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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

(Mark One)

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 (FEE REQUIRED)

        For the fiscal year ended: December 31, 2000

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

        For the transition period from ___________ to ___________

                             Commission File Number:

                                 CLIMACHEM, INC.
             (Exact Name of Registrant as Specified in its Charter)

        Oklahoma                                                73-1528549
------------------------                                    ------------------
(State of Incorporation)                                     (I.R.S. Employer
                                                            Identification No.)

      16 South Pennsylvania Avenue
        Oklahoma City, Oklahoma                                    73107
-----------------------------------------                        ----------
(Address of Principal Executive Officers)                        (Zip Code)

Registrant's Telephone Number, Including Area Code:       (405) 235-4546

Securities Registered Pursuant to Section 12(b) of the Act:  NONE

                            (Facing Sheet Continued)

        Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for the shorter period that the Registrant has had
to file the reports), and (2) has been subject to the filing requirements for
the past 90 days. YES [X]  NO [ ].

        Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __________.

        All outstanding shares of common stock of the registrant are held
directly or indirectly by the registrant's parent company, LSB Industries, Inc.

        The information required by Part III of this Form 10-K is incorporated
by reference from the registrant's proxy statement to be filed pursuant to
regulation 14A which involves the election of directors no later than 120 days
after the end of the fiscal year covered by this Form 10-K.



<PAGE>   2

                            FORM 10-K CLIMACHEM, INC.

                                TABLE OF CONTENTS


                                     PART I

<TABLE>
<CAPTION>
                                                                              Page
                                                                              ----
<S>                                                                           <C>
Item 1.     Business                                                            1
                General                                                         1
                Segment Information and Foreign
                  and Domestic Operations and Export Sales                      2
                Chemical Business                                               2
                Climate Control Business                                        5
                Employees                                                       8
                Research and Development                                        8
                Environmental Matters                                           8

Item 2.     Properties                                                          10
                Chemical Business                                               10
                Climate Control Business                                        11

Item 3.     Legal Proceedings                                                   11

Item 4.     Submission of Matters to a vote of Security Holders                 11

Item 4A.    Executive Officers of the Company                                   11

                                     PART II

Item 5.     Market for Company's Common Equity
              and Related Stockholder Matters
                Market Information                                              12

Item 6.     Selected Financial Data                                             13

Item 7.     Management's Discussion and Analysis of
              Financial Condition and Results of Operations                     15
                Overview                                                        15
                Results of Operations                                           23
                Liquidity and Capital Resources                                 26

Item 7A.    Quantitative and Qualitative Disclosures About
              Market Risk                                                       30
                General                                                         30
                Interest Rate Risk                                              30
                Raw Material Price Risk                                         32

Item 8.     Financial Statements and Supplementary Data                         32

Item 9.     Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure                               32

Special Note Regarding Forward-Looking Statements                               33

                                   PART III                                     35

The information required by Part III of this Form 10-K is incorporated by
reference from the registrant's proxy statement to be filed pursuant to
regulation 14A which involves the election of directors no later than 120 days
after the end of the fiscal year covered by this Form 10-K

                                     PART IV

Item 14.    Exhibits, Financial Statement Schedules and Reports
              on Form 8-K                                                       36
</TABLE>



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                                     PART I

ITEM 1. BUSINESS

GENERAL

        ClimaChem, Inc. ("the Company"), a wholly owned subsidiary of LSB
Industries, Inc. ("LSB"), is engaged, through its subsidiaries, in the
manufacture and sale of (i) chemical products for the explosives, agricultural
and industrial acids markets (the "Chemical Business"), and (ii) a broad range
of hydronic fan coils and water source heat pumps as well as other products used
in commercial and residential air conditioning systems (the "Climate Control
Business").

        The Company is pursuing a strategy of concentrating on businesses and
product lines in niche markets where it can establish a position as a market
leader. In addition, the Company is seeking to reduce its outstanding
indebtedness and improve its liquidity and operating results through the
liquidation and/or sale of selected assets. The Company believes that it can
maximize its long-term profitability by offering specialized products and
value-added services to its customers. See "Special Note Regarding
Forward-Looking Statements".

        The Chemical Business seeks to maximize profitability by (i) being a
low cost producer, (ii) focusing on a specific geographic area where it can
develop a freight and distribution advantage and establish a leading regional
presence, (iii) offering value added services as a means of building customer
loyalty, and (iv) continuing to alter the product mix towards higher margin
products. The Company has developed a geographic advantage in the Texas,
Oklahoma, Missouri, Alabama and Tennessee agricultural markets by establishing
an extensive network of wholesale and retail distribution centers for
nitrogen-based fertilizer tailored toward regional farming practices and by
providing value added services. The Company has also developed a proprietary
line of packaged explosives which is sold as a nationally recognized branded
product. Given the nature of the product, the Company believes its branding
strategy, emphasizing quality, safety and reliability, gives it a competitive
advantage over less recognized explosive products. See "Special Note Regarding
Forward-Looking Statements."

        The Climate Control Business seeks to establish leadership positions in
niche markets by offering extensive product lines, custom tailored products and
proprietary new technologies. Under this focused strategy, the Company has
developed the most extensive line of hydronic fan coils and water source heat
pumps in the United States. The Company has developed flexible production to
allow it to custom design units for the growing retrofit and replacement
markets. The Company believes that the Climate Control Business is one of the
leaders in commercializing new technology to satisfy increasingly stringent
indoor air quality standards. Products recently developed by the Company include
heat pump technology for dehumidification, specialty filters for the removal of
airborne particles and gases, ultraviolet light units for bacteria removal and
highly energy efficient dual path heat pump products. The Climate Control
Business is a pioneer in the use of geothermal water source heat pumps in
residential applications. The Company believes that an aging installed base of
residential HVAC systems, coupled with relatively short payback periods of
geothermal systems, will continue to increase demand for its geothermal products
in the residential replacement market. See "Special Note Regarding
Forward-Looking Statements."



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        In conjunction with the Company's strategy, subsidiaries of LSB, which
are not subsidiaries of the Company, completed the acquisition of two chemical
plants during the fourth quarter of 2000. One plant is located in Cherokee,
Alabama ("Cherokee Facility"), and the other is located in Crystal City,
Missouri ("Crystal City Facility"). The Cherokee Facility produces anhydrous
ammonia, nitric acid, aqua ammonia, agricultural grade ammonium nitrate
fertilizer, urea ammonium nitrate fertilizer and ammonium nitrate solutions as a
blasting product ingredient. The Crystal City Facility is currently held for
sale and will not be operated by LSB or any of its subsidiaries including the
Company. A subsidiary of the Company leases the Crystal City Facility and the
Cherokee Facility from the acquiring subsidiaries, which are not subsidiaries of
the Company. The subsidiary leases the plants under a triple net lease. The
terms of the Crystal City Facility lease is for six months and the terms of the
Cherokee Facility lease is for one year. See discussion in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

        For the year ended December 31, 2000, subsidiaries of the Company
repurchased approximately $25.2 million of Senior Unsecured Notes and recognized
a pretax gain of approximately $17.4 million. The purchases will serve to reduce
interest expense by approximately $1.9 million annually.

        As of December 31, 2000, LSB and certain of its subsidiaries, including
the Company, were parties to a Revolving Credit Facility evidenced by two
separate loan agreements ("Agreement") with a lender. The Agreements have been
amended from time to time since inception to accommodate changes in business
conditions and financial results. The term of the Agreements, as amended, was
through December 31, 2000, and was automatically being renewed thereafter for
successive terms of one month each. In April 2001, the Company replaced its
existing Revolving Credit Facility with a new lender. See Note 7 of Notes to
Consolidated Financial Statements.

SEGMENT INFORMATION AND FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

        Schedules of the amounts of sales, operating profit and loss, and
identifiable assets attributable to each of the Company's lines of business and
of the amount of export sales of the Company in the aggregate and by major
geographic area for each of the Company's last three fiscal years appear in Note
13 of the Notes to Consolidated Financial Statements included elsewhere in this
report.

CHEMICAL BUSINESS

        GENERAL

        The Company's Chemical Business manufactures three principal product
lines that are derived from anhydrous ammonia: (1) fertilizer grade ammonium
nitrate and urea ammonia nitrate ("UAN") for the agricultural industry, (2)
explosive grade ammonium nitrate for the mining industry and (3) concentrated,
blended and mixed nitric acid and sulfuric acid for industrial applications. The
Chemical Business' principal manufacturing facilities are located in El Dorado,
Arkansas ("El Dorado Facility") and Cherokee, Alabama, ("Cherokee Facility").
The other manufacturing operations are located in Hallowell, Kansas, Wilmington,
North Carolina, and Baytown, Texas. The following discussion is that of the
Businesses continuing and accordingly exclude the business disposed of in 1999.

        For each of the years 2000, 1999 and 1998, approximately 27%, 26% and
30% of the respective sales of the Chemical Business consisted of sales of
fertilizer and related chemical products for agricultural purposes, which
represented approximately 15%, 14% and 15% of the Company's consolidated sales



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for each respective year. For each of the years 2000, 1999 and 1998,
approximately 35%, 39% and 46% of the respective sales of the Chemical Business
consisted of sales of ammonium nitrate and other chemical-based blasting
products for the mining industry, which represented approximately 18%, 20% and
24% of the Company's 2000, 1999 and 1998 consolidated sales, respectively. For
each of the years 2000, 1999 and 1998, approximately 38%, 35% and 24% of the
respective sales of the Chemical business consisted of the industrial acids for
sale in the food, paper, chemical and electronics industries, which represented
approximately 20%, 18% and 13% of the Company's 2000, 1999 and 1998 consolidated
sales respectively. Sales of the Chemical Business accounted for approximately
53%, 52% and 52% of the Company's 2000, 1999 and 1998 consolidated sales,
respectively.

        AGRICULTURAL PRODUCTS

        The Chemical Business produces ammonium nitrate, a nitrogen-based
fertilizer, at the El Dorado Facility and the Cherokee Facility and in addition
produces UAN at the Cherokee Facility. Ammonium nitrate and UAN are two of
several forms of nitrogen-based fertilizers which include anhydrous ammonia and
urea. Although, to some extent, the various forms of nitrogen-based fertilizers
are interchangeable, each has its own characteristics which produce agronomic
preferences among end users. Farmers decide which type of nitrogen-based
fertilizer to apply based on the crop planted, soil and weather conditions,
regional farming practices and relative nitrogen fertilizer prices. These
agricultural products are sold to farmers, fertilizer dealers and distributors
located primarily in the South Central and Southeastern United States.

        The Chemical Business markets are in close proximity to its El Dorado,
Arkansas and Cherokee, Alabama facilities and include a high concentration of
pasture land and row crops which favor the Company's products. The Company has
developed its market position in these areas by emphasizing high quality
products, customer service and technical advice. Using a proprietary prilling
process, the El Dorado Facility produces a high performance ammonium nitrate
fertilizer that, because of its uniform size, is easier to apply than many
competing nitrogen-based fertilizer products. The Company believes that its
"E-2" brand ammonium nitrate fertilizer is recognized as a premium product
within its primary market. See "Special Note Regarding Forward - Looking
Statements". In addition, the El Dorado Facility has developed long term
relationships with end users through its network of 20 wholesale and retail
distribution centers and the Cherokee Facility sells directly to agricultural
cooperative customers.

        EXPLOSIVES

        The Chemical Business manufactures low density ammonium nitrate-based
explosives including bulk explosives used in surface mining. In addition, the
Company manufactures and sells a branded line of packaged explosives used in
construction, quarrying and other applications, particularly where controlled
explosive charges are required. The Company's bulk explosives are marketed
primarily through eight distribution centers, five of which are located in close
proximity to the customers' surface mines in the coal producing states of
Kentucky, Missouri, Tennessee, and West Virginia. The Company emphasizes
value-added customer services and specialized product applications for its bulk
explosives. Most of the sales of bulk explosives are to customers who work
closely with the Company's technical representatives in meeting their specific
product needs. In addition, the Company sells bulk explosives to independent
wholesalers and to other explosives companies. Packaged explosives are used for
applications requiring controlled explosive charges and typically command a
premium price and produce higher margins. The Company believes its Slurry
packaged explosive products are among the most widely



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recognized in the industry. Slurry packaged explosive products are sold
nationally and internationally to other explosive companies and end-users.
The Chemical Business has a letter of intent with a third party to sell its
explosive distribution outlets and enter into a long-term supply agreement,
which the Company currently expects to close in May 2001. Under the terms of the
letter of intent, the Chemical Business would sell its wholesale and retail
explosive distribution business (excluding accounts receivable) for $3.5 million
plus any additional amount for inventories and enter into an ammonium nitrate
tolling agreement with the third party. The buyer has prepaid to the Chemical
Business $2 million of the $3.5 million, which amount has been received by the
Chemical Business. If the transaction does not close by May 31, 2001, the $2
million prepayment will be applied towards the purchase of ammonium nitrate
products by the third party from the Chemical Business. However if the
transaction has not closed by May 31, 2001 and the third party reasonably,
determines that the Chemical Business is unable to make deliveries of the
ammonium nitrate products beginning June 2001 and thereafter, the Chemical
Business shall return the prepayment. See Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operation" for a discussion of
the expected impact upon the operations and financial position of the Chemical
Business as a result of these anticipated transactions. See "Special Note
Regarding Forward-Looking Statement."


        INDUSTRIAL ACIDS

        The Chemical Business manufactures and sells industrial acids, primarily
to the food, paper, chemical and electronics industries. The Company is the
major supplier to third parties of concentrated nitric acid which is a special
grade of nitric acid used in the manufacture of plastics, pharmaceuticals,
herbicides, explosives, and other chemical products. In addition, the Company
produces and sells regular, blended and mixed nitric acid and a variety of
grades of sulfuric acid. The Company competes on the basis of price and service,
including on-time reliability and distribution capabilities. The company
provides inventory management as part of the value-added services it offers to
its customers.

        Subsidiaries within the Company's Chemical Business entered into a
series of agreements with Bayer Corporation ("Bayer") (collectively, the "Bayer
Agreement"). Under the Bayer Agreement, El Dorado Nitrogen Company ("EDNC") is
operating a nitric acid plant (the "EDNC Baytown Plant") at Bayer's Baytown,
Texas chemical facility. Under the terms of the Bayer Agreement, Bayer will
purchase from EDNC all of its requirements for nitric acid to be used by Bayer
at its Baytown, Texas facility for an initial ten-year term ending May 2009.
EDNC will purchase from Bayer its requirements for anhydrous ammonia for the
manufacture of nitric acid as well as utilities and other services. 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.

        EDNC and Bayer may terminate the Bayer Agreement upon the occurrence of
certain events of default if not cured. Bayer retains the right of first refusal
with respect to any bona fide third-party offer to purchase any voting stock of
EDNC or any portion of the EDNC Baytown Plant.

        In October 2000, the EDNC Baytown Plant experienced a mechanical failure
resulting in an interruption of production. To supply nitric acid to Bayer
during the interruption, EDNC purchased nitric acid produced by a subsidiary of
the Company, El Dorado Chemical Company, as well as from third party producers.
The repairs to the nitric plant were completed in January 2001. The Company
believes that the losses arising from this mechanical failure and interruption
of production will be fully covered by insurance and payments by Bayer. The
mechanical failure is not expected to result in any material liability to the
Company. See "Special Note Regarding Forward-Looking Statements".

        MAJOR CUSTOMER

        Revenues from sales to one customer, Bayer, of the Company's Chemical
Business segment represented approximately $38.4 million and $17.2 million
(13.6% and 7.0% of consolidated revenues, respectively) for the years ended 2000
and 1999, respectively (none in 1998). As discussed above, under the terms of
the Bayer Agreement, Bayer will purchase from a subsidiary of the Company all of
its requirements for nitric acid to be used at its Baytown, Texas facility for
an initial ten-year term ending May 2009.

        RAW MATERIALS

        Anhydrous ammonia represents the primary component in the production of



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most of the products of the Chemical Business. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Chemical Business purchased approximately 180,000 tons of anhydrous ammonia in
2000 (151,000 in 1999 and 220,000 in 1998). Upon leasing the Cherokee Facility,
the Chemical Business became a purchaser of natural gas. At full production the
Cherokee Facility will purchase approximately 500,000 MMBtu of natural gas per
month.

        During 2000, the Chemical Business purchased its raw material
requirements of anhydrous ammonia from one supplier. As of December 31, 2000,
the Chemical Business had commitments to purchase 72,000 tons of anhydrous
ammonia under a take or pay contract at an average minimum volume of 3,000 tons
per month during 2001 and 2002. In addition, under the contract the Chemical
Business is committed to purchase 100% of its anhydrous ammonia requirements in
2001 and 50% of its remaining quantities in excess of the take or pay volumes of
its anhydrous ammonia requirements through 2002 from this third party at prices
which approximate market prices. The Company believes that it could obtain
anhydrous ammonia from other sources in the event of a termination of the
above-referenced contract. See "Special Note Regarding Forward-Looking
Statements" and Note 10 of Notes to Consolidated Financial Statements.

        SEASONALITY

        The Company believes that the only seasonal products of the Chemical
Business are fertilizer and related chemical products sold to the agricultural
industry. The selling seasons for those products are primarily during the spring
and fall planting seasons, which typically extend from March through June and
from September through November in the geographical markets in which the
majority of the Company's agricultural products are distributed. As a result,
the Chemical Business increases its inventory of ammonium nitrate and UAN prior
to the beginning of each planting season. Sales to the agricultural markets
depend upon weather conditions and other circumstances beyond the control of the
Company. The agricultural markets serviced by the Chemical Business have
sustained a drought resulting in a lack of demand for the Chemical Business'
fertilizer products during the 1998, 1999, and 2000 fall and spring planting
seasons and have had a material adverse effect on the Company.

        REGULATORY MATTERS

        Each of the Chemical Business' domestic blasting product distribution
centers are licensed by the Bureau of Alcohol, Tobacco and Firearms in order to
manufacture and distribute blasting products. The Chemical Business is also
subject to extensive federal, state and local environmental laws, rules and
regulations. See "Environmental Matters" and "Legal Proceedings".

        COMPETITION

        The Chemical Business competes with other chemical companies in its
markets, many of whom have greater financial and other resources than the
Company. In 2000, there were plant closures due to the high cost of natural gas
and other economic factors in the nitrogen business. The Company believes that
competition within the markets served by the Chemical Business is primarily
based upon price, service, warranty and product performance.

CLIMATE CONTROL BUSINESS

        GENERAL

        The Company's Climate Control Business manufactures and sells a broad
range of standard and custom designed hydronic fan coils and water source heat
pumps as well as other products for use in commercial and residential heating



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ventilation and air conditioning ("HVAC") systems. Demand for the Climate
Control Business products is driven by the construction of commercial,
institutional and residential buildings, the renovation of existing buildings
and the replacement of existing systems. The Climate Control Business commercial
products are used in a wide variety of buildings, such as: hotels, motels,
office buildings, schools, universities, apartments, condominiums, hospitals,
nursing homes, extended care facilities, supermarkets and superstores. Many of
the Company's products are targeted to meet increasingly stringent indoor air
quality and energy efficiency standards. The Climate Control Business accounted
for approximately 47%, 48% and 48% of the Company's 2000, 1999 and 1998
consolidated sales, respectively.

        HYDRONIC FAN COILS

        The Climate Control Business is a leading provider of hydronic fan coils
targeted to the commercial and institutional markets in the United States
Hydronic fan coils use heated or chilled water, provided by a centralized
chiller or boiler through a water pipe system, to condition the air and allow
individual room control. Hydronic fan coil systems are quieter and have longer
lives and lower maintenance costs than comparable systems used where individual
room control is required. The breadth of the product line coupled with
customization capability provided by a flexible manufacturing process are
important components of the Company's strategy for competing in the commercial
and institutional renovation and replacement markets. During 2000, the Company
completed a facility to manufacture large air handlers. See "Special Note
Regarding Forward-Looking Statements".

        WATER SOURCE HEAT PUMPS

        The Company is a leading United States provider of water source heat
pumps to the commercial construction and renovation markets. These are highly
efficient heating and cooling units which enable individual room climate control
through the transfer of heat through a water pipe system which is connected to a
centralized cooling tower or heat injector. Water source heat pumps enjoy a
broad range of commercial applications, particularly in medium to large sized
buildings with many small, individually controlled spaces. The Company believes
the market for commercial water source heat pumps will continue to grow due to
the relative efficiency and long life of such systems as compared to other air
conditioning and heating systems, as well as to the emergence of the replacement
market for those systems. See "Special Note Regarding Forward-Looking
Statements."

        GEOTHERMAL PRODUCTS

        The Climate Control Business is a pioneer in the use of geothermal water
source heat pumps in residential and commercial applications. Geothermal
systems, which circulate water or antifreeze through an underground heat
exchanger, are among the most energy efficient systems available. The Company
believes the longer life, lower cost to operate, and relatively short payback
periods of geothermal systems, as compared with air-to-air systems, will
continue to increase demand for its geothermal products. The Company is
specifically targeting new residential construction of homes exceeding $200,000
in value. See "Special Note Regarding Forward-Looking Statements".

        HYDRONIC FAN COIL AND WATER SOURCE HEAT PUMP MARKET

        The Company has pursued a strategy of specializing in hydronic fan coils
and water source heat pump products. The annual United States market for
hydronic fan coils and water source heat pumps is approximately $310 million.
Demand in these markets is generally driven by levels of repair, replacement,
and new construction activity. The United States market for fan coils and



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water source heat pump products has grown on average 8% per year over the last 5
years. This growth is primarily a result of new construction, the aging of the
installed base of units, the introduction of new energy efficient systems,
upgrades to central air conditioning and increased governmental regulations
restricting the use of ozone depleting refrigerants in HVAC systems.

        PRODUCTION AND BACKLOG

        Most of the Climate Control Business production of the above-described
products occurs on a specific order basis. The Company manufactures the units in
many sizes and configurations, as required by the purchaser, to fit the space
and capacity requirements of hotels, motels, school, hospitals, apartment
buildings, office buildings and other commercial or residential structures. As
of December 31, 2000, the backlog of confirmed orders for the Climate Control
Business was approximately $26.7 million as compared to approximately $22.1
million at December 31, 1999. See discussion in Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations". A customer
generally has the right to cancel an order prior to the order being released to
production. Past experience indicates that customers generally do not cancel
orders after the Company receives them. As of the date of this report, the
Climate Control Business had released substantially all of the December 31, 2000
backlog to production. All of the December 31, 2000 backlog is expected to be
filled by December 31, 2001. See "Special Note Regarding Forward-Looking
Statements."

        MARKETING AND DISTRIBUTION

        DISTRIBUTION

        The Climate Control Business sells its products to mechanical
contractors, original equipment manufacturers and distributors. The Company's
sales to mechanical contractors primarily occur through independent
manufacturers' representatives, who also represent complementary product lines
not manufactured by the Company. Original equipment manufacturers generally
consist of other air conditioning and heating equipment manufacturers who resell
under their own brand name the products purchased from the Climate Control
Business in competition with the Company. Sales to original equipment
manufacturers accounted for approximately 22% of the sales of the Climate
Control Business in 2000 and approximately 10% of the Company's 2000
consolidated sales.

        MARKET

        The Climate Control Business depends primarily on the commercial
construction industry, including new construction and the remodeling and
renovation of older buildings. This Business also depends primarily on the
construction industry for both new and replacement markets relating to their
geothermal products.

        RAW MATERIALS

        Numerous domestic and foreign sources exist for the materials used by
the Climate Control Business, which materials include aluminum, copper, steel,
electric motors and compressors. The Company does not expect to have any
difficulties in obtaining any necessary materials for the Climate Control
Business. See "Special Note Regarding Forward-Looking Statements."

        COMPETITION

        The Climate Control Business competes with approximately fourteen
companies, some of whom are also customers of the Company. Some of the



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competitors have greater financial and other resources than the Company. The
Climate Control Business manufactures a broader line of fan coil and water
source heat pump products than any other manufacturer in the United States, and
the Company believes that it is competitive as to price, service, warranty and
product performance.

        JOINT VENTURE AND OPTION TO PURCHASE

        In April 1999, the Company purchased from a subsidiary of LSB, an option
to acquire a French manufacturing company and all amounts due and payable from
such French manufacturer or its parent to LSB. The Company may exercise its
option to acquire the French manufacturer by converting approximately $150,000
of the amount loaned into equity. The option is currently exercisable and will
expire June 15, 2005. As of the date of this report, management of the Company
which holds the option has not decided whether it will exercise the option. For
2000, 1999 and 1998, the French manufacturer had revenues of $16.7, $18.9 and
$17.2 million, respectively, and reported net income of approximately $200,000,
$600,000 and $100,000, respectively. As of December 31, 2000, the note
receivable from the French manufacturer, net of reserves, amount to
approximately $2.2 million which is secured by the stock and assets of the
French manufacturer. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations".

        In January 1999, the Company acquired LSB's 50% limited partner interest
in an energy conservation joint venture (the "Project") by purchasing the stock
of the LSB subsidiary that owned the Project. The Company's equity interest in
the results of the operations of the Project were not material for the years
ended December, 2000, 1999 and 1998.

EMPLOYEES

        As of December 31, 2000, the Company employed 1,463 persons. As of that
date, (i) the Chemical Business employed 566 persons, with 91 represented by
unions under agreements expiring in August, 2001, and February, 2002, and (ii)
the Climate Control Business employed 862 persons, none of whom are represented
by a union.

RESEARCH AND DEVELOPMENT

        The Company incurred approximately $391,000 in 2000, $713,000 in 1999,
and $377,000 in 1998 on research and development relating to the development of
new products or the improvement of existing products. All expenditures for
research and development related to the development of new products and
improvements are expensed by the Company.

ENVIRONMENTAL MATTERS

        The Company and its operations are subject to numerous Environmental
Laws and to other federal, state and local laws regarding health and safety
matters ("Health Laws"). In particular, the manufacture and distribution of
chemical products are activities which entail environmental risks and impose
obligations under the Environmental Laws and the Health Laws, many of which
provide for substantial fines and criminal sanctions for violations. There can
be no assurance that material costs or liabilities will not be incurred by the
Company in complying with such laws or in paying fines or penalties for
violation of such laws. The Environmental Laws and Health Laws and enforcement
policies thereunder relating to the Chemical Business have in the past resulted,
and could in the future result, in penalties, cleanup costs, or other
liabilities relating to the handling, manufacture, use, emission, discharge or
disposal of pollutants or other substances at or from the Company's facilities
or the use or disposal of certain of its chemical products. Significant



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expenditures have been incurred by the Chemical Business at the El Dorado
Facility in order to comply with the Environmental Laws and Health Laws. The
Chemical Business may be required to make additional significant site or
operational modifications at the El Dorado Facility, potentially involving
substantial expenditures and reduction, suspension or cessation of certain
operations. See "Special Note Regarding Forward-Looking Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Chemical Business."

        The Chemical Business entered into a consent administrative order with
the Arkansas Department of Environmental Quality ("ADEQ") in August, 1998 (the
"Wastewater Consent Order"). The Wastewater Consent Order recognized the
presence of nitrate contamination in the groundwater and required the chemical
Business to undertake on-site bioremediation. The bioremediation was not
successful in achieving denitrification. The Chemical Business is preparing a
report to the ADEQ regarding field testing of the shallow groundwater. Upon
completion of the waste minimization activities referenced below, a final remedy
for groundwater contamination will be selected, based on an evaluation of risk.
There are no known users of groundwater in the area, and preliminary risk
assessments have not identified any risk that would require additional
remediation. The Wastewater Consent Order included a $183,700 penalty
assessment, of which $125,000 will be satisfied over five years at expenditures
of $25,000 per year for waste minimization activities. The Chemical Business has
documented in excess of $25,000 on expenditures for each of the years 1998, 1999
and 2000.

        The Wastewater Consent Order also required installation of an interim
groundwater treatment system (which is now operating) and certain improvements
in the wastewater collection and treatment system (discussed below). Twelve
months after all improvements are in place, the risk will be reevaluated, and a
final decision will be made on what additional groundwater remediation, if any,
is required. There can be no assurance that the risk assessment will be approved
by the ADEQ, or that further work will not be required.

        The Wastewater Consent Order also requires the Chemical Business to
undertake a facility wide wastewater evaluation and pollutant source control
program and facility wide wastewater minimization program. The program requires
that the subsidiary complete rainwater drain off studies including engineering
design plans for additional water treatment components to be submitted to the
State of Arkansas, by the revised date of October 1, 2001. The construction of
the additional water treatment components is required to be completed by the
revised date of October 1, 2002 and the El Dorado plant has been mandated to be
in compliance with the final effluent limits on or before the revised date of
April 2003. The aforementioned compliance deadlines, however, are not scheduled
to commence until after the State of Arkansas has issued a renewal permit
establishing new, more restrictive effluent limits. Alternative methods for
meeting these requirements are continuing to be examined by the Chemical
Business. The Company believes, although there can be no assurance, that any
such new effluent limits would not have a material adverse effect on the
Company. See "Special Note Regarding Forward-Looking Statements." The Wastewater
Consent Order provided that the State of Arkansas will make every effort to
issue the renewal permit by December 1, 1999; however, the State of Arkansas has
delayed issuance of the permit. Because the Wastewater Consent Order provides
that the compliance deadline may be extended for circumstances beyond the
reasonable control of the Company, and because the State of Arkansas has not yet
issued the renewal permit, the Company does not believe that failure to meet the
aforementioned compliance deadlines will present a material adverse impact. The
State of Arkansas has been advised that the company is seeking financing from
Arkansas authorities for the projects required to comply with the Wastewater
Consent Order and the Company has requested that the permit be further delayed
until financing arrangements can



                                       9
<PAGE>   12

be made, which requests have been met to date.

        The Chemical Business and the ADEQ entered into certain agreements,
including an administrative consent order (the "Air Consent Order") in 1995 to
resolve certain of the Chemical Business' past violations. The Air Consent Order
was amended in 1996, 1997 and 1998. The Air Consent Order was unilaterally
withdrawn by the ADEQ as of July 31, 2000. In addition, prior to 1998, the El
Dorado Facility was identified as one of 33 significant violators of the federal
Clean Air Act in a review of Arkansas air programs by the EPA Office of
Inspector General. The Company is unable to predict the impact, if any, of such
designation. See "Special Note Regarding Forward-Looking Statements." Effective
May 1, 2000, the Chemical Business is operating under a new air permit. This air
permit supercedes all air-related consent administrative orders other than the
Air Consent Order discussed above.

        During 2000, the Chemical Business expended approximately $.1 million in
connection with capital expenditures relating to compliance with federal, state
and local Environmental Laws at its El Dorado Facility, including, but not
limited to, compliance with the Wastewater Consent Order, as amended. The
Company anticipates that the Chemical Business will spend approximately $2 to $3
million for future capital expenditures relating to environmental control
facilities at its El Dorado Facility to comply with Environmental Laws,
including, but not limited to, the Wastewater Consent Order, as amended, with
$.3 million being spent in 2001 and the balance being spent in 2002. No
assurance can be made that the actual expenditures of the Chemical Business for
such matters will not exceed the estimated amounts by a substantial margin,
which could have a material adverse effect on the Company and its financial
condition. The amount to be spent for capital expenditures related to compliance
with Environmental Laws is dependent upon a variety of factors, including, but
not limited to, obtaining financing through Arkansas authorities, the occurrence
of additional releases or threatened releases into the environment, or changes
in the Environmental Laws (or in the enforcement or interpretation by any
federal or state agency or court of competent jurisdiction). See "Special Note
Regarding Forward-Looking Statements." Additional orders from the ADEQ imposing
penalties, or requiring the Chemical Business to spend more for environmental
improvements or curtail production activities at the El Dorado Facility, could
have a material adverse effect on the Company.

ITEM 2. PROPERTIES

CHEMICAL BUSINESS

        The Chemical Business primarily conducts manufacturing operations (i) on
150 acres of a 1,400 acre tract of land located in El Dorado, Arkansas (the "El
Dorado Facility"), (ii) on 120 acres of a 1,300 acre tract of land located in
Cherokee, Alabama ("Cherokee Facility"), (iii) in a facility of approximately
60,000 square feet located on ten acres of land in Hallowell, Kansas ("Kansas
Facility"), (iv) in a mixed acid plant in Wilmington, North Carolina
("Wilmington Plant"), and (v) in a nitric acid plant in Baytown, Texas ("Baytown
Plant"). The Chemical Business owns all of its manufacturing facilities except
the Cherokee Facility and Baytown Plant. The Wilmington Plant and the DSN Plant
(located at the El Dorado Facility) are subject to mortgages. A subsidiary of
the Company leases the Cherokee Facility from the acquiring subsidiary of LSB,
which is not a subsidiary of the Company. The subsidiary leases the facility
under a triple net lease. The term of the Cherokee Plant lease is for one year.
The Baytown Plant is being leased pursuant to a leveraged lease from an
unrelated third party. As discussed in Item 1, "Business-General", the Cherokee
Facility was acquired during the fourth quarter of 2000.



                                       10
<PAGE>   13

        As of December 31, 2000, the El Dorado Facility was utilized at
approximately 77% of capacity, based on continuous operation.

        The Chemical Business operates its Kansas Facility from buildings
located on an approximate ten acre site in southeastern Kansas, and a research
and testing facility comprising approximately ten acres, including buildings and
equipment thereon, located in southeastern Kansas, which it owns.

        In addition, the Chemical Business distributes its products through 28
agricultural and explosive distribution centers. The Chemical Business currently
operates 20 agricultural distribution centers, with 16 of the centers located in
Texas (10 of which the Company owns and 6 of which it leases); 2 centers located
in Missouri including the Crystal City Facility which was acquired by a
subsidiary of LSB, which is not a subsidiary of the Company, during the fourth
quarter of 2000 as discussed in item 1. "Business-General" (leased); and 2
centers located in Tennessee (owned). The Chemical Business currently operates 8
domestic explosives distribution centers located in Hallowell, Kansas (owned);
Bonne Terre, Missouri (owned); Poca, West Virginia (leased); Owensboro, Martin
and Combs, Kentucky (leased); Pryor, Oklahoma (leased) and Dunlap, Tennessee
(owned). The Chemical Business has entered into a letter of intent with a third
party to sell its explosive distribution outlets and enter into a long-term
supply agreement which the Company currently expects to close in May 2001. Under
the terms of the letter of intent, the Chemical Business would sell its
wholesale and retail explosive distribution business (excluding accounts
receivable) for $3.5 million plus any additional amount for inventories and
enter into an ammonium nitrate tolling agreement with the third party. The buyer
has prepaid to the Chemical Business $2 million of the $3.5 million, which
amount has been received by the Chemical Business. If the transaction does not
close by May 31, 2001, the $2 million prepayment will be applied towards the
purchase of ammonium nitrate products by the third party from the Chemical
Business. However if the transaction has not closed by May 31, 2001 and the
third party reasonably, determines that the Chemical Business is unable to make
deliveries of the ammonium nitrate products beginning June 2001 and thereafter,
the Chemical Business shall return the prepayment. See "Business -- Chemical
Business -- Explosives" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of the expected impact
upon the operations and financial position of the Chemical Business as a result
of these anticipated transactions. See "Special Note Regarding Forward-Looking
Statements".



CLIMATE CONTROL BUSINESS

        The Climate Control Business conducts its fan coil manufacturing
operations in a facility located in Oklahoma City, Oklahoma, consisting of
approximately 265,000 square feet. The Company owns this facility subject to a
mortgage. As of December 31, 2000, the Climate Control Business was using the
productive capacity of the above referenced facilities to the extent of
approximately 78%, based on three, eight-hour shifts per day and a five-day week
in one department and one and one half eight-hour shifts per day and a five-day
week in all other departments.

        The Climate Control Business manufactures most of its heat pump products
in a 270,000 square foot facility in Oklahoma City, Oklahoma, which it leases
from an unrelated party. The lease term began March 1, 1988, and expires
February 28, 2003, with options to renew for additional five-year periods. The
lease currently provides for the payment of rent in the amount of $52,389 per
month. The Company also has an option to acquire the facility at any time in
return for the assumption of the then outstanding balance of the lessor's
mortgage. As of December 31, 2000, the productive capacity of this manufacturing
operation was being utilized to the extent of approximately 81%, based on two
nine-hour shifts per day and a five-day week in one department, and one
eight-hour shift per day and a five-day week in all other departments.

        All of the properties utilized by the Climate Control Business are
considered by the Company management to be suitable and adequate to meet the
current needs of that Business.

ITEM 3. LEGAL PROCEEDINGS

        The Company was dismissed from the previously reported case of ASARCO v.
ICI, et al., pending in the U.S. District Court for the Eastern District of
Missouri.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Not applicable.

ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY

IDENTIFICATION OF EXECUTIVE OFFICERS



                                       11
<PAGE>   14

        The following table lists the executive officers of the Company, each of
whom also serves as an executive officer of LSB, except for James L. Wewers.


<TABLE>
<CAPTION>
Name                  Office
----                  ------
<S>                   <C>
Jack E. Golsen        Chairman of the Board, Chief Executive Officer and
                      President

Barry H. Golsen       Vice Chairman of the Board and Vice President

Tony M. Shelby        Vice President and Chief Financial Officer

David R. Goss         Vice President

Jim D. Jones          Vice President and Treasurer

James L. Wewers       Vice President

David M. Shear        Secretary
</TABLE>


        The Company's officers serve one-year terms, renewable on an annual
basis by the Board of Directors. All of the individuals listed above have served
in substantially the same capacity with LSB and/or its subsidiaries for the last
five years.

FAMILY RELATIONSHIPS

        The only family relationship that exists among the executive officers of
the Company is that Jack E. Golsen is the father of Barry H. Golsen.

                                     PART II

ITEM    5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

MARKET INFORMATION

        The Company is a wholly owned subsidiary of LSB. As such, the Company
does not have any shares of common equity that trade in the public market.

        Under the terms of the Indenture of Senior Unsecured Notes, the Company
cannot transfer funds to LSB in the form of cash dividends or other
distributions or advances, except for (i) the amount of taxes that the Company
would be required to pay if they were not consolidated with LSB and (ii) an
amount not to exceed fifty percent (50%) of the Company's net income from
January 1, 1998 through the end of the period for which the calculation is made
for the purpose of proposing a payment, and (iii) the amount of direct and
indirect costs and expenses incurred by LSB on behalf of the Company pursuant to
a certain services agreement and a certain management agreement to which the
Company and LSB are parties. The Company and LSB are parties to a services
agreement, management agreement and tax sharing agreement, and under the
Indenture the Company may pay amounts to LSB under each such agreement. In
addition, under the Indenture, the Company may enter into other transactions
with LSB under certain conditions. See Note 3 of Notes to Consolidated Financial
Statements and Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations".



                                       12
<PAGE>   15

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                     Years ended December 31,
                                                                     ------------------------
                                              2000            1999            1998            1997            1996
                                            ---------       ---------       ---------       ---------       ---------
                                                                      (Dollars in Thousands)
<S>                                         <C>             <C>             <C>             <C>             <C>
Selected Statement of Operations Data:

Net sales (1)                               $ 279,972       $ 244,462       $ 241,546       $ 236,365       $ 255,285
                                            =========       =========       =========       =========       =========

Total revenues (1)                          $ 281,866       $ 246,955       $ 243,014       $ 237,258       $ 255,618
                                            =========       =========       =========       =========       =========

Interest expense (1)                        $  13,882       $  14,260       $  13,463       $   9,041       $   6,247
                                            =========       =========       =========       =========       =========

Income (loss)
  before extraordinary
  gain (charge)                             $ (14,073)      $ (19,182)      $  (2,569)      $     897       $   5,753
                                            =========       =========       =========       =========       =========

Net income (loss)                           $   3,248       $ (19,182)      $  (2,569)      $  (1,972)      $   5,753
                                            =========       =========       =========       =========       =========
</TABLE>


(1) Amounts exclude balances relating to business disposed of.



                                       13
<PAGE>   16

ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)


<TABLE>
<CAPTION>
                                                      Years ended December 31,
                                                      ------------------------
                                    2000          1999          1998          1997          1996
                                  --------      --------      --------      --------      --------
                                                       (Dollars in Thousands)
<S>                               <C>           <C>           <C>           <C>           <C>
Selected Balance Sheet Data:

Total assets                      $189,167      $184,078      $196,603      $200,875      $173,734
                                  ========      ========      ========      ========      ========

Long-term debt,
   including
   current portion                $126,156      $142,188      $137,931      $136,184      $ 82,588
                                  ========      ========      ========      ========      ========

Total stockholders'
  equity                          $  9,383      $  6,135      $ 23,758      $ 27,289      $ 32,843
                                  ========      ========      ========      ========      ========
</TABLE>



                                       14
<PAGE>   17

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

        The following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with a review
of the Company's December 31, 2000 Consolidated Financial Statements, Item 6
"SELECTED FINANCIAL DATA" and Item 1 "BUSINESS" included elsewhere in this
report.

        Certain Statements contained in this "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" may be deemed
forward-looking statements. See "Special Note Regarding Forward-Looking
Statements".

OVERVIEW

GENERAL

        The Company is pursuing a strategy of concentrating on businesses and
product lines in niche markets where it can establish a position as a market
leader. In addition, the Company is seeking to reduce its outstanding
indebtedness and improve its liquidity and operating results through the
liquidation and/or sale of selected assets.

        For the year ended December 31, 2000, subsidiaries of the Company
repurchased approximately $25.2 million of Senior Unsecured Notes and recognized
a gain of approximately $17.4 million, before income taxes. The purchases, which
were paid out of its working capital, will serve to reduce interest expense by
approximately $1.9 million annually.

        In October 2000, the nitric acid plant in Baytown, Texas, operated by El
Dorado Nitrogen Company ("EDNC") experienced a mechanical failure resulting in
an interruption of production. To supply nitric acid to Bayer Corporation
("Bayer") during the interruption, EDNC purchased nitric acid produced by a
subsidiary of the Company, El Dorado Chemical Company, as well as from third
party producers. The repairs to the nitric plant were completed in January 2001.
The Company believes that the losses arising from this mechanical failure and
interruption of production will be fully covered by insurance and payments by
Bayer. See "Special Note Regarding Forward-Looking Statements".

        In conjunction with the Company's strategy, effective October 31, 2000,
subsidiaries of LSB, which are not subsidiaries of the Company, completed the
acquisition of two chemical plants from LaRoche Industries, Inc. ("LaRoche")
during the fourth quarter of 2000. One plant is located in Cherokee, Alabama
("Cherokee Plant") and the other is located in Crystal City, Missouri ("Crystal
City Plant").

        Following LSB's acquisition, a subsidiary of the Company leased the
Crystal City Plant and the Cherokee Plant from the acquiring subsidiaries of
LSB, which are not subsidiaries of the Company. The subsidiary leases the plants
under a triple net lease. The terms of the Crystal City Plant lease is for six
months and requires the Company to maintain the facility for product storage and
distribution purposes. The terms of the Cherokee Plant lease is for one year and
requires lease payments totaling $1,350,000.

        The Cherokee Plant produces anhydrous ammonia, nitric acid, aqua
ammonia, agricultural grade ammonium nitrate fertilizer, urea ammonium nitrate
fertilizer and ammonium nitrate solution as a blasting product ingredient and
will remain in operation on at least a temporary basis while the acquiring
subsidiary evaluates the plant's profitability. Because natural gas is a
significant element in the production of anhydrous ammonia and the natural gas



                                       15
<PAGE>   18

costs rose significantly during the fourth quarter of 2000, the Cherokee Plant
was shut down in mid-December 2000 and restarted in mid-February 2001. Due to
the current fluctuations in natural gas costs, future production shut-downs may
occur. The funding of future operations will be obtained from working capital
and financing arrangements of the Company. For the year ended February 28, 2000,
this plant (under operatorship of the previous owners) sold 398,000 tons of
product and had net sales of approximately $32 million.

TRANSACTIONS WITH RELATED PARTIES

        On November 21, 1997, the Company and LSB entered into a services
agreement (the "Services Agreement") pursuant to which LSB will continue to
provide to the Company various services, including financial and accounting,
order entry, billing, credit, payable, insurance, legal, human resources,
advertising and marketing, and related administrative and management services,
that LSB has historically provided to the operations and businesses of the
Company. The Company will pay to, or reimburse, LSB for the costs and expenses
incurred by LSB in the performance of the Services Agreement.

        Under the terms of the Services Agreement, the Company will pay to, or
reimburse, LSB for the value of the office facilities of LSB, including LSB's
principal offices and financial accounting offices utilized in the performance
of the Services Agreement. LSB will determine the proportionate usage of such
facilities by LSB and the Company, and the Company will pay to, or reimburse,
LSB for its proportionate share of such usage.

        Charges for such services aggregate $1,952,000, $4,780,000 and
$2,265,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Management of the Company believes these charges from LSB reasonably approximate
additional general and administrative costs which would have been incurred if
the Company had been an independent entity during such periods. These amounts do
not include reimbursements for cost described in the next paragraph or amounts
paid by LSB relating to certain of the Company's payroll that are directly
charged to the Company by LSB.

        The Services Agreement also provides that LSB will permit employees of
the Company and its subsidiaries to continue to participate in the benefit plans
and programs sponsored by LSB. The Company will pay to, or reimburse, LSB for
the costs associated with participation by the employees of the Company in LSB's
benefit plans and programs.

        In addition, the Services Agreement allows for purchases of other goods
and services to the extent that the amount paid approximates fair value that
would be paid to a third party. In 2000 and 1999, subsidiaries of the Company
purchased certain raw materials and finished goods from a subsidiary of LSB, not
a subsidiary of the Company, for $9,306,000 and $681,000, respectively. In 2000
and 1999, subsidiaries of the Company purchased certain raw materials with LSB's
assistance and paid $947,000 and $461,000, respectively to LSB in commissions on
such purchases. In 2000 and 1999, the Company also purchased $757,000 and
$1,076,000, respectively in industrial supplies from subsidiaries of LSB which
are not subsidiaries of the Company. As of December 31, 2000 and 1999, $1.5
million and $.3 million of these amounts had not yet been paid to LSB and its
subsidiaries which were not subsidiaries of the Company.

        The Company's Climate Control manufacturing subsidiaries also lease
facilities and production equipment from an affiliate under various operating
leases and a capital lease. See Note 10 -- Commitments and Contingencies,
Operating Leases. Rental expense associated with the operating leases aggregated
$2,539,000, $1,806,000 and $475,000 for the years ended December 31, 2000, 1999
and 1998, respectively. In December 1999, a subsidiary of the Climate Control
Business entered into a capital lease with a subsidiary of LSB



                                       16
<PAGE>   19

which is not a subsidiary of the Company. The lease agreement required an
initial payment of $2 million for capital improvements required in the facility,
which was paid in 1999, and requires 112 monthly payments of $20,291 commencing
on September 1, 2006. The accompanying balance sheet includes buildings and
improvements under the capital lease of $3,172,000 and long-term debt includes a
capital lease obligation of $1,246,000 ($1,172,000 at December 31, 1999) due to
the LSB subsidiary.

        During July 1999, a subsidiary of the Company sold 26 railcars to a
non-affiliated entity for approximately $1.1 million. Thereafter, the entity
leased the railcars to a subsidiary of LSB, which is neither the Company nor a
subsidiary of the Company. A subsidiary of the Company has entered into a
services agreement with such LSB subsidiary pursuant to which such subsidiary is
to provide railcar services to a subsidiary of the Company. Under the services
agreement, the Company's subsidiary will pay a fee based on each railcar unit
used by such subsidiary of $1,031 per month. The Company's subsidiary paid
$322,000 and $107,000 in 2000 and 1999, respectively relating to this fee which
is included in the rent expense associated with operating leases discussed
above. Furthermore, the LSB subsidiary reimbursed the Company's subsidiary for
maintenance fees relating to the railcars of $125,000 and $43,000 in 2000 and
1999, respectively. The Company's subsidiary is not required to use any railcar
equipment under the services agreement, and the services agreement may be
terminated at any time on 30 days written notice.

        As of December 31, 2000 and 1999, the Company had advanced LSB $2
million pursuant to a provision in the bond indenture which allows the Company
to make up to a $2 million investment in any other "person," as defined. The
advance bears interest at 10-3/4% per annum payable on demand.

        On November 21, 1997, LSB and the Company entered into a management
agreement (the "Management Agreement"), which provides that LSB will provide to
the Company, managerial oversight and guidance concerning the broad policies,
strategic decisions and operations of the Company and the subsidiaries and the
rendering of such further managerial assistance as deemed reasonably necessary
by LSB. Under the Management Agreement, the Company is to pay LSB a fee for such
services which will not exceed $1.8 million annually. The fee will be paid
quarterly based upon the excess of actual earnings before interest, income
taxes, depreciation and amortization ("EBITDA") for the quarter minus
$6,500,000, not to exceed $450,000. If at the end of the calendar year, EBITDA
is less than $26 million, management fees paid to LSB during the year shall be
refunded to the Company for the first three quarters of the year, not to exceed
$1,350,000. The maximum management fee amount to be paid to LSB by the Company
is adjusted annually commensurate with the percentage change, if any, in the
Consumer Price Index during the preceding calendar year. For the year ended
December 31, 2000, the Company was required to pay LSB $1.8 million under the
Management Agreement inasmuch as EBITDA exceeded $26 million for the period
($1.35 million has been paid as of December 31, 2000). No payments were made to
LSB under the Management Agreement in 1999 or 1998.

        On November 21, 1997, the Company and LSB entered into a tax sharing
agreement (the "Tax Sharing Agreement") which provides for (i) the allocation of
payments of taxes for periods during which the Company and its subsidiaries and
LSB are included in the same consolidated group for federal income tax purposes
or the same consolidated, combined or unitary returns for state, local or
foreign tax purposes, (ii) the allocation of responsibility for the filing of
tax returns, (iii) the conduct of tax audits and the handling of tax
controversies, and (iv) various related matters. For tax periods beginning after
December 1996 and ending ten years thereafter, so long as the Company is
included in LSB's consolidated federal income tax returns or state consolidated
combined or unitary tax returns, the Company will be required to



                                       17
<PAGE>   20

pay to LSB an amount equal to the Company's consolidated federal and state
income tax liability calculated as if the Company and its subsidiaries were a
separate consolidated tax group and not part of LSB's consolidated tax group.
Such amount is payable in estimated quarterly installments. If the sum of the
estimated quarterly installments is (a) greater than the tax liability of the
Company, on a consolidated basis, as determined by LSB, under the Tax Sharing
Agreement, then LSB will refund the amount of the excess to the Company, or (b)
less than the Company's tax liability, on a consolidated basis, as determined by
LSB, under the Tax Sharing Agreement, then the Company will pay to LSB the
amount of the deficiency. The Company recorded a provision for income taxes
relating to the extraordinary gain on the repurchase of Senior Unsecured Notes
for the year ended December 31, 2000 of $.1 million, all of which is payable to
LSB under the terms of the Tax Sharing Agreement ($.8 million had been paid as
of December 31, 2000 for the tax liability existing at September 30, 2000). The
Company did not pay LSB any amounts under the Tax Sharing Agreement in 1999 or
1998.

        Under the terms of an Indenture between the Company, the guarantors and
the trustee relating to the Notes (as defined in Note 7), the Company is
permitted to distribute or pay in the form of dividends and other distributions
to LSB in connection with the Company's outstanding equity securities or loans,
(a) advances or investments to any person (including LSB), up to 50% of the
Company's consolidated net income for the period (taken as one accounting
period), commencing on the first day of the first full fiscal quarter commencing
after the Issue Date of the Notes to and including the last day of the fiscal
quarter ended immediately prior to the date of said calculation (or, in the
event consolidated net income for such period is a deficit, then minus 100% of
such deficit), plus (b) the aggregate net cash proceeds received by the Company
from the sale of its capital stock. This limitation will not prohibit (i)
payment to LSB under the Services Agreement, Management Agreement and the Tax
Sharing Agreement, or (ii) the payment of any dividend within 60 days after the
date of its declaration if such dividend could have been made on the date of
such declaration. Based on the terms stated above, the Company declared and paid
to LSB a dividend, in the fourth quarter of 1998, in the amount of $406,000
representing 50% of the Company's consolidated net income for the nine months
ended September 30, 1998 (none in 2000 or 1999).

        The Company has, at various times, maintained certain unsecured
borrowings from LSB and its subsidiaries and made loans and advances to LSB
which generally bear interest. At December 31, 2000 and 1999, the Company had
loans and advances due from LSB of approximately $13.4 million, $10.0 million of
which was loaned to LSB from the proceeds of the sale of the Notes, as defined
(Note 7 -- Long-Term Debt), and bears interest at 10-3/4%, maturing November
2007 and $3.4 million due from LSB and affiliates related to cash advances from
the Company to LSB and affiliates prior to the sale of the Notes, as defined,
from borrowings on the Company's credit facilities. These loans are due by their
terms in November 2007 and bear interest at 7% per annum. At December 31, 2000
and 1999, the Company had $1.1 million and $2.3 million, respectively, due from
LSB and affiliates included in current assets related to advances as discussed
previously, interest and refunds due associated with operations under the
Services Agreement or refunds under the tax sharing agreement. The Company
earned interest income on net loans and advances due from LSB and affiliates
aggregating approximately $1,531,000, $1,474,000 and $1,316,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.

        LSB and its subsidiaries (other than the Company and its subsidiaries),
the "LSB Non-ClimaChem Entities," are dependent upon their separate cash flows
and the restricted funds which can be distributed by the Company under the above
mentioned agreements. As of December 31, 2000, the LSB Non-ClimaChem



                                       18
<PAGE>   21

Entities had working capital deficit of $6.0 million (including $2.6 million of
inventories and $2.4 million of accounts receivable), and long-term debt of
$32.3 million (including $15.3 million owed to the Company), $4.4 million of
which is due within one year. For the year ended December 31, 2000, the LSB
Non-ClimaChem Entities had net loss of $.2 million. LSB is focusing its efforts
and resources on its core businesses, which represent that of the Company.
Management of LSB believes the LSB Non-ClimaChem Entities will have sufficient
operating capital to meet its obligations as they come due (other than dividend
obligation under its outstanding preferred stocks), including those to the
Company. If LSB management is not successful in realizing certain excess and
non-core assets, and if the Company is not able to transfer funds to LSB and its
affiliates as permitted under the Indenture, the recoverability of the loans and
advances to LSB may not be recoverable. As of December 31, 2000, the Company has
not provided an allowance for doubtful accounts against these receivables, loans
and advances since it is their present belief that LSB will be able to pay these
amounts when they come due; however, it is reasonably possible that the
evaluation relative to the amounts due from LSB and its subsidiaries could
change in the near term.

The following table contains selected historical financial information about the
Company's operating segments for each of the three years in the period ended
December 31, 2000. The information for each of the three in the period ended
December 31, 2000, was derived from the Consolidated Financial Statements of the
Company included elsewhere herein.



                                       19
<PAGE>   22

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER, 31,
                                                              ------------------------
                                                        2000            1999            1998
                                                      ---------       ---------       ---------
<S>                                                   <C>             <C>             <C>
Net sales:
 Business Continuing:
   Chemical                                           $ 149,398       $ 127,407       $ 125,761
   Climate Control                                      130,574         117,055         115,785
                                                      ---------       ---------       ---------
                                                        279,972         244,462         241,546
  Business disposed of: Chemical (1)                         --           7,461          14,184
                                                      ---------       ---------       ---------
                                                      $ 279,972       $ 251,923       $ 255,730
                                                      =========       =========       =========
Gross Profit: (2)
  Business continuing:
    Chemical                                          $  14,974       $  13,458       $  18,590
    Climate Control                                      32,503          34,909          32,234
                                                      ---------       ---------       ---------
                                                         47,477          48,367          50,824
                                                      =========       =========       =========
Operating profit (loss): (3)
  Businesses continuing
    Chemical                                          $    (230)      $  (1,353)      $   5,877
    Climate Control                                       6,291           8,628           9,723
                                                      ---------       ---------       ---------
                                                          6,061           7,275          15,600
Business disposed of: Chemical (1)                           --          (1,632)         (2,467)
                                                      ---------       ---------       ---------
                                                      $   6,061       $   5,643       $  13,133

Unallocated fees from Services
 Agreement and general corporate                         (4,516)         (4,526)         (2,881)
 expenses, net
Interest income                                           1,683           1,512           1,445
Other income, net                                           211             981              23
Interest expense:
  Business disposed of                                       --            (326)           (434)
  Business continuing                                   (13,882)        (14,260)        (13,463)
Loss on businesses disposed of                               --          (1,971)             --
Provision for loss on firm sales and
  purchase commitments -- Chemical                       (3,395)         (8,439)             --

Provision for impairment on long-lived
  assets                                                     --          (3,913)             --
                                                      ---------       ---------       ---------
Loss before provision (benefit) for income taxes
and extraordinary gain                                $ (13,838)      $ (25,299)      $  (2,177)

                                                      =========       =========       =========

Total assets:
  Business Continuing:
    Chemical                                          $ 108,387       $ 102,185       $ 116,655
    Climate Control                                      61,865          61,781          40,498
    Corporate                                            18,915          20,112          22,653
    Business disposed of --Chemical                          --              --          16,797
                                                      ---------       ---------       ---------
                                                      $ 189,167       $ 184,078       $ 196,603
                                                      =========       =========       =========
</TABLE>



                                       20
<PAGE>   23

(1)     In August 1999, the Company sold substantially all the assets of its
        wholly owned Australian subsidiary.

(2)     Gross profit by industry segment represents net sales less cost of
        sales.

(3)     Operating profit by industry segment represents gross profit less
        operating expenses before deducting fees from the Service Agreement,
        general corporate expenses, interest expense, income taxes, loss on
        business disposed of, provision for loss on firm sales and purchase
        commitments, impairment on long-lived assets in 1999 and before interest
        and other income and extraordinary gain on extinguishment of debt in
        2000.



                                       21
<PAGE>   24

CHEMICAL BUSINESS

        Net Sales in the Chemical Business (excluding the Australian subsidiary
in which substantially all of its assets were disposed of in August, 1999) were
$149.4 million for the year ended December 31, 2000 and $127.4 million for the
year ended December 31, 1999. The gross profit (excluding the Australian
subsidiary and the provision for loss on firm purchase commitments) increased to
$15.0 million (or 10% of net sales) in 2000 from $13.5 million (or 10.6% of net
sales) in 1999.

        The Company's Chemical Business manufactures three principal product
lines that are derived from anhydrous ammonia: (1) fertilizer grade ammonium
nitrate and urea ammonia nitrate (UAN) for the agricultural industry, (2)
explosive grade ammonium nitrate for the mining industry and (3) concentrated,
blended and regular nitric acid for industrial applications. In addition, the
Company also produces sulfuric acid for commercial applications primarily in the
paper industry.

        As of December 31, 2000, the Chemical Business had commitments to
purchase 72,000 tons of anhydrous ammonia under a take or pay contract at an
average minimum volume of 3,000 tons per month during 2001 and 2002. In
addition, under the contract the Chemical Business is committed to purchase 100%
of its anhydrous ammonia requirements in 2001 and 50% of its remaining
quantities in excess of the take or pay volumes of its anhydrous ammonia
requirements through 2002 from this third party at prices which approximate
market prices. Based on the pricing index contained in this contract, prices
paid during 2000 and 1999 were higher than the current market spot price. As a
result, in 2000 and 1999 the Company recorded loss provisions for anhydrous
ammonia required to be purchased during the remainder of the contract
aggregating approximately $2.5 and $8.4 million, respectively. At December 31,
2000, the accrued liability for future payments of the loss provision included
in the Consolidated Balance Sheet was approximately $6.9 million ($3.5 million
of which is included in current accrued liabilities).

        During the fourth quarter of 2000, subsidiaries of the Company leased
two chemical plants. See discussion in Overview-General.

        The Chemical Business has entered into a letter of intent with a third
party to sell its explosives distribution outlets and enter into a long-term
supply agreement, which the Company currently expects to close in May 2001.
Under the terms of the letter of intent, the Chemical Business would sell its
wholesale and retail explosive distribution business (excluding accounts
receivable) for $3.5 million plus any additional amount for inventories and
enter into an ammonium nitrate tolling agreement with the third party. The buyer
has prepaid to the Chemical Business $2 million of the $3.5 million, which
amount has been received by the Chemical Business. If the transaction does not
close by May 31, 2001, the $2 million prepayment will be applied towards the
purchase of ammonium nitrate products by the third party from the Chemical
Business. However if the transaction has not closed by May 31, 2001 and the
third party reasonably, determines that the Chemical Business is unable to make
deliveries of the ammonium nitrate products beginning June 2001 and thereafter,
the Chemical Business shall return the prepayment. If these transactions are
executed, they are expected to have the effect of providing working capital from
the proceeds of the sale of asset of approximately $3.5 million, reduce
outstanding accounts receivable and inventory balances and provide a more
constant and predictable operating margin on explosives sales in the Chemical
Business. See "Special Note Regarding Forward-Looking Statements".

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.

        As of December 31, 2000, the backlog of confirmed orders for the Climate
Control Business increased to approximately $26.7 million from approximately
$22.1 million at December 31, 1999. This increase in backlog is primarily due
from continued growth and an influx of orders late in the third quarter of 2000.
These orders represented a combination of models including engineered-to-order
products which require an increased lead-time for production.

        Net sales of $130.6 million for the year ended December 31, 2000, in the
Climate Control Business were approximately 11.5% greater than sales of $117.1
million for the year ended December 31, 1999. The gross profit was approximately
$32.5 million in 2000 and $34.9 million in 1999. The gross profit percentage
decreased from 29.8% for 1999 to 24.9% for 2000.



                                       22
<PAGE>   25

                              RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

REVENUES

        Total revenues of Businesses continuing for the year ended December 31,
2000 and 1999 were $281.9 million and $247.0 million, respectively, an increase
of $34.9 million. Net sales increased $35.5 and interest and other income
decreased $.6 million. Interest and other income in 2000 includes $1.7 million
of interest income.

NET SALES

        Consolidated net sales of Businesses continuing included in total
revenues for 2000 were $280.0 million, compared to $244.5 million for 1999, an
increase of $35.5 million. This increase in sales resulted principally from: (i)
increased sales in the Chemical Business of $22 million from increased sales
volumes of agricultural, explosive, and industrial acid products due in part to
the completion of the nitric acid plant in Baytown, Texas in May 1999 and the
lease of the Cherokee Plant and improved sales prices of certain agricultural
products and (ii) increased sales in the Climate Control Business of $13.5
million due primarily from an increase in foreign sales, variation in product
sales mix, increase customer demand and the expansion of new products and
services.

GROSS PROFIT

        Gross profit of Businesses continuing as a percent of net sales was
17.0% for 2000, compared to 19.8% for 1999. The decrease in the gross profit
percentage was the result of lower profit margins in the Chemical and Climate
Control Business caused primarily from (i) increased raw material costs relating
to certain explosive and industrial acid products and increased sales volume of
explosive products with lower margins relating to the Chemical Business, and
(ii) increased material and labor costs relating to a new heat pump product
line, start up costs of the new large air handler business, lower gross margins
caused by competitive pressures and variation in product sales mix relating to
the Climate Control Business. This decrease was partially offset by improved
gross margins relating to certain agricultural products relating to the Chemical
Business.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

        Selling, general and administrative ("SG&A) expenses as a percent of net
sales from Businesses continuing for 2000 were 16.4% compared to 18.7% for 1999.
This decrease is primarily the result of higher sales without a comparable
increase in expenses; however, SG&A expenses are higher due to management fees
of $1.8 million due to LSB and new start-up operations during 1999 and 2000. The
management fee was not incurred or paid in 1999 because the earnings formula
provision in the Company's Indenture covering the Senior Unsecured Notes was not
met. The increase was partially offset by a decrease in depreciation and
amortization expenses and a reduction in advertising and research and
development expenditures.

INTEREST EXPENSE

        Interest expense for continuing businesses of the Company was $13.9
million for 2000, compared to $14.3 million for 1999. The decrease of $.4
million primarily due to reduced debt outstanding resulting from the repurchase
of the Senior Unsecured Notes partially offset by an increase in the lenders'
prime rate and an increase in the rate being charged by the Company's working



                                       23
<PAGE>   26

capital lender.

PROVISION FOR LOSS ON FIRM SALES AND PURCHASE COMMITMENTS

        The Company had a provision for loss on firm sales and purchase
commitments of $3.4 million and $8.4 million for the year ended December 31,
2000 and 1999, respectively. See discussion in Note 12 of the Notes to
Consolidated Financial Statements.

PROVISION FOR IMPAIRMENT ON LONG-LIVED ASSETS

        The Company had a provision for impairment on long-lived assets of $3.9
million for the year ended December 31, 1999 associated with two chemical plants
which are to be sold or dismantled. See discussion in Note 2 of the Notes to
Consolidated financial Statements.

BUSINESS DISPOSED OF

        The Company sold substantially all the assets of a wholly owned
subsidiary in 1999. See discussion in Note 4 of the Notes to Consolidated
Financial Statements.

LOSS BEFORE INCOME TAXES AND EXTRAORDINARY GAIN

        The Company had a loss before income taxes and extraordinary gain of
$13.8 million for 2000, compared to a loss of $25.3 million for 1999.
Approximately $5.0 million of the reduced loss of $11.5 million was due to the
difference in loss provision on firm sales and purchase commitments,
approximately $3.9 million was due to the provision for impairment on long-lived
assets in 1999, and approximately $3.9 million was due to losses relating to the
business disposed of in 1999. The remainder of the improvement was primarily due
to increased gross profit of the Chemical Business and the decrease in interest
expense as described above. This improvement was partially offset by decreased
gross profit of the Climate Control Business and the decrease in other income
and an increase in SG&A expenses as described above.

PROVISION (BENEFIT) FOR INCOME TAXES

        For the year ended December 31, 2000, the Company's provision for income
taxes is comprised of state income taxes. As a result of the Company's Federal
net operating loss carry-forward for income tax purposes, the provision for
Federal income taxes was limited to alternative minimum tax and related to the
extraordinary gain discussed below. For the year ended December 31, 1999, the
Company recognized a benefit for income taxes of $6.1 million pursuant to the
terms of the Tax Sharing Agreement as discussed in Note 3 of Notes to
Consolidated Financial Statements.

EXTRAORDINARY GAIN

        During the second and third quarters of 2000, a subsidiary of the
Company repurchased approximately $25.2 million of the Senior Unsecured Notes
and recognized a gain of approximately $17.3 million, net of income taxes of $.1
million.



                                       24
<PAGE>   27

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

REVENUES

        Total revenues, excluding business disposed of for the year ended
December 31, 1999 and 1998 were $247.0 million and $243.0 million, respectively
(an increase of $4.0 million). Sales increased $3.0 million and interest other
income increased $1.0 million. Interest and other income includes $1.5 million
of interest income.

NET SALES

        Consolidated net sales of businesses continuing included in total
revenues for 1999 were $244.5 million, compared to $241.5 million for 1998, an
increase of $3.0 million. This increase in sales resulted principally from: (i)
increased sales in the Climate Control Business of $1.2 million primarily due to
increased heat pump sales offset by production delays related to mechanical
problems with certain new equipment and (ii) lower sales of $16.6 million from
the Chemical Business other than the EDNC Baytown Plant offset by increased
sales to Bayer and other customers by EDNC of $18.4 million from the Baytown
Plant which began operations in May 1999. Lower volumes of the Company's
nitrogen based products were sold at a lower price in 1999 due primarily to the
import of Russian nitrate resulting in an over supply of nitrate based products
in the primary market areas for the Chemical Business' agricultural products.

GROSS PROFIT

        Gross profit of Businesses continuing as a percent of net sales was
19.8% for 1999, compared to 21.0% for 1998. The decrease in the gross profit
percentage was the result of decreases in the Chemical Business. The decrease in
the Chemical Business was primarily the result of lower sales volumes and
reduced selling prices for the Company's nitrogen based products. The decrease
in the gross profit percentage was offset by an increase in the Climate Control
Business due primarily to an improved focus on sales of more profitable product
lines.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

        Selling general and administrative ("SG&A") expenses as a percent of net
sales from Businesses continuing for 1999 were 18.7% compared to 15.8% for 1998.
This increase is primarily the result of decreased sales volume in the Chemical
Products Business without equivalent corresponding decrease in SG&A and
increased cost of the Company sponsored medical care programs for its employees
due to increased health care costs. Additionally, costs associated with new
start-up operations in 1999, by the Climate Control Business, having minimal or
no sales, increased warranty accrual on a certain line of products. LSB has been
restructuring the alignment of certain overhead costs to match the benefit and
cost. As a result of this restructuring, LSB increased the billing for services
performed under the "Services Agreement" in 1999 by approximately $2.5 million
over the amount charged in 1998.

INTEREST EXPENSE

        Interest expense for continuing businesses of the Company was $14.3
million for 1999, compared to $13.5 million for 1998. The increase of $.8
million primarily resulted from increased borrowings and lenders' prime rates
during the last half of 1999. The increased borrowings were necessary to support
capital expenditures, higher accounts receivable balances and to meet the
operational requirements of the Company.



                                       25
<PAGE>   28

PROVISION FOR LOSS ON FIRM PURCHASE COMMITMENTS

        The Company had a provision for loss on firm purchase commitments of
$8.4 million for the year ended December 31, 1999 to provide for losses
resulting from cost of remaining anhydrous ammonia to be purchased pursuant to
the firm purchase commitment in the Chemical Business when combined with the
manufacturing and distribution costs exceeded the anticipated future sales
price. See discussion in Note 12 of the Notes to Consolidated financial
Statements.

PROVISION FOR IMPAIRMENT ON LONG-LIVED ASSETS

        The Company had a provision for impairment on long-lived assets of $3.9
million for the year ended December 31, 1999 associated with two out of service
chemical plants which are to be sold or dismantled. See discussion in Note 2 of
the Notes to Consolidated Financial Statements.

BUSINESS DISPOSED OF

        The Company sold substantially all the assets of its wholly owned
subsidiary in 1999. See discussion in Note 4 of the Notes to Consolidated
Financial Statements.

INCOME (LOSS) BEFORE INCOME TAXES

        The Company had a loss before income taxes of $25.3 million for 1999,
compared to loss before income taxes of $2.2 million for 1998. The decreased
profitability of $23.1 million was due to decreased gross profits and increased
SG&A expenses, the loss on the disposal of the Australian subsidiary, lower
ammonium nitrate sales prices and volume, excluding EDNC, from the Chemical
Business, the provision for losses on purchase commitments, and the provision
for impairment on long-lived assets as previously discussed.

PROVISION (BENEFIT) FOR INCOME TAXES

        The benefit for income taxes pursuant to the terms of the Tax Sharing
Agreement as discussed in Note 8 of Notes to Consolidated Financial Statements
was $6.1 million for 1999 on a pre-tax loss of $25.3 million, compared to a
provision for income taxes of $.4 million for 1998 on a pre-tax loss of $2.2
million. The effective rates differ from statutory rates due primarily to the
Australian subsidiary losses and the valuation allowance on the net operating
loss carryforward in 1999.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW FROM OPERATIONS

        Historically, the Company's primary cash needs have been for operating
expenses, working capital and capital expenditures. The Company has financed its
cash requirements primarily through internally generated cash flow, borrowings
under its revolving credit facilities, and by issuance of Senior Unsecured Notes
in November, 1997.

        Net cash provided by operating activities for the year ended December
31, 2000 was $3.8 million, after adjustments for a noncash extraordinary gain of
$17.4 million, net provision for loss on firm sales and purchase commitments of
$.4, depreciation and amortization of $9.5 million, provision for possible
losses on receivables of $2.0 million, and including an increase in accounts
receivable of $6.0 million; an increase in inventories of $3.2 million; an
increase in supplies and prepaid items of $2.6 million; an increase in accounts
payable of $9.8 million; and an increase in accrued



                                       26
<PAGE>   29

liabilities of $8.1 million. The increase in receivables is primarily due to
improved sales prices and increased sales due, in part, to the lease of the
Cherokee Facility in 2000 in the Chemical Business and increased sales due, in
part, to new start-up operations during 1999 and 2000 in the Climate Control
Business. This increase was partially offset by successful efforts to reduce the
number of days outstanding relating to the Climate Control Business. The
increase in inventories is primarily due to the operation of the Cherokee
Facility in 2000, increased costs of raw materials in the Chemical Business and
an increase in certain raw materials relating to hydronic fan coil products and
a new start-up operation during 1999 in the Climate control Business. This
increase was partially offset by a reduction in certain raw materials relating
to heat pump products in the Climate Control Business. The increase in supplies
and prepaid items is primarily due to the operation of the Cherokee Facility in
2000 and the purchase of precious metals to be used in the manufacturing process
in the Chemical Business. The increase in accounts payable is primarily due to
the increase in the number of days outstanding, increase in production, the
operation of the Cherokee Facility in 2000, the new start-up operation during
2000 and timing of payments in the Chemical and Climate Control Businesses. The
increase in accrued liabilities is primarily due to cash deposits received from
customers for agricultural products to be delivered during 2001 in the Chemical
Business, loss on firm purchase commitment and accrued property taxes.

CASH FLOW FROM INVESTING AND FINANCING ACTIVITIES

        Net cash used in investing activities for the year ended December 31,
2000 included $6.8 million for capital expenditures and a decrease in other
assets of $.7 million. 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 proceeds from
long-term debt and other debt of $5.1, million a net increase in revolving debt
of $7.7 million and the decrease in the amount due from LSB and affiliates
offset by payments and Note acquisitions of $10.7 million.

SOURCE OF FUNDS

        The Company owns or leases substantially all of LSB's Chemical and
Climate Control Businesses or assets. The Company and its subsidiaries are
dependent on credit agreements with lenders, Indenture with bondholders, and
internally generated cash flow in order to fund their operations and pay their
debts and obligations.

        As of December 31, 2000, the Company had working capital of $.3 million
($17.2 million as of December 31, 1999). Working capital at December 31, 2000
includes $37.1 million of long-term debt due within one year of which $32.7
million relates to the Company's revolving credit facility which has a stated
maturity of April 2005. For each of the three years in the period ended December
31, 2000, the Company generated cash from operating activities of $3.8 million,
$1.7 million and $3.9 million, respectively.

        As of December 31, 2000, LSB and certain of its subsidiaries, including
the Company, were parties to a working capital line of credit evidenced by two
separate loan agreements ("Agreements") with a lender. The term of the
Agreements, as amended, was through December 31, 2000, and was automatically
being renewed thereafter for successive terms of one month each. The Company's
outstanding borrowings under the Agreements at December 31, 2000 was $32.7
million.

        In April 2001, the Company and its subsidiaries entered into a new $50



                                       27
<PAGE>   30
million credit facility. The Foothill Facility provides for advances based on
specified percentages of eligible accounts receivable and inventory of the
Company and its subsidiaries and accrues interest at a base rate (generally
equivalent to the prime rate) plus 2% or the LIBOR rate plus 4.5%. Interest is
due monthly. The Facility provides for up to $8.5 million of letters of credit;
All letters of credit outstanding reduce availability under the facility. Under
the Foothill Facility, the lender also requires the borrowers to pay a letter of
credit fee equal to 2.75% per annum of the undrawn amount of all outstanding
letters of credit, an unused line fee equal to .5% per annum for the excess
amount available under the facility not drawn and various other audit, appraisal
and valuation charges. The Foothill Facility matures in April 2005 and is
secured by receivables, inventory and intangibles of the Company and its
subsidiaries and certain assets of non-ClimaChem entities. LSB, each of the
Company's subsidiaries and two LSB subsidiaries are guarantors of the
indebtedness. A prepayment penalty equal to 4% of the facility is due to the
lender should the borrowers elect to prepay the facility prior to the first
anniversary date. This penalty is reduced 1% per year through maturity. The
Foothill Facility requires the Company to meet certain financial covenants on a
monthly, quarterly and/or annual basis, including a fixed charge coverage ratio,
minimum EBITDA (earnings before interest, taxes, depreciation and amortization)
of the Company and the Company's Climate Control Business and limits capital
expenditures. The Foothill Facility requires the borrowers to have varying
minimum amounts of availability under the revolver, which amounts generally
increase prior to interest payment due dates of the Senior Notes discussed in
Note 7 of the Notes to Consolidated Financial Statements. The Foothill Facility
requires that ClimaChem's excess availability, as defined, equal an amount not
less than $3.8 million, on each interest payment date, after making the interest
payment due pursuant to the Company's 10 3/4% Senior Notes. The Foothill
Facility also contains covenants that, among other things, limit the borrowers
ability to: (i) incur additional indebtedness, (ii) incur liens, (iii) make
restricted payments or loans to affiliates who are not borrowers, or (iv) engage
in mergers, consolidations or other forms of recapitalization, (v) dispose of
assets, and (vi) repurchase the Company's 10 3/4% Senior Notes. It also requires
all collections on accounts be made through an account in the name of the lender
or their agent and gives the lender the sole discretion to determine whether
there has been any material adverse change; as defined, in the financial
condition of the borrowers or LSB Industries, Inc., as guarantor, prior to
granting additional advances. The Foothill Facility requires the borrowers to
use their best efforts to assist Foothill Capital Corporation with the
syndication of no less than 40% and no more than 50% of the total facility
commitment. In connection therewith, the borrowers have agreed that Foothill
Capital Corporation or agent shall have the right after consultation with the
borrowers' agent to alter certain terms and conditions as may be necessary, to
insure a successful syndication of the total facility commitment. The lender
may, upon an event of default, as defined, terminate the Foothill Facility and
make the balance outstanding due and payable in full.

        As of April 16, 2001, the Company had borrowing availability under the
Foothill Facility of $4.5 million, with an effective interest rate of 10%.
Borrowings under the Foothill Facility outstanding at April 16, 2001, were $41.5
million. The interest on the outstanding debt under the Foothill Facilities at
April 16, 2001, at the rates then in effect would approximate $4.2 million
annually.

        For 2001, the Company has planned capital expenditures of approximately
$5 million but such capital expenditures are dependent upon obtaining acceptable
financing. The Company expects to delay these expenditures as necessary based on
the availability of financing. The Company has obtained a fourteen (14) month
extension of the compliance dates under its wastewater management project and in
the implementation dates of such project. Because the Company has not completed
its evaluation of engineering alternatives, the Company has not yet provided to
the state of Arkansas its final design plans under the new extended deadlines.
The consent order provides for an October 1, 2001 deadline for submission of
final design plans and will be preceded by the agency's issuance of a revised
permit. The revised permit will include the discharge limits that will apply to
the wastewater treatment project. To date the state has deferred issuance of the
revised permit. The Company continues to regularly advise the state of the
projects engineering status and financing status. Construction of the wastewater
treatment project is subject to the Company obtaining financing to fund this
project. There are no assurances that the Company will be able to obtain the
required financing. Failure to construct the wastewater treatment project could
have a material adverse effect on the Company.

        During 2000, the Company repurchased $25.2 million of the Senior
Unsecured Notes and recognized a gain of approximately $17.4 million, before
income taxes. These purchases will serve to reduce interest expense by
approximately $1.9 million annually.

         If the letter of intent to sell the Chemical Business' explosive
business distribution outlets and a long-term supply agreement closes, they are
expected to have the effect of providing working capital from the proceeds of
the sale of the assets of approximately $3.5 million, reduce outstanding
accounts receivable and inventory, as well as provide a more constant and
predictable operating margin in the Company's explosive business.

         In April 2001, a subsidiary of LSB, which is not a subsidiary of the
Company entered into a contract with a third party to sell land adjacent to the
Crystal City Plant for $4.5 million, before selling and closing expenses. The
buyer has 65 days to complete due diligence. Should this transaction close, up
to $2 million of the proceeds will be available to LSB and its subsidiaries
which are not subsidiaries of the Company with the remainder to be applied
against the Company's outstanding balance on the Foothill Facility revolver.

        A subsidiary of the Company is negotiating to sell its option to acquire
a building in which its heat pumps are built to a subsidiary of LSB that is not
ClimaChem or a subsidiary of ClimaChem for $2.0 million, plus receipt of an
unsecured promissory note in the amount of $1.6 million ("Note") to be held by
the Company. In connection with this proposed sale, the lease and the option to
purchase the building held by the subsidiary of the Company is to be extended
from February 28, 2003 to November 11, 2007. The exercise price of the option to
purchase will be based on the remaining outstanding balance of the mortgage on
the building at the time the option is exercised plus $1,000, less the amount of
the Note. The closing of this transaction is subject to certain conditions.

        As previously stated, LSB, the parent of the Company, owes the Company
approximately $15.3 million, of which $10.0 million bears an annual rate of



                                       28
<PAGE>   31

interest of 10-3/4%, payable semiannually on June 1 and December 1, with the
principal due in 2007 and $3.4 million bears interest at 7% with the principal
and interest due in 2007. The net amount due from LSB also includes $2.0 million
which is due on demand. The Company currently expects to collect the interest on
these notes from LSB when due; however, no demand is expected to be made on the
$2.0 million.

        During 2001, the Company has experienced a significant increase in the
sales prices of its nitrogen-based products compared to 2000, due primarily to
reduced competition in the market including a reduction in foreign imports. The
Company has also seen a reduction in its raw material costs of its Chemical
Business from the later part of 2000 and early 2001, which are expected to
result in improved margins in that business. The Company's Climate Control
Business has continued to experience strong demand and steady increases in
margins, contributing to a return to profitability for the Company in March
2001.

        With these improved business economics, the completion of the Foothill
Facility in April 2001, and the lack of other unforeseen adverse events,
management of the Company expects to see significant improvements in operating
results for the Company in 2001 from 2000 and believe the Company has adequate
resources to meet its obligations as they come due; however, this expectation
may change in the near term.

JOINT VENTURE AND OPTION TO PURCHASE

        During 1994, a subsidiary of LSB obtained an option to acquire all of
the stock of a French manufacturer of air conditioning and heating equipment.
The LSB subsidiary had loaned to the parent of the French manufacturer $3.7
million. The amount loaned is secured by the stock and assets of the French
manufacturer. In April 1999, the Company purchased from the subsidiary of LSB,
the option to acquire the French manufacturing company and all amounts due and
payable from such French manufacturer or its parent to LSB. The Company may
exercise its option to acquire the French manufacturer by converting
approximately $150,000 of the amount loaned into equity. The option is currently
exercisable and will expire June 15, 2005. As of the date of this report,
management of the Company has not decided whether it will exercise the option.
For 2000, 1999 and 1998, the French manufacturer had revenues of $16.7, $18.9
and $17.2 million, respectively, and reported net income of approximately
$200,000, $600,000 and $100,000, respectively. See Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

        In 1995, a subsidiary of LSB invested approximately $2.8 million to
purchase a fifty percent (50%) equity interest in an energy conservation joint
venture (the "Project"). The Project was awarded a contract to retrofit
residential housing units at a United States Army base, which it completed
during 1996. For the installation and management of energy-efficient equipment
(including air conditioning and heating equipment), the Project will receive a
percent of all energy and maintenance savings during the twenty (20) year
contract term. In January 1999, the Company acquired this investment by
purchasing the stock of the LSB subsidiary that owned the Project. The Company's
equity interest in the results of the operations of the Project were not
material for the years ended December, 2000, 1999 and 1998.

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



                                       29
<PAGE>   32

determine the outcome. The preceding sentence is a forward looking statement
that involves a number of risks and uncertainties that could cause actual
results to differ materially, such as, among other factors, the following: a
court finds the Chemical Business liable for a material amount of damages in the
antitrust lawsuits pending against the Chemical Business in a manner not
presently anticipated by the Company. See "Business", "Legal Proceedings" and
Note 10 of Notes to Consolidated Financial Statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

GENERAL

        The Company's results of operations and operating cash flows are
impacted by changes in market interest rates and raw material prices for
products used in its manufacturing processes. All information is presented in
U.S. dollars.

INTEREST RATE RISK

        The Company's interest rate risk exposure results from its debt
portfolio which is impacted by short-term rates, primarily prime rate-based
borrowings from commercial banks, and long-term rates, primarily fixed-rate
notes, some of which prohibit prepayment or require substantial prepayment
penalties.



                                       30
<PAGE>   33

        The following table provides information about the Company's interest
rate sensitive financial instruments as of December 31, 2000.

<TABLE>
<CAPTION>
                                                    YEARS ENDING DECEMBER 31,
                             ----------------------------------------------------------------------
                                2001           2002           2003           2004           2005        THEREAFTER       TOTAL
                             ----------     ----------     ----------     ----------     ----------     ----------     ----------
<S>                          <C>            <C>            <C>            <C>            <C>            <C>            <C>
Expected maturities of
  long -term debt:

    Variable rate debt       $   32,747     $       --     $       --     $       --     $       --     $    5,050     $   37,797

      Weighted average
        interest rate(1)          11.00%          6.45%          6.45%          6.45%          6.45%          6.45%         10.39%

    Fixed rate debt          $    4,345     $    2,314     $      388     $      219     $       10     $   81,083     $   88,359

      Weighted average
        interest rate(2)          10.62%         10.67%         10.68%         10.68%         10.68%         10.58%         10.65%
</TABLE>

----------

(1)     Interest rate is based on the aggregate rate of debt outstanding as of
        December 31, 2000. Interest is at floating rate based on the lender's
        prime rate plus 1.5% per annum, or at the Company's option, on its
        Revolving Credit Agreements on the lender's LIBOR rate plus 3.875% per
        annum. In April 2001, the Revolving Credit Agreements were replaced
        which caused an increase in the floating rate by .5%.

(2)     Interest rate is based on the aggregate of debt outstanding as of
        December 31, 2000.



                                       31
<PAGE>   34

        As of December 31, 2000, the Company's variable-rate and fixed-rate debt
which aggregated $126.2 million exceeded the debt's fair market value by
approximately $51.7 million. The fair value of the Company's Senior Notes was
determined based on a market quotation for such securities.

RAW MATERIAL PRICE RISK

        The Company has a commitment to purchase 72,000 tons of anhydrous
ammonia under a contract. The Company's purchase price can be higher or lower
than the current market spot price. Based on the pricing index contained in this
contract, prices paid during 2000 and 1999 were higher than the current market
spot price. As a result, in 2000 and 1999 the accompanying Consolidated
Financial Statements include loss provisions for anhydrous ammonia required to
be purchased during the remainder of the contract aggregating approximately $2.5
and $8.4 million, respectively.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The Company has included the financial statements and supplementary
financial information required by this item immediately following Part IV of
this report and hereby incorporates by reference the relevant portions of those
statements and information into this Item 8.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        No disagreements between the Company and its accountants have occurred
within the 24-month period prior to the date of the Company's most recent
financial statements.



                                       32
<PAGE>   35

                             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 from operations on an annualized basis, (ii) establishing a position
as a market leader, (iii) the amount of the loss provision for anhydrous ammonia
required to be purchased on that the cost to produce Chemical Business products
will improve, (iv) the market for certain of the Climate Control Business
products will continue to grow, (v) losses arising from the mechanical failure
and interruption of production will be fully paid by insurance (vi) amount to be
spent relating to compliance with federal, state and local Environmental laws at
the El Dorado Facility, (vii) improving liquidity and profits through
liquidation of assets or realignment of assets or some other method, (viii)
anticipated financial performance, (ix) ability to comply with the Company's
general working capital and debt service requirements, (x) ability to be able to
continue to borrow under the Company's revolving line of credit, (xi) adequate
cash flows to meet its presently anticipated capital requirements and (xii) the
ability to obtain necessary materials for the manufacturing of products, (xiii)
fertilizer and related chemical products sold to the agricultural industry are
the only seasonal products, (xiv) the sale of the Company's explosive business
distribution outlets and related long-term supply agreement will close, (xv)
contingencies will not result in substantial adverse impact in the Company's
liquidity, (xvi) ability to obtain anhydrous ammonia from other sources in the
event of a termination of its existing contract, (xvii) Climate Control
Business' backlog is expected to be completed by December 31, 2001, (xviii)
management expects to see significant improvements in operating results from the
Company in 2001 and believes that the Company has adequate resources to meet its
obligations as they come due, and (xix) ability to make required capital
improvement. While the Company believes the expectations reflected in such
Forward Looking Statements are reasonable, it can give no assurance such
expectations will prove to have been correct. There are a variety of factors
which could cause future outcomes to differ materially from those described in
this report, including, but not limited to, (i) decline in general economic
conditions, both domestic and foreign, (ii) material reduction in revenues,
(iii) material increase in interest rates; (iv) inability to collect in a timely
manner a material amount of receivables, (v) increased competitive pressures,
(vi) changes in federal, state and local laws and regulations, especially
environmental regulations, or in interpretation of such, pending (vii)
additional releases (particularly air emissions into the environment), (viii)
material increases in equipment, maintenance, operating or labor costs not
presently anticipated by the Company, (ix) the requirement to use internally
generated funds for purposes not presently anticipated, (x) ability to become
profitable from operations, or if unable to become profitable from operations,
the inability to secure additional liquidity in the form of additional equity or
debt, (xi) the effect of additional production capacity of anhydrous ammonia in
the western hemisphere, (xii) the cost for the purchase of anhydrous ammonia and
natural gas, (xiii) changes in competition, (xiv) the loss of any significant
customer, (xv) changes in operating strategy or development plans, (xvi)
inability to fund the working capital and expansion of the Company's businesses,
(xvii) inability to obtain necessary raw materials, (xviii) Bayer's inability or
refusal to purchase all of the Company's production at the Baytown nitric acid
plant, (xix) insurance does not cover all of the Company's losses due to
mechanical failure and interruption, (xx) sale of the Chemical Business'
explosive distribution centers does not close by a certain date, and in such
event, the buyer does not believe that the Chemical Business can deliver product
to it, and (xxi) other factors described in "Management's Discussion and
Analysis of Financial Condition and Results of



                                       33
<PAGE>   36

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.



                                       34
<PAGE>   37

                                    PART III

        Because all of the Company's outstanding capital stock is owned directly
or indirectly by its parent, LSB Industries, Inc., the Company is not required
to file a definitive proxy statement, and, as a result, the Company will provide
the information required by Part III of this report by amending this report on
or before April 30, 2001, to include such information (except for the
information of the Company's executive officers included under Item 4A of Part I
of this report), and incorporate such by reference.



                                       35
<PAGE>   38


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) FINANCIAL STATEMENTS

        The following consolidated financial statements of the Company appear
        immediately following this Part IV:


<TABLE>
<CAPTION>
                                                                               Pages
                                                                               -----
<S>                                                                     <C>
Report of Independent Auditors                                                  F-1

Consolidated Balance Sheets at December 31, 2000
  and 1999                                                                      F-2

Consolidated Statements of Operations for each of
  the three years in the period ended December 31,
  2000                                                                          F-3

Consolidated Statements of Stockholders' Equity
  for each of the three years in the period ended
  December 31, 2000                                                             F-4

Consolidated Statements of Cash Flows for
  each of the three years in the period
  ended December 31, 2000                                                F-5 to F-6

Notes to Consolidated Financial Statements                              F-7 to F-49

Quarterly Financial Data (Unaudited)                                           F-50

(a)(2) FINANCIAL STATEMENT SCHEDULE

                The Company has included the following schedule in this report:

II - Valuation and Qualifying Accounts                                         F-51
</TABLE>

        The Company has omitted all other schedules because the conditions
requiring their filing do not exist or because the required information appears
in the Company's Consolidated Financial Statements, including the notes to those
statements.



                                       36
<PAGE>   39

(a)(3) EXHIBITS

                3.1. Certificate of Incorporation of ClimaChem, Inc., which the
        Company hereby incorporates by reference from Exhibit 3.1 to the
        Company's Registration Statement, No. 333-44905.

                3.2. Bylaws of ClimaChem, Inc., which the Company hereby
        incorporates by reference from Exhibit 3.2 to the Company's Registration
        Statement, No. 333-44905.

                4.1. Indenture, dated as of November 26, 1997, by and among
        ClimaChem, Inc., the Subsidiary Guarantors and Bank One, N.A., as
        trustee, which the Company hereby incorporates by reference from Exhibit
        4.1 to LSB Industries, Inc.'s Form 8-K, dated November 26, 1997.

                4.2. Form 10 3/4% Series B Senior Notes due 2007, which the
        Company hereby incorporates by reference from Exhibit 4.3 to the
        Company's Registration Statement, No. 333-44905.

                4.3. Promissory Note, dated November 26, 1997, executed by LSB
        Industries, Inc. in favor of ClimaChem, Inc., which the Company hereby
        incorporates by reference from Exhibit 10.1 to the Company's
        Registration Statement, No. 333-44905.

                4.4. First supplement to indenture dated as of February 9, 1999
        which is incorporated by reference from Exhibit 4.19 to LSB's Form 10-K
        for the year ended December 31, 1998.

                10.1. Services Agreement, dated November 21, 1997, between LSB
        Industries, Inc. and ClimaChem, Inc., which the Company hereby
        incorporates by reference from Exhibit 10.4 to the Company's
        Registration Statement, No. 333-44905.

                10.2. Management Agreement, dated November 21, 1997, between LSB
        Industries, Inc. and ClimaChem, Inc., which the Company hereby
        incorporates by reference from Exhibit 10.5 to the Company's
        Registration Statement, No. 333-44905.

                10.3. Tax Sharing Agreement, dated November 21, 1997, between
        LSB Industries, Inc. and ClimaChem, Inc., which the Company hereby
        incorporates by reference from Exhibit 10.6 to the Company's
        Registration Statement, No. 333-44905.

                10.4. Union Contracts, dated August 5, 1995, between EDC and the
        Oil, Chemical and Atomic Workers, and the United Steel Workers of
        America, dated November 1, 1995, which the Company hereby incorporates
        by reference from Exhibit 10.7 to the Company's Form 10-K for the fiscal
        year ended December 31, 1995.

                10.5. Severance Agreement, dated January 17, 1989, between LSB
        Industries, Inc. and Jack E. Golsen, which the Company hereby
        incorporates by reference from Exhibit 10.48 to LSB Industries, Inc.'s
        Form 10-K for fiscal year ended December 31, 1988. LSB Industries, Inc.
        also entered into identical agreements with Tony M. Shelby, David R.
        Goss, Barry H. Golsen, David M. Shear, and Jim D. Jones, and the Company
        will provide copies thereof to the Commission upon request.



                                       37
<PAGE>   40

                10.6. Employment Agreement and Amendment to Severance Agreement,
        dated January 12, 1989 between LSB Industries, Inc. and Jack E. Golsen,
        dated March 21, 1996, which the Company hereby incorporates by reference
        from Exhibit 10.15 to LSB Industries, Inc.'s Form 10-K for fiscal year
        ended December 31, 1995.

                10.7. Letter Amendment, dated May 14, 1997, to Loan and Security
        Agreement between DSN Corporation and The CIT Group/Equipment Financing,
        Inc., is incorporated by reference from Exhibit 10.1 to LSB Industries,
        Inc.'s Form 10-Q for the fiscal quarter ended March 31, 1997.

                10.8. Amendment to Loan and Security Agreement, dated November
        21, 1997, between DSN Corporation and The CIT Group/Equipment Financing,
        Inc., which the Company hereby incorporates by reference from Exhibit
        10.19 to the Company's Registration Statement, No. 333-44905.

                10.9. Guaranty Agreement, dated November 21, 1997, executed by
        ClimaChem, Inc. in favor of The CIT Group/Equipment Financing, Inc.,
        which the Company hereby incorporates by reference from Exhibit 10.20 to
        the Company's Registration Statement, No. 333-44905.

                10.10. Promissory Note, dated July 14, 1989, from Climate
        Master, Inc. to Oklahoma County Finance Authority, which the Company
        hereby incorporates by reference from Exhibit 10.21 to the Company's
        Registration Statement, No. 333-44905.

                10.11. Extension of Maturity on Promissory Note, dated February
        7, 1997, relating to the Promissory Note, dated July 14, 1989, from
        Climate Master, Inc., to Oklahoma County Finance Authority, which the
        Company hereby incorporates by reference from Exhibit 10.22 to the
        Company's Registration Statement, No. 333-44905.

                10.12. Mortgage of Tenant's Interest in Lease, dated July 1,
        1989, executed by Climate Master, Inc. in favor of the Oklahoma County
        Finance Authority, which the Company hereby incorporates by reference
        from Exhibit 10.23 to the Company's Registration Statement, No.
        333-44905.

                10.13. Project Loan Agreement, dated July 1, 1989, between
        Climate Master, Inc., and the Oklahoma County Finance Authority, which
        the Company hereby incorporates by reference from Exhibit 10.24 to the
        Company's Registration Statement, No. 333-44905.

                10.14. Land Lease, dated March 1, 1995, between DSN Corporation
        and Koch Sulphur Products Company, which the Company hereby incorporates
        by reference from Exhibit 10.29 to the Company's Registration Statement,
        No. 333-44905.

                10.15. Promissory Note, dated June 2, 1997, executed by
        International Environmental Corporation in favor of ORIX Credit
        Alliance, Inc., which the Company hereby incorporates by reference from
        Exhibit 10.30 to the Company's Registration Statement, No. 333-44905.

                10.16. Security Agreement-Mortgage on Goods and Chattels, dated
        April 18, 1997, executed by International Environmental Corporation in
        favor of ORIX Credit Alliance, Inc., which the Company hereby
        incorporates by reference from Exhibit 10.31 to the Company's
        Registration Statement, No. 333-44905.

                10.17. Lease Agreement, dated March 7, 1988, between Northwest
        Financial Corporation and International Environmental Corporation, which



                                       38
<PAGE>   41

        the Company hereby incorporates by reference from Exhibit 10.32 to the
        Company's Registration Statement, No. 333-44905.

                10.18. First Amendment, dated August 17, 1995, to Lease
        Agreement, dated March 7, 1988, between Prime Financial Corporation and
        International Environmental Corporation, which the Company hereby
        incorporates by reference from Exhibit 10.33 to the Company's
        Registration Statement, No. 333-44905.

                10.19. Assignment, dated August 17, 1995, between Northwest
        Financial Corporation and Prime Financial Corporation, which the Company
        hereby incorporates by reference from Exhibit 10.34 to the Company's
        Registration Statement, No. 333-44905.

                10.20. Loan and Security Agreement, dated March 14, 1995,
        between International Environmental Corporation and Met-Life Capital
        Corporation, which the Company hereby incorporates by reference from
        Exhibit 10.35 to the Company's Registration Statement, No. 333-44905.

                10.21. Lease Agreement, dated April 3, 1996, between Amplicon
        Financial and International Environmental Corporation, which the Company
        hereby incorporates by reference from Exhibit 10.36 to the Company's
        Registration Statement, No. 333-44905.

                10.22. Equipment Purchase and Security Agreement, dated February
        1, 1994, between U.S. Amada Ltd. and Climate Master, Inc., which the
        Company hereby incorporates by reference from Exhibit 10.37 to the
        Company's Registration Statement, No. 333-44905. Climate Master has
        entered into three other Equipment Purchase and Security Agreements
        which are substantially identical in all material respects except the
        principal amount is $380,000, $88,000, and $330,000, respectively.
        Copies of each of the foregoing will be provided to the Commission upon
        request.

                10.23. Loan and Security Agreement (DSN Plant), dated October
        31, 1994, between DSN Corporation and The CIT Group, which the Company
        hereby incorporates by reference from Exhibit 10.1 to LSB Industries,
        Inc.'s Form 10-Q for the fiscal quarter ended September 30, 1994.

                10.24. Loan and Security Agreement (Mixed Acid Plant), dated
        April 5, 1995, between DSN Corporation and The CIT Group, which the
        Company hereby incorporates by reference from Exhibit 10.25 to LSB
        Industries, Inc.'s Form 10-K for the fiscal year ended December 31,
        1994.

                10.25. First Amendment to Loan and Security Agreement (DSN
        Plant), dated June 1, 1995, between DSN Corporation and The CIT
        Group/Equipment Financing, Inc., which the Company hereby incorporates
        by reference from Exhibit 10.13 to the Company's Registration Statement,
        No. 333-44905.

                10.26. First Amendment to Loan and Security Agreement (Mixed
        Acid Plant), dated November 15, 1995, between DSN Corporation and The
        CIT Group/Equipment Financing, Inc., which the Company hereby
        incorporates by reference from Exhibit 10.15 to the Company's
        Registration Statement, No. 333-44905.

                10.27. Loan and Security Agreement (Rail Tank Cars), dated
        November 15, 1995, between DSN Corporation and The CIT Group/Equipment
        Financing, Inc., which the Company hereby incorporates by reference from
        Exhibit 10.16 to the Company's Registration Statement, No. 333-44905.



                                       39
<PAGE>   42

                10.28. First Amendment to Loan and Security Agreement (Rail Tank
        Cars), dated November 15, 1995, between DSN Corporation and The CIT
        Group/Equipment Financing, Inc., which the Company hereby incorporates
        by reference from Exhibit 10.17 to the Company's Registration Statement,
        No. 333-44905.

                10.29. Letter Amendment, dated May 14, 1997, to Loan and
        Security Agreement between DSN Corporation and The CIT Group/Equipment
        Financing, Inc., which the Company hereby incorporates by reference from
        Exhibit 10.1 to LSB Industries, Inc.'s Form 10-Q for the fiscal quarter
        ended March 31, 1997.

                10.30. Amendment to Loan and Security Agreement, dated November
        21, 1997, between DSN Corporation and The CIT Group/Equipment Financing,
        Inc., which the Company hereby incorporates by reference from Exhibit
        10.19 to the Company's Registration Statement, No. 333-44905.

                10.31. Anhydrous Ammonia Sales Agreement, dated May 28, 1997, to
        be effective January 1, 1997, between Koch Nitrogen Company and El
        Dorado Chemical Company, which the Company hereby incorporates by
        reference from Exhibit 10.1 to LSB Industries, Inc.'s Form 10-Q for the
        fiscal quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN THIS
        EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF
        #5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL
        TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE SECURITIES
        EXCHANGE ACT OF 1934, AS AMENDED.

                10.32. Baytown Nitric Acid Project and Supply Agreement, dated
        June 27, 1997, by and among El Dorado Nitrogen Company, El Dorado
        Chemical Company and Bayer Corporation, which the Company hereby
        incorporates by reference from Exhibit 10.2 to LSB Industries, Inc.'s
        Form 10-Q for the fiscal quarter ended June 30, 1997. CERTAIN
        INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT S THE SUBJECT OF
        COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST
        FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE
        SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

                10.33. First Amendment to Baytown Nitric Acid Supply Agreement,
        dated February 1, 1999, between El Dorado Nitrogen Company and Bayer
        Corporation, which the Company hereby incorporates by reference from
        Exhibit 10.30 to LSB Industries, Inc.'s Form 10-K for the fiscal year
        ended December 31, 1998. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS
        BEEN OMITTED AS IT IS THE SUBJECT OF A REQUEST BY THE COMPANY FOR
        CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER
        THE FREEDOM OF INFORMATION ACT. THE OMITTED INFORMATION HAS BEEN FILED
        SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION
        FOR PURPOSES OF SUCH REQUEST.

                10.34. Service Agreement, dated June 27, 1997, between Bayer
        Corporation and El Dorado Nitrogen Company, which the Company hereby
        incorporates by reference from Exhibit 10.3 to LSB Industries, Inc.'s
        Form 10-Q for the fiscal quarter ended June 30, 1997. CERTAIN
        INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
        COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST
        FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE
        SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

                10.35. Ground Lease, dated June 27, 1997, between Bayer
        Corporation and El Dorado Nitrogen Company, which the Company hereby
        incorporates by reference from Exhibit 10.4 to LSB Industries, Inc.'s



                                       40
<PAGE>   43

        Form 10-Q for the fiscal quarter ended June 30, 1997. CERTAIN
        INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
        COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST
        FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE
        SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

                10.36. Participation Agreement, dated as of June 27, 1997, among
        El Dorado Nitrogen Company, Boatmen's Trust Company of Texas as Owner
        Trustee, Security Pacific Leasing corporation, as Owner Participant and
        a Construction Lender, Wilmington Trust Company, Bayerische Landesbank,
        New York Branch, as a Construction Lender and the Note Purchaser, and
        Bank of America National Trust and Savings Association, as Construction
        Loan Agent, which the Company hereby incorporates by reference from
        Exhibit 10.5 to LSB Industries, Inc.'s Form 10-Q for the fiscal quarter
        ended June 30, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
        OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551, DATED
        SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER
        THE FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934,
        AS AMENDED.

                10.37. Lease Agreement, dated as of June 27, 1997, between
        Boatmen's Trust Company of Texas as Owner Trustee and El Dorado Nitrogen
        Company, which the Company hereby incorporates by reference from Exhibit
        10.6 to LSB Industries, Inc.'s Form 10-Q for the fiscal quarter ended
        June 30, 1997.

                10.38. Security Agreement and Collateral Assignment of
        Construction Documents, dated as of June 27, 1997, made by El Dorado
        Nitrogen Company, which the Company hereby incorporates by reference
        from Exhibit 10.7 to LSB Industries, Inc.'s Form 10-Q for the fiscal
        quarter ended June 30, 1997.

                10.39. Security Agreement and Collateral Assignment of Facility
        Documents, dated as of June 27, 1997, made by El Dorado Nitrogen Company
        and consented to by Bayer Corporation, which the Company hereby
        incorporates by reference from Exhibit 10.8 to LSB Industries, Inc.'s
        Form 10-Q for the fiscal quarter ended June 30, 1997.

                10.40. Amendment to Loan and Security Agreement, dated March 16,
        1998, between The CIT Group/Equipment Financing, Inc., and DSN
        Corporation, which the Company hereby incorporates by reference from
        Exhibit 10.54 to the Company's Registration Statement, No. 333-44905.

                10.41. Sales Contract, dated December 7, 1998, between Solutia,
        Inc. and El Dorado Chemical Company, which the Company hereby
        incorporates by reference from Exhibit 10.39 to LSB Industries, Inc.'s
        Form 10-K for the fiscal year ended December 31, 1998. CERTAIN
        INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
        A REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES
        AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE
        OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
        SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.

                10.42. Agreement, dated March 23, 1999, among El Dorado Chemical
        Company, El Dorado Nitrogen Company, Bayer Corporation, ICF Kaiser
        Engineers, Inc., ICF Kaiser International, Inc., and Acstar Insurance
        Company, which the Company hereby incorporates by reference from Exhibit
        10.41 to LSB Industries, Inc.'s Form 10-K for the fiscal year ended
        December 31, 1998.



                                       41
<PAGE>   44

                10.43. Union Contract, dated as of August 1, 1998, between EDC
        and the International Association of Machinists and Aerospace Workers,
        which the Company hereby incorporates by reference from Exhibit 10.42 to
        LSB Industries, Inc.'s Form 10-K for the year ended December 31, 1998.

                10.44. Stock Purchase Agreement, dated February 9, 1999, by and
        between LSB Holdings, Inc. and ClimaChem, Inc., which the Company hereby
        incorporates by reference from Exhibit 10.59 to the Company's Form 10-K
        for the fiscal year ended December 31, 1998.

                10.45. Amendment to Anhydrous Ammonia Sales Agreement, dated
        January 4, 2000, to be effective October 1, 1999, between Koch Nitrogen
        Company and El Dorado Chemical Company, which is incorporated by
        reference from LSB Industries, Inc. Amendment No 2 to its 1999 Form
        10-K. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS
        THE SUBJECT OF COMMISSION ORDER CF#9650, DATED JULY 2000, GRANTING A
        REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND
        EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.

                10.46. Anhydrous Ammonia Sales Agreement, dated January, 12,
        2000, to be effective October 1, 1999, between Koch Nitrogen and El
        Dorado Chemical Company, which is incorporated by reference from exhibit
        10.44 to LSB Industries, Inc. Amendment No 2 to its 1999 Form 10-K.
        CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
        SUBJECT OF COMMISSION ORDER CF#9650, DATED JULY 2000, GRANTING A REQUEST
        BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
        COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.

                10.47. Rail Car Service Agreement, dated July 29, 1999, between
        Prime Financial Corporation and El Dorado Chemical Company, which the
        Company hereby incorporates by reference from Exhibit 10.2 to the
        Company's Form 10-Q for the fiscal quarter ended September 30, 1999.

                10.48. Covenant waiver letter, dated October 19, 2000, with CIT
        Group, which is incorporated by reference from exhibit 10.1 to LSB
        Industries, Inc. Form 10-Q for the quarter ended September 30, 2000.

                10.49. Lease Agreement, dated October 31, 2000 between Cherokee
        Nitrogen Company and El Dorado Chemical Company.

                21.1. Subsidiaries of the Company

                23.1. Consent of Independent Auditors

                (b) REPORTS ON FORM 8-K. The Company filed the following report
        on Form 8-K during the fourth quarter of 2000.

                (i) Form 8-K, dated November 15, 2000. (date of event: October
        31, 2000). The item reported was Item 2, "Acquisition or Disposition of
        Assets", discussing the letter agreement between LSB Chemical Corp. and
        Orica USA, Inc., and the agreement between Orica Nitrogen, L.L.C., Orica
        USA, Inc. and LSB Chemical Corp. relating to the acquisition of certain
        assets located in Cherokee, Alabama and Crystal City, Missouri.


SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has caused the undersigned,



                                       42
<PAGE>   45

duly-authorized, to sign this report on its behalf of this 17th day of
April, 2001.

                                 CLIMACHEM, INC.


                                       By: /s/ JACK E. GOLSEN

                                           Jack E. Golsen
                                           Chairman of the Board and
                                           President
                                           (Principal Executive Officer)

                                       By: /s/ TONY M. SHELBY

                                           Tony M. Shelby
                                           Senior Vice President of Finance
                                           (Principal Financial Officer)

                                       By: /s/ JIM D. JONES

                                           Jim D. Jones
                                           Vice President, Treasurer
                                           (Principal Accounting Officer)


        Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the undersigned have signed this report on behalf of the Company, in
the capacities and on the dates indicated.


Dated: April 17, 2001           By: /s/ JACK E. GOLSEN
                                Jack E. Golsen, Director


Dated: April 17, 2001           By: /s/ TONY M. SHELBY
                                Tony M. Shelby, Director


Dated: April 17, 2001           By: /s/ DAVID R. GOSS
                                David R. Goss, Director


Dated: April 17, 2001           By: /s/ BARRY H. GOLSEN
                                Barry H. Golsen, Director


Dated: April 17, 2001           By: /s/ ROBERT C. BROWN
                                Robert C. Brown, Director


Dated: April 17, 2001           By: /s/ BERNARD G. ILLE
                                Bernard G. Ille, Director



                                       43
<PAGE>   46

Dated: April 17, 2001           By: /s/ JEROME D. SHAFFER
                                Jerome D. Shaffer, Director


Dated: April 17, 2001           By: /s/ RAYMOND B. ACKERMAN
                                Raymond B. Ackerman, Director


Dated: April 17, 2001           By: /s/ HORACE RHODES
                                Horace Rhodes, Director.



                                       44
<PAGE>   47

                                    ClimaChem
                                    Financial
                                    Statement



<PAGE>   48

                                 ClimaChem, Inc.

                        Consolidated Financial Statements

                  Years ended December 31, 2000, 1999 and 1998


                                    CONTENTS

<TABLE>
<S>                                                                                 <C>
Report of Independent Auditors......................................................F-1

Consolidated Financial Statements

Consolidated Balance Sheets.........................................................F-2
Consolidated Statements of Operations...............................................F-3
Consolidated Statements of Stockholders' Equity.....................................F-4
Consolidated Statements of Cash Flows...............................................F-5
Notes to Consolidated Financial Statements..........................................F-7
</TABLE>



<PAGE>   49

                         Report of Independent Auditors

The Board of Directors and Stockholders
ClimaChem, Inc.

We have audited the accompanying consolidated balance sheets of ClimaChem, Inc.
as of December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. Our audits also included the financial
statement schedule listed in the Index at Item 14(a)(2). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ClimaChem, Inc. at December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.


                                                              Ernst & Young, LLP


Oklahoma City, Oklahoma
April 16, 2001



                                      F-1
<PAGE>   50

                                 ClimaChem, Inc.

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                                 2000            1999
                                                               ---------       ---------
                                                                    (In Thousands)
<S>                                                            <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents                                    $   2,838       $   2,673
  Trade accounts receivable, net                                  45,981          41,934
  Inventories                                                     29,020          25,772
  Supplies and prepaid items                                       5,989           4,314
  Due from LSB and affiliates                                      1,103           2,263
                                                               ---------       ---------
Total current assets                                              84,931          76,956

Property, plant and equipment, net                                72,825          75,667
Due from LSB and affiliates, net                                  14,166          13,443
Other assets, net                                                 17,245          18,012
                                                               ---------       ---------
                                                               $ 189,167       $ 184,078
                                                               =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                             $  25,865       $  16,312
  Accrued liabilities                                             21,647          13,791
  Current portion of long-term debt                               37,092          29,644
                                                               ---------       ---------
Total current liabilities                                         84,604          59,747

Long-term debt                                                    89,064         112,544
Accrued losses on firm purchase commitments and other
  noncurrent liabilities                                           6,116           5,652
Commitments and contingencies (Note 10)

Stockholders' equity
  Common stock, $.10 par value; 500,000 shares
    authorized, 10,000 shares issued                                   1               1
  Capital in excess of par value                                  12,652          12,652
  Accumulated  deficit                                            (3,270)         (6,518)
                                                               ---------       ---------
Total stockholders' equity                                         9,383           6,135
                                                               ---------       ---------
                                                               $ 189,167       $ 184,078
                                                               =========       =========
</TABLE>


See accompanying notes.



                                      F-2
<PAGE>   51

                                 ClimaChem, Inc.

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                    2000            1999            1998
                                                  ---------       ---------       ---------
                                                                (In Thousands)
<S>                                               <C>             <C>             <C>
Revenues:
  Net sales                                       $ 279,972       $ 244,462       $ 241,546
  Interest and other income                           1,894           2,493           1,468
                                                  ---------       ---------       ---------
                                                    281,866         246,955         243,014

Costs and expenses:
  Cost of sales                                     232,495         196,095         190,722
  Selling, general and administrative                45,932          45,618          38,105
  Interest                                           13,882          14,260          13,463
  Provision for loss on firm sales and
    purchase commitments                              3,395           8,439              --
  Provision for impairment on long-lived
    assets                                               --           3,913              --
                                                  ---------       ---------       ---------
                                                    295,704         268,325         242,290
                                                  ---------       ---------       ---------
Loss before business disposed of,  provision
  (benefit) for income taxes and
  extraordinary gain                                (13,838)        (21,370)            724

Business disposed of
  Revenues                                               --           7,461          14,184
  Operating costs, expenses and interest                 --           9,419          17,085
                                                  ---------       ---------       ---------
                                                         --          (1,958)         (2,901)

  Loss on disposal of business                           --          (1,971)             --
                                                  ---------       ---------       ---------
                                                         --          (3,929)         (2,901)
                                                  ---------       ---------       ---------
Loss before provision (benefit) for income
  taxes and extraordinary gain                      (13,838)        (25,299)         (2,177)

Provision (benefit) for income taxes                    235          (6,117)            392
                                                  ---------       ---------       ---------
Loss before extraordinary gain                      (14,073)        (19,182)         (2,569)

Extraordinary gain, net of income taxes of
$100                                                 17,321              --              --
                                                  =========       =========       =========
Net income (loss)                                 $   3,248       $ (19,182)      $  (2,569)
                                                  =========       =========       =========
</TABLE>


See accompanying notes.



                                      F-3
<PAGE>   52

                                 ClimaChem, Inc.

                 Consolidated Statements of Stockholders' Equity
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                           ACCUMULATED
                                                                             OTHER         RETAINED
                                        COMMON STOCK         CAPITAL IN   COMPREHENSIVE    EARNINGS
                                  -----------------------     EXCESS OF      INCOME      (ACCUMULATED
                                   SHARES       PAR VALUE     PAR VALUE      (LOSS)         DEFICIT)        TOTAL
                                  --------      ---------    ----------   -------------  ------------      --------
<S>                               <C>           <C>          <C>          <C>            <C>               <C>
Balance at December 31, 1997        10,000       $      1      $ 12,652      $ (1,003)      $ 15,639       $ 27,289

Net loss                                --             --            --            --         (2,569)        (2,569)
Foreign currency
  translation adjustment                --             --            --          (556)            --           (556)
                                                                                                           --------
Total comprehensive loss                                                                                     (3,125)

Dividends to Parent                     --             --            --            --           (406)          (406)
                                  --------       --------      --------      --------       --------       --------
Balance at December 31, 1998        10,000              1        12,652        (1,559)        12,664         23,758

Net loss                                --             --            --            --        (19,182)       (19,182)
Foreign currency
  translation adjustment                --             --            --         1,559             --          1,559
                                                                                                           --------
Total comprehensive loss                                                                                    (17,623)
                                  --------       --------      --------      --------       --------       --------
Balance at December 31, 1999        10,000              1        12,652            --         (6,518)         6,135

Net income                              --             --            --            --          3,248          3,248
                                  --------       --------      --------      --------       --------       --------
Balance at December 31, 2000        10,000       $      1      $ 12,652      $     --       $ (3,270)      $  9,383
                                  ========       ========      ========      ========       ========       ========
</TABLE>


See accompanying notes.



                                      F-4
<PAGE>   53

                                 ClimaChem, Inc.

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                      2000           1999           1998
                                                                    --------       --------       --------
                                                                                (In Thousands)
<S>                                                                 <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                                                   $  3,248       $(19,182)      $ (2,569)
Adjustments to reconcile net income (loss) to net
  cash provided by operations:
    Extraordinary gain on extinguishment of debt                     (17,421)            --             --
    Inventory write-down and provision for loss on
      firm sales and purchase commitments, net of
      amount realized                                                    389          8,175             --
    Provision for impairment on long-lived assets                         --          3,913             --
    Depreciation of property, plant and equipment                      8,324          8,830          9,545
    Amortization                                                       1,183          1,138          1,324
    Provision for losses:
      Trade accounts receivable                                        1,960            828            971
      Notes receivable                                                    --             --            854
      Environmental matters and other                                     --            195           (387)
    Deferred income tax provision (benefit)                               --         (6,192)           351
    Gain on sales of assets                                               --             --            (30)
    Loss on business disposed of                                          --          1,971             --
    Cash provided (used) by changes in assets and liabilities:
        Trade accounts receivable                                     (6,007)        (3,661)        (1,484)
        Inventories                                                   (3,248)         3,892            904
        Supplies and prepaid items                                    (2,550)          (186)        (1,252)
        Income tax receivable                                             --             --             92
        Accounts payable                                               9,828         (1,325)        (1,598)
        Accrued liabilities                                            8,081          3,285         (2,859)
                                                                    --------       --------       --------
Net cash provided by operating activities                              3,787          1,681          3,862
</TABLE>


(Continued on following page)



                                      F-5
<PAGE>   54

                                 ClimaChem, Inc.

                Consolidated Statements of Cash Flows (continued)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                           2000          1999           1998
                                                          -------       -------       -------
                                                                     (In Thousands)
<S>                                                       <C>           <C>           <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Payment made for acquisition of limited partner
  interest in business                                    $    --       $(3,114)      $    --
Purchase of receivables and option to acquire
  business                                                     --        (2,558)           --
Capital expenditures                                       (6,778)       (6,688)       (7,418)
Proceeds from sales of equipment                               --         1,045            65
Proceeds from the sale of business disposed of                 --         9,981            --
Other assets                                                  669          (870)       (1,072)
                                                          -------       -------       -------
Net cash used by investing activities                      (6,109)       (2,204)       (8,425)

CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term and other debt                       (3,674)       (6,867)       (4,690)
Long-term and other borrowings, net of
  origination fees                                          5,050            --          (583)
Acquisition of 10 3/4% Senior Notes                        (7,002)           --            --
Net change in revolving debt facilities                     7,676         8,269         6,348
Net change in due to/from LSB and affiliates                  437         1,044         1,110
Dividends paid to parent                                       --            --          (406)
                                                          -------       -------       -------
Net cash provided by financing activities                   2,487         2,446         1,779
                                                          -------       -------       -------
Net increase (decrease) in cash and cash equivalents
                                                              165         1,923        (2,784)

Cash and cash equivalents at beginning of year              2,673           750         3,534
                                                          -------       -------       -------
Cash and cash equivalents at end of year                  $ 2,838       $ 2,673       $   750
                                                          =======       =======       =======
</TABLE>


See accompanying notes.



                                      F-6
<PAGE>   55

                                 ClimaChem, Inc.

                   Notes to Consolidated Financial Statements

                        December 31, 2000, 1999 and 1998


1. BASIS OF PRESENTATION

ClimaChem, Inc. (the "Company"), a wholly-owned subsidiary, directly or
indirectly of LSB Industries, Inc. ("LSB" or "Parent"), was organized under the
laws of the State of Oklahoma in October 1997. The Company's Certificate of
Incorporation authorizes the issuance of 500,000 shares of $.10 par value common
stock. The Company is a holding company which maintains operations through
various wholly-owned subsidiaries. The Company owns, through its subsidiaries,
substantially all of the operations comprising the Chemical Business and Climate
Control Business as previously owned by LSB. Prior to November 21, 1997, all of
the Company's subsidiaries were wholly-owned subsidiaries of LSB, directly or
through one or more intermediaries, and were contributed to the Company,
following its formation, by LSB or other subsidiaries in exchange for all of the
outstanding common stock of the Company. These exchanges have been accounted for
as a reorganization of entities under common control and, accordingly, reflect
LSB's and its subsidiaries' historical cost of such subsidiaries and net assets.

The consolidated financial statements include the accounts of ClimaChem, Inc.
and its wholly-owned subsidiaries. All material intercompany transactions have
been eliminated in the accompanying financial statements.

The Company has historically had significant transactions with LSB and its
subsidiaries which are reflected in the accompanying consolidated financial
statements on the basis established between the Company and LSB and its
subsidiaries. See Notes 3, 8, 9 and 10.

2. ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.



                                      F-7
<PAGE>   56

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


2. ACCOUNTING POLICIES (CONTINUED)

INVENTORIES

Inventory is priced at the lower of cost or market, with cost being determined
using the first-in, first-out (FIFO) basis, except for certain heat pump
products with a value of $7,798,000 and $8,351,000 at December 31, 2000 and
1999, respectively, which are priced at the lower of cost or market, with cost
being determined using the last-in, first-out (LIFO) basis. The difference
between the LIFO basis and current cost was $682,000 and $822,000 at December
31, 2000 and 1999, respectively.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are carried at cost. For financial reporting
purposes, depreciation, depletion and amortization are primarily computed using
the straight-line method over the estimated useful lives of the assets ranging
from 3 to 30 years. Property, plant and equipment leases which are deemed to be
installment purchase obligations have been capitalized and included in property,
plant and equipment. Maintenance, repairs and minor renewals are charged to
operations while major renewals and improvements are capitalized.

EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED

The excess of purchase price over net assets acquired, which is included in
other assets in the accompanying consolidated balance sheets, totaling
$1,969,000 and $2,312,000, net of accumulated amortization, of $4,443,000 and
$4,100,000 at December 31, 2000 and 1999, respectively, and is being amortized
by the straight-line method over periods of 15 to 19 years.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of the asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.



                                      F-8
<PAGE>   57

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


2. ACCOUNTING POLICIES (CONTINUED)

For the year ended December 31, 1999, the Company recognized impairment totaling
$3.9 million (none in 2000) associated with two chemical plants which are to be
sold or dismantled. The 1999 provision for impairment represented the difference
between the net carrying cost and the estimated salvage value for the
non-operating plant to be dismantled and the difference between the net carrying
cost and the estimated selling price less cost to dispose for the plant to be
sold. The Company has made estimates of the future cash flows related to its
Chemical Business in order to determine recoverability of the Company's
remaining cost. Based on these estimates, no additional impairment was indicated
at December 31, 2000; however, it is reasonably possible that the Company may
recognize additional impairments in this business in the near term if the
Company experiences continued or further deterioration of the chemical business.

DEBT ISSUANCE COST

Debt issuance costs are amortized over the term of the associated debt
instrument using the straight-line method. Such costs, which are included in
other assets in the accompanying consolidated balance sheets, were $2,299,000
and $3,416,000, net of accumulated amortization, of $1,156,000 and $987,000 as
of December 31, 2000 and 1999, respectively.

REVENUE RECOGNITION

The Company recognizes revenue at the time title of the goods transfers to the
buyer and there remains no significant future performance obligations by the
Company.

SHIPPING AND HANDLING COSTS

The Company records its shipping and handling costs in the Chemical Business in
net sales while the Climate Control business records shipping and handling costs
in selling, general and administrative expense. For the years ended December 31,
2000, 1999 and 1998 the shipping and handling costs of the Chemical Business
amounted to $9,689,000, $6,042,000 and $6,213,000, respectively while the costs
in the Climate Control Business amounted to $5,135,000, $4,960,000 and
$4,748,000, respectively.

INCOME TAXES

Taxable income of the Company is included in the consolidated federal income tax
return of LSB. The provision for or benefit from income taxes is calculated as
if the Company filed a separate federal income tax return. To the extent a state
or other taxing jurisdiction



                                      F-9
<PAGE>   58

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


2. ACCOUNTING POLICIES (CONTINUED)

requires or permits a consolidated, combined, or unitary tax return to be filed,
and such return includes the Company, the principles expressed with respect to
consolidated federal income tax allocation shall apply.

Deferred income taxes result from the Company having different bases for
financial and income tax reporting principally from utilizing different lives
for income taxes purposes than for financial reporting purposes.

RESEARCH AND DEVELOPMENT COSTS

Costs incurred in connection with product research and development are expensed
as incurred. Such costs amounted to $391,000, $713,000 and $377,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.

ADVERTISING COSTS

Costs incurred in connection with advertising and promotion of the Company's
products are expensed as incurred. Such costs amounted to $1,367,000, $1,536,000
and $1,152,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.

HEDGING

In June 1998, the Financial Accounting Standards Board issued Statement No. 133
("SFAS" 133"), "Accounting for Derivative Instruments and Hedging Activities."
The Company will adopt this new Statement effective January 1, 2001. The
Statement requires the company to recognize all derivatives on the balance sheet
at fair value. Derivatives that do not qualify or are not designated as hedges
must be adjusted to fair value through operations. If the derivative is a hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings.

In 1997, the Company entered into an interest rate forward agreement to
effectively fix the interest rate on a long-term lease commitment (not for
trading purposes). In 1999, the Company executed the long-term lease agreement
and terminated the forward at a net cost of $2.8 million. The Company has
historically accounted for this hedge under the deferral method (as an
adjustment of the initial term lease rentals). At December 31, 2000 and 1999,
the remaining deferred loss included in other assets approximated $2.4



                                      F-10
<PAGE>   59

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


2. ACCOUNTING POLICIES (CONTINUED)

million and $2.7 million, respectively. The deferred cost recognized in
operations amounted to $290,000 in 2000 ($169,000 in 1999 and none in 1998).
Upon adoption of SFAS 133 on January 1, 2001, the deferred loss will be
reclassified into accumulated other comprehensive income and be amortized to
operations over the term of the lease arrangement. The Company also periodically
enters into exchange traded futures contracts for copper and aluminum (as such
products are used in the Company's Climate Control Business), which contracts
presently are and will continue to be accounted for on a mark to market basis.
As of December 31, 2000, the Company had 20 such contracts outstanding (which
expire December 2001), whose fair value was not material. The adoption of SFAS
133 is not expected to have any other material impact as of January 1, 2001, on
the Company's consolidated financial statements.

STATEMENTS OF CASH FLOWS

For purposes of reporting cash flows, cash and cash equivalents include cash,
overnight funds and interest bearing deposits with maturities when purchased by
the Company of 90 days or less.

Under the Company's Revolving Credit Facility (Note 7 -- Long-Term Debt) cash
received by the Company on collection of trade accounts receivable is deposited
in cash collection accounts. Cash in the collection accounts is applied against
the outstanding balance under the Company's revolving credit agreement within
1-2 business days following receipt. The cash balance held in the collection
accounts at December 31, 2000 and 1999 aggregated $2.6 million and $2.2 million,
respectively.

Supplemental cash flow information includes:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                     2000         1999         1998
                                                    -------      -------      -------
                                                             (In Thousands)
<S>                                                 <C>          <C>          <C>
Cash payments for interest and income taxes:
  Interest on long-term debt and other               $14,010      $14,525      $14,079
  Income taxes:
    Paid to state taxing authorities                       4           17           65
    Paid to Parent                                       800           --        1,908
Noncash financing and investing activities--
  Long-term debt issued for property, plant and
    equipment                                             81          471          523
</TABLE>



                                      F-11
<PAGE>   60

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


3. TRANSACTIONS WITH RELATED PARTIES

On November 21, 1997, the Company and LSB entered into a services agreement (the
"Services Agreement") pursuant to which LSB will continue to provide to the
Company various services, including financial and accounting, order entry,
billing, credit, payable, insurance, legal, human resources, advertising and
marketing, and related administrative and management services, that LSB has
historically provided to the operations and businesses of the Company. The
Company will pay to, or reimburse, LSB for the costs and expenses incurred by
LSB in the performance of the Services Agreement.

Under the terms of the Services Agreement, the Company will pay to, or
reimburse, LSB for the value of the office facilities of LSB, including LSB's
principal offices and financial accounting offices utilized in the performance
of the Services Agreement. LSB will determine the proportionate usage of such
facilities by LSB and the Company, and the Company will pay to, or reimburse,
LSB for its proportionate share of such usage.

Charges for such services aggregate $1,952,000, $4,780,000 and $2,265,000 for
the years ended December 31, 2000, 1999 and 1998, respectively. Management of
the Company believes these charges from LSB reasonably approximate additional
general and administrative costs which would have been incurred if the Company
had been an independent entity during such periods. These amounts do not include
reimbursements for costs described in the next paragraph or amounts paid by LSB
relating to certain of the Company's payroll that are directly charged to the
Company by LSB.

The Services Agreement also provides that LSB will permit employees of the
Company and its subsidiaries to continue to participate in the benefit plans and
programs sponsored by LSB. The Company will pay to, or reimburse, LSB for the
costs associated with participation by the employees of the Company in LSB's
benefit plans and programs.

In addition, the Services Agreement allows for purchases of other goods and
services to the extent that the amount paid approximates fair value that would
be paid to a third party. In 2000 and 1999, subsidiaries of the Company
purchased certain raw materials and finished goods from a subsidiary of LSB, not
a subsidiary of the Company, for $9,306,000 and $681,000, respectively. In 2000
and 1999, subsidiaries of the Company purchased certain raw materials with LSB's
assistance and paid $947,000 and $461,000, respectively to LSB in commissions on
such purchases. In 2000 and 1999, the Company also purchased $757,000 and
$1,076,000 respectively in industrial supplies from subsidiaries of LSB which
are not subsidiaries of the Company. As of December 31, 2000 and 1999 $1.5
million and $.3 million of these amounts had not yet been paid to LSB and its
subsidiaries which were not subsidiaries of the Company.



                                      F-12
<PAGE>   61

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


3. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

The Company's Climate Control manufacturing subsidiaries also lease facilities
and production equipment from an affiliate under various operating leases and a
capital lease. See Note 10 -- Commitments and Contingencies, Operating Leases.
Rental expense associated with the operating leases aggregated $2,539,000,
$1,806,000 and $475,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. In December 1999, a subsidiary of the Climate Control Business
entered into a capital lease with a subsidiary of LSB which is not a subsidiary
of the Company. The lease agreement required an initial payment of $2 million
for capital improvements required in the facility, which was paid in 1999, and
requires 112 monthly payments of $20,291 commencing on September 1, 2006. The
accompanying balance sheet includes buildings and improvements under the capital
lease of $3,172,000 and long-term debt includes a capital lease obligation of
$1,246,000 ($1,172,000 at December 31, 1999) due to the LSB subsidiary.

During July 1999, a subsidiary of the Company sold 26 railcars to a
non-affiliated entity for approximately $1.1 million. Thereafter, the entity
leased the railcars to a subsidiary of LSB, which is neither the Company nor a
subsidiary of the Company. A subsidiary of the Company has entered into a
services agreement with such LSB subsidiary pursuant to which such subsidiary is
to provide railcar services to a subsidiary of the Company. Under the services
agreement, the Company's subsidiary will pay a fee based on each railcar unit
used by such subsidiary of $1,031 per month. The Company's subsidiary paid
$322,000 and $107,000 in 2000 and 1999, respectively relating to the fee which
is included in the rent expense associated with operating leases discussed
above. Furthermore, the LSB subsidiary reimbursed the Company's subsidiary for
maintenance fees relating to the railcars of $125,000 and $43,000 in 2000 and
1999, respectively. The Company's subsidiary is not required to use any railcar
equipment under the services agreement, and the services agreement may be
terminated at any time on 30 days written notice.

As of December 31, 2000 and 1999, the Company had advanced LSB $2 million
pursuant to a provision in the bond indenture which allows the Company to make
up to a $2 million investment in any other "person," as defined. The advance
bears interest at 10-3/4% per annum payable on demand.

On November 21, 1997, LSB and the Company entered into a management agreement
(the "Management Agreement"), which provides that LSB will provide to the
Company, managerial oversight and guidance concerning the broad policies,
strategic decisions and operations of the Company and the subsidiaries and the
rendering of such further managerial assistance as deemed reasonably necessary
by LSB. Under the Management Agreement, the Company is to pay LSB a fee for such
services which will not exceed



                                      F-13
<PAGE>   62

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


3. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

$1.8 million annually. If management determines that it is probable that the
Company will have to pay the annual management fee to LSB, then the fee will be
accrued quarterly based upon the excess of actual earnings before interest,
income taxes, depreciation and amortization ("EBITDA") for the quarter minus
$6,500,000, not to exceed $450,000. If at the end of the calendar year, EBITDA
is less than $26 million, management fees paid to LSB during the year shall be
refunded to the Company for the first three quarters of the year, not to exceed
$1,350,000. The maximum management fee amount to be paid to LSB by the Company
is adjusted annually commensurate with the percentage change, if any, in the
Consumer Price Index during the preceding calendar year. For the year ended
December 31, 2000, the Company was required to pay LSB $1.8 million under the
Management Agreement inasmuch as EBITDA exceeded $26 million for the period
($1.4 million has been paid as of December 31, 2000). No payments were made to
LSB under the Management Agreement in 1999 or 1998.

On November 21, 1997, the Company and LSB entered into a tax sharing agreement
(the "Tax Sharing Agreement") which provides for (i) the allocation of payments
of taxes for periods during which the Company and its subsidiaries and LSB are
included in the same consolidated group for federal income tax purposes or the
same consolidated, combined or unitary returns for state, local or foreign tax
purposes, (ii) the allocation of responsibility for the filing of tax returns,
(iii) the conduct of tax audits and the handling of tax controversies, and (iv)
various related matters. For tax periods beginning after December 1996 and
ending ten years thereafter, so long as the Company is included in LSB's
consolidated federal income tax returns or state consolidated combined or
unitary tax returns, the Company will be required to pay to LSB an amount equal
to the Company's consolidated federal and state income tax liability calculated
as if the Company and its subsidiaries were a separate consolidated tax group
and not part of LSB's consolidated tax group. Such amount is payable in
estimated quarterly installments. If the sum of the estimated quarterly
installments is (a) greater than the tax liability of the Company, on a
consolidated basis, as determined by LSB, under the Tax Sharing Agreement, then
LSB will refund the amount of the excess to the Company, or (b) less than the
Company's tax liability, on a consolidated basis, as determined by LSB, under
the Tax Sharing Agreement, then the Company will pay to LSB the amount of the
deficiency. The Company recorded a provision for income taxes relating to the
extraordinary gain on the repurchase of Senior Unsecured Notes for the year
ended December 31, 2000 of $.1 million which was payable to LSB under the terms
of the Tax Sharing Agreement ($.8 million had been paid as of December 31, 2000
for the tax liability existing at September 30, 2000). The Company did not pay
LSB any amounts under the Tax Sharing Agreement in 1999 or 1998.



                                      F-14
<PAGE>   63

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


3. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

Under the terms of an Indenture between the Company, the guarantors and the
trustee relating to the Notes (as defined in Note 7), the Company is permitted
to distribute or pay in the form of dividends and other distributions to LSB in
connection with the Company's outstanding equity securities or loans, (a)
advances or investments to any person (including LSB), up to 50% of the
Company's consolidated net income for the period (taken as one accounting
period), commencing on the first day of the first full fiscal quarter commencing
after the Issue Date of the Notes to and including the last day of the fiscal
quarter ended immediately prior to the date of said calculation (or, in the
event consolidated net income for such period is a deficit, then minus 100% of
such deficit), plus (b) the aggregate net cash proceeds received by the Company
from the sale of its capital stock. This limitation will not prohibit (i)
payment to LSB under the Services Agreement, Management Agreement and the Tax
Sharing Agreement, or (ii) the payment of any dividend within 60 days after the
date of its declaration if such dividend could have been made on the date of
such declaration. Based on the terms stated above, the Company declared and paid
to LSB a dividend, in the fourth quarter of 1998, in the amount of $406,000
representing 50% of the Company's consolidated net income for the nine months
ended September 30, 1998 (none in 2000 or 1999).

The Company has, at various times, maintained certain unsecured borrowings from
LSB and its subsidiaries and made loans and advances to LSB which generally bear
interest. At December 31, 2000 and 1999, the Company had loans and advances due
from LSB of approximately $13.4 million, $10.0 million of which was loaned to
LSB from the proceeds of the sale of the Notes, as defined (Note 7 -- Long-Term
Debt), and bears interest at 10-3/4%, maturing November 2007 and $3.4 million
due from LSB and affiliates related to cash advances from the Company to LSB and
affiliates prior to the sale of the Notes, as defined, from borrowings on the
Company's credit facilities. This loan is due by its terms in November 2007 and
bears interest at 7% per annum. At December 31, 2000 and 1999, the Company had
$1.1 million and $2.3 million, respectively, due from LSB and affiliates
included in current assets related to advances as discussed previously, interest
and refunds due associated with operations under the Services Agreement or
refunds under the management or tax agreements. The Company earned interest
income on net loans and advances due from LSB and affiliates aggregating
approximately $1,531,000, $1,474,000 and $1,316,000 for the years ended December
31, 2000, 1999 and 1998, respectively.

LSB and its subsidiaries (other than the Company and its subsidiaries), the "LSB
Non-ClimaChem Entities," are dependent upon their separate cash flows and the
restricted funds which can be distributed by the Company under the above
mentioned agreements. As of December 31, 2000, the LSB Non-ClimaChem Entities
had a working capital



                                      F-15
<PAGE>   64

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


3. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

deficit of $7.5 million (including $2.6 million of inventories and $2.4 million
of accounts receivable), and long-term debt of $32.3 million (including $15.3
million owed to the Company), $5.9 million of which is due within one year. For
the year ended December 31, 2000, the LSB Non-ClimaChem Entities had a net loss
of $.2 million. LSB is focusing its efforts and resources on its core
businesses, which represent that of the Company. Management of LSB believes the
LSB Non-ClimaChem Entities will have sufficient operating capital to meet its
obligations as they come due (other than dividend obligation under its
outstanding preferred stocks), including those to the Company. If LSB management
is not successful in realizing certain excess and non-core assets, and if the
Company is not able to transfer funds to LSB and its affiliates as permitted
under the Indenture, the recoverability of the loans and advances to LSB may not
be recoverable. As of December 31, 2000, the Company has not provided an
allowance for doubtful accounts against these receivables, loans and advances
since it is their present belief that LSB will be able to pay these amounts when
they come due; however, it is reasonably possible that the evaluation relative
to the amounts due from LSB and its subsidiaries could change in the near term.

4. BUSINESS DISPOSED OF

On August 2, 1999, the Company sold substantially all the assets of its wholly
owned subsidiary, Total Energy Systems Limited and its subsidiaries ("TES"), of
the Chemical Business. Pursuant to the sale agreement, TES retained certain of
its liabilities which were liquidated from the proceeds of the sale and from the
collection of its accounts receivables which were retained. In connection with
the closing in August 1999, the Company received approximately $3.6 million in
net proceeds from the assets sold, after paying off $6.4 million bank debt and
the purchaser assuming approximately $1.1 million of debt related to certain
capitalized lease obligations.

The loss associated with the disposition included in the accompanying
consolidated statements of operations for the year ended December 31, 1999 was
$2.0 million.



                                      F-16
<PAGE>   65

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


5. INVENTORIES

Inventories consist of:

<TABLE>
<CAPTION>
                                  FINISHED
                               (OR PURCHASED)    WORK-IN-        RAW
                                   GOODS         PROCESS       MATERIALS        TOTAL
                                ------------     -------       ---------       -------
                                                     (In Thousands)
<S>                             <C>              <C>           <C>             <C>
December 31, 2000:
  Climate Control products        $ 5,691        $ 2,962        $ 7,020        $15,673
  Chemical products                10,680             --          2,667         13,347
                                  -------        -------        -------        -------
Total                             $16,371        $ 2,962        $ 9,687        $29,020
                                  =======        =======        =======        =======

December 31, 1999:
Total                             $11,275        $ 5,503        $ 8,994        $25,772
                                  =======        =======        =======        =======
</TABLE>


6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, at cost, consist of:

<TABLE>
<CAPTION>
                                                  DECEMBER 31,
                                             2000              1999
                                           ---------         ---------
                                                 (In Thousands)
<S>                                        <C>               <C>
Land and improvements                      $   1,698         $   1,411
Buildings and improvements(A)                 11,239            11,352
Machinery, equipment and automotive          126,758           124,459
Furniture and fixtures                         4,784             3,968
                                           ---------         ---------
                                             144,479           141,190
Less accumulated depreciation                (71,654)           65,523
                                           ---------         ---------
                                           $  72,825         $  75,667
                                           =========         =========
</TABLE>

(A)     Includes capital lease of $3,173,000 with a related party as discussed
        in Note 3.



                                      F-17
<PAGE>   66

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


7. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         2000            1999
                                                       --------        --------
                                                           (In Thousands)
<S>                                                    <C>             <C>
Secured revolving credit facility with interest
 at a base rate plus a specified percentage
 (11% aggregate rate at December 31, 2000)(A)          $ 32,747        $ 25,071
10-3/4% Senior Notes due 2007(B)                         79,835         105,000
Secured loan with interest payable monthly(C)             4,463           7,128
Other, with interest at rates of 6% to 12.76%,
 most of which is secured by machinery,
 equipment and real estate                                9,111           4,989
                                                       --------        --------
                                                        126,156         142,188
Less current portion of long-term debt                   37,092          29,644
                                                       --------        --------
Long-term debt due after one year                      $ 89,064        $112,544
                                                       ========        ========
</TABLE>

(A)     In December 1994, LSB and certain subsidiaries and a bank entered into a
        series of six asset-based revolving credit facilities which provided for
        an initial term of three years. The agreement has been amended at
        various dates since 1994 with the latest being executed on October 10,
        2000. The amended agreement provided for a $50 million revolving credit
        facility (the "Revolving Credit Facility") with separate loan
        agreements, for the Company and its subsidiaries and LSB and its
        subsidiaries excluding the Company and its subsidiaries ("Non-ClimaChem
        entities").

        In April, the Company and its subsidiaries, ("the borrowers"), entered
        into a new $50 million credit facility with Foothill Capital Corporation
        (the "Foothill Facility"). The Foothill Facility provides for advances
        based on specified percentages of eligible accounts receivable and
        inventory of the Company and its subsidiaries and accrues interest at a
        base rate (generally equivalent to the prime rate) plus 2% or the LIBOR
        rate plus 4.5%. Interest is due monthly. The Facility provides for up to
        $8.5 million of letters of credit; All letters of credit outstanding
        reduce availability under the facility. Under the Foothill Facility, the
        lender also requires the borrowers to pay a letter of credit fee equal
        to 2.75% per annum of the undrawn amount of all outstanding letters of
        credit, an unused line fee equal to .5% per annum for the excess amount
        available under the facility not drawn and various other audit,
        appraisal and valuation charges. The Foothill Facility matures in April
        2005 and is secured by receivables, inventory and intangibles of the
        Company and its subsidiaries and certain assets of non-ClimaChem
        entities. LSB, each of the Company's subsidiaries and two of LSB
        subsidiaries are guarantors of the indebtedness. A prepayment penalty
        equal to 4% of the facility is due to the lender should the borrowers
        elect to prepay the facility prior to the first anniversary date. This
        penalty is reduced 1% per year through maturity. The Foothill Facility
        requires the Company to meet certain financial covenants on a monthly,
        quarterly or annual basis, including a fixed charge coverage ratio,
        minimum EBITDA (earnings before interest, taxes, depreciation and
        amortization) of the Company and the Company's Climate Control Business
        and limits capital expenditures. The Foothill Facility requires the
        borrowers to have varying minimum amounts of availability under the
        revolver, which amounts generally increase prior to interest payment due
        dates of the Senior Notes discussed in (B) below. The Foothill Facility
        requires that the Company's excess availability, as defined, equal an
        amount not less than $3.8 million, on each interest payment date, after
        making the interest payment due pursuant to the Company's 10 3/4% Senior
        Notes. The Foothill Facility also contains covenants that, among other
        things, limit the borrowers ability to: (i) incur additional
        indebtedness, (ii) incur liens, (iii) make restricted payments or loans
        to affiliates who are not borrowers, or (iv) engage in mergers,
        consolidations or other forms of recapitalization, (v) dispose of
        assets, and (vi) repurchase the Company's 10 3/4% Senior Notes. It also
        requires all collections on accounts be made through an account in the
        name of the lender or their agent and gives the lender the sole
        discretion to determine whether there has been any material adverse
        change; as defined, in the



                                      F-18
<PAGE>   67

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


(7) LONG-TERM DEBT (CONTINUED)

        financial condition of the borrowers or LSB Industries, Inc., as
        guarantor, prior to granting additional advances. The Foothill Facility
        requires the borrowers to use their best efforts to assist Foothill
        Capital Corporation with the syndication of no less than 40% and no
        more than 50% of the total facility commitment. In connection
        therewith, the borrowers have agreed that Foothill Capital Corporation
        or agent shall have the right after consultation with the borrowers'
        agent to alter certain terms and conditions as may be necessary, to
        insure a successful syndication of the total facility commitment. The
        lender may, upon an event of default, as defined, terminate the
        Foothill Facility and make the balance outstanding due and payable in
        full.

(B)     On November 26, 1997, the Company completed the sale of $105 million
        principal amount of 10-3/4% Senior Notes due 2007 (the "Notes"). The
        Notes bear interest at an annual rate of 10-3/4% payable semiannually in
        arrears on June 1 and December 1 of each year. The Notes are senior
        unsecured obligations of the Company and rank pari passu in right of
        payment to all existing senior unsecured indebtedness of the Company.
        The Notes are effectively subordinated to all existing and future senior
        secured indebtedness of the Company and its subsidiaries.

        The Notes were issued pursuant to an Indenture, which contains certain
        covenants that, among other things, limit the ability of the Company and
        its subsidiaries to: (i) incur additional indebtedness; (ii) incur
        certain liens; (iii) engage in certain transactions with affiliates;
        (iv) make certain restricted payments; (v) agree to payment restrictions
        affecting subsidiaries; (vi) engage in unrelated lines of



                                      F-19
<PAGE>   68

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


7. LONG-TERM DEBT (CONTINUED)

        business; or (vii) engage in mergers, consolidations or the transfer of
        all or substantially all of the assets of the Company to another person.
        In addition, in the event of certain asset sales, the Company will be
        required to use the proceeds to reinvest in the Company's business, to
        repay certain debt or to offer to purchase Notes at 100% of the
        principal amount thereof, plus accrued and unpaid interest, if any,
        thereon, plus liquidated damages, if any, to the date of purchase.

        Except as described below, the Notes are not redeemable at the Company's
        option prior to December 1, 2002. After December 1, 2002, the Notes will
        be subject to redemption at the option of the Company, in whole or in
        part, at the redemption prices set forth in the Indenture, plus accrued
        and unpaid interest thereon, plus liquidated damages, if any, to the
        applicable redemption date.

        In the event of a Change of Control of LSB or the Company, holders of
        the Notes will have the right to require the Company to repurchase the
        Notes, in whole or in part, at a redemption price of 101% of the
        principal amount thereof, plus accrued and unpaid interest, if any,
        thereon, plus liquidated damages, if any, to the date of repurchase.

        During 2000, the Company repurchased approximately $25.2 million of the
        Notes and recognized a gain of approximately $17.4 million before income
        taxes. The Company is a holding company with no material assets (other
        than the notes and accounts receivable from LSB, specified in the
        accompanying consolidated balance sheets, and the Notes origination fees
        which have a net book value of $2.1 million and $3.3 million as of
        December 31, 2000 and 1999, respectively), or material operations other
        than its investments in its subsidiaries, and each of its subsidiaries
        is wholly owned, directly or indirectly. ClimaChem's payment obligations
        under the Notes are fully, unconditionally and joint and severally
        guaranteed by all of the existing subsidiaries of the Company, except
        for El Dorado Nitrogen Company ("EDNC").

        Set forth below are consolidating financial statements of the Guarantor
        Subsidiaries, the Company's subsidiary which is not a guarantor of the
        Senior Notes (the "Non-Guarantor Subsidiary") and the Company. For all
        periods presented, EDNC was the only Non-Guarantor Subsidiary.



                                      F-20
<PAGE>   69

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


7. LONG-TERM DEBT (CONTINUED)

                           Consolidating Balance Sheet
                             As of December 31, 2000
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                 COMBINED           NON-
                                 GUARANTOR       GUARANTOR       COMPANY
                                SUBSIDIARIES     SUBSIDIARY      (PARENT)      ELIMINATIONS     CONSOLIDATED
                                ------------     ----------      ---------     ------------     ------------
<S>                             <C>              <C>             <C>           <C>              <C>
ASSETS
Current assets:
  Cash                            $   2,782       $       8      $      48                       $   2,838
  Trade accounts                     40,525           5,376             80                          45,981
    receivable, net
  Inventories                        28,706             314             --                          29,020
  Supplies and prepaid items          5,054              48            887                           5,989
  Due from LSB and                       --              --          1,103                           1,103
    affiliates, net
                                  ---------       ---------      ---------       ---------       ---------
        Total current assets         77,067           5,746          2,118                          84,931

Property, plant and                  71,521           1,221             83                          72,825
  equipment, net
Due from LSB and affiliates              --              --         14,166                          14,166
Investment in and advances
  to affiliates                          --              --         72,374       $ (72,374)             --
Receivable from Parent                   --           2,764             --          (2,764)             --
Other assets, net                    12,206           2,491          2,548                          17,245
                                  ---------       ---------      ---------       ---------       ---------
                                  $ 160,794       $  12,222      $  91,289       $ (75,138)      $ 189,167
                                  =========       =========      =========       =========       =========

LIABILITIES AND
  STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                $  23,039       $   2,250      $     576                       $  25,865
  Accrued liabilities                18,079           2,160          1,408                          21,647
  Current deferred income               550              --             --       $    (550)             --
    taxes
  Current portion of                 36,835             170             87                          37,092
    long-term debt
                                  ---------       ---------      ---------       ---------       ---------
        Total current                78,503           4,580          2,071            (550)         84,604
         liabilities

Long-term debt                        7,679           1,550         79,835                          89,064
Accrued losses on firm
  purchase commitments and
  other noncurrent                    3,675           2,441             --                           6,116
  liabilities
Deferred income taxes                   405              --             --            (405)             --
Payable to Parent                    15,648              --             --         (15,648)             --

Stockholders' equity:
  Common stock                           64               1              1             (65)              1
  Capital in excess of par           79,217              --         12,652         (79,217)         12,652
    value
  Retained earnings
    (accumulated deficit)           (24,397)          3,650         (3,270)         20,747          (3,270)
                                  ---------       ---------      ---------       ---------       ---------
Total stockholders' equity           54,884           3,651          9,383         (58,535)          9,383
                                  ---------       ---------      ---------       ---------       ---------
                                  $ 160,794       $  12,222      $  91,289       $ (75,138)      $ 189,167
                                  =========       =========      =========       =========       =========
</TABLE>



                                      F-21
<PAGE>   70

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


7. LONG-TERM DEBT (CONTINUED)

                           Consolidating Balance Sheet
                             As of December 31, 1999
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                   COMBINED          NON-
                                   GUARANTOR       GUARANTOR       COMPANY
                                  SUBSIDIARIES     SUBSIDIARY      (PARENT)      ELIMINATIONS    CONSOLIDATED
                                  ------------     ----------      ---------     ------------    ------------
<S>                               <C>              <C>             <C>           <C>             <C>
ASSETS
Current assets:
  Cash                              $     816       $     703      $   1,154                       $   2,673
  Trade accounts                       39,709           2,215             10                          41,934
    receivable, net
  Inventories                          25,594             178             --                          25,772
  Supplies and prepaid items            3,306              83            925                           4,314
  Due from LSB and                         --              --          1,781                           1,781
    affiliates, net
                                    ---------       ---------      ---------       ---------       ---------
        Total current assets           69,425           3,179          3,870                          76,474

Property, plant and                    75,158             509             --                          75,667
  equipment, net
Due from LSB and affiliates                --              --         13,925                          13,925
Investment in and advances
  to affiliates                            --              --         91,011       $ (91,011)             --
Other assets, net                      12,353           2,004          3,655                          18,012
                                    ---------       ---------      ---------       ---------       ---------
                                    $ 156,936       $   5,692      $ 112,461       $ (91,011)      $ 184,078
                                    =========       =========      =========       =========       =========

LIABILITIES AND
  STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                  $  14,793       $   1,519      $      --                       $  16,312
  Accrued liabilities                   9,873           2,592          1,326                          13,791
  Current deferred income taxes           510              --             --       $    (510)             --
  Current portion of
    long-term debt                     29,644              --             --                          29,644
                                    ---------       ---------      ---------       ---------       ---------
        Total current liabilities      54,820           4,111          1,326            (510)         59,747


Long-term debt                          7,544              --        105,000                         112,544
Accrued losses on firm
  purchase commitments                  5,652              --             --                           5,652
Deferred income taxes                     485              --             --            (485)             --
Payable to Parent                      23,097              66             --         (23,163)             --

Stockholders' equity:
  Common stock                             60               1              1             (61)              1
  Capital in excess of par
    value                              78,467              --         12,652         (78,467)         12,652
  Retained earnings
    (accumulated deficit)             (13,189)          1,514         (6,518)         11,675          (6,518)
                                    ---------       ---------      ---------       ---------       ---------
Total stockholders' equity             65,338           1,515          6,135         (66,853)          6,135
                                    ---------       ---------      ---------       ---------       ---------
                                    $ 156,936       $   5,692      $ 112,461       $ (91,011)      $ 184,078
                                    =========       =========      =========       =========       =========
</TABLE>



                                      F-22
<PAGE>   71

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


7. LONG-TERM DEBT (CONTINUED)

                      Consolidating Statement of Operations
                          Year ended December 31, 2000
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                COMBINED          NON-
                                GUARANTOR       GUARANTOR       COMPANY
                               SUBSIDIARIES     SUBSIDIARY      (PARENT)      ELIMINATIONS    CONSOLIDATED
                               ------------     ----------      ---------     ------------    ------------
<S>                            <C>              <C>             <C>           <C>             <C>
BUSINESS CONTINUING AT
  DECEMBER 31, 2000
Revenues:
  Net sales                      $ 238,103       $  41,869                                      $ 279,972
  Other income (expense)               992             100      $   8,742       $  (7,940)          1,894
                                 ---------       ---------      ---------       ---------       ---------
                                   239,095          41,969          8,742          (7,940)        281,866

 Costs and expenses:
  Cost of sales                    192,918          38,345          1,232                         232,495
  Selling, general and
    administrative                  40,988             428          4,516                          45,932
  Interest                          12,140              17          9,665          (7,940)         13,882
  Provisions for losses on
    firm sales and purchase
    commitments                      3,395              --             --                           3,395
                                 ---------       ---------      ---------       ---------       ---------
                                   249,441          38,790         15,413          (7,940)        295,704
                                 ---------       ---------      ---------       ---------       ---------
 Income (loss) before
  equity in loss of
  subsidiaries,  provision
  (benefit) for income
  taxes and extraordinary
  gain                             (10,346)          3,179         (6,671)             --         (13,838)

 Equity in loss of
  subsidiaries                          --              --         (9,072)          9,072              --
 Provision (benefit) for
  income taxes                         862           1,043         (1,670)                            235
 Extraordinary gain                     --              --         17,321                          17,321
                                 ---------       ---------      ---------       ---------       ---------
 Net income (loss)               $ (11,208)      $   2,136      $   3,248       $   9,072       $   3,248
                                 =========       =========      =========       =========       =========
</TABLE>



                                      F-23
<PAGE>   72

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


7. LONG-TERM DEBT (CONTINUED)

                      Consolidating Statement of Operations
                          Year ended December 31, 1999
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                COMBINED          NON-
                                GUARANTOR       GUARANTOR       COMPANY
                               SUBSIDIARIES     SUBSIDIARY      (PARENT)      ELIMINATIONS    CONSOLIDATED
                               ------------     ----------      ---------     ------------    ------------
<S>                            <C>              <C>             <C>           <C>             <C>
BUSINESS CONTINUING AT
  DECEMBER 31, 1999
Revenues:
  Net sales                      $ 225,956       $  18,397       $     109                       $ 244,462
  Other income (expense)             1,467            (373)          9,965       $  (8,566)          2,493
                                 ---------       ---------       ---------       ---------       ---------
                                   227,423          18,024          10,074          (8,566)        246,955

 Costs and expenses:
  Cost of sales                    179,862          15,594             639                         196,095
  Selling, general and
    administrative                  41,367             254           3,997                          45,618
  Interest                          11,477              62          11,287          (8,566)         14,260
  Provisions for losses on
    firm purchase
    commitments                      8,439              --              --                           8,439
  Provisions for impairment
    on long-lived assets             3,913              --              --                           3,913
                                 ---------       ---------       ---------       ---------       ---------
                                   245,058          15,910          15,923          (8,566)        268,325
                                 ---------       ---------       ---------       ---------       ---------
  Income (loss) before
    business disposed of
    and provisions
    (benefit) for income
    taxes                          (17,635)          2,114          (5,849)             --         (21,370)

 Business disposed of
  during 1999:
  Revenues                           7,461              --              --                           7,461
  Operating costs, expenses
    and interest                     9,419              --              --                           9,419
                                 ---------       ---------       ---------       ---------       ---------
                                    (1,958)             --              --              --          (1,958)
  Loss on disposal of
    business                        (1,971)             --              --              --          (1,971)
                                 ---------       ---------       ---------       ---------       ---------
                                    (3,929)             --              --              --          (3,929)
                                 ---------       ---------       ---------       ---------       ---------
 Income (loss) before
  equity in loss of
  subsidiaries and
  provision (benefit) for
  income taxes                     (21,564)          2,114          (5,849)             --         (25,299)

 Equity in loss of
  subsidiaries                          --              --         (13,333)         13,333              --
 Provision (benefit) for
  income taxes                      (6,857)            740              --                          (6,117)
                                 ---------       ---------       ---------       ---------       ---------
 Net income (loss)               $ (14,707)      $   1,374       $ (19,182)      $  13,333       $ (19,182)
                                 =========       =========       =========       =========       =========
</TABLE>



                                      F-24
<PAGE>   73

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


7. LONG-TERM DEBT (CONTINUED)

                      Consolidating Statement of Operations
                          Year ended December 31, 1998
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                              COMBINED          NON-
                                             GUARANTOR       GUARANTOR       COMPANY
                                            SUBSIDIARIES     SUBSIDIARY      (PARENT)      ELIMINATIONS    CONSOLIDATED
                                            ------------     ----------      ---------     ------------    ------------
<S>                                         <C>              <C>             <C>           <C>             <C>
BUSINESS CONTINUING AT
  DECEMBER 31, 1998
Revenues:
  Net sales                                   $ 241,546       $      --      $      --                       $ 241,546
  Other income (expense)                            146              --         12,298       $ (10,976)          1,468
                                              ---------       ---------      ---------       ---------       ---------
                                                241,692              --         12,298         (10,976)        243,014

 Costs and expenses:
  Cost of sales                                 190,722              --             --                         190,722
  Selling, general and
    administrative                               37,489              --            616                          38,105
  Interest expense                               13,151              --         11,288         (10,976)         13,463
                                              ---------       ---------      ---------       ---------       ---------
                                                241,362              --         11,904         (10,976)        242,290
                                              ---------       ---------      ---------       ---------       ---------
   Income before business
    disposed of and
    provisions for income
    taxes                                           330              --            394              --             724

 Business to be disposed of during 1999:
  Revenues                                       14,184              --             --                          14,184
  Operating costs, expenses
    and interest                                 17,085              --             --                          17,085
                                              ---------       ---------      ---------       ---------       ---------
                                                 (2,901)             --             --                          (2,901)
                                              ---------       ---------      ---------       ---------       ---------
  Income (loss) before
  provision  for income taxes                    (2,571)             --            394                          (2,177)

Equity in loss of subsidiaries                       --              --         (2,781)          2,781              --
Provision for income taxes                          210              --            182                             392
                                              ---------       ---------      ---------       ---------       ---------
 Net income (loss)                            $  (2,781)      $      --      $  (2,569)      $   2,781       $  (2,569)
                                              =========       =========      =========       =========       =========
</TABLE>



                                      F-25
<PAGE>   74

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


7. LONG-TERM DEBT (CONTINUED)

                 Condensed Consolidating Statement of Cash Flows
                          Year ended December 31, 2000
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                              COMBINED          NON-
                                             GUARANTOR       GUARANTOR       COMPANY
                                            SUBSIDIARIES     SUBSIDIARY      (PARENT)      ELIMINATIONS    CONSOLIDATED
                                            ------------     ----------      ---------     ------------    ------------
<S>                                         <C>              <C>             <C>           <C>             <C>
 Cash flows provided (used)
  by operating activities                     $  (859)        $ 4,830         $  (184)                        $ 3,787

 Cash flows from investing activities:
  Capital expenditures                         (5,915)           (780)            (83)                         (6,778)
  Purchase of Senior notes of parent               --          (5,688)             --         $ 5,688              --
  Other assets                                  1,495            (777)            (49)                            669
                                              -------         -------         -------         -------         -------
 Net cash used by investing activities         (4,420)         (7,245)           (132)          5,688          (6,109)

 Cash flows from financing activities:
  Payments on long-term debt                   (3,674)             --              --                          (3,674)
  Long-term and other
    borrowings, net of
    origination fees                            3,500           1,550              --                           5,050
  Acquisition of 10 3/4%
    Senior Unsecured Notes                         --              --          (1,314)         (5,688)         (7,002)
  Net change in revolving debt                  7,419             170              87                           7,676
  Net change in due to/from
    LSB and affiliates                             --              --             437                             437
                                              -------         -------         -------         -------         -------
 Net cash provided (used)
  by financing activities                       7,245           1,720            (790)         (5,688)          2,487
                                              -------         -------         -------         -------         -------
 Net increase in cash from
  all activities                                1,966            (695)         (1,106)             --             165

 Cash at the beginning of period                  816             703           1,154              00           2,673
                                              -------         -------         -------         -------         -------
 Cash at the end of period                    $ 2,782         $     8         $    48         $    --         $ 2,838
                                              =======         =======         =======         =======         =======
</TABLE>



                                      F-26
<PAGE>   75

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


7. LONG-TERM DEBT (CONTINUED)

                 Condensed Consolidating Statement of Cash Flows
                          Year ended December 31, 1999
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                              COMBINED          NON-
                                             GUARANTOR       GUARANTOR       COMPANY
                                            SUBSIDIARIES     SUBSIDIARY      (PARENT)      ELIMINATIONS    CONSOLIDATED
                                            ------------     ----------      ---------     ------------    ------------
<S>                                         <C>              <C>             <C>           <C>             <C>
 Cash flows provided (used)
  by operating activities                     $ 4,180         $ 3,538         $(6,037)                       $ 1,681

 Cash flows from investing activities:
  Capital expenditures                         (6,179)           (509)             --                         (6,688)
  Payments made for
    acquisition of limited
    partner interest in
    business                                   (3,114)             --              --                         (3,114)
  Purchase of receivable
    and option to acquire
    business                                   (2,558)             --              --                         (2,558)
  Proceeds from sale of
    equipment                                   1,045              --              --                          1,045
  Proceeds from the sale of
    business disposed of                        9,981              --              --                          9,981
  Increase in other assets                       (467)           (315)            (88)                          (870)
                                              -------         -------         -------         -------        -------
 Net cash used by investing
  activities                                   (1,292)           (824)            (88)                        (2,204)

 Cash flows from financing activities:
  Payments on long-term debt                   (6,867)             --              --                         (6,867)
  Net change in revolving
    debt                                        8,269              --              --                          8,269
  Net change in due to/from
    LSB and affiliates                         (4,218)         (2,013)          7,275                          1,044
                                              -------         -------         -------         -------        -------
 Net cash provided (used)
  by financing activities                      (2,816)         (2,013)          7,275                          2,446
                                              -------         -------         -------         -------        -------
 Net increase in cash from
  all activities                                   72             701           1,150                          1,923

 Cash at the beginning of
  period                                          744               2               4                            750
                                              -------         -------         -------         -------        -------
 Cash at the end of period                    $   816         $   703         $ 1,154                        $ 2,673
                                              =======         =======         =======         =======        =======
</TABLE>



                                      F-27
<PAGE>   76

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


7. LONG-TERM DEBT (CONTINUED)

                 Condensed Consolidating Statement of Cash Flows
                          Year ended December 31, 1998
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                              COMBINED          NON-
                                             GUARANTOR       GUARANTOR       COMPANY
                                            SUBSIDIARIES     SUBSIDIARY      (PARENT)      ELIMINATIONS    CONSOLIDATED
                                            ------------     ----------      ---------     ------------    ------------
<S>                                         <C>              <C>             <C>           <C>             <C>
 Cash flows provided (used)
  by operating activities                     $ 3,298         $  (369)        $   933                        $ 3,862

 Cash flows from investing activities:
  Capital expenditures                         (7,418)             --              --                         (7,418)
  Proceeds from sale of
    equipment                                      65              --              --                             65
  Decrease (increase) in
    other assets                                1,797          (1,991)           (878)                        (1,072)
                                              -------         -------         -------         -------        -------
 Net cash used by investing
  activities                                   (5,556)         (1,991)           (878)                        (8,425)

 Cash flows from financing activities:
  Payments on long-term debt                   (4,690)             --              --                         (4,690)
  Long-term and other
    borrowing                                    (583)             --              --                           (583)
  Net change in revolving
    debt                                        6,348              --              --                          6,348
  Net change in due to/from
    LSB and affiliates                         (1,966)          2,317             759                          1,110
  Dividends paid to parent                         --              --            (406)                          (406)
                                              -------         -------         -------         -------        -------
 Net cash provided (used)
  by financing activities                        (891)          2,317             353                          1,779
                                              -------         -------         -------         -------        -------
 Net increase (decrease) in
  cash from all activities                     (3,149)            (43)            408                         (2,784)

 Cash at the beginning of period                3,893              45            (404)                         3,534
                                              -------         -------         -------         -------        -------
 Cash at the end of period                    $   744         $     2         $     4                        $   750
                                              =======         =======         =======         =======        =======
</TABLE>



                                      F-28
<PAGE>   77

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


7. LONG-TERM DEBT (CONTINUED)

(C)     This agreement, as amended, between a subsidiary of the Company and an
        institutional lender provides for a loan, the proceeds of which were
        used in the construction of a nitric acid plant, in the aggregate amount
        of $16.5 million requiring 84 equal monthly payments of principal plus
        interest, with interest at a fixed rate of 8.86% through maturity in
        2002. This agreement is secured by the plant, equipment and machinery,
        and proprietary rights associated with the plant which has an
        approximate carrying value of $25.3 million at December 31, 2000.

        This agreement, as amended, contains covenants (i) requiring maintenance
        of an escalating tangible net worth, (ii) restricting distributions and
        dividends from a subsidiary of the Company to the Company to 50% of the
        subsidiary's annual net income, as defined, (iii) restricting a change
        of control of the Company and (iv) requiring maintenance of a debt to
        tangible net worth ratio. In October 2000, the lender waived compliance
        of financial covenants through December 31, 2001.

Maturities of long-term debt for each of the five years after December 31, 2000
are as follows: (in thousands) 2001--$37,092; 2002--$2,314; 2003--$388;
2004--$219; 2005--$10 and thereafter--$86,133.

8. INCOME TAXES

The provision (benefit) for income taxes consists of:

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                            2000          1999          1998
                                           -------       -------       -------
                                                     (In Thousands)
<S>                                        <C>           <C>           <C>
Current:
  Federal                                  $    --       $    --       $    35
  State                                        235            75             6
                                           -------       -------       -------
                                               235            75            41

Deferred:
  Federal                                       --        (5,297)          299
  State                                         --          (895)           52
                                           -------       -------       -------
                                                --        (6,192)          351
                                           -------       -------       -------
 Provision (benefit) for income taxes      $   235       $(6,117)      $   392
                                           =======       =======       =======
</TABLE>



                                      F-29
<PAGE>   78

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


8. INCOME TAXES (CONTINUED)

The approximate tax effects of each type of temporary difference and carry
forward that are used in computing deferred tax assets and liabilities and the
valuation allowance related to deferred tax assets at December 31, 2000 and 1999
are as follows:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              2000         1999
                                                             -------      -------
                                                                (In Thousands)
<S>                                                          <C>          <C>
DEFERRED TAX LIABILITIES
Accelerated depreciation used for tax purposes               $ 9,964      $ 9,360
Inventory basis difference resulting from a business
  combination                                                  2,133        2,133
Other                                                            187           90
                                                             -------      -------
Total deferred tax liabilities                                12,284       11,583

DEFERRED TAX ASSETS
Accounts and accruals not deductible for tax purposes:
  Accrued liabilities                                          3,580        3,723
  Allowances for doubtful accounts and notes receivable        1,244        1,589
  Other                                                        1,220        1,792
Capitalization of certain costs as inventory for tax
  purposes                                                     1,275        1,064
Discount purchase of debt by related party treated as
  income for tax purposes                                      1,037           --
Net operating loss carry forward                               3,972        5,361
                                                             -------      -------
Total deferred tax assets                                     12,328       13,529
  Valuation allowance                                             44        1,946
                                                             -------      -------
Total deferred tax assets                                     12,284       11,583
                                                             =======      =======
Net deferred tax liabilities                                 $    --      $    --
                                                             =======      =======
</TABLE>



                                      F-30
<PAGE>   79

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


8. INCOME TAXES (CONTINUED)

The provision for income taxes differs from the amount computed by applying the
federal statutory rate to "Income (loss) before provision for income taxes and
extraordinary charge" due to the following:

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                               2000          1999           1998
                                              -------       -------       -------
                                                        (In Thousands)
<S>                                           <C>           <C>           <C>
Provision (benefit) for income taxes at
  federal statutory rate                      $ 1,604       $(8,855)      $  (762)
State income taxes                                235          (820)           38
Amortization of excess of purchase price
  over net assets acquired                        128           120           120
Foreign subsidiary loss                            --         1,375         1,016
Change in valuation allowance                  (1,902)        1,946            --
Other                                             170           117           (20)
                                              -------       -------       -------
Provision (benefit) for income taxes          $   235       $(6,117)      $   392
                                              =======       =======       =======
</TABLE>

9. STOCKHOLDERS' EQUITY

STOCK OPTIONS

Certain employees of the Company, including members of management of LSB
devoting time to the Company, participate in the incentive stock option plans of
LSB (the "Stock Option Plans"). As a result thereof, the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations in accounting for such
employee stock options because, as discussed below, the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the employee stock options equals the market price of the
underlying LSB stock on the date of grant, no compensation expense is
recognized.

Pro forma information regarding net income is required by Statement 123, which
also requires that the information be determined as if the Company has accounted
for such employee stock options granted subsequent to December 31, 1994 under
the fair value method of that Statement. The fair value for these options was
estimated by LSB at the date of grant using a Black-Scholes option pricing model
with the following weighted



                                      F-31
<PAGE>   80

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


9. STOCKHOLDERS' EQUITY (CONTINUED)

date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 1999 and 1998, respectively: risk-free interest
rates of 6.04% and 5.75%; a dividend yield of 0% and .5%; a volatility factor of
the expected market price of LSB's common stock of .48 and .57; and a weighted
average expected life of the option of 6.9 and 8 years. There were no stock
options granted in 2000.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of such employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the qualified
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:

<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,
                                  2000           1999          1998
                                --------       --------       --------
                                            (In Thousands)
<S>                             <C>            <C>            <C>
Pro forma net loss              $ (4,830)      $(26,007)      $ (3,208)
</TABLE>

QUALIFIED STOCK OPTION PLAN

At December 31, 2000, there are 976,500 options outstanding under the Qualified
Stock Option Plans related to employees of the Company and members of LSB
management devoting time to the Company. These options become exercisable 20%
after one year from date of grant, 40% after two years, 70% after three years,
100% after four years and lapse at the end of ten years. The exercise price of
options to be granted under this plan is equal to the fair market value of LSB's
common stock at the date of grant.

On April 22, 1998, the Company terminated 85,000 qualified stock options (the
"terminated options"), previously granted and replaced the terminated options
with newly granted options (the "replacement options"). The replacement options
were granted at the fair market value of the Company's stock on April 22, 1998,
have a life and vesting schedule based on the terminated options.



                                      F-32
<PAGE>   81

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)



9. STOCKHOLDERS' EQUITY (CONTINUED)

Activity in the Qualified Stock Option Plans related to Company employees and
members of LSB management devoting time to the Company during each of the three
years in the period ended December 31, 2000 is as follows:

<TABLE>
<CAPTION>
                                           2000                         1999                      1998
                                  ----------------------     ------------------------    -----------------------
                                                WEIGHTED                     WEIGHTED                  WEIGHTED
                                                AVERAGE                      AVERAGE                    AVERAGE
                                                EXERCISE                     EXERCISE                   EXERCISE
                                   SHARES        PRICE         SHARES         PRICE        SHARES        PRICE
                                  ---------     ---------    ----------      --------    ----------    ---------
<S>                               <C>           <C>          <C>             <C>         <C>           <C>
Outstanding at beginning of       1,037,050       $2.68         462,550       $4.39         519,550       $4.39
  year
Granted                                  --          --         579,500        1.29          85,000        4.19
Exercised                                --          --              --          --         (55,000)       1.13
Canceled, forfeited or expired      (60,550)       2.47          (5,000)       1.25         (87,000)       6.15
                                  ---------                   ---------                  ----------
Outstanding at end of year          976,500        2.70       1,037,050        2.68         462,550        4.39
                                  =========                   =========                  ==========

Exercisable at end of year          543,300        3.82         313,000       $4.02         248,750       $4.43
                                  =========                   =========                  ==========

Weighted average fair value
  of options granted during year                    N/A                        $ .71                      $2.22

</TABLE>

Outstanding options to acquire 954,500 shares of stock at December 31, 2000 had
exercise prices ranging from $1.25 to $4.88 per share (521,300 of which are
exercisable at a weighted average price of $3.65 per share) and had a weighted
average exercise price of $2.58 and remaining contractual life of 5.3 years. The
balance of options outstanding at December 31, 2000 had exercise prices ranging
from $5.36 to $9.00 per share (all of which are exercisable) and had a weighted
average exercise price of $7.68 and remaining contractual life of 1.61 years.

NON-QUALIFIED STOCK OPTIONS PLANS

Certain outside directors and certain key employees of the Company participate
in LSB's Non-qualified Stock Option Plan. The exercise prices of the options are
based on the market value of LSB's common stock at the date of grant. These
options have vesting terms and lives specific to each grant but generally vest
over 48 months and expire five or ten years from the grant date (except for the
1998 grants discussed below).

In 2000, the LSB Board of Directors did not grant any options to employees. In
1999, the LSB Board of Directors granted 100,000 options to employees, 60,000
options to outside directors and 207,000 options to employee-directors of the
Company at the price equivalent to LSB's stock price at the date of grant. The
options vest over 48 months and



                                      F-33
<PAGE>   82

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


9. STOCKHOLDERS' EQUITY (CONTINUED)

have contractual lives of either five or ten years. In 1998, the LSB Board of
Directors granted employees of the Company 175,000 stock options, at the price
equivalent to LSB's stock price at the date of grant. Options to two key
employees for 100,000 shares have a nine-year vesting schedule while the
remaining 75,000 vest over 48 months. These options expire ten years from the
date of grant. During 1998, the Company granted 52,500 options under LSB's
Outside Director Plan. The granted options vested over six months and expire ten
years from the date of grant.

Activity in the Non-qualified Stock Option Plans related to Company employees
and members of LSB management or directors devoting time to the Company during
each of the three years in the period ended December 31, 2000 is as follows:

<TABLE>
<CAPTION>
                                                2000                            1999                            1998
                                       --------------------------     --------------------------      --------------------------
                                                        WEIGHTED                        WEIGHTED                       WEIGHTED
                                                        AVERAGE                         AVERAGE                        AVERAGE
                                                        EXERCISE                        EXERCISE                       EXERCISE
                                        SHARES           PRICE          SHARES            PRICE          SHARES          PRICE
                                       ---------       -----------    ----------       -----------    ----------      ----------
<S>                                    <C>             <C>            <C>              <C>            <C>             <C>
Outstanding at beginning of year         661,500       $      2.48       343,750       $      3.80       116,250      $      3.03
Granted                                       --                         367,000              1.30       227,500             4.19
Surrendered, forfeited, or expired       (73,000)             2.44       (49,250)             2.88            --               --
                                         -------                         -------                         -------
Outstanding at end of year               588,500              2.49       661,500              2.55       343,750             3.80
                                         =======                         =======                         =======

Exercisable at end of year               230,500       $      2.70       100,000       $      3.49       118,750      $      3.05
                                         =======                         =======                         =======

Weighted average fair value
  of options granted during year                              N/A                      $       .69                    $      2.61
</TABLE>

Outstanding options to acquire 347,000 shares of stock at December 31, 2000 had
exercise prices ranging from $1.25 to $1.38 per share (117,400 of which are
exercisable at a weighted average exercise price of $1.28 per share) and had a
weighted average exercise price of $1.31 and remaining contractual life of 6.4
years. The balance of options outstanding at December 31, 2000 had exercise
prices ranging from $4.13 to $4.19 per share (113,100 of which are exercisable
at a weighted average price of $4.18) and had a weighted average exercise price
of $2.49 and remaining contractual life of 7.3 years.



                                      F-34
<PAGE>   83

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


10. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases certain property, plant and equipment under operating lease
agreements from related parties (Note 3) and others. Future annual minimum
payments on operating leases with initial or remaining terms of one year or more
at December 31, 2000 are as follows:

<TABLE>
<CAPTION>
                RELATED
                PARTIES           OTHERS
                -------           -------
                      (In Thousands)
<S>             <C>               <C>
2001            $ 2,878           $10,376
2002              1,250            10,067
2003              1,200             9,406
2004                685            14,441
2005                628             3,450
After 2005        3,309            36,791
                -------           -------
                $ 9,950           $84,531
                =======           =======
</TABLE>

Rent expense under all operating lease agreements, including month-to-month
leases, was $12,306,000 in 2000, $9,880,000 in 1999 and $3,903,000 in 1998.
Renewal options are available under certain of the lease agreements for various
periods at approximately the existing annual rental amounts.

NITRIC ACID PROJECT

The Company's wholly owned subsidiary, EDNC, operates a nitric acid plant (the
"Baytown Plant") at Bayer's Baytown, Texas chemical facility in accordance with
a series of agreements with Bayer Corporation ("Bayer") (collectively, the
"Bayer Agreement"). Under the Bayer Agreement, EDNC converts ammonia supplied by
Bayer in nitric acid based on a cost plus arrangement. Under the terms of the
Bayer Agreement, EDNC is leasing the Baytown Plant pursuant to a leveraged lease
from an unrelated third party with an initial lease term of ten years. The
schedule of future minimum payments on operating leases above includes
$7,665,000 in 2001, $7,665,000 in 2002, $7,666,000 in 2003, $13,001,000 in 2004,
$2,250,000 in 2005, and $33,457,000 after 2005 related to lease payments on the
EDNC Baytown Plant. Upon expiration of the initial ten-year term, the Bayer
Agreement may be renewed for up to six renewal terms of five years each;



                                      F-35
<PAGE>   84

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

however, prior to each renewal period, either party to the Bayer Agreement may
opt against renewal.

PURCHASE COMMITMENTS

As of December 31, 2000, the Chemical Business has a long-term commitment to
purchase anhydrous ammonia. The commitment requires the Company to take or pay
for an average minimum volume of 3,000 tons of anhydrous ammonia during each
month of 2001 and 2002. The Company's purchase price of anhydrous ammonia under
this contract can be higher or lower than the current market spot price of
anhydrous ammonia. The Company has also committed to purchase 100% of its
anhydrous ammonia requirements in 2001 and 50% of its remaining quantities in
excess of the take or pay volumes of its anhydrous ammonia requirements in 2002
from this third party at prices which approximate market. See Note 12 Inventory
Write-down and Loss on Firm Sales and Purchase Commitment. The Company also
enters into agreements with suppliers of raw materials which require the Company
to provide finished goods in exchange therefore. The Company did not have a
significant commitment to provide finished goods with its suppliers under these
exchange agreements at December 31, 2000. At December 31, 2000, the Company has
a standby letter of credit outstanding related to its Chemical Business of
approximately $4.3 million.

In July 1995, the Company entered into a product supply agreement with a third
party whereby the Company is required to make minimum monthly facility fee and
other payments which aggregate $71,965. In return for this payment, the Company
is entitled to certain quantities of compressed oxygen produced by the third
party. Except in circumstances as defined by the agreement, the monthly payment
is payable regardless of the quantity of compressed oxygen used by the Company.
The term of this agreement, which has been included in the above minimum
operating lease commitments, is for a term of 15 years; however, after the
agreement has been in effect for 60 months, the Company can terminate the
agreement without cause at a cost of approximately $4.5 million. Based on the
Company's estimate of compressed oxygen demands of the plant, the cost of the
oxygen under this agreement is expected to be favorable compared to floating
market prices. Purchases under this agreement aggregated $933,000, $912,000 and
$938,000 in 2000, 1999 and 1998, respectively.



                                      F-36
<PAGE>   85

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

LEGAL MATTERS

The Company and its operations are subject to numerous Environmental Laws and to
other federal, state and local laws regarding health and safety matters ("Health
Laws"). In particular, the manufacture and distribution of chemical products are
activities which entail environmental risks and impose obligations under the
Environmental Laws and the Health Laws, many of which provide for substantial
fines and criminal sanctions for violations. There can be no assurance that
material costs or liabilities will not be incurred by the Company in complying
with such laws or in paying fines or penalties for violation of such laws. The
Environmental Laws and Health Laws and enforcement policies thereunder relating
to the Chemical Business have in the past resulted, and could in the future
result, in penalties, cleanup costs, or other liabilities relating to the
handling, manufacture, use, emission, discharge or disposal of pollutants or
other substances at or from the Company's facilities or the use of disposal of
certain of its chemical products. Significant expenditures have been incurred by
the Chemical Business at the El Dorado Facility in order to comply with the
Environmental Laws and Health Laws. The Chemical Business will be required to
make additional significant site or operational modifications at the El Dorado
Facility, involving substantial expenditures.

The Chemical Business entered into consent administrative order with the
Arkansas Department of Environmental Quality ("ADEQ") in August, 1998 (the
"Wastewater Consent Order"). The Wastewater Consent Order recognized the
presence of nitrate contamination in the shallow groundwater and required the
Chemical Business to undertake on-site bioremediation. The bioremediation was
not successful in achieving denitrification. The Chemical Business is preparing
a report to the ADEQ regarding field testing of the shallow groundwater. Upon
completion of the waste minimization activities referenced below, a final remedy
for groundwater contamination will be selected, based on an evaluation of risk.
There are no known users of groundwater in the area, and preliminary risk
assessments have not identified any risk that would require additional
remediation. The Wastewater Consent Order included a $183,700 penalty
assessment, of which $125,000 will be satisfies over five years at expenditures
of $25,000 per year for waste minimization activities. The Chemical Business has
documented in excess of $25,000 on expenditures for each of the years 1998, 1999
and 2000.

        The Wastewater Consent Order Consent Order also required installation of
an interim groundwater treatment system (which is now operating) and certain
improvements in the wastewater collection and treatment system (discussed
below). Twelve months after all improvements are in place, the risk will be
reevaluated, and a



                                      F-37
<PAGE>   86

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


final decision will be made on what additional groundwater remediation, if any,
is required. There can be no

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

assurance that the risk assessment will be approved by the ADEQ, or that further
work will not be required.

The Wastewater Consent Order also requires the Chemical Business to undertake a
facility wide wastewater evaluation and pollutant source control program and
facility wide wastewater minimization program. The program requires that the
subsidiary complete rainwater drain off studies including engineering design
plans for additional water treatment components to be submitted to the State of
Arkansas, by the revised date of October 1, 2001. The construction of the
additional water treatment components is required to be completed by the revised
date of October 1, 2002 and the El Dorado plant has been mandated to be in
compliance with the final effluent limits on or before the revised date of
April, 2003. The aforementioned compliance deadlines, however, are not scheduled
to commence until after the State of Arkansas has issued a renewal permit
establishing new, more restrictive effluent limits. Alternative methods for
meeting these requirements are continuing to be examined by the Chemical
Business. The Company believes, although there can be no assurance, that any
such new effluent limits would not have a material adverse effect on the
Company. The Wastewater Consent Order provided that the State of Arkansas will
make every effort to issue the renewal permit by December 1, 1999; however, the
State of Arkansas has delayed issuance of the permit. Because the Wastewater
Consent Order provides that the compliance deadlines may be extended for
circumstances beyond the reasonable control of the Company, and because the
State of Arkansas has not yet issued the renewal permit, the Company does not
believe that failure to meet the aforementioned compliance deadlines will
present a material adverse impact. The State of Arkansas has been advised that
the Company is seeking financing from Arkansas authorities for the projects
required to comply with the Wastewater Consent Order and the Company has
requested that the permit be further delayed until financing arrangements can be
made, which requests have been met to date. The wastewater program is currently
expected to require future capital expenditures of approximately $2 to $3
million. Negotiations for securing financing are currently underway.

The Company including its subsidiaries, is a party to various other claims,
legal actions, and complaints arising in the ordinary course of business. In the
opinion of management after consultation with counsel, all claims, legal actions
(including those described above) and complaints are not presently probable of
material loss, are adequately covered by insurance, or if not so covered, are
without merit or are of such kind, or involve such amounts that unfavorable
disposition would not have a material effect on the financial



                                      F-38
<PAGE>   87

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


position of the Company, but could have a material impact to the net income
(loss) of a particular quarter or year, if resolved unfavorably.

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

OTHER

LSB and, thus, the Company has retained certain risks associated with its
operations, choosing to self-insure up to various specified amounts under its
health insurance program and maintains loss sensitive (retrospective) policies
on its automotive, workers compensation and general liability programs. LSB
reviews such programs on at least an annual basis to balance the cost-benefit
between its coverage and retained exposure. See the Services Agreement, Note 3.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following discussion of fair values is not indicative of the overall fair
value of the Company's balance sheet since the provisions of the SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments," do not apply to all
assets, including intangibles. Fair values for fixed rate borrowings, other than
the Notes, are estimated using a discounted cash flow analysis that applies
interest rates currently being offered on borrowings of similar amounts and
terms to those currently outstanding. The fair value of the Notes was determined
based on a quotation for such securities. As of December 31, 2000 and 1999,
carrying values of variable rate debt which aggregated $37.8 million and $25.2
million, respectively, approximated estimated fair value. As of December 31,
2000 and 1999, carrying values of fixed rate debt which aggregated $88.4 million
and $117.0 million, respectively, had estimated fair values of approximately
$36.6 million and $38.4 million, respectively.

At December 31, 2000 and 1999, the carrying value of the intercompany loans of
$15.3 million exceeded the estimated fair value of such loans (assuming full
realization) by approximately $2.8 million and $1.7 million, respectively.

As of December 31, 2000 and 1999, the carrying values of cash and cash
equivalents, accounts receivable, accounts payable, and accrued liabilities
approximated their estimated fair value.

12. INVENTORY WRITE-DOWN AND LOSS ON FIRM SALES AND PURCHASE COMMITMENT

The Chemical Business had a firm uncancelable commitment to purchase anhydrous
ammonia pursuant to the terms of a supply contract (Note 10 - Commitments and
Contingencies, Purchase Commitments). Based on the pricing index contained in
this



                                      F-39
<PAGE>   88

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


contract, prices paid during 2000 and 1999, were higher than the current market
spot price. As a result, in 2000 and 1999 a subsidiary of the Company recorded
loss provisions for anhydrous ammonia required to be purchased during the
remainder of the contract aggregating approximately $2.5 and $8.4 million,
respectively. At December 31, 2000 and 1999, the accrued liability for future
payments of the loss provision included in the Consolidated Balance Sheet was
approximately $6.9 and $7.4 million, respectively ($3.5 and $1.8 million of
which is included in accrued liabilities due within one year as of December 31,
2000 and 1999, respectively). During 1999, the Company's Chemical Business also
wrote down the carrying value of certain nitrate-based inventories by
approximately $1.6 million. Substantially all of the inventory written down was
sold during 1999. Due to the pricing mechanism in the contract, it is reasonably
possible that this loss provision estimate may change in the near term.

Also during November and December 2000, the Company entered into a forward sales
commitment with a customer for deliveries in 2001 which ultimately were at
prices below the Company's anticipated costs as of December 31, 2000. In
connection therewith, the Company recognized a loss on this sales commitment in
2000 of $.9 million.

13. SEGMENT INFORMATION

FACTORS USED BY MANAGEMENT TO IDENTIFY THE ENTERPRISE'S REPORTABLE SEGMENTS AND
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS

ClimaChem, Inc. has two reportable segments: the Chemical Business and the
Climate Control Business. The Company's reportable segments are based on
business units that offer similar products and services. The reportable segments
are each managed separately because they manufacture and distribute distinct
products with different production processes.

The Company evaluates performance and allocates resources based on operating
profit or loss. The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting policies.

DESCRIPTION OF EACH REPORTABLE SEGMENT

        CHEMICAL



                                      F-40
<PAGE>   89

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


        This segment manufactures and sells fertilizer grade ammonium nitrate
        and urea ammonia nitrate for the agriculture industry, explosive grade
        ammonium nitrate

13. SEGMENT INFORMATION (CONTINUED)

        for the mining industry and concentrated, blended and mixed nitric acid
        for industrial applications. The Company's primary manufacturing
        facilities are located in El Dorado, Arkansas, Baytown, Texas and
        Cherokee, Alabama. Sales to customers of this segment primarily include
        farmers in the South Central and Southeast regions of the United States,
        coal mining companies in Kentucky, Missouri and West Virginia and
        industrial users of acids in the South and East regions of the United
        States.

        The Chemical Business is subject to various federal, state and local
        environmental regulations. Although the Company has designed policies
        and procedures to help reduce or minimize the likelihood of significant
        chemical accidents and/or environmental contamination, there can be no
        assurances that the Company will not sustain a significant future
        operating loss related thereto.

        In 1999, the Chemical Business sold its Australian subsidiary and
        incurred a loss upon disposition of $2.0 million. (See Note 4 --
        Business Disposed Of.)

        Further, the Company purchases substantial quantities of anhydrous
        ammonia and natural gas for use in manufacturing its products. The
        pricing volatility of such raw material directly affects the operating
        profitability of the Chemical segment. (See Note 12 -- Inventory
        Write-down and Loss on Firm Sales and Purchase Commitments.)

        CLIMATE CONTROL

        This business segment manufactures and sells, primarily from its various
        facilities in Oklahoma City, a variety of hydronic fan coil, water
        source heat pump products and other HVAC products for use in commercial
        and residential air conditioning and heating systems. The Company's
        various facilities in Oklahoma City comprise substantially all of the
        Climate Control segment's operations. Sales to customers of this segment
        primarily include original equipment manufacturers, contractors and
        independent sales representatives located throughout the world which are
        generally secured by a mechanic's lien, except for sales to original
        equipment manufacturers.

Credit, which is generally unsecured, is extended to customers based on an
evaluation of the customer's financial condition and other factors. Credit
losses are provided for in the



                                      F-41
<PAGE>   90

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


financial statements based on historical experience and periodic assessment of
outstanding account receivable, particularly those accounts which are past due.
The

13. SEGMENT INFORMATION (CONTINUED)

Company's periodic assessment of accounts and credit loss provisions are based
on the Company's best estimate of amounts which are not recoverable.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer bases, and
their dispersion across many different industries and geographic areas. As of
December 31, 2000 and 1999, the Company's accounts and notes receivable are
shown net of allowance for doubtful accounts of $4,026,000 and $4,085,000,
respectively.

Information about the Company's operations in different industry segments is
detailed below.



                                      F-42
<PAGE>   91

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


13. SEGMENT INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                2000            1999            1998
                                              ---------       ---------       ---------
                                                           (In Thousands)
<S>                                           <C>             <C>             <C>
Net sales:
  Businesses continuing:
     Chemical:
       Agricultural Products                  $  40,671       $  33,398       $  37,203
       Explosives                                51,438          49,965          57,427
       Industrial Acids                          57,289          44,044          31,131
                                              ---------       ---------       ---------
  Total Chemical                                149,398         127,407         125,761

     Climate Control:
       Water source heat pumps                   54,242          51,292          55,046
       Hydronic fan coils                        61,111          57,133          58,239
       Other HVAC products and services          15,221           8,630           2,500
                                              ---------       ---------       ---------
  Total Climate Control                         130,574         117,055         115,785

  Business disposed of -- Chemical                   --           7,461          14,184
                                              ---------       ---------       ---------
                                              $ 279,972       $ 251,923       $ 255,730
                                              =========       =========       =========

Gross profit
  Businesses continuing:
    Chemical                                  $  14,974       $  13,458       $  18,590
    Climate Control                              32,503          34,909          32,234
                                              ---------       ---------       ---------
                                              $  47,477          48,367          50,824
                                              =========       =========       =========

Operating profit (loss):
  Businesses continuing:
    Chemical                                  $    (230)      $  (1,353)      $   5,877
    Climate Control                               6,291           8,628           9,723
                                              ---------       ---------       ---------
                                                  6,061           7,275          15,600
  Business disposed of -- Chemical                   --          (1,632)         (2,467)
                                              ---------       ---------       ---------
                                                  6,061           5,643          13,133

Unallocated fees from Services Agreement
  and general corporate expenses, net            (4,516)         (4,526)         (2,881)
Interest income                                   1,683           1,512           1,445
Other income, net                                   211             981              23
Interest expense:
  Business disposed of                               --            (326)           (434)
  Businesses continuing                         (13,882)        (14,260)        (13,463)
Loss on businesses disposed of                       --          (1,971)             --
Provision for loss on firm sales and
  purchase commitments -- Chemical               (3,395)         (8,439)             --
Provision for impairment on long-lived
  assets                                             --          (3,913)             --
</TABLE>



                                      F-43
<PAGE>   92

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)

<TABLE>
<S>                                    <C>            <C>           <C>
Loss before provision (benefit) for
 income taxes and extraordinary gain   $  (13,838)    $  (25,299)   $   (2,177)
                                       ==========     ==========    ==========
</TABLE>



                                      F-44
<PAGE>   93

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


13. SEGMENT INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                      2000          1999          1998
                                                    --------      --------      --------
                                                               (In Thousands)
<S>                                                 <C>           <C>           <C>
Depreciation of property, plant and equipment:
  Businesses continuing:
    Chemical                                        $  6,617      $  7,283      $  7,019
    Climate Control                                    1,677         1,547         1,553
  Business disposed of -- Chemical                        --            --           973
                                                    --------      --------      --------
Total depreciation of property, plant and
equipment                                           $  8,324      $  8,830      $  9,545
                                                    ========      ========      ========

Additions to property, plant and equipment:
  Businesses continuing:
    Chemical                                        $  3,997      $  3,670      $  5,221
    Climate Control                                    2,781         3,489         2,720
                                                    --------      --------      --------
Total additions to property, plant and
equipment                                           $  6,778      $  7,159      $  7,941
                                                    ========      ========      ========

Total assets:
  Businesses continuing:
    Chemical                                        $108,387      $102,185      $116,655
    Climate Control                                   61,865        61,781        40,498
    Corporate assets                                  18,915        20,112        22,653
  Business disposed of -- Chemical                        --            --        16,797
                                                    --------      --------      --------
Total assets                                        $189,167      $184,078      $196,603
                                                    ========      ========      ========
</TABLE>

Revenues by industry segment include revenues from unaffiliated customers, as
reported in the consolidated financial statements. Intersegment revenues, which
are accounted for at transfer prices ranging from the cost of producing or
acquiring the product or service to normal prices to unaffiliated customers, are
not significant.

Gross profit by industry segment represents net sales less cost of sales.
Operating profit by industry segment represents gross profit less selling,
general and administrative expenses. In computing operating profit, none of the
following items have been added or deducted: fees from Service Agreements,
general corporate expenses, income taxes, interest expense, provision for loss
on firm sales and purchase commitments, provision for impairment on long-lived
assets, results from businesses disposed of or extraordinary gain.



                                      F-45
<PAGE>   94

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


13. SEGMENT INFORMATION (CONTINUED)

Total assets by industry segment are those assets used in the operations of each
industry. Corporate assets are those principally owned by the parent company not
involved in the two identified industries.

Information about the Company's domestic and foreign operations for each of the
three years in the period ended December 31, 2000 is detailed below:

<TABLE>
<CAPTION>
             GEOGRAPHIC REGION                      2000            1999            1998
             -----------------                    ---------       ---------       ---------
                                                               (In Thousands)
<S>                                               <C>             <C>             <C>
Sales:
  Businesses continuing:
    Domestic                                      $ 274,427       $ 241,198       $ 239,257
    Foreign                                           5,545           3,264           2,289
                                                  ---------       ---------       ---------
                                                    279,972         244,462         241,546
  Foreign business disposed of -- Chemical               --           7,461          14,184
                                                  ---------       ---------       ---------
                                                  $ 279,972       $ 251,923       $ 255,730
                                                  =========       =========       =========

Income (loss) before provision (benefit) for
 income taxes and extraordinary gain:
    Businesses continuing:
      Domestic                                    $ (13,517)      $ (21,086)      $     964
      Foreign                                          (321)           (284)           (240)
                                                  ---------       ---------       ---------
                                                    (13,838)        (21,370)            724
  Foreign business disposed of -- Chemical               --          (1,958)         (2,901)
  Loss on disposal of foreign business --
    Chemical                                             --          (1,971)             --
                                                  ---------       ---------       ---------
                                                  $ (13,838)      $ (25,299)      $  (2,177)
                                                  =========       =========       =========

Long-lived assets:
    Domestic                                      $  72,825       $  75,667       $  77,724
    Foreign -- Business disposed of                      --              --           4,665
                                                  ---------       ---------       ---------
                                                  $  72,825       $  75,667       $  82,389
                                                  =========       =========       =========
</TABLE>



                                      F-46
<PAGE>   95

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


13. SEGMENT INFORMATION (CONTINUED)

Revenues by geographic region include revenues from unaffiliated customers, as
reported in the consolidated financial statements. Revenues earned from sales or
transfers between affiliates in different geographic regions are shown as
revenues of the transferring region and are eliminated in consolidation.

Revenues from unaffiliated customers include foreign export sales as follows:

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
      GEOGRAPHIC REGION                    2000         1999         1998
      -----------------                   -------      -------      -------
                                                    (In Thousands)
<S>                                       <C>          <C>          <C>
Canada                                    $ 5,744      $ 5,954      $ 7,051
Middle East                                 3,695        4,431        5,055
Mexico and Central and South America          834        1,144          493
Other                                       3,609        4,240        5,077
                                          -------      -------      -------
                                          $13,883      $15,769      $17,676
                                          =======      =======      =======
</TABLE>

MAJOR CUSTOMER

Revenues from sales to one customer, Bayer Corporation ("Bayer") of the
Company's Chemical Business segment represented approximately $38.4 million and
$17.2 million for the years ended 2000 and 1999, respectively (none in 1998). As
discussed in Note 10 Commitments and Contingencies, under the terms of the Bayer
Agreement, Bayer will purchase from a subsidiary of the Company all of its
requirements for nitric acid to be used at its Baytown, Texas facility for an
initial ten-year term ending May 2009.

14. LIQUIDITY AND MANAGEMENT'S PLAN

As of December 31, 2000, the Company had working capital of $.3 million ($17.2
million as of December 31, 1999). Working capital at December 31, 2000 includes
$37.1 million of long-term debt due within one year of which $32.7 million
relates to the Company's revolving credit facility which has a stated maturity
of April 2005. For each of the three years in the period ended December 31,
2000, the Company generated cash from operating activities of $3.8 million, $1.7
million and $3.9 million, respectively.

As of December 31, 2000, LSB and certain of its subsidiaries, including the
Company, were parties to a working capital line of credit evidenced by two
separate loan agreements ("Agreements") with a lender. The term of the
Agreements, as amended, was through December 31, 2000, and was automatically
being renewed thereafter for successive terms



                                      F-47
<PAGE>   96

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


of one month each. The Company's outstanding borrowings under the Agreements at
December 31, 2000 was $32.7 million.

In April 2001, the Company replaced its existing Revolving Credit Facility
("Revolver") with a new lender. See Note 7 -- Long-Term Debt.

As of April 16, 2001 the Company had borrowing availability under the Foothill
Facility of $4.5 million, with an effective interest rate of 10%. Borrowings
under the Foothill Facility outstanding at April 16, 2001, were $41.5 million.
The interest on the outstanding debt under the Foothill Facilities at April 16,
2001, at the rates then in effect would approximate $4.2 million annually.

For 2001, the Company has planned capital expenditures of approximately $5
million but such capital expenditures are dependent upon obtaining acceptable
financing. The Company expects to delay these expenditures as necessary based on
the availability of financing. The Company has obtained a fourteen (14) month
extension of the compliance dates under its wastewater management project and in
the implementation dates of such project. Because the Company has not completed
its evaluation of engineering alternatives, the Company has not yet provided to
the state of Arkansas its final design plans under the new extended deadlines.
The consent order provides for an October 1, 2001 deadline for submission of
final design plans and will be preceded by the agency's issuance of a revised
permit. The revised permit will include the discharge limits that will apply to
the wastewater treatment project. To date the state has deferred issuance of the
revised permit. The Company continues to regularly advise the state of the
projects engineering status and financing status. Construction of the wastewater
treatment project is subject to the Company obtaining financing to fund this
project. There are no



                                      F-48
<PAGE>   97

                                 ClimaChem, Inc.

             Notes to Consolidated Financial Statements (continued)


assurances that the Company will be able to obtain the required financing.
Failure to construct the wastewater treatment project could have a material
adverse effect on the Company.

During 2000, the Company repurchased $25.2 million of the Senior Unsecured Notes
and recognized a gain of approximately $17.4 million, before income taxes. These
purchases will serve to reduce interest expense by approximately $1.9 million
annually.

The Company has a letter of intent to sell its explosive business distribution
outlets and a long-term supply agreement with a third party which the Company
currently expects to close in May 2001. If these transactions are executed, they
are expected to have the effect of providing working capital from the proceeds
of the sale of approximately $3.5 million, reduce outstanding accounts
receivable and inventory, as well as provide a more constant and predictable
operating margin in the Company's explosives business.

In April 2001, a subsidiary of LSB, which is not a subsidiary of the Company
entered into a contract with a third party to sell land adjacent to the Crystal
City Plant for $4.5 million, before selling and closing expenses. The buyer has
65 days to complete due diligence. Should this transaction close, up to $2
million of the proceeds will be available to LSB and its subsidiaries which are
not subsidiaries of the Company with the remainder to be applied against the
Company's outstanding balance on the Foothill Facility revolver.

A subsidiary of the Company is negotiating to sell its option to acquire a
building in which its heat pumps are built to a subsidiary of LSB that is not
ClimaChem or a subsidiary of ClimaChem for $2.0 million, plus receipt of an
unsecured promissory note in the amount of $1.6 million ("Note") to be held by
the Company. In connection with this proposed sale, the lease and the option to
purchase the building held by the subsidiary of the Company is to be extended
from February 28, 2003 to November 11, 2007. The exercise price of the option
to purchase will be based on the remaining outstanding balance of the mortgage
on the building at the time the option is exercised plus $1,000, less the
amount of the Note. The closing of this transaction is subject to certain
conditions.

As previously stated, LSB, the parent of the Company, owes the Company
approximately $15.3 million, of which $10.0 million bears an annual rate of
interest of 10-3/4%, payable semiannually on June 1 and December 1, with the
principal due in 2007 and $3.4 million bears interest at 7% with the principal
and interest due in 2007. The net amount due from LSB also includes $2.0 million
which is due on demand. The Company currently expects to collect the interest on
these notes from LSB when due; however, no demand is expected to be made on the
$2.0 million.

During 2001, the Company has experienced a significant increase in the sales
prices of its nitrogen-based products compared to 2000, due primarily to reduced
competition in the market including a reduction in foreign imports. The Company
has also seen a reduction in its raw material costs of its Chemical Business
from the later part of 2000 and early 2001, which are expected to result in
improved margins in that business. The Company's Climate Control Business has
continued to experience strong demand and steady increases in margins,
contributing to a return to profitability for the Company in March 2001.

With these improved business economics, the completion of the Foothill Facility
in April 2001, and the lack of other unforeseen adverse events, management of
the Company expects to see significant improvements in operating results for the
Company in 2001 from 2000 and believes the Company will have adequate resources
to meet its obligations as they come due; however, this expectation may change
in the near term.



                                      F-49
<PAGE>   98
                                 ClimaChem, Inc.

                          Supplementary Financial Data

                      Quarterly Financial Data (Unaudited)

                    (In Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                                          MARCH 31        JUNE 30     SEPTEMBER 30    DECEMBER 31
                                          ---------       --------    ------------    -----------
<S>                                       <C>             <C>            <C>            <C>
2000
Total revenues                            $  67,438       $ 74,323       $ 66,383       $ 73,722
                                          =========       ========       ========       ========

Gross profit on net sales                 $  14,543       $ 14,305       $ 10,218       $  8,411
                                          =========       ========       ========       ========

Net loss before extraordinary gain        $    (295)      $ (2,827)      $ (3,252)      $ (7,699)
                                          =========       ========       ========       ========

Extraordinary gain before taxes                  --       $ 13,469       $  3,952             --
                                          =========       ========       ========       ========

1999
Total revenues                            $  60,190       $ 72,003       $ 61,037       $ 61,186
                                          =========       ========       ========       ========

Gross profit on net sales                 $  13,019       $ 13,616       $ 11,920       $  9,694
                                          =========       ========       ========       ========

Net loss                                  $  (1,151)      $ (7,441)      $ (2,753)      $ (7,837)
                                          =========       ========       ========       ========
</TABLE>


The Company recorded provisions for losses on firm sales and purchase
commitments of $1.5 million, $1.0 million and $.9 million in the first, second
and fourth quarters of 2000, respectively and $7.5 million and $.9 million in
the second quarter and third quarter of 1999, respectively.

The Company repurchased approximately $19.2 million and $6.0 million of Senior
Unsecured Notes in the second and third quarter of 2000, respectively. Therefore
the Company recognized pre-tax extraordinary a gain, of approximately $13.5
million and $3.9 million, respectively.

In the second quarter of 1999, the Company incurred a loss of $2.0 million on
the disposal of its Australian subsidiary, TES.

The Company recorded a provision for impairment on long-lived assets of $3.9
million in the fourth quarter of 1999.

Total revenues, as reported above, includes interest income of $410,000,
$443,000, $395,000 and $435,000 and $340,000, $387,000, $387,000 and $398,000
for the quarter ended March 31, June 30, September 30 and December 31, 2000 and
1999, respectively.


                                      F-50
<PAGE>   99

                                ClimaChem, Inc.

                Schedule II -- Valuation and Qualifying Accounts

                  Years ended December 31, 2000, 1999 and 1998

                             (Dollars in Thousands)



<TABLE>
<CAPTION>
                                                     ADDITIONS      DEDUCTIONS
                                      BALANCE AT     CHARGED TO     WRITE-OFFS/     BALANCE
                                       BEGINNING     COSTS AND        COSTS         AT END
DESCRIPTION                             OF YEAR       EXPENSES       INCURRED       OF YEAR
                                      ----------     ----------     -----------     -------
<S>                                   <C>            <C>            <C>             <C>
Accounts receivable--allowance
  for doubtful accounts (1):
    2000                                $1,541         $1,960         $  504         $2,997
                                        ======         ======         ======         ======

    1999                                $1,802         $  828         $1,089         $1,541
                                        ======         ======         ======         ======

    1998                                $1,478         $  971         $  647         $1,802
                                        ======         ======         ======         ======

Notes receivable--allowance
  for doubtful accounts (1):
    2000                                $2,544            $--         $1,515         $1,029
                                        ======         ======         ======         ======

    1999                                $2,544            $--            $--         $2,544
                                        ======         ======         ======         ======

    1998                                $1,690         $  854            $--         $2,544
                                        ======         ======         ======         ======

Accrual for plant turnaround:
    2000                                $1,299         $1,922         $1,373         $1,848
                                        ======         ======         ======         ======

    1999                                $1,104         $1,420         $1,226         $1,298
                                        ======         ======         ======         ======

    1998                                $1,263         $2,264         $2,423         $1,104
                                        ======         ======         ======         ======
</TABLE>


(1)     Deducted in the balance sheet from the related assets to which the
        reserve applies.

---------------



                                      F-51
<PAGE>   100

                               INDEX TO EXHIBITS


        3.1. Certificate of Incorporation of ClimaChem, Inc., which the Company
hereby incorporates by reference from Exhibit 3.1 to the Company's Registration
Statement, No. 333-44905.

        3.2. Bylaws of ClimaChem, Inc., which the Company hereby incorporates by
reference from Exhibit 3.2 to the Company's Registration Statement, No.
333-44905.

        4.1. Indenture, dated as of November 26, 1997, by and among ClimaChem,
Inc., the Subsidiary Guarantors and Bank One, N.A., as trustee, which the
Company hereby incorporates by reference from Exhibit 4.1 to LSB Industries,
Inc.'s Form 8-K, dated November 26, 1997.

        4.2. Form 10 3/4% Series B Senior Notes due 2007, which the Company
hereby incorporates by reference from Exhibit 4.3 to the Company's Registration
Statement, No. 333-44905.

        4.3. Promissory Note, dated November 26, 1997, executed by LSB
Industries, Inc. in favor of ClimaChem, Inc., which the Company hereby
incorporates by reference from Exhibit 10.1 to the Company's Registration
Statement, No. 333-44905.

        4.4. First supplement to indenture dated as of February 9, 1999 which is
incorporated by reference from Exhibit 4.19 to LSB's Form 10-K for the year
ended December 31, 1998.

        10.1. Services Agreement, dated November 21, 1997, between LSB
Industries, Inc. and ClimaChem, Inc., which the Company hereby incorporates by
reference from Exhibit 10.4 to the Company's Registration Statement, No.
333-44905.

        10.2. Management Agreement, dated November 21, 1997, between LSB
Industries, Inc. and ClimaChem, Inc., which the Company hereby incorporates by
reference from Exhibit 10.5 to the Company's Registration Statement, No.
333-44905.

        10.3. Tax Sharing Agreement, dated November 21, 1997, between LSB
Industries, Inc. and ClimaChem, Inc., which the Company hereby incorporates by
reference from Exhibit 10.6 to the Company's Registration Statement, No.
333-44905.

        10.4. Union Contracts, dated August 5, 1995, between EDC and the Oil,
Chemical and Atomic Workers, and the United Steel Workers of America, dated
November 1, 1995, which the Company hereby incorporates by reference from
Exhibit 10.7 to the Company's Form 10-K for the fiscal year ended December 31,
1995.

        10.5. Severance Agreement, dated January 17, 1989, between LSB
Industries, Inc. and Jack E. Golsen, which the Company hereby incorporates by
reference from Exhibit 10.48 to LSB Industries, Inc.'s Form 10-K for fiscal year
ended December 31, 1988. LSB Industries, Inc. also entered into identical
agreements with Tony M. Shelby, David R. Goss, Barry H. Golsen, David M. Shear,
and Jim D. Jones, and the Company will provide copies thereof to the Commission
upon request.


<PAGE>   101

        10.6. Employment Agreement and Amendment to Severance Agreement, dated
January 12, 1989 between LSB Industries, Inc. and Jack E. Golsen, dated March
21, 1996, which the Company hereby incorporates by reference from Exhibit 10.15
to LSB Industries, Inc.'s Form 10-K for fiscal year ended December 31, 1995.

        10.7. Letter Amendment, dated May 14, 1997, to Loan and Security
Agreement between DSN Corporation and The CIT Group/Equipment Financing, Inc.,
is incorporated by reference from Exhibit 10.1 to LSB Industries, Inc.'s Form
10-Q for the fiscal quarter ended March 31, 1997.

        10.8. Amendment to Loan and Security Agreement, dated November 21, 1997,
between DSN Corporation and The CIT Group/Equipment Financing, Inc., which the
Company hereby incorporates by reference from Exhibit 10.19 to the Company's
Registration Statement, No. 333-44905.

        10.9. Guaranty Agreement, dated November 21, 1997, executed by
ClimaChem, Inc. in favor of The CIT Group/Equipment Financing, Inc., which the
Company hereby incorporates by reference from Exhibit 10.20 to the Company's
Registration Statement, No. 333-44905.

        10.10. Promissory Note, dated July 14, 1989, from Climate Master, Inc.
to Oklahoma County Finance Authority, which the Company hereby incorporates by
reference from Exhibit 10.21 to the Company's Registration Statement, No.
333-44905.

        10.11. Extension of Maturity on Promissory Note, dated February 7, 1997,
relating to the Promissory Note, dated July 14, 1989, from Climate Master, Inc.,
to Oklahoma County Finance Authority, which the Company hereby incorporates by
reference from Exhibit 10.22 to the Company's Registration Statement, No.
333-44905.

        10.12. Mortgage of Tenant's Interest in Lease, dated July 1, 1989,
executed by Climate Master, Inc. in favor of the Oklahoma County Finance
Authority, which the Company hereby incorporates by reference from Exhibit 10.23
to the Company's Registration Statement, No. 333-44905.

        10.13. Project Loan Agreement, dated July 1, 1989, between Climate
Master, Inc., and the Oklahoma County Finance Authority, which the Company
hereby incorporates by reference from Exhibit 10.24 to the Company's
Registration Statement, No. 333-44905.

        10.14. Land Lease, dated March 1, 1995, between DSN Corporation and Koch
Sulphur Products Company, which the Company hereby incorporates by reference
from Exhibit 10.29 to the Company's Registration Statement, No. 333-44905.

        10.15. Promissory Note, dated June 2, 1997, executed by International
Environmental Corporation in favor of ORIX Credit Alliance, Inc., which the
Company hereby incorporates by reference from Exhibit 10.30 to the Company's
Registration Statement, No. 333-44905.

        10.16. Security Agreement-Mortgage on Goods and Chattels, dated April
18, 1997, executed by International Environmental Corporation in favor of ORIX
Credit Alliance, Inc., which the Company hereby incorporates by reference from
Exhibit 10.31 to the Company's Registration Statement, No. 333-44905.

        10.17. Lease Agreement, dated March 7, 1988, between Northwest Financial
Corporation and International Environmental Corporation, which

<PAGE>   102

the Company hereby incorporates by reference from Exhibit 10.32 to the Company's
Registration Statement, No. 333-44905.

        10.18. First Amendment, dated August 17, 1995, to Lease Agreement, dated
March 7, 1988, between Prime Financial Corporation and International
Environmental Corporation, which the Company hereby incorporates by reference
from Exhibit 10.33 to the Company's Registration Statement, No. 333-44905.

        10.19. Assignment, dated August 17, 1995, between Northwest Financial
Corporation and Prime Financial Corporation, which the Company hereby
incorporates by reference from Exhibit 10.34 to the Company's Registration
Statement, No. 333-44905.

        10.20. Loan and Security Agreement, dated March 14, 1995, between
International Environmental Corporation and Met-Life Capital Corporation, which
the Company hereby incorporates by reference from Exhibit 10.35 to the Company's
Registration Statement, No. 333-44905.

        10.21. Lease Agreement, dated April 3, 1996, between Amplicon Financial
and International Environmental Corporation, which the Company hereby
incorporates by reference from Exhibit 10.36 to the Company's Registration
Statement, No. 333-44905.

        10.22. Equipment Purchase and Security Agreement, dated February 1,
1994, between U.S. Amada Ltd. and Climate Master, Inc., which the Company hereby
incorporates by reference from Exhibit 10.37 to the Company's Registration
Statement, No. 333-44905. Climate Master has entered into three other Equipment
Purchase and Security Agreements which are substantially identical in all
material respects except the principal amount is $380,000, $88,000, and
$330,000, respectively. Copies of each of the foregoing will be provided to the
Commission upon request.

        10.23. Loan and Security Agreement (DSN Plant), dated October 31, 1994,
between DSN Corporation and The CIT Group, which the Company hereby incorporates
by reference from Exhibit 10.1 to LSB Industries, Inc.'s Form 10-Q for the
fiscal quarter ended September 30, 1994.

        10.24. Loan and Security Agreement (Mixed Acid Plant), dated April 5,
1995, between DSN Corporation and The CIT Group, which the Company hereby
incorporates by reference from Exhibit 10.25 to LSB Industries, Inc.'s Form 10-K
for the fiscal year ended December 31, 1994.

        10.25. First Amendment to Loan and Security Agreement (DSN Plant), dated
June 1, 1995, between DSN Corporation and The CIT Group/Equipment Financing,
Inc., which the Company hereby incorporates by reference from Exhibit 10.13 to
the Company's Registration Statement, No. 333-44905.

        10.26. First Amendment to Loan and Security Agreement (Mixed Acid
Plant), dated November 15, 1995, between DSN Corporation and The CIT
Group/Equipment Financing, Inc., which the Company hereby incorporates by
reference from Exhibit 10.15 to the Company's Registration Statement, No.
333-44905.

        10.27. Loan and Security Agreement (Rail Tank Cars), dated November 15,
1995, between DSN Corporation and The CIT Group/Equipment Financing, Inc., which
the Company hereby incorporates by reference from Exhibit 10.16 to the Company's
Registration Statement, No. 333-44905.


<PAGE>   103

        10.28. First Amendment to Loan and Security Agreement (Rail Tank Cars),
dated November 15, 1995, between DSN Corporation and The CIT Group/Equipment
Financing, Inc., which the Company hereby incorporates by reference from Exhibit
10.17 to the Company's Registration Statement, No. 333-44905.

        10.29. Letter Amendment, dated May 14, 1997, to Loan and Security
Agreement between DSN Corporation and The CIT Group/Equipment Financing, Inc.,
which the Company hereby incorporates by reference from Exhibit 10.1 to LSB
Industries, Inc.'s Form 10-Q for the fiscal quarter ended March 31, 1997.

        10.30. Amendment to Loan and Security Agreement, dated November 21,
1997, between DSN Corporation and The CIT Group/Equipment Financing, Inc., which
the Company hereby incorporates by reference from Exhibit 10.19 to the Company's
Registration Statement, No. 333-44905.

        10.31. Anhydrous Ammonia Sales Agreement, dated May 28, 1997, to be
effective January 1, 1997, between Koch Nitrogen Company and El Dorado Chemical
Company, which the Company hereby incorporates by reference from Exhibit 10.1 to
LSB Industries, Inc.'s Form 10-Q for the fiscal quarter ended June 30, 1997.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.

        10.32. Baytown Nitric Acid Project and Supply Agreement, dated June 27,
1997, by and among El Dorado Nitrogen Company, El Dorado Chemical Company and
Bayer Corporation, which the Company hereby incorporates by reference from
Exhibit 10.2 to LSB Industries, Inc.'s Form 10-Q for the fiscal quarter ended
June 30, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT S
THE SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25, 1997, GRANTING A
REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

        10.33. First Amendment to Baytown Nitric Acid Supply Agreement, dated
February 1, 1999, between El Dorado Nitrogen Company and Bayer Corporation,
which the Company hereby incorporates by reference from Exhibit 10.30 to LSB
Industries, Inc.'s Form 10-K for the fiscal year ended December 31, 1998.
CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
A REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND
EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND
EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.

        10.34. Service Agreement, dated June 27, 1997, between Bayer Corporation
and El Dorado Nitrogen Company, which the Company hereby incorporates by
reference from Exhibit 10.3 to LSB Industries, Inc.'s Form 10-Q for the fiscal
quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN
OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551, DATED SEPTEMBER 25,
1997, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF
INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

        10.35. Ground Lease, dated June 27, 1997, between Bayer Corporation and
El Dorado Nitrogen Company, which the Company hereby incorporates by reference
from Exhibit 10.4 to LSB Industries, Inc.'s

<PAGE>   104

Form 10-Q for the fiscal quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN
THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551,
DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER
THE FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

        10.36. Participation Agreement, dated as of June 27, 1997, among El
Dorado Nitrogen Company, Boatmen's Trust Company of Texas as Owner Trustee,
Security Pacific Leasing corporation, as Owner Participant and a Construction
Lender, Wilmington Trust Company, Bayerische Landesbank, New York Branch, as a
Construction Lender and the Note Purchaser, and Bank of America National Trust
and Savings Association, as Construction Loan Agent, which the Company hereby
incorporates by reference from Exhibit 10.5 to LSB Industries, Inc.'s Form 10-Q
for the fiscal quarter ended June 30, 1997. CERTAIN INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF #5551,
DATED SEPTEMBER 25, 1997, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER
THE FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.

        10.37. Lease Agreement, dated as of June 27, 1997, between Boatmen's
Trust Company of Texas as Owner Trustee and El Dorado Nitrogen Company, which
the Company hereby incorporates by reference from Exhibit 10.6 to LSB
Industries, Inc.'s Form 10-Q for the fiscal quarter ended June 30, 1997.

        10.38. Security Agreement and Collateral Assignment of Construction
Documents, dated as of June 27, 1997, made by El Dorado Nitrogen Company, which
the Company hereby incorporates by reference from Exhibit 10.7 to LSB
Industries, Inc.'s Form 10-Q for the fiscal quarter ended June 30, 1997.

        10.39. Security Agreement and Collateral Assignment of Facility
Documents, dated as of June 27, 1997, made by El Dorado Nitrogen Company and
consented to by Bayer Corporation, which the Company hereby incorporates by
reference from Exhibit 10.8 to LSB Industries, Inc.'s Form 10-Q for the fiscal
quarter ended June 30, 1997.

        10.40. Amendment to Loan and Security Agreement, dated March 16, 1998,
between The CIT Group/Equipment Financing, Inc., and DSN Corporation, which the
Company hereby incorporates by reference from Exhibit 10.54 to the Company's
Registration Statement, No. 333-44905.

        10.41. Sales Contract, dated December 7, 1998, between Solutia, Inc. and
El Dorado Chemical Company, which the Company hereby incorporates by reference
from Exhibit 10.39 to LSB Industries, Inc.'s Form 10-K for the fiscal year ended
December 31, 1998. CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS
IT IS THE SUBJECT OF A REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE
OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST.

        10.42. Agreement, dated March 23, 1999, among El Dorado Chemical
Company, El Dorado Nitrogen Company, Bayer Corporation, ICF Kaiser Engineers,
Inc., ICF Kaiser International, Inc., and Acstar Insurance Company, which the
Company hereby incorporates by reference from Exhibit 10.41 to LSB Industries,
Inc.'s Form 10-K for the fiscal year ended December 31, 1998.


<PAGE>   105

        10.43. Union Contract, dated as of August 1, 1998, between EDC and the
International Association of Machinists and Aerospace Workers, which the Company
hereby incorporates by reference from Exhibit 10.42 to LSB Industries, Inc.'s
Form 10-K for the year ended December 31, 1998.

        10.44. Stock Purchase Agreement, dated February 9, 1999, by and between
LSB Holdings, Inc. and ClimaChem, Inc., which the Company hereby incorporates by
reference from Exhibit 10.59 to the Company's Form 10-K for the fiscal year
ended December 31, 1998.

        10.45. Amendment to Anhydrous Ammonia Sales Agreement, dated January 4,
2000, to be effective October 1, 1999, between Koch Nitrogen Company and El
Dorado Chemical Company, which is incorporated by reference from LSB Industries,
Inc. Amendment No 2 to its 1999 Form 10-K. CERTAIN INFORMATION WITHIN THIS
EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF#9650, DATED
JULY 2000, GRANTING A REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.

        10.46. Anhydrous Ammonia Sales Agreement, dated January, 12, 2000, to be
effective October 1, 1999, between Koch Nitrogen and El Dorado Chemical Company,
which is incorporated by reference from exhibit 10.44 to LSB Industries, Inc.
Amendment No 2 to its 1999 Form 10-K. CERTAIN INFORMATION WITHIN THIS EXHIBIT
HAS BEEN OMITTED AS IT IS THE SUBJECT OF COMMISSION ORDER CF#9650, DATED JULY
2000, GRANTING A REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.

        10.47. Rail Car Service Agreement, dated July 29, 1999, between Prime
Financial Corporation and El Dorado Chemical Company, which the Company hereby
incorporates by reference from Exhibit 10.2 to the Company's Form 10-Q for the
fiscal quarter ended September 30, 1999.

        10.48. Covenant waiver letter, dated October 19, 2000, with CIT Group,
which is incorporated by reference from exhibit 10.1 to LSB Industries, Inc.
Form 10-Q for the quarter ended September 30, 2000.

        10.49. Lease Agreement, dated October 31, 2000 between Cherokee
Nitrogen Company and El Dorado Chemical Company.

        21.1. Subsidiaries of the Company

        23.1. Consent of Independent Auditors