally sufficient under such laws and regulations and all
such documentation will be legally enforceable in accordance with
its terms.
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(d) Lender shall have the right at any time or times, in
Lender's name or in the name of a nominee of Lender, to verify the
validity, amount or any other matter relating to any Account or
other Collateral of any Borrower, by mail, telephone, facsimile
transmission or otherwise.
(e) To the extent that any Borrower or Borrowers have
knowledge thereof, each Borrower shall deliver or cause to be
delivered to Lender, within a reasonable time, with appropriate
endorsement and assignment, all chattel paper and instruments which
such Borrower now owns or may at any time acquire, except as Lender
may otherwise agree.
(f) Lender may, at any time or times that an Event of
Default exists or has occurred and is continuing, (i) notify any or
all account debtors that the Accounts have been assigned to Lender
and that Lender has a security interest therein and Lender may
direct any or all accounts debtors to make payment of Accounts
directly to Lender, (ii) extend the time of payment of, compromise,
settle or adjust for cash, credit, return of merchandise or
otherwise, and upon any terms or conditions, any and all Accounts
or other obligations included in the Collateral and thereby
discharge or release the account debtor or any other party or
parties in any way liable for payment thereof without affecting any
of the Obligations, (iii) demand, collect or enforce payment of any
Accounts or such other obligations, but without any duty to do so,
and Lender shall not be liable for its failure to collect or
enforce the payment thereof nor for the negligence of its agents or
attorneys with respect thereto and (iv) take whatever other action
Lender may deem necessary or desirable for the protection of its
interests. At any time that an Event of Default exists or has
occurred and is continuing, at Lender's request, all invoices and
statements sent to any account debtor shall state that the Accounts
and such other obligations have been assigned to Lender and are
payable directly and only to Lender and Borrower shall deliver to
Lender such originals of documents evidencing the sale and delivery
of goods or the performance of services giving rise to any Accounts
as Lender may require.
7.3 Inventory Covenants. With respect to the Inventory: (a)
Borrowers shall at all times maintain inventory records reasonably
satisfactory to Lender, keeping correct and accurate records
itemizing and describing the kind, type, quality and quantity of
Inventory, Borrowers' cost therefor and daily withdrawals therefrom
and additions thereto; (b) Borrowers shall conduct a physical count
of the Inventory at least once each year, but at any time or times
as Lender may request on or after an Event of Default and promptly
following such physical inventory, Borrowers shall supply Lender
with a report in the form and with such specificity as may be
reasonably satisfactory to Lender concerning such physical count;
(c) Borrowers shall not remove any Inventory from the locations set
forth or permitted herein, without the prior written consent of
Lender, except for sales of Inventory in the ordinary course of
Borrowers' business and except to move Inventory directly from one
location set forth or permitted herein to another such location;
(d) upon Lender's request, Borrowers shall, at their expense, no
more than twice in any twelve (12) month period, but at any time or
times as Lender may request on or after an Event of Default that is
continuing; deliver or cause to be delivered to Lender written
reports or appraisals as to the Inventory in form, scope and
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methodology acceptable to Lender and by an appraiser acceptable to
Lender, addressed to Lender or upon which Lender is expressly
permitted to rely; (e) Borrowers shall produce, use, store and
maintain the Inventory with all reasonable care and caution and in
accordance with applicable standards of any insurance and in
conformity with applicable laws (including the requirements of the
Federal Fair Labor Standards Act of 1938, as amended and all rules,
regulations and orders related thereto); (f) each Borrower assumes
all responsibility and liability arising from or relating to the
production, use, sale or other disposition of the Inventory; (g)
Borrower shall not sell Inventory to any customer on approval, or
any other basis which entitles the customer to return or may
obligate Borrower to repurchase such Inventory, except in the
ordinary course of business; (h) Borrower shall keep the Inventory
in good and marketable condition; and (i) Borrower shall not,
without prior written notice to Lender, acquire or accept any
Inventory on consignment or approval.
7.4 Equipment Covenants. With respect to the Equipment: (a)
upon Lender's request, Borrowers shall, at their expense, at any
time or times as Lender may request on or after an Event of Default
that is continuing, deliver or cause to be delivered to Lender
written reports or appraisals as to the Equipment in form, scope
and methodology acceptable to Lender and by an appraiser acceptable
to Lender; (b) Borrowers shall keep the Equipment in good order,
repair, running and marketable condition (ordinary wear and tear
excepted and excluding Equipment which is (i) obsolete and can or
will no longer be used in the ordinary course of Borrowers'
business; (ii) not repairable or useful for any purpose, (iii)
damaged beyond repair or constitutes a total loss or constructive
total loss, (iv) other than the Equipment on Attachment I hereto;
(c) Borrowers shall use the Equipment with all reasonable care and
caution and in accordance with applicable standards of any
insurance and in conformity with all applicable laws; (d) the
Equipment is and shall be used in Borrowers' business and not for
personal, family, household or farming use; (e) Subject to the
provisions of Section 9.7 hereof, Borrowers shall not remove any
Equipment from the locations set forth or permitted herein, except
to the extent necessary to have any Equipment repaired or
maintained in the ordinary course of the business of any Borrower
or to move Equipment directly from one location set forth or
permitted herein to another such location and except for the
movement of motor vehicles used by or for the benefit of any
Borrower in the ordinary course of business; (f) the Equipment is
now and shall remain personal property and no Borrowers shall
permit any of the Equipment to be or become a part of or affixed to
real property; (g) Borrowers assume all responsibility and
liability arising from the use of the Equipment.
7.5 Power of Attorney. Each Borrower hereby irrevocably
designates and appoints Lender (and all persons designated by
Lender) as such Borrower's true and lawful attorney-in-fact, and
authorizes Lender, in such Borrower's or Lender's name, to: (a) at
any time an Event of Default or event which with notice or passage
of time or both would constitute an Event of Default exists or has
occurred and is continuing (i) demand payment on Accounts or other
proceeds of Inventory or other Collateral, (ii) enforce payment of
Accounts by legal proceedings or otherwise, (iii) exercise all of
such Borrower's rights and remedies to collect any Account or other
Collateral, (iv) sell or assign any Account upon such terms, for
such amount and at such time or times as the Lender deems
advisable, (v) settle, adjust, compromise, extend or renew an
Account, (vi) discharge and release any Account, (vii) prepare,
file and sign such Borrower's name on any proof of claim in
bankruptcy or other similar document against an account debtor,
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(viii) notify the post office authorities to change the address for
delivery of such Borrower's mail to an address designated by
Lender, and open and dispose of all mail addressed to Borrower,
(ix) take control in any manner of any item of payment or proceeds
thereof, (x) have access to any lockbox or postal box into which
such Borrower's mail is deposited, (xi) do all acts and things
which are necessary, in Lender's determination, to fulfill such
Borrower's obligations under this Agreement and the other Financing
Agreements, and (b) at any time to (i) endorse such Borrower's name
upon any items of payment or proceeds thereof and deposit the same
in the Lender's account for application to the Obligations, (ii)
endorse such Borrower's name upon any chattel paper, document,
instrument, invoice, or similar document or agreement relating to
any Account or any goods pertaining thereto or any other
Collateral, (iii) sign such Borrower's name on any verification of
Accounts and notices thereof to account debtors, and (iv) execute
in such Borrower's name and file any UCC financing statements or
amendments thereto. Such Borrower hereby releases Lender and its
officers, employees and designees from any liabilities arising from
any act or acts under this power of attorney and in furtherance
thereof, whether of omission or commission, except as a result of
Lender's own gross negligence or willful misconduct as determined
pursuant to a final non-appealable order of a court of competent
jurisdiction.
7.6 Right to Cure. After the occurrence of an Event of
Default, Lender may, at its option, (a) cure any default by any
Borrower under any agreement with a third party or pay or bond on
appeal any judgment entered against such Borrower, (b) discharge
taxes, liens, security interests or other encumbrances at any time
levied on or existing with respect to the Collateral and (c) pay
any amount, incur any expense or perform any act which, in Lender's
judgment, is necessary or appropriate to preserve, protect, insure
or maintain the Collateral and the rights of Lender with respect
thereto. Lender may add any amounts so expended to the Obligations
and charge Borrowers' account therefor, such amounts to be
repayable by Borrowers on demand. Lender shall be under no
obligation to effect such cure, payment or bonding and shall not,
by doing so, be deemed to have assumed any obligation or liability
of such Borrower. Any payment made or other action taken by Lender
under this section shall be without prejudice to any right to
assert an Event of Default hereunder and to proceed accordingly.
7.7 Access to Premises. From time to time as requested by
Lender, at the cost and expense of Borrowers, (a) Lender or its
designee shall have complete access to all of Borrowers' premises
during normal business hours and after notice to Borrowers, or at
any time and without notice to Borrowers if an Event of Default
exists or has occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and all of
Borrowers' books and records, including the Records, and (b)
Borrowers shall promptly furnish to Lender such copies of such
books and records or extracts therefrom as Lender may request, and
(c) use during normal business hours such of any Borrower's
personnel, equipment, supplies and premises as may be reasonably
necessary for the foregoing and if an Event of Default exists or
has occurred and is continuing for the collection of Accounts and
realization of other Collateral.
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SECTION 8. REPRESENTATIONS AND WARRANTIES
Each Borrower hereby jointly and severally represents and
warrants to Lender the following (which shall survive the execution
and delivery of this Agreement), the truth and accuracy of which
are a continuing condition of the making of Loans and providing
Letter of Credit Accommodations by Lender to any Borrower:
8.1 Corporate Existence, Power and Authority; Subsidiaries.
Each Borrower is a corporation duly organized and in good standing
under the laws of its state of incorporation and is duly qualified
as a foreign corporation and in good standing in all states or
other jurisdictions where the nature and extent of the business
transacted by it or the ownership of assets makes such
qualification necessary, except for those jurisdictions in which
the failure to so qualify would not have a material adverse effect
on such Borrower's financial condition, results of operation or
business or the rights of Lender in or to any of the Collateral.
The execution, delivery and performance of this Agreement, the
other Financing Agreements and the transactions contemplated
hereunder and thereunder are all within such Borrower's corporate
powers, have been duly authorized and are not in contravention of
law or the terms of such Borrower's certificate of incorporation,
by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which such Borrower is a party or by
which such Borrower or its property is bound. This Agreement and
the other Financing Agreements constitute legal, valid and binding
obligations of such Borrower enforceable in accordance with their
respective terms. Such Borrower does not have any subsidiaries
except as set forth on the Information Certificate.
8.2 Financial Statements; No Material Adverse Change. All
financial statements relating to Borrowers which have been or may
hereafter be delivered by Borrowers to Lender have been prepared in
accordance with GAAP and fairly present the financial condition and
the results of operation of Borrowers as at the dates and for the
periods set forth therein. Except as disclosed in any interim
financial statements furnished by Borrowers to Lender prior to the
date of this Agreement, there has been no material adverse change
in the assets, liabilities, properties and condition, financial or
otherwise, of Borrowers, taken as a whole since the date of the
most recent audited financial statements furnished by Borrowers to
Lender prior to the date of this Agreement.
8.3 Chief Executive Office; Collateral Locations. The chief
executive office of each Borrower and such Borrower's Records
concerning Accounts are located only at the address set forth below
and its only other places of business and the only other locations
of Collateral, if any, are the addresses set forth in the
Information Certificate, subject to the right of such Borrower to
establish new locations in accordance with Section 9.2 below. The
Information Certificate correctly identifies any of such locations
which are not owned by such Borrower and sets forth the owners
and/or operators thereof. The holders of any mortgages on such
locations of which any Borrower is aware are identified on Schedule
8.3.
8.4 Priority of Liens; Title to Properties. The security
interests and liens granted to Lender under this Agreement and the
other Financing Agreements constitute valid and perfected first
priority liens and security interests in and upon the Collateral
when all proper filing, recordings and other actions necessary to
perfect such liens have been taken subject only to the liens
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indicated on Schedule 8.4 hereto and the other liens permitted
under Section 9.8 hereof. To the best of its knowledge, each
Borrower has good and marketable title to all of its material
properties and assets subject to no liens, mortgages, pledges,
security interests, encumbrances or charges of any kind, except
those granted to Lender and such others as are specifically listed
on Schedule 8.4 hereto or permitted under Section 9.8 hereof.
8.5 Tax Returns. Borrowers have filed, or caused to be
filed, in a timely manner all tax returns, reports and declarations
which are required to be filed by it (without requests for
extension except as previously disclosed in writing to Lender).
All information in such tax returns, reports and declarations is
complete and accurate in all material respects. Borrowers have
paid or caused to be paid all taxes due and payable or claimed due
and payable in any assessment received by it, except taxes the
validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to Borrowers and with
respect to which adequate reserves have been set aside on their
books. Adequate provision has been made for the payment of all
accrued and unpaid Federal, State, county, local, foreign and other
taxes whether or not yet due and payable and whether or not
disputed.
8.6 Litigation. Except as set forth on the Information
Certificate, there is no present investigation by any governmental
agency pending, or to the best of any Borrower's knowledge
threatened, against or affecting such Borrower, its assets or
business and there is no action, suit, proceeding or claim by any
Person pending, or to the best of such Borrower's knowledge
threatened, against any Borrower or its assets or goodwill, or
against or affecting any transactions contemplated by this
Agreement, which if adversely determined against such Borrower
would result in a material adverse change in the assets, business
or prospects of Borrowers as taken as a whole or would impair the
ability of Borrowers to perform their obligations hereunder or
under any of the other Financing Agreements to which it is a party
or of Lender to enforce any Obligations or realize upon any
Collateral.
8.7 Compliance with Other Agreements and Applicable Laws. No
Borrower is in default in any material respect under, or in
violation in any material respect of any of the terms of, any
agreement, contract, instrument, lease or other commitment to which
it is a party or by which they or any of its assets are bound and
each Borrower is in compliance in all material respects with all
applicable provisions of laws, rules, regulations, licenses,
permits, approvals and orders of any foreign, Federal, State or
local governmental authority the failure to comply with which would
have a material adverse effect on the Borrowers or any Borrower.
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8.8 Employee Benefits.
(a) No Borrower has engaged in any transaction in
connection with which such Borrower or any of its ERISA Affiliates
could be subject to either a civil penalty assessed pursuant to
Section 502(i) of ERISA or a tax imposed by Section 4975 of the
Code, including any accumulated funding deficiency described in
Section 8.8(c) hereof and any deficiency with respect to vested
accrued benefits described in Section 8.8(d) hereof.
(b) No liability to the Pension Benefit Guaranty
Corporation has been or is expected by any Borrower to be incurred
with respect to any employee benefit plan of such Borrower or any
of its ERISA Affiliates. There has been no reportable event
(within the meaning of Section 4043(b) of ERISA) or any other event
or condition with respect to any employee pension benefit plan of
any Borrower or any of its ERISA Affiliates which presents a risk
of termination of any such plan by the Pension Benefit Guaranty
Corporation.
(c) Full payment has been made of all amounts which such
Borrower or any of its ERISA Affiliates is required under Section
302 of ERISA and Section 412 of the Code to have paid under the
terms of each employee benefit plan as contributions to such plan
as of the last day of the most recent fiscal year of such plan
ended prior to the date hereof, and no accumulated funding
deficiency (as defined in Section 302 of ERISA and Section 412 of
the Code), whether or not waived, exists with respect to any
employee benefit plan, including any penalty or tax described in
Section 8.8(a) hereof and any deficiency with respect to vested
accrued benefits described in Section 8.8(d) hereof.
(d) The current value of all vested accrued benefits
under all employee benefit plans maintained by any Borrower that
are subject to Title IV of ERISA does not exceed the current value
of the assets of such plans allocable to such vested accrued
benefits, including any penalty or tax described in Section 8.8(a)
hereof and any accumulated funding deficiency described in Section
8.8(c) hereof. The terms "current value" and "accrued benefit"
have the meanings specified in ERISA.
(e) Neither any Borrower nor any of its ERISA Affiliates
is or has ever been obligated to contribute to any "multiemployer
plan" (as such term is defined in Section 4001(a)(3) of ERISA) that
is subject to Title IV of ERISA.
8.9 Bank Accounts. All of the deposit accounts, investment
accounts or other accounts in the name of or used by each Borrower
maintained at any bank or other financial institution are set forth
on Schedule 8.9 hereto, subject to the right of such Borrower to
establish new accounts in accordance with Section 9.13 below.
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8.10 Environmental Compliance.
(a) Except as set forth on Schedule 8.10 hereto and the
Information Certificate, no Borrower has not generated, used,
stored, treated, transported, manufactured, handled, produced or
disposed of any Hazardous Materials, on or off its premises
(whether or not owned by it) in any manner which at any time
violates any applicable Environmental Law or any license, permit,
certificate, approval or similar authorization thereunder and the
operations of Borrowers comply in all material respects with all
Environmental Laws and all licenses, permits, certificates,
approvals and similar authorizations thereunder.
(b) Except as set forth on Schedule 8.10 hereto and the
Information Certificate, there has been no investigation,
proceeding, complaint, order, directive, claim, citation or notice
by any governmental authority or any other person nor is any
pending or to the best of any Borrower's knowledge threatened, with
respect to any non-compliance with or violation of the requirements
of any Environmental Law by Borrower or the release, spill or
discharge, threatened or actual, of any Hazardous Material or the
generation, use, storage, treatment, transportation, manufacture,
handling, production or disposal of any Hazardous Materials or any
other environmental, health or safety matter, which affects any
Borrower or its business, operations or assets or any properties at
which any Borrower has transported, stored or disposed of any
Hazardous Materials which would have a material adverse effect on
any Borrower.
(c) Except as set forth on Schedule 8.10 hereto and the
Information Certificate, no Borrower has any material liability
(contingent or otherwise) in connection with a release, spill or
discharge, threatened or actual, of any Hazardous Materials or the
generation, use, storage, treatment, transportation, manufacture,
handling, production or disposal of any Hazardous Materials.
(d) Each Borrower has all licenses, permits,
certificates, approvals or similar authorizations ("Permits")
required to be obtained or filed in connection with the operations
of Borrower under any Environmental Law and all of which such
Permits are valid and in full force and effect unless the failure
to obtain such Permits would not have a material adverse effect on
any Borrower.
8.11 Accuracy and Completeness of Information. All
information furnished by or on behalf of each Borrower in writing
to Lender in connection with this Agreement or any of the other
Financing Agreements or any transaction contemplated hereby or
thereby, including all information on the Information Certificate
is true and correct in all material respects on the date as of
which such information is dated or certified and does not omit any
material fact necessary in order to make such information not
misleading. Since the date of the last financial statements
delivered to Lender, no event or circumstance has occurred which
has had or could reasonably be expected to have a material adverse
effect on the business, assets or prospects of Borrowers, taken as
a whole, which has not been fully and accurately disclosed to
Lender in writing.
8.12 Survival of Warranties; Cumulative. All representations
and warranties contained in this Agreement or any of the other
Financing Agreements shall survive the execution and delivery of
this Agreement and shall be deemed to have been made again to
Lender on the date of each additional borrowing or other credit
accommodation hereunder and shall be conclusively presumed to have
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been relied on by Lender regardless of any investigation made or
information possessed by Lender. The representations and
warranties set forth herein shall be cumulative and in addition to
any other representations or warranties which any Borrower shall
now or hereafter give, or cause to be given, to Lender.
8.13 Year 2000 Issues. Each Borrower shall, and shall cause
any subsidiary to, take all actions which may be required so that
its computer-based information systems, including, without
limitation, all of its proprietary computer hardware and software
and all computer hardware and software leased or licensed from
third parties (and whether supplied by others) are able to operate
effectively and correctly process data using dates on or after
January 1, 2000. Compliance with the foregoing shall mean that the
Borrower's systems will operate and correctly process data without
human intervention such that (a) there is correct century
recognition, (b) calculations properly accommodate same century and
multi-century formulas and date values, (c) all leap years shall be
calculated correctly and (d) the information systems shall
otherwise comply with applicable industry standards and regulatory
guidelines regarding the change of the century and year 2000
compliance. Such Borrower shall, by no later than September 30,
1999, certify to Lender in writing that its information systems
have been modified, updated and reprogrammed as required by this
section. On and after September 30, 1999, the computer-based
information systems of such Borrower shall be, and with ordinary
course upgrading and maintenance, will continue to be sufficient to
permit such Borrower to conduct its business without any material
adverse effect as a result of the year 2000.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTSS
9.1 Maintenance of Existence. Except as otherwise permitted
pursuant to the Distribution Agreement and the provisions of this
section, each Borrower shall at all times preserve, renew and keep
in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and
effect all permits, licenses, trademarks, tradenames, approvals,
authorizations, leases and contracts necessary to carry on the
business as presently or proposed to be conducted. Each Borrower
shall give Lender thirty (30) days prior written notice of any
proposed change in its corporate name, which notice shall set forth
the new name and such Borrower shall deliver to Lender a copy of
the amendment to the Certificate of Incorporation of such Borrower
providing for the name change certified by the Secretary of State
of the jurisdiction of incorporation of such Borrower as soon as it
is available.
9.2 New Collateral Locations. Any Borrower may open any new
location within the continental United States provided such
Borrower (a) gives Lender thirty (30) days prior written notice of
the intended opening of any such new location and (b) executes and
delivers, or causes to be executed and delivered, to Lender such
agreements, documents, and instruments as Lender may deem
reasonably necessary or desirable to protect its interests in the
Collateral at such location, including, without limitation, UCC
financing statements.
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9.3 Compliance with Laws, Regulations, Etc.
(a) Each Borrower shall, at all times, comply in all
material respects with all laws, rules, regulations, licenses,
permits, approvals and orders applicable to it, and duly observe
all requirements of any Federal, State or local governmental
authority, including the Employee Retirement Security Act of 1974,
as amended, the Occupational Safety and Health Act of 1970, as
amended, the Fair Labor Standards Act of 1938, as amended, and all
statutes, rules, regulations, orders, permits and stipulations
relating to environmental pollution and employee health and safety,
including all of the Environmental Laws, (except to the extent the
failure to so comply would not have a material adverse effect on
any Borrower).
(b) Each Borrower shall establish and maintain, at its
expense, a system to assure and monitor its continued compliance
with all Environmental Laws in all of its operations, which system
shall include annual reviews of such compliance by employees or
agents of Borrower who are familiar with the requirements of the
Environmental Laws. Copies of all environmental surveys, audits,
assessments, feasibility studies and results of remedial
investigations which are performed or received after the date
hereof shall be promptly furnished, or caused to be furnished, by
Borrower to Lender. Borrower shall take prompt and appropriate
action to respond to any non-compliance with any of the
Environmental Laws and shall regularly report to Lender on such
response.
(c) Borrowers shall give both oral and written notice to
Lender immediately upon any Borrower's receipt of any notice of, or
any Borrower's otherwise obtaining knowledge of, (i) the occurrence
of any event involving the release, spill or discharge, threatened
or actual, of any Hazardous Material or (ii) any investigation,
proceeding, complaint, order, directive, claims, citation or notice
with respect to: (A) any non-compliance with or violation of any
Environmental Law by Borrower or (B) the release, spill or
discharge, threatened or actual, of any Hazardous Material or (C)
the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous
Materials or (D) any other environmental, health or safety matter,
all which has or may be expected to have a material adverse effect
on any Borrower or its businesses, operations or assets or any
properties at which such Borrower transported, stored or disposed
of any Hazardous Materials.
(d) Without limiting the generality of the foregoing,
whenever Lender reasonably determines that there is non-compliance,
or any condition which requires any action by or on behalf of
Borrower in order to avoid any material non-compliance, with any
Environmental Law, Borrowers shall, at Lender's request and
Borrowers' expense: (i) cause an independent environmental engineer
acceptable to Lender to conduct such tests of the site where any
Borrower's non-compliance or alleged non-compliance with such
Environmental Laws has occurred as to such non-compliance and
prepare and deliver to Lender a report as to such non-compliance
setting forth the results of such tests, a proposed plan for
responding to any environmental problems described therein, and an
estimate of the costs thereof and (ii) provide to Lender a
supplemental report of such engineer whenever the scope of such
non-compliance, or Borrower's response thereto or the estimated
costs thereof, shall change in any material respect.
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(e) Each Borrower shall indemnify and hold harmless
Lender, its directors, officers, employees, agents, invitees,
representatives, successors and assigns, from and against any and
all losses, claims, damages, liabilities, costs, and expenses
(including attorneys' fees and legal expenses) directly or
indirectly arising out of or attributable to the use, generation,
manufacture, reproduction, storage, release, threatened release,
spill, discharge, disposal or presence of a Hazardous Material,
including the costs of any required or necessary repair, cleanup or
other remedial work with respect to any property of Borrower and
the preparation and implementation of any closure, remedial or
other required plans. All representations, warranties, covenants
and indemnifications in this Section 9.3 shall survive the payment
of the Obligations and the termination or non-renewal of this
Agreement.
9.4 Payment of Taxes and Claims. Borrowers shall duly pay
and discharge all taxes, assessments, contributions and
governmental charges upon or against them or their properties or
assets, except for taxes the validity of which are being contested
in good faith by appropriate proceedings diligently pursued and
available to such Borrower and with respect to which adequate
reserves have been set aside on its books. Borrowers shall be
liable for any tax or penalties imposed on Lender as a result of
the financing arrangements provided for herein and Borrowers agree
to jointly and severally indemnify and hold Lender harmless with
respect to the foregoing, and to repay to Lender on demand the
amount thereof, and until paid by Borrowers such amount shall be
added and deemed part of the Loans, provided, that, nothing
contained herein shall be construed to require Borrowers to pay any
income or franchise taxes attributable to the income of Lender from
any amounts charged or paid hereunder to Lender. The foregoing
indemnity shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
9.5 Insurance. Borrowers shall, at all times, maintain with
financially sound and reputable insurers insurance with respect to
the Collateral against loss or damage and all other insurance of
the kinds and in the amounts customarily insured against or carried
by corporations of established reputation engaged in the same or
similar businesses and similarly situated. Said policies of
insurance shall be satisfactory to Lender as to form, amount and
insurer. Lender acknowledges that the insurance amounts, carriers
and policies set forth in Schedule 9.5 are satisfactory to Lender
as of the time of Closing hereof. Borrowers shall furnish
certificates, policies or endorsements to Lender as Lender shall
require as proof of such insurance, and, if Borrowers fail to do
so, Lender is authorized, but not required, to obtain such
insurance at the expense of Borrowers. All policies shall provide
for at least thirty (30) days prior written notice to Lender of any
cancellation or reduction of coverage and that Lender may act as
attorney for any and every Borrower in obtaining, and at any time
an Event of Default exists or has occurred and is continuing,
adjusting, settling, amending and canceling such insurance.
Borrowers shall cause Lender to be named as a loss payee and an
additional insured as its interest may appear (but without any
liability for any premiums) under such insurance policies and
Borrowers shall obtain non-contributory lender's loss payable
endorsements to all insurance policies in form and substance
satisfactory to Lender. Such lender's loss payable endorsements
shall specify that the proceeds of such insurance shall be payable
to Lender as its interests may appear and further specify that
Lender shall be paid regardless of any act or omission by any or
every Borrowers or any of its or their affiliates. At its option,
Lender may apply any insurance proceeds received by Lender at any
time to the cost of repairs or replacement of Collateral and/or to
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payment of the Obligations, whether or not then due, in any order
and in such manner as Lender may determine or hold such proceeds as
cash collateral for the Obligations.
9.6 Financial Statements and Other Information.
(a) Borrowers shall keep proper books and records in
which true and complete entries shall be made of all dealings or
transactions of or in relation to the Collateral and the business
of Borrowers and their subsidiaries (if any) in accordance with
GAAP and LSAP and its subsidiaries shall furnish or cause to be
furnished to Lender: (i) within forty-five (45) days after the end
of each fiscal month, monthly unaudited consolidated financial
statements (including balance sheets, statements of income and
loss, statements of cash flow, and statements of shareholders'
equity), all in reasonable detail, fairly presenting the financial
position and the results of the operations of LSAP and its
subsidiaries as of the end of and through such fiscal month; (ii)
within one hundred (100) days after the end of each fiscal year,
audited consolidated financial statements of LSAP and its
subsidiaries (including in each case balance sheets, statements of
income and loss, and statements of shareholders' equity), and the
accompanying notes thereto, all in reasonable detail, fairly
presenting the financial position and the results of the operations
of LSAP and its subsidiaries as of the end of and for such fiscal
year, together with either the unqualified opinion of independent
certified public accountants or if the opinion is qualified, such
qualifications are acceptable to Lender in its sole discretion, in
either case, which accountants shall be an independent accounting
firm selected by LSAP and reasonably acceptable to Lender, that
such financial statements have been prepared in accordance with
GAAP, and present fairly the results of operations and financial
condition of LSAP and its subsidiaries as of the end of and for the
fiscal year then ended; and (iii) as soon as available, a copy of
each regular, periodic or special report, registration statement,
or prospectus filed by LSA Technologies, Inc. with any securities
exchange or the Securities and Exchange Commission or any successor
agency.
(b) Each Borrower shall promptly notify Lender in
writing of the details of (i) any loss, damage, investigation,
action, suit, proceeding or claim relating to the Collateral or
which would result in any material adverse change in Borrowers'
business, properties, assets, goodwill or condition, financial or
otherwise and (ii) the occurrence of any Event of Default or event
which, with the passage of time or giving of notice or both, would
constitute an Event of Default.
(c) Borrowers shall promptly after the sending or filing
thereof furnish or cause to be furnished to Lender copies of all
reports which Guarantor or such Borrower sends to its stockholders
generally and copies of all reports and registration statements
which Guarantor or any Borrower files with the Securities and
Exchange Commission, any national securities exchange or the
National Association of Securities Dealers, Inc.
(d) Borrowers shall furnish or cause to be furnished to
Lender such budgets, forecasts, projections and other information
respecting the Collateral and the business of Borrowers, as Lender
may, from time to time, reasonably request. Lender is hereby
authorized to deliver a copy of any financial statement or any
other information relating to the business of Borrowers to any
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court or other government agency or to any participant or assignee
or prospective participant or assignee. If at any time, (i) an
Event of Default occurs and is continuing, or (ii) for any reason,
Ernst & Young LLP no longer prepares the financial statements of
Borrower, Borrower hereby authorizes and directs all accountants or
auditors to deliver to Lender, at Borrower's expense, copies of the
financial statements of Borrower and any reports or management
letters prepared by such accountants or auditors on behalf of
Borrower and to disclose to Lender such information as they may
have regarding the business of Borrower. Any documents, schedules,
invoices or other papers delivered to Lender may be destroyed or
otherwise disposed of by Lender one (1) year after the same are
delivered to Lender, except as otherwise designated by any Borrower
to Lender in writing.
(e) Borrowers shall furnish no later than sixty (60)
days prior to the expiry date of the Collateral Letter of Credit,
written confirmation of the extension, or notice of expiration, of
the Collateral Letter of Credit at such expiry date. Borrowers
shall cause the issuer of such Collateral Letter of Credit not
later than sixty (60) days prior to such expiry date, to furnish,
if applicable, a notice that such Collateral Letter of Credit will
not be renewed or extended.
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc.
Except as provided in the Distribution Agreement, no Borrower will,
directly or indirectly, (a) merge into or with or consolidate with
any other Person or permit any other Person to merge into or with
or consolidate with it except for the merger of any Borrower with
any other Borrower upon the prior consent of Lender, or (b) sell,
assign, lease, transfer, abandon or otherwise dispose of any stock
or indebtedness to any other Person or any of its assets to any
other Person except (i) as between Borrowers, in the ordinary
course of and pursuant to the reasonable requirements of
such Borrowers' businesses; (ii) for sales of Inventory in the
ordinary course of business, or other sale, assignment, lease,
transfer or other disposal in an amount not to exceed $100,000 per
calendar year; (iii) for the disposition of worn-out or obsolete
Equipment or Equipment no longer used in the business of any
Borrower so long as (A) if an Event of Default exists or has
occurred and is continuing, any proceeds are paid to Lender and (B)
for all Borrowers, in the aggregate, such sales do not involve
Equipment having an aggregate fair market value in excess of
$100,000 for all such Equipment disposed of in any fiscal year;
(iv) for sales of Accounts of any Borrower, the principal office,
assets or place of business of the account debtors with respect to
such Accounts are outside either the United States Canada or Puerto
Rico provided (A) such Accounts are not Eligible Accounts; (B) the
Excess Availability at the time of the sale of such Accounts is
less than $1,000,000 and (C) the sales price for such Accounts is
not less than 100% of the original invoice for such Accounts); (v)
sale of capital stock with respect to a Borrower to the extent such
transactions do not cause a Change of Control (as hereinafter
defined) of such Borrower; or (vi) sale of Inventory of IBI
pursuant to an Operating Agreement, an Inventory Purchase Agreement
and other related agreements substantially in the form of the
drafts of the Operating Agreement and Inventory Purchase Agreement,
dated as of April 16, 1999 previously provided to Lender, provided;
(A) Lender shall have received a payment equal to the amount of
Revolving Loans outstanding at any time with respect to Eligible
Inventory of IBI pursuant to Section 2.1(a)(ii) hereof plus undrawn
amounts available to IBI pursuant to section 2.1(a)(ii) hereof and
an additional amount of $500,000, and (B) after the sale of
Inventory pursuant to this subsection, no further amounts will be
made available with respect to IBI pursuant to this Agreement; or
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(c) form or acquire any subsidiaries, or (d) wind up, liquidate or
dissolve or (e) agree to do any of the foregoing. For any sale of
assets of any Borrowers pursuant to subsections 9.7(b)(iii) or (iv)
hereof, Lender shall upon such sale and at the expense of
Borrowers, release its security interest in such assets. As used
in this section, "Change of control" shall mean the acquisition by
any Person or group of Persons acting together, of a direct
interest in more than fifty-one percent (51%) of the voting power
of the voting stock of or membership interests in, any Borrower,
including by way of merger or consolidation, or otherwise.
9.8 Encumbrances. No Borrower shall create, incur, assume or
suffer to exist any security interest, mortgage, pledge, lien,
charge or other encumbrance of any nature whatsoever on any of its
assets or properties, including the Collateral, except: (a) liens
and security interests of Lender; (b) liens in favor of
warehouseman, landlords, carriers, mechanics, materialmen, laborers
or suppliers; (c) liens arising from deposits made in connection
with obtaining workers' compensation or other unemployment
insurance; (d) liens arising by reason of security for surety,
appeal bonds or performance bonds; (e) liens resulting from any
judgment or award that would not have a material adverse effect on
the Borrowers taken as a whole; (f) liens securing the payment of
taxes, either not yet overdue or the validity of which are being
contested in good faith by appropriate proceedings diligently
pursued and available to such Borrower and with respect to which
adequate reserves have been set aside on its books; (g) non-
consensual statutory liens (other than liens securing the payment
of taxes) arising in the ordinary course of such Borrower's
business to the extent: (i) such liens secure indebtedness which is
not overdue or (ii) such liens secure indebtedness relating to
claims or liabilities which are fully insured and being defended at
the sole cost and expense and at the sole risk of the insurer or
being contested in good faith by appropriate proceedings diligently
pursued and available to such Borrower, in each case prior to the
commencement of foreclosure or other similar proceedings and with
respect to which adequate reserves have been set aside on its
books; (h) zoning restrictions, easements, licenses, covenants and
other restrictions affecting the use of real property which do not
interfere in any material respect with the use of such real
property or ordinary conduct of the business of such Borrower as
presently conducted thereon or materially impair the value of the
real property which may be subject thereto; (i) purchase money
security interests in Equipment (including capital leases) arising
after the date hereof and purchase money mortgages on real estate
not to exceed $1,500,000 in the aggregate at any time outstanding
so long as such security interests and mortgages do not apply to
any property of such Borrower other than the Equipment or real
estate so acquired, and the indebtedness secured thereby does not
exceed the cost of the Equipment or real estate so acquired, as the
case may be; (i) the security interests and liens set forth on
Schedule 8.4 hereto; (k) security interests and liens created
pursuant to the refinancing of obligations and indebtedness
pursuant to Section 9.9(e) hereof; (l) liens arising from operating
leases and (m) liens against any life insurance policy or the cash
surrender value thereof which relate to borrowings incurred to
finance the premiums made under such policy. Lender shall upon the
acquisition of Equipment as provided pursuant to subsection (i)
above, release its security interest in such Equipment so acquired
if so required under the terms of the financing arrangements
governing such acquisition.
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9.9 Indebtedness. No Borrower shall incur, create, assume,
become or be liable in any manner with respect to, or permit to
exist, any obligations or indebtedness, except:
(a) the Obligations;
(b) trade obligations and normal accruals in the
ordinary course of business not yet due and payable, or with
respect to which such Borrower is contesting in good faith the
amount or validity thereof by appropriate proceedings diligently
pursued and available to such Borrower, and with respect to which
adequate reserves have been set aside on its books;
(c) purchase money indebtedness (including capital
leases) to the extent not incurred or secured by liens (including
capital leases) in violation of any other provision of this
Agreement;
(d) the indebtedness set forth on Schedule 9.9; or as
set forth in the latest financial statements of any Borrower
submitted to Lender on or prior to the date hereof, to the extent
that there has been no change in or modification of terms of the
indebtedness described on such financial statements provided, that,
(i) such Borrower may only make regularly scheduled payments of
principal and interest in respect of such indebtedness in
accordance with the terms of the agreement or instrument evidencing
or giving rise to such indebtedness as in effect on the date
hereof, (ii) such Borrower shall not, directly or indirectly (A)
amend, modify, alter or change the terms of such indebtedness or
any agreement, document or instrument related thereto as in effect
on the date hereof as such may (1) increase the amounts payable
thereunder, (2) increase the amount or rate of interest payable
thereon (3) cause any payment thereon to be due on any earlier
date, or (4) provide additional collateral therefor (B) redeem,
retire, defease, purchase or otherwise acquire such indebtedness,
or set aside or otherwise deposit or invest any sums for such
purpose, and (iii) such Borrower shall furnish to Lender all
notices of default or demands in connection with such indebtedness
either received by any Borrower or on its behalf, promptly after
the receipt thereof, or sent by such Borrower or on its behalf,
concurrently with the sending thereof, as the case may be. No
Borrower is, or will be rendered, insolvent as a result of any
Revolving Loan or any other advance of credit by Lender to such
Borrower;
(e) indebtedness incurred as a result of the refinancing
of Option Equipment pursuant to the terms of Section 2.7, provided
that, (i) the terms, conditions and amount of any such refinancing
shall be on terms no less favorable to any Borrower than the
indebtedness being refinanced up to the original principal amount
of such indebtedness, or otherwise satisfactory to Lender in its
sole discretion; (ii) Excess Availability at the time of such
refinancing, and after giving effect to such refinancing, is
greater than $2,000,000
(f) other indebtedness not to exceed $1,500,000;
(g) indebtedness described in the Subordination
Agreement;
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(h) indebtedness resulting from a judgment having been
rendered against any Borrower that is being appealed in good faith
and in a timely manner for which adequate reserves acceptable to
Lender have been recorded and which is not covered by insurance;
(i) Borrowings based on the cash value of life insurance
policies, the proceeds of which are used to pay life insurance
premiums;
(j) other indebtedness approved by Lender in its sole
discretion; and
(k) indebtedness described in Section 9.10(e) and as
otherwise permitted hereunder.
9.10 Loans, Investments, Guarantees, Etc. Except as set out
in the Distribution Agreement and as otherwise provided herein, no
Borrower shall directly or indirectly, make any loans or advance
money or property to any person, or invest in (by capital
contribution, dividend or otherwise) or purchase or repurchase the
stock or indebtedness or all or a substantial part of the assets or
property of any person, or assume, endorse, or otherwise become
responsible for (directly or indirectly) the indebtedness,
performance, obligations or dividends of any Person or agree to do
any of the foregoing, except: (a) loans to employees of Borrowers
not to exceed at any one time $75,000, in the aggregate; (b) the
endorsement of instruments for collection or deposit in the
ordinary course of business; (c) investments in: (i) short-term
direct obligations of the United States Government, (ii) negotiable
certificates of deposit issued by any bank satisfactory to Lender,
payable to the order of such Borrower or to bearer and delivered to
Lender, and (iii) commercial paper rated A1 or P1; provided, that,
as to any of the foregoing, unless waived in writing by Lender,
such Borrower shall take such actions as are deemed necessary by
Lender to perfect the security interest of Lender in such
investments; (d) the loans, advances and guarantees set forth on
Schedule 9.10 hereto; provided, that, as to such loans, advances
and guarantees, (i) such Borrowers shall not, directly or
indirectly, (A) amend, modify, alter or change the terms of such
loans, advances or guarantees or any agreement, document or
instrument related thereto, or (B) as to such guarantees, redeem,
retire, defease, purchase or otherwise acquire the obligations
arising pursuant to such guarantees, or set aside or otherwise
deposit or invest any sums for such purpose, and (ii) such Borrower
shall furnish to Lender all notices of default or demands in
connection with such loans, advances or guarantees or other
indebtedness subject to such guarantees either received by such
Borrower or on its behalf, promptly after the receipt thereof, or
sent by such Borrower or on its behalf, concurrently with the
sending thereof, as the case may be; and (e) loans, advances or
investments in the ordinary course of each such Person's business
operations, as presently existing, among LSAP, L&SB, LSBE, Rotex
and Tribonetics.
9.11 Dividends and Redemptions. Except for dividends duly
declared and paid by L&SB, LSBE, Rotex and Tribonetics to LSAP,
Borrowers shall not, directly or indirectly, declare or pay any
dividends on account of any shares of class of capital stock of
such Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem,
retire, defease, purchase or otherwise acquire any shares of any
class of capital stock (or set aside or otherwise deposit or invest
any sums for such purpose) for any consideration other than common
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stock or apply or set apart any sum, or make any other distribution
(by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing other than the
distribution to Guarantor of actual franchise and related taxes
owing by Borrowers and otherwise, as may be permitted herein.
9.12 Transactions with Affiliates. Except as set out in
Schedule 9.12 hereto, and as otherwise provided herein, no Borrower
shall, directly or indirectly, (a) purchase, acquire or lease any
property from, or sell, transfer or lease any property to, (i) any
officer, director, agent or other person affiliated with such
Borrower; (ii) any other Borrower; or (iii) any officer, director,
agent or other person affiliated with any other Borrower, except in
the ordinary course of and pursuant to the reasonable requirements
of such Borrower's business and upon fair and reasonable terms no
less favorable to such Borrower than such Borrower would obtain in
a comparable arm's length transaction with an unaffiliated person
or (b) make any payments of management, consulting or other fees
for management or similar services, or of any indebtedness owing to
(i) any officer, employee, shareholder, director or other person
affiliated with such Borrower; (ii) any other Borrower; or (iii)
any officer, employee, shareholder, director or other person
affiliated with any other Borrower. except (w) reasonable
compensation to officers, employees and directors for services
rendered to such Borrower in the ordinary course of business (x)
fees (i) for services and expenses actually incurred by the
provider of such services, (ii) for services performed by the
provider of such services in the ordinary course of business of
such provider and pursuant to the reasonable requirements of any
Borrower or Guarantor pursuant to either (A) the Services Agreement
(in the form substantially similar to the draft Services Agreement
attached to the Distribution Agreement) in an amount not to exceed
$250,000 per calendar year and (B) the Services and Consulting
Agreement (in the form substantially similar to the draft Services
and Consulting Agreement attached to the Distribution Agreement)
for administrative services offered by LSB in an amount not to
exceed $750,000 per calendar year; (y) payments made pursuant to
the Tax Sharing Agreement (in the form substantially similar to the
draft Tax Sharing Agreement attached to the Distribution Agreement)
in an amount not to exceed $100,000 per calendar year, or $250,000
in the aggregate, during the term hereof; and (z) payments made
pursuant to the Indemnity Agreement (in the form substantially
similar to the draft Indemnification Agreement attached to the
Distribution Agreement) in an amount not to exceed $100,000 per
calendar year, or $500,000 in the aggregate, during the term
hereof.
9.13 Additional Bank Accounts. No Borrowers shall directly or
indirectly, open, establish or maintain any deposit account,
investment account or any other account with any bank or other
financial institution, other than the Blocked Accounts and the
accounts set forth in Schedule 8.9 hereto, except: (a) as to any
new or additional Blocked Accounts and other such new or additional
accounts which contain any Collateral or proceeds thereof, with the
prior written consent of Lender and subject to such conditions
thereto as Lender may establish and (b) as to any accounts used by
any Borrower to make payments of payroll, taxes or other
obligations to third parties, after prior written notice to Lender.
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9.14 Compliance with ERISA.
(a) No Borrower shall, with respect to any "employee
benefit plans" maintained by such Borrower or any of its ERISA
Affiliates: (i) terminate any of such employee benefit plans so as
to incur any liability to the Pension Benefit Guaranty Corporation
established pursuant to ERISA, (ii) allow or suffer to exist any
prohibited transaction involving any of such employee benefit plans
or any trust created thereunder which would subject such Borrower
or such ERISA Affiliate to a tax or penalty or other liability on
prohibited transactions imposed under Section 4975 of the Code or
ERISA, (iii) fail to pay to any such employee benefit plan any
contribution which it is obligated to pay under Section 302 of
ERISA, Section 412 of the Code or the terms of such plan, (iv)
allow or suffer to exist any accumulated funding deficiency,
whether or not waived, with respect to any such employee benefit
plan, (v) allow or suffer to exist any occurrence of a reportable
event or any other event or condition which presents a material
risk of termination by the Pension Benefit Guaranty Corporation of
any such employee benefit plan that is a single employer plan,
which termination could result in any liability to the Pension
Benefit Guaranty Corporation or (vi) incur any withdrawal liability
with respect to any multiemployer pension plan.
(b) As used in this Section 9.14, the terms "employee
benefit plans", "accumulated funding deficiency" and "reportable
event" shall have the respective meanings assigned to them in
ERISA, and the term "prohibited transaction" shall have the meaning
assigned to it in Section 4975 of the Code and ERISA.
9.15 Net Worth. LSAP shall, at all times, maintain Net Worth
of not less than $6,400,000.
9.16 Costs and Expenses. Borrowers shall pay to Lender on
demand all reasonable costs, expenses, filing fees and taxes paid
or payable in connection with the preparation, negotiation,
execution, delivery, recording, administration, collection,
liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing
Agreements and all other documents related hereto or thereto,
including any amendments, supplements or consents which may
hereafter be contemplated (whether or not executed) or entered into
in respect hereof and thereof, including: (a) all costs and
expenses of filing or recording (including Uniform Commercial Code
financing statement filing taxes and fees, documentary taxes,
intangibles taxes and mortgage recording taxes and fees, if
applicable); (b) costs, expenses and fees for insurance premiums,
environmental audits, surveys, assessments, engineering reports and
inspections, appraisal fees and search fees; (c) costs and expenses
of remitting loan proceeds, collecting checks and other items of
payment, and establishing and maintaining the Blocked Accounts,
together with Lender's customary charges and fees with respect
thereto; (d) charges, fees or expenses charged by any bank or
issuer in connection with the Letter of Credit Accommodations; (e)
costs and expenses of preserving and protecting the Collateral; (f)
costs and expenses paid or incurred in connection with obtaining
payment of the Obligations, enforcing the security interests and
liens of Lender, selling or otherwise realizing upon the
Collateral, and otherwise enforcing the provisions of this
Agreement and the other Financing Agreements or defending any
claims made or threatened against Lender arising out of the
transactions contemplated hereby and thereby (including
preparations for and consultations concerning any such matters);
(g) all out-of-pocket expenses and costs heretofore and from time
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to time hereafter incurred by Lender during the course of periodic
field examinations of the Collateral and Borrowers' operations,
plus a per diem charge at the rate of $650.00 per person per day
for Lender's examiners in the field and office; and (h) the
reasonable fees and disbursements of outside counsel (including
legal assistants) to Lender in connection with any of the
foregoing.
9.17 Further Assurances. At the request of Lender at any time
and from time to time, each Borrower shall, at its expense, duly
execute and deliver, or cause to be duly executed and delivered,
such further agreements, documents and instruments, and do or cause
to be done such further acts as may be necessary or proper to
evidence, perfect, maintain and enforce the security interests and
the priority thereof in the Collateral and to otherwise effectuate
the provisions or purposes of this Agreement or any of the other
Financing Agreements. Within three day's after Lender's request,
such Borrower shall provide a certificate from an officer of such
Borrower representing that all conditions precedent to the making
of Loans and providing Letter of Credit Accommodations contained
herein are satisfied. Where permitted by law, each Borrower hereby
authorizes Lender to execute and file one or more UCC financing
statements signed only by Lender.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
10.1 Events of Default. The occurrence or existence of any
one or more of the following events are referred to herein
individually as an "Event of Default", and collectively as "Events
of Default":
(a) (i) any Borrower fails to pay any of its Obligations
within two (2) Business Days after the same becomes due and payable
or (ii) such Borrower or any Obligor fails to perform any of the
covenants contained in Sections 9.1, 9.2, 9.3, 9.4, 9.6, 9.14, 9.16
and 9.17 of this Agreement and such failure shall continue for ten
(10) days; provided, that, such ten (10) day period shall not apply
in the case of: (A) any failure to observe any such covenant which
is not capable of being cured at all or within such ten (10) day
period or which has been the subject of a prior failure within a
six (6) month period or (B) an intentional breach of such Borrower
or any Obligor of any such covenant or (iii) such Borrower fails to
perform any of the terms covenants, conditions or provisions
contained in this Agreement or any of the other Financing
Agreements other than those described in Sections 10.1(a)(i) and
10.1(a)(ii) above;
(b) any representation, warranty or statement of fact
made by any Borrower to Lender in this Agreement, the other
Financing Agreements or any other agreement, schedule, confirmatory
assignment or otherwise shall when made or deemed made be false or
misleading in any material respect;
(c) any Obligor revokes, terminates or fails to perform
any of the terms, covenants, conditions or provisions of any
guarantee, endorsement or other agreement of such party in favor of
Lender;
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(d) any final judgment for the payment of money is
rendered against any Borrower or any Obligor in excess of $100,000
in any one case or in excess of $500,000 in the aggregate and shall
remain undischarged or unvacated for a period in excess of thirty
(30) days or execution shall at any time not be effectively stayed,
or any judgment other than for the payment of money, or injunction,
attachment, garnishment or execution is rendered against any
Borrower or any Obligor or any of their assets;
(e) any Obligor (being a natural person or a general
partner of an Obligor which is a partnership) dies or any Borrower
or any Obligor, which is a partnership, limited liability company,
limited liability partnership or a corporation, dissolves or
suspends or discontinues doing business;
(f) any Borrower or any Obligor becomes insolvent
(however defined or evidenced), makes an assignment for the benefit
of creditors, makes or sends notice of a bulk transfer or calls a
meeting of its creditors or principal creditors;
(g) a case or proceeding under the bankruptcy laws of
the United States of America now or hereafter in effect or under
any insolvency, reorganization, receivership, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction now
or hereafter in effect (whether at law or in equity) is filed
against any Borrower or any Obligor or all or any part of its
properties and such petition or application is not dismissed within
thirty (30) days after the date of its filing or any Borrower or
any Obligor shall file any answer admitting or not contesting such
petition or application or indicates its consent to, acquiescence
in or approval of, any such action or proceeding or the relief
requested is granted sooner;
(h) a case or proceeding under the bankruptcy laws of
the United States of America now or hereafter in effect or under
any insolvency, reorganization, receivership, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction now
or hereafter in effect (whether at a law or equity) is filed by any
Borrower or any Obligor or for all or any part of its property; or
(i) any default by any Borrower or Borrowers or any
Obligor under any agreement, document or instrument relating to any
indebtedness for borrowed money owing to any person other than
Lender, or any capitalized lease obligations, contingent
indebtedness in connection with any guarantee, letter of credit,
indemnity or similar type of instrument in favor of any person
other than Lender, in any case in an amount, individually or in the
aggregate in excess of $250,000, which default continues for more
than the applicable cure period, if any, with respect thereto, or
any default by any Borrower or any Obligor under any material
contract, lease, license or other obligation to any person other
than Lender, which default continues for more than the applicable
cure period, if any, with respect thereto;
(j) any change in the controlling ownership of any
Borrower;
(k) the indictment of any Borrower or any Obligor under
any criminal statute, or commencement or threatened commencement of
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criminal or civil proceedings against any Borrower or any Obligor,
pursuant to which statute or proceedings the penalties or remedies
sought or available include forfeiture of any of the property of
such Borrower or such Obligor;
(l) there shall be a material adverse change in the
business or assets of any Borrower or any Obligor individually or
of Borrowers (in the aggregate) after the date hereof;
(m) there shall be an event of default under any of the
other Financing Agreements;
(n) (i) the Collateral Letter of Credit shall not be in
full force and effect at any time prior to the termination of the
Financing Agreements; or (ii) any drawing or renewal of the
Collateral Letter of Credit shall be subject to dispute or actual
legal challenge by LSB or the issuer thereof; or (iii) Lender shall
have received notice from the issuer of the Collateral Letter of
Credit that such Collateral Letter of Credit will not be renewed or
extended; or (iv) such Collateral Letter of Credit shall not be
renewed effective on or before its expiry date; or (v) Borrower
shall fail to furnish, or cause to be furnished, the notices
pursuant to Section 9.6(e); provided, however, that any such Event
of Default shall be deemed cured upon the indefeasible payment in
full by the issuer of the Collateral Letter of Credit to Lender of
the face amount of the Collateral Letter of Credit.
10.2 Remedies.
(a) At any time an Event of Default exists or has
occurred and is continuing, Lender shall have all rights and
remedies provided in this Agreement, the other Financing
Agreements, the Uniform Commercial Code and other applicable law,
all of which rights and remedies may be exercised without notice to
or consent by any Borrower or any Obligor, except as such notice or
consent is expressly provided for hereunder or required by
applicable law. All rights, remedies and powers granted to Lender
hereunder, under any of the other Financing Agreements, the Uniform
Commercial Code or other applicable law, are cumulative, not
exclusive and enforceable, in Lender's discretion, alternatively,
successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of
equity for an injunction to restrain a breach or threatened breach
by any Borrower of this Agreement or any of the other Financing
Agreements. Lender may, at any time or times, proceed directly
against any Borrower (or any group of Borrowers) or any Obligor to
collect the Obligations without prior recourse to the Collateral
and without prejudice, waiver or impairment of any other rights and
remedies against, or with respect to, another Borrower Obligor or
other Person.
(b) Without limiting the foregoing, at any time an Event
of Default exists or has occurred and is continuing, Lender may, in
its discretion and without limitation, (i) accelerate the payment
of all Obligations and demand immediate payment thereof to Lender
(provided, that, upon the occurrence of any Event of Default
described in Sections 10.1(g) and 10.1(h), all Obligations shall
automatically become immediately due and payable), (ii) with or
without judicial process or the aid or assistance of others, enter
upon any premises on or in which any of the Collateral may be
located and take possession of the Collateral or complete
processing, manufacturing and repair of all or any portion of the
Collateral, (iii) require one or more Borrowers, at any Borrowers'
expense, to assemble and make available to Lender any part or all
of the Collateral at any place and time designated by Lender, (iv)
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collect, foreclose, receive, appropriate, setoff and realize upon
any and all Collateral, (v) remove any or all of the Collateral
from any premises on or in which the same may be located for the
purpose of effecting the sale, foreclosure or other disposition
thereof or for any other purpose, (vi) sell, lease, transfer,
assign, deliver or otherwise dispose of any and all Collateral
(including entering into contracts with respect thereto, public or
private sales at any exchange, broker's board, at any office of
Lender or elsewhere) at such prices or terms as Lender may deem
reasonable, for cash, upon credit or for future delivery, with the
Lender having the right to purchase the whole or any part of the
Collateral at any such public sale, all of the foregoing being free
from any right or equity of redemption of any Borrower, which right
or equity of redemption is hereby expressly waived and released by
such Borrower and/or (vii) terminate this Agreement. If any of the
Collateral is sold or leased by Lender upon credit terms or for
future delivery, the Obligations shall not be reduced as a result
thereof until payment therefor is finally collected by Lender. If
notice of disposition of Collateral is required by law, five (5)
days prior notice by Lender to such Borrower designating the time
and place of any public sale or the time after which any private
sale or other intended disposition of Collateral is to be made,
shall be deemed to be reasonable notice thereof and such Borrower
waives any other notice. In the event Lender institutes an action
to recover any Collateral or seeks recovery of any Collateral by
way of prejudgment remedy, such Borrower waives the posting of any
bond which might otherwise be required.
(c) Lender may apply the cash proceeds of Collateral
actually received by Lender from any sale, lease, foreclosure or
other disposition of the Collateral to payment of the Obligations,
in whole or in part and in such order as Lender may elect, whether
or not then due. Borrowers shall remain jointly and severally
liable to Lender for the payment of any deficiency with interest at
the highest rate provided for herein and all costs and expenses of
collection or enforcement, including attorneys' fees and legal
expenses.
(d) Without limiting the foregoing, upon the occurrence
of an Event of Default or an event which with notice or passage of
time or both would constitute an Event of Default, Lender may, at
its option, without notice, (i) cease making Loans or arranging for
Letter of Credit Accommodations or reduce the lending formulas or
amounts of Revolving Loans and Letter of Credit Accommodations
available to any Borrower or all Borrowers and/or (ii) terminate
any provision of this Agreement providing for any future Loans or
Letter of Credit Accommodations to be made by Lender to any
Borrower.
(e) Upon the occurrence of any Event of Default that is
continuing. Lenders may draw on the Collateral Letter of Credit
and apply the proceeds thereof to the repayment of the Obligations.
49
<PAGE>
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS;
GOVERNING LAW
11.1 Governing Law; Choice of Forum; Service of Process; Jury
Trial Waiver.
(a) The validity, interpretation and enforcement of this
Agreement and the other Financing Agreements and any dispute
arising out of the relationship between the parties hereto, whether
in contract, tort, equity or otherwise, shall be governed by the
internal laws of the State of Texas (without giving effect to
principles of conflicts of law).
(b) Each Borrower and Lender irrevocably consent and
submit to the non-exclusive jurisdiction of the State of Texas and
the United States District Court for the Northern District of Texas
and waive any objection based on venue or forum non conveniens with
respect to any action instituted therein arising under this
Agreement or any of the other Financing Agreements or in any way
connected with or related or incidental to the dealings of the
parties hereto in respect of this Agreement or any of the other
Financing Agreements or the transactions related hereto or thereto,
in each case whether now existing or hereafter arising, and whether
in contract, tort, equity or otherwise, and agree that any dispute
with respect to any such matters shall be heard only in the courts
described above (except that Lender shall have the right to bring
any action or proceeding against such Borrower or its property in
the courts of any other jurisdiction which Lender deems necessary
or appropriate in order to realize on the Collateral or to
otherwise enforce its rights against such Borrower or its
property).
(c) Each Borrower hereby waives personal service of any
and all process upon it and consents that all such service of
process may be made by certified mail (return receipt requested)
directed to its address set forth on the signature pages hereof and
service so made shall be deemed to be completed five (5) days after
the same shall have been so deposited in the U.S. mails, or, at
Lender's option, by service upon Such Borrower in any other manner
provided under the rules of any such courts. Within thirty (30)
days after such service, Such Borrower shall appear in answer to
such process, failing which Such Borrower shall be deemed in
default and judgment may be entered by Lender against Such Borrower
for the amount of the claim and other relief requested.
(d) EACH BORROWER AND LENDER HEREBY WAIVES ANY RIGHT TO
TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i)
ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER FINANCING
AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE
TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW
EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT,
EQUITY OR OTHERWISE. EACH BORROWER AND LENDER HEREBY AGREES AND
CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT SUCH
50
<PAGE>
BORROWER OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF
THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF
THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to any Borrower
(whether in tort, contract, equity or otherwise) for losses
suffered by such Borrowers in connection with, arising out of, or
in any way related to the transactions or relationships
contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a
final and non-appealable judgment or court order binding on Lender,
that the losses were the result of acts or omissions constituting
gross negligence or willful misconduct. In any such litigation,
Lender shall be entitled to the benefit of the rebuttable
presumption that it acted in good faith and with the exercise of
ordinary care in the performance by it of the terms of this
Agreement.
11.2 Waiver of Notices. Each Borrower hereby expressly waives
demand, presentment, protest and notice of protest and notice of
dishonor with respect to any and all instruments and commercial
paper, included in or evidencing any of the Obligations or the
Collateral, and any and all other demands and notices of any kind
or nature whatsoever with respect to the Obligations, the
Collateral and this Agreement, except such as are expressly
provided for herein. No notice to or demand on such Borrower which
Lender may elect to give shall entitle such Borrower to any other
or further notice or demand in the same, similar or other
circumstances.
11.3 Amendments and Waivers. Neither this Agreement nor any
provision hereof shall be amended, modified, waived or discharged
orally or by course of conduct, but only by a written agreement
signed by an authorized officer of Lender, and as to amendments, as
also signed by an authorized officer of each Borrower. Lender
shall not, by any act, delay, omission or otherwise be deemed to
have expressly or impliedly waived any of its rights, powers and/or
remedies unless such waiver shall be in writing and signed by an
authorized officer of Lender. Any such waiver shall be enforceable
only to the extent specifically set forth therein. A waiver by
Lender of any right, power and/or remedy on any one occasion shall
not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future
occasion, whether similar in kind or otherwise.
11.4 Indemnification. EACH BORROWER SHALL JOINTLY AND
SEVERALLY INDEMNIFY AND HOLD LENDER, AND ITS DIRECTORS, AGENTS,
EMPLOYEES AND COUNSEL (THE "INDEMNIFIED PARTIES"), HARMLESS FROM
AND AGAINST ANY AND ALL LOSSES, CLAIMS, DAMAGES, LIABILITIES, COSTS
OR EXPENSES IMPOSED ON, INCURRED BY OR ASSERTED AGAINST ANY OF THEM
IN CONNECTION WITH ANY LITIGATION, INVESTIGATION, CLAIM OR
PROCEEDING COMMENCED OR THREATENED RELATED TO THE NEGOTIATION,
PREPARATION, EXECUTION, DELIVERY, ENFORCEMENT, PERFORMANCE OR
ADMINISTRATION OF THIS AGREEMENT, ANY OTHER FINANCING AGREEMENTS,
OR ANY UNDERTAKING OR PROCEEDING RELATED TO ANY OF THE TRANSACTIONS
51
<PAGE>
CONTEMPLATED HEREBY OR ANY ACT, OMISSION, EVENT OR TRANSACTION
(INCLUDING LENDER'S OWN NEGLIGENCE) RELATED OR ATTENDANT THERETO,
INCLUDING AMOUNTS PAID IN SETTLEMENT, COURT COSTS, AND THE FEES AND
EXPENSES OF COUNSEL OTHER THAN THOSE ARISING SOLELY OUT OF THE
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY INDEMNIFIED PARTY.
TO THE EXTENT THAT THE UNDERTAKING TO INDEMNIFY, PAY AND HOLD
HARMLESS SET FORTH IN THIS SECTION MAY BE UNENFORCEABLE BECAUSE IT
VIOLATES ANY LAW OR PUBLIC POLICY, EACH BORROWER SHALL PAY THE
MAXIMUM PORTION WHICH IT IS PERMITTED TO PAY UNDER APPLICABLE LAW
TO LENDER IN SATISFACTION OF INDEMNIFIED MATTERS UNDER THIS
SECTION. THE FOREGOING INDEMNITY SHALL SURVIVE THE PAYMENT OF THE
OBLIGATIONS AND THE TERMINATION OR NON-RENEWAL OF THIS AGREEMENT.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
12.1 Term.
(a) This Agreement and the other Financing Agreements
shall become effective as of the date set forth on the first page
hereof and shall continue in full force and effect for a term
ending on the date two (2) years from the date hereof (the "Renewal
Date"), and from year to year thereafter, unless sooner terminated
pursuant to the terms hereof. Lender or Borrowers may terminate
this Agreement and the other Financing Agreements effective on the
Renewal Date or on the anniversary of the Renewal Date in any year
by giving to the other party at least sixty (60) days prior written
notice; provided, that, this Agreement and all other Financing
Agreements must be terminated simultaneously. Upon the effective
date of termination of the Financing Agreements, Borrowers shall
pay to Lender, in full, all outstanding and unpaid Obligations and
shall furnish cash collateral to Lender in such amounts as Lender
determines are reasonably necessary to secure Lender from loss,
cost, damage or expense, including attorneys' fees and legal
expenses, in connection with any contingent Obligations, including
issued and outstanding Letter of Credit Accommodations and checks
or other payments provisionally credited to the Obligations and/or
as to which Lender has not yet received final and indefeasible
payment. Such payments in respect of the Obligations and cash
collateral shall be remitted by wire transfer in Federal funds to
such bank account of Lender, as Lender may, in its discretion,
designate in writing to Borrowers for such purpose. Interest shall
be due until and including the next Business Day, if the amounts so
paid by Borrowers to the bank account designated by Lender are
received in such bank account later than 12:00 noon, Dallas, Texas
time.
(b) No termination of this Agreement or the other
Financing Agreements shall relieve or discharge any Borrowers of
its respective duties, obligations and covenants under this
Agreement or the other Financing Agreements until all Obligations
have been fully and finally discharged and paid, and Lender's
continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Financing Agreements
and applicable law, shall remain in effect until all such
Obligations have been fully and finally discharged and paid and
52
<PAGE>
Lender shall have no further obligations to make Loans or Letter of
Credit Accommodations available to any Borrower.
(c) Upon the payment in full, in cash, of all
Obligations and termination of the Financing Agreements, Lender
shall, at Borrowers' expense, release the Collateral from the
security interest granted herein and make such filings as may be
reasonably necessary in connection herewith.
(d) If for any reason this Agreement is terminated prior
to the end of the then current term or renewal term of this
Agreement, in view of the impracticality and extreme difficulty of
ascertaining actual damages and by mutual agreement of the parties
as to a reasonable calculation of Lender's lost profits as a result
thereof, Borrowers agree to pay to Lender, upon the effective date
of such termination, an early termination fee in the amount set
forth below if such termination is effective in the period
indicated:
Amount Period
______ ______
(i) 2% of Maximum Credit From the date hereof to
and including May 7, 2000
(ii) 1% of Maximum Credit After May 7, 2000 to and
including the Renewal Date.
(iii) .5% of Maximum Credit From the Renewal Date and to
but not including the next
occurring anniversary of
this Agreement after the
Renewal Date
Such early termination fee shall be presumed to be the amount of
damages sustained by Lender as a result of such early termination
and each Borrower agrees that it is reasonable under the
circumstances currently existing. In addition, Lender shall be
entitled to such early termination fee upon the occurrence of any
Event of Default described in Sections 10.1(g) and 10.1(h) hereof,
even if Lender does not exercise its right to terminate this
Agreement, but elects, at its option, to provide financing to any
Borrower or permit the use of cash collateral under the United
States Bankruptcy Code. The early termination fee provided for in
this Section 12.1 shall be deemed included in the Obligations.
12.2 Notices. All notices, requests and demands hereunder
shall be in writing and (a) made to Lender at its address set forth
below and to Borrowers at their chief executive offices set forth
below, or to such other address as each party may designate by
written notice to the other in accordance with this provision, and
(b) deemed to have been given or made: if delivered in person,
immediately upon delivery; if by telex, telegram or facsimile
transmission, immediately upon sending and upon confirmation of
receipt; if by nationally recognized overnight courier service with
instructions to deliver the next Business Day, one (1) Business Day
after sending; and if by certified mail, return receipt requested,
five (5) days after mailing.
53
<PAGE>
12.3 Partial Invalidity. If any provision of this Agreement
is held to be invalid or unenforceable, such invalidity or
unenforceability shall not invalidate this Agreement as a whole,
but this Agreement shall be construed as though it did not contain
the particular provision held to be invalid or unenforceable and
the rights and obligations of the parties shall be construed and
enforced only to such extent as shall be permitted by applicable
law.
12.4 Successors. This Agreement, the other Financing
Agreements and any other document referred to herein or therein
shall be binding upon and inure to the benefit of and be
enforceable by Lender, Borrowers and their respective successors
and assigns, except that no Borrower may assign its rights under
this Agreement, the other Financing Agreements and any other
document referred to herein or therein without the prior written
consent of Lender. Lender may, after notice to Borrowers, assign
its rights and delegate its obligations under this Agreement and
the other Financing Agreements and further may assign, or sell
participations in, all or any part of the Loans, the Letter of
Credit Accommodations or any other interest herein to another
financial institution or other person, in which event, the assignee
or participant shall have, to the extent of such assignment or
participation, the same rights and benefits as it would have if it
were the Lender hereunder, except as otherwise provided by the
terms of such assignment or participation.
12.5 Entire Agreement. This Agreement, the other Financing
Agreements, any supplements hereto or thereto, and any instruments
or documents delivered or to be delivered in connection herewith or
therewith represents the entire agreement and understanding
concerning the subject matter hereof and thereof between the
parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations,
warranties, commitments, proposals, offers and contracts concerning
the subject matter hereof, whether oral or written. In the event
of any inconsistency between the terms of this Agreement and any
schedule or exhibit hereto, the terms of this Agreement shall
govern.
12.6 NONAPPLICABILITY OF ARTICLE 5069-15.01 ET SEQ. BORROWER
AND LENDER HEREBY AGREE THAT, EXCEPT FOR SECTION 15.10(B) THEREOF,
THE PROVISIONS OF TEX. REV. CIV. STAT. ANN. ART. 5069-15.01 ET SEQ.
(VERNON 1987) (REGULATING CERTAIN REVOLVING CREDIT LOANS AND
REVOLVING TRI-PARTY ACCOUNTS) SHALL NOT APPLY TO THIS AGREEMENT OR
ANY OF THE OTHER FINANCING AGREEMENTS.
12.7 WAIVER OF CONSUMER RIGHTS. BORROWERS HEREBY WAIVE THEIR
RIGHTS UNDER THE DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION
ACT, SECTION 17.41 ET. SEQ. BUSINESS & COMMERCE CODE, A
54
<PAGE>
LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER
CONSULTATION WITH AN ATTORNEY OF THE BORROWERS' OWN SELECTION, THE
BORROWERS VOLUNTARILY CONSENT TO THIS WAIVER. BORROWERS EXPRESSLY
WARRANT AND REPRESENT THAT THE BORROWERS (a) ARE NOT IN A
SIGNIFICANTLY DISPARATE BARGAINING POSITION RELATIVE TO LENDER, AND
(b) HAS BEEN REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
BORROWERS HAVE READ AND UNDERSTAND
SECTION 12.7: ___________________
(INITIALS OF
AUTHORIZED OFFICER OF BORROWERS)
12.8 ORAL AGREEMENTS INEFFECTIVE. THIS AGREEMENT AND THE
OTHER FINANCING AGREEMENTS REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND THE SAME MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
BORROWERS AND LENDER EACH
READ AND UNDERSTAND THIS
SECTION 12.8:
________________ (INITIALS OF AUTHORIZED OFFICER OF BORROWER)
________________ (INITIALS OF AUTHORIZED OFFICER OF BORROWER)
________________ (INITIALS OF AUTHORIZED OFFICER OF BORROWER)
________________ (INITIALS OF AUTHORIZED OFFICER OF BORROWER)
________________ (INITIALS OF AUTHORIZED OFFICER OF BORROWER)
________________ (INITIALS OF AUTHORIZED OFFICER OF BORROWER)
________________ (INITIALS OF AUTHORIZED OFFICER OF BORROWER)
________________ (INITIALS OF AUTHORIZED OFFICER OF LENDER)
55
<PAGE>
IN WITNESS WHEREOF, Lender and Borrowers have caused these
presents to be duly executed as of the day and year first above
written.
LENDER
CONGRESS FINANCIAL CORPORATION
(SOUTHWEST)
By:___________________________
Name:
_________________________
Title:
_________________________
Address:
_______
1201 Main Street, Ste. 1625
Dallas, TX 75250
BORROWERS
L&S AUTOMOTIVE PRODUCTS CO.
By:
_________________________
Name:
_______________________
Title:
______________________
Chief Executive Office:
6 South Pennsylvania
Oklahoma City, Oklahoma
73107
L&S BEARING CO.
By:
_______________________
Name:
_____________________
Title:
____________________
Chief Executive Office:
6 South Pennsylvania
Oklahoma City, Oklahoma
73107
LSB EXTRUSION CO.
By:
________________________
Name:
_____________________
Title:
____________________
Chief Executive Office:
6 South Pennsylvania
Oklahoma City, Oklahoma
73107
<PAGE>
ROTEX CORPORATION
By:
__________________________
Name:
_________________________
Title:
________________________
Chief Executive Office:
6 South Pennsylvania
Oklahoma City, Oklahoma
73107
TRIBONETICS CORPORATION
By:
___________________________
Name:
_________________________
Title:
_________________________
Chief Executive Office:
6 South Pennsylvania
Oklahoma City, Oklahoma
73107
INTERNATIONAL BEARINGS, INC.
By:
__________________________
Name:
________________________
Title:
_______________________
Chief Executive Office:
1775 Airways Boulevard
Memphis, Tennessee 38114
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 Statements (Forms 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 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 August 19, 1999,
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 June 30, 1999.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not
a part of the registration statement prepared or certified by accountants
within the meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
Ernst & Young LLP
Oklahoma City, Oklahoma
August 19, 1999
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> $ 3,039
<SECURITIES> 0
<RECEIVABLES> 60,381
<ALLOWANCES> 2,238
<INVENTORY> 57,107
<CURRENT-ASSETS> 133,609
<PP&E> 192,583
<DEPRECIATION> 98,280
<TOTAL-ASSETS> 250,705
<CURRENT-LIABILITIES> 76,004
<BONDS> 155,738
139
48,000
<COMMON> 1,511
<OTHER-SE> (30,687)
<TOTAL-LIABILITY-AND-EQUITY> 250,705
<SALES> 149,578
<TOTAL-REVENUES> 149,431
<CGS> 117,385
<TOTAL-COSTS> 162,578
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,500
<INTEREST-EXPENSE> 8,834
<INCOME-PRETAX> (16,849)
<INCOME-TAX> 50
<INCOME-CONTINUING> (13,147)
<DISCONTINUED> (3,702)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,899)
<EPS-BASIC> (1.56)
<EPS-DILUTED> (1.56)
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