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
For the fiscal year ended December
31, 2007
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
transition period from __________ to __________
Commission
File Number: 1-7677
LSB INDUSTRIES,
INC.
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware
|
73-1015226
|
|
(State
of Incorporation)
|
(I.R.S.
Employer)
Identification
No.)
|
|
16
South Pennsylvania Avenue
Oklahoma
City, Oklahoma
|
73107
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant's
Telephone Number, Including Area Code: (405) 235-4546
Securities
Registered Pursuant to Section 12(b) of the Act:
|
Title
of Each Class
|
Name
of Each Exchange
On
Which Registered
|
|
|
Common
Stock, Par Value $.10
|
American
Stock Exchange
|
Securities
Registered Pursuant to Section 12(g) of the Act: Preferred Share Purchase Rights
1
|
(Facing
Sheet Continued)
|
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
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. [X] Yes [ ] 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. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [
]
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). [ ] Yes [X] No
The
aggregate market value of the Registrant’s voting common equity held by
non-affiliates of the Registrant, computed by reference to the price at which
the voting common stock was last sold as of June 29, 2007, was
approximately $272 million. As a result, the Registrant is an accelerated filer
as of December 31, 2007. For purposes of this computation, shares of the
Registrant’s common stock beneficially owned by each executive officer and
director of the Registrant and by Jayhawk Capital Management, L.L.C. and its
affiliates were deemed to be owned by affiliates of the Registrant as of June
29, 2007. Such determination should not be deemed an admission that such
executive officers, directors and other beneficial owners of our common stock
are, in fact, affiliates of the Registrant or affiliates as of the date of this
Form 10-K.
As of
March 7, 2008 the Registrant had 21,106,292 shares of common stock outstanding
(excluding 3,448,518 shares of common stock held as treasury
stock).
2
FORM 10-K
OF LSB INDUSTRIES, INC.
TABLE OF
CONTENTS
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Page
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PART
I
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5
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17
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| 23 | |||
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23
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25
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28
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29
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PART
II
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31
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|
33
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34
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68
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71
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71
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72
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74
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PART
III
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|||
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79
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|
85
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3
|
FORM
10-K OF LSB INDUSTRIES, INC.
TABLE
OF CONTENTS
|
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Page
|
||
|
100
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|
106
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||
|
110
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|
PART
IV
|
|
|
|
112
|
4
PART I
General
LSB
Industries, Inc. (the "Company", “Registrant”, “LSB”, "We", "Us", or "Our") was
formed in 1968 as an Oklahoma corporation, and became a Delaware corporation in
1977. We are a diversified holding company. Our wholly-owned subsidiary,
ThermaClime, Inc. (“ThermaClime”) through its subsidiaries, owns substantially
all of our core businesses consisting of the:
|
·
|
Climate
Control Business engaged in the manufacturing and selling of a broad range
of heating, ventilation and air conditioning (“HVAC”) products for the
niche markets we serve. These products are used in commercial and
residential new building construction, renovation of existing buildings
and replacement of existing
systems.
|
|
·
|
Chemical
Business engaged in the manufacturing and selling of chemical products
produced from plants in Texas, Arkansas and Alabama for the industrial,
mining and agricultural markets.
|
Certain
statements contained in this Part I may be deemed to be forward-looking
statements. See "Special Note Regarding Forward-Looking
Statements."
We
believe our Climate Control Business has developed leadership positions in niche
markets by offering extensive product lines, customized products and improved
technologies. Under this focused strategy, we have developed what we believe to
be the most extensive line of water source heat pumps and hydronic fan coils in
the United States. Further, we were a pioneer in the use of geothermal
technology in the climate control industry and have used it to create what we
believe to be the most energy efficient climate control systems commercially
available today. We employ highly flexible production capabilities that allow us
to custom design units for new construction markets and for the retrofit and
replacement markets. Our products are currently installed in some of the most
recognizable commercial developments in the country, including Prudential Tower,
Rockefeller Plaza, Trump Tower, and Time Warner Center, and are slated to be in
a number of developments currently under construction. In addition, we have a
significant presence in the lodging industry with installations in numerous
Hyatt, Marriott, Four Seasons, Starwood, Ritz Carlton and Hilton hotels. We also
have a substantial share of resort destinations in Las Vegas where we have units
installed in over 70,000 rooms for a number of premier properties, including the
MGM Grand, Luxor, Venetian, Treasure Island, Bellagio, Mandalay Bay, Caesar’s
Palace, Monte Carlo, Mirage, Golden Nugget, Hard Rock, Wynn resorts, and many
others.
Our
Chemical Business has three chemical production facilities located in Baytown,
Texas (the “Baytown Facility”), El Dorado, Arkansas (the “El Dorado Facility”)
and Cherokee, Alabama (the “Cherokee Facility”). Our Chemical Business is a
supplier to some of the world’s leading chemical and industrial companies. By
focusing on specific geographic areas, we have developed freight and
distribution advantages over many of our competitors, and we believe our
Chemical Business has established leading regional market positions, a key
element in the success of this
5
business.
The primary raw material feedstocks (natural gas, anhydrous ammonia and sulfur)
of the Chemical Business are commodities, subject to price fluctuations and are
purchased at prices in effect at time of purchase.
The
Baytown Facility consumes approximately 125,000 tons of purchased anhydrous
ammonia per year. The majority of the Baytown Facility’s production is sold
pursuant to a long-term contract that provides for a pass-through of certain
costs, including the anhydrous ammonia costs, plus a profit.
The El
Dorado Facility purchases approximately 220,000 tons of anhydrous ammonia and
40,000 tons of sulfur annually and produces and sells approximately 455,000 tons
of nitrogen-based products and approximately 120,000 tons of sulfuric acid per
year. The anhydrous ammonia is purchased pursuant to a supply agreement whereby
the El Dorado Facility secures the majority of its requirements of anhydrous
ammonia from one supplier. Although anhydrous ammonia is produced from natural
gas, the price does not necessarily follow the spot-price of natural gas in the
U.S. because anhydrous ammonia is an internationally traded commodity and the
relative price is set in the world market while natural gas is primarily a
nationally traded commodity. The ammonia supply to the El Dorado Facility is
transported from the Gulf of Mexico by pipeline. Our cost of anhydrous ammonia
is based upon formulas indexed to published industry prices, primarily tied to
import prices. Historically, the sulfur costs have been relatively stable;
however, the recent world sulfur shortages have led to significant increase in
the cost of this raw material.
The
Cherokee Facility normally consumes 4 to 6 million MMBtu’s of natural
gas annually and produces and sells approximately 305,000 tons of nitrogen-based
products per year. Natural gas is a primary raw material for anhydrous ammonia.
Natural gas costs continue to exhibit volatility. In 2007 daily spot prices per
MMBtu, excluding transportation, ranged from $5.30 to $10.59.
Due to
the uncertainty of the sales prices of our products in relation to the cost of
sulfur, anhydrous ammonia and natural gas, our Chemical Business has pursued a
strategy of developing customers that purchase substantial quantities of
products pursuant to sales agreements and/or pricing arrangements that provide
for the pass through of these raw material costs. These pricing arrangements
help mitigate the commodity risk inherent in the raw material feedstocks of
natural gas, anhydrous ammonia and sulfur. For 2007, approximately 60% of the
Chemical Business’ sales were made pursuant to sales agreements and/or pricing
arrangements that pass-through the cost of these raw materials. The remaining
sales are primarily into agricultural markets at the price in effect at time of
shipment. The sales prices of our agricultural products have only a moderate
correlation to the anhydrous ammonia and natural gas feedstock costs and reflect
market conditions for like and competing nitrogen sources. This can compromise
our ability to recover our full cost to produce the product in this market.
Additionally, the lack of sufficient non-seasonal sales volume to operate our
manufacturing facilities at optimum levels can preclude the Chemical Business
from reaching full performance potential. Our primary efforts to improve the
results of our Chemical Business include maintaining the current level of
non-seasonal sales volumes with an emphasis on customers that will accept the
commodity risk inherent with natural gas and anhydrous ammonia, while
maintaining a strong presence in the agricultural sector.
6
Segment Information and
Foreign and Domestic Operations and Export Sales
Schedules
of the amounts of net sales, gross profit, operating income (loss) and
identifiable assets attributable to each of our lines of business and of the
amount of our export sales in the aggregate and by major geographic area for
each of the last three years appear in Note 20 of the Notes to Consolidated
Financial Statements included elsewhere in this report.
Climate Control
Business
General
Our
Climate Control Business manufactures and sells a broad range of standard and
custom designed geothermal and water source heat pumps and hydronic fan coils as
well as other products for the niche markets we serve. These products are for
use in commercial and residential HVAC systems, including large custom air
handlers and modular chiller systems. The construction of commercial,
institutional and residential buildings including multi and single-family homes,
the renovation of existing buildings and the replacement of existing HVAC
systems drive the demand for our Climate Control products. Our Climate Control
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, industrial and high tech
manufacturing facilities, food and chemical processing facilities, and
pharmaceutical manufacturing facilities. We target many of our products to meet
increasingly stringent indoor air quality and energy efficiency
standards.
The
following table summarizes net sales information relating to our products of the
Climate Control Business:
|
2007
|
2006
|
2005
|
|
Percentage
of net sales of the Climate Control Business:
|
|||||||||
|
Geothermal
and water source heat pumps
|
58
|
%
|
61
|
%
|
54
|
%
|
|||
|
Hydronic
fan coils
|
30
|
%
|
27
|
%
|
34
|
%
|
|||
|
Other
HVAC products
|
12
|
%
|
12
|
%
|
12
|
%
|
|||
|
100
|
%
|
100
|
%
|
100
|
%
|
||||
|
Percentage
of our consolidated net sales:
|
|||||||||
|
Geothermal
and water source heat pumps
|
28
|
%
|
27
|
%
|
21
|
%
|
|||
|
Hydronic
fan coils
|
15
|
%
|
12
|
%
|
13
|
%
|
|||
|
Other
HVAC products
|
6
|
%
|
6
|
%
|
5
|
%
|
|||
|
49
|
%
|
45
|
%
|
39
|
%
|
Geothermal and Water Source
Heat Pumps
We
believe we are a leading provider of geothermal and water source heat pumps to
the commercial construction and renovation markets in the United States. Water
source heat pumps are highly efficient heating and cooling products, 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
7
applications,
particularly in medium to large sized buildings with many small, individually
controlled spaces. We believe 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.
Our
Climate Control Business has also developed the use of geothermal water source
heat pumps in residential and commercial applications. Geothermal systems, which
circulate water and antifreeze through an underground heat exchanger, are among
the most energy efficient systems available. We believe 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 our
geothermal products. We specifically target new residential construction of
moderate and high-end multi and single-family homes, as well as commercial
applications.
Hydronic Fan
Coils
We
believe that our Climate Control Business is a leading provider of hydronic fan
coils. Our Climate Control Business targets the commercial and institutional
markets. 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 other comparable systems used
where individual room control is required. Important components of our strategy
for competing in the commercial and institutional renovation and replacement
markets include the breadth of our product line coupled with customization
capability provided by a flexible manufacturing process. The lodging and
hospitality industry is a significant user of hydronic fan coils; however, fan
coils are used in a wide variety of applications.
Geothermal and Water Source
Heat Pump and Hydronic Fan Coil Market
We
estimate the annual United States market for water source heat pumps and
hydronic fan coils to be approximately $589 million based on data supplied by
the Air-Conditioning and Refrigeration Institute (“ARI”). Levels of repair,
replacement, and new construction activity generally drive demand in these
markets.
Production and
Backlog
We
manufacture our products in many sizes and configurations, as required by the
purchaser, to fit the space and capacity requirements of hotels, motels,
schools, hospitals, apartment buildings, office buildings and other commercial
or residential structures. In addition, most of these customer orders are placed
well in advance of required delivery dates.
During
2006 and 2007, we invested approximately $10.6 million in production and
fabrication equipment, plant-wide process control systems and other upgrades
relating to our Climate Control Business. In addition to the spending on
equipment and systems, during 2006 and 2007, we invested a total of
approximately $3.8 million in facilities.
8
As a result of record order intake level of our heat pump products during 2006 and 2007, our backlog of confirmed orders for these products had increased to high levels and our lead times had pushed out beyond levels that we consider to be optimum for good customer service. In order to work the backlog down and to improve product lead times, we have increased unit capacity by approximately 65% (through additional shifts, overtime, investment in equipment, and facilities) since the end of 2005, with the potential for a further increase in capacity by debottlenecking and the addition of certain fabrication equipment. The facility expansion included a new 46,000 square foot building next to our existing heat pump manufacturing facility and the renovation of 110,000 square feet of an existing facility for a distribution center.
Our fan
coil business also experienced significant increases in customer orders and
shipments during 2007 and was able to increase production capacity through
increased utilization of second shifts, equipment purchases, and the extension
and reconfiguration of production assembly lines. During 2007, we
also made capital investments to substantially increase our capacity of
tube-in-fin heat transfer coils used in geothermal and water source heat pumps
and hydronic fan coils.
For 2008,
we have committed to date to spend an additional $3.2 million for production
equipment and land for future expansion. Our investment in the Climate Control
Business will continue if order intake levels continue to warrant. These
investments have and will increase our capacity to produce and distribute our
Climate Control products.
As of
December 31, 2007 and 2006, the backlog of confirmed orders for our Climate
Control Business was approximately $54.5 million and $80.4 million,
respectively. The decrease in our backlog relates primarily to utilizing the
increased capacity discussed above. Our experience indicates that customers
generally do not cancel orders after we receive them. We expect to ship
substantially all the orders in the backlog within the next twelve
months.
Marketing and
Distribution
Distribution
Our
Climate Control Business sells its products to mechanical contractors, original
equipment manufacturers (“OEMs”) and distributors. Our sales to mechanical
contractors primarily occur through independent manufacturers' representatives,
who also represent complementary product lines not manufactured by us. OEMs
generally consist of other air conditioning and heating equipment manufacturers
who resell under their own brand name the products purchased from our Climate
Control Business in competition with us. The following table summarizes net
sales to OEMs relating to our products of the Climate Control
Business:
|
2007
|
2006
|
2005
|
|
Net
sales to OEMs as a percentage of:
|
|||||||||
|
Net
sales of the Climate Control Business
|
19
|
%
|
17
|
%
|
22
|
%
|
|||
|
Consolidated
net sales
|
9
|
%
|
8
|
%
|
9
|
%
|
9
Market
Our
Climate Control Business depends primarily on the commercial construction
industry, including new construction and the remodeling and renovation of older
buildings, and on the residential 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 our Climate Control
Business, which materials include compressors, steel, electric motors, valves
and copper. Periodically, our Climate Control Business enters into fixed-price
copper contracts. We do not anticipate any difficulties in obtaining necessary
materials for our Climate Control Business. In 2008, however, changes in market
volatility, supply and demand could result in increased costs, lost production
and/or delayed shipments. We believe the majority of cost increases, if any,
will be passed to our customers in the form of higher prices as product price
increases are implemented and take effect and while we believe we will have
sufficient materials, a shortage of raw materials could impact production of our
Climate Control products.
Competition
Our
Climate Control Business competes primarily with six companies, some of whom are
also our customers. Some of our competitors serve other markets and have greater
financial and other resources than we do. Our Climate Control Business
manufactures a broader line of geothermal and water source heat pump and fan
coil products than any other manufacturer in the United States, and we believe
that we are competitive as to price, service, warranty and product
performance.
Continue to Introduce New
Products
Our
Climate Control Business will continue to launch new products and product
upgrades in an effort to maintain and increase our current market position and
to establish a presence in new markets.
Chemical
Business
General
Our
Chemical Business manufactures three principal product lines that are derived
from natural gas, anhydrous ammonia, and sulfur:
|
·
|
concentrated,
blended and regular nitric acid, mixed nitrating acids, metallurgical
grade anhydrous ammonia, sulfuric acid, and high purity ammonium nitrate
for industrial applications,
|
|
·
|
anhydrous
ammonia, fertilizer grade ammonium nitrate, urea ammonium nitrate (“UAN”),
and ammonium nitrate ammonia solution (“ANA”) for the agricultural
applications, and
|
|
·
|
industrial
grade ammonium nitrate and solutions for the mining
industry.
|
10
The
following table summarizes net sales information relating to our products of the
Chemical Business:
|
2007
|
2006
|
2005
|
|
Percentage
of net sales of the Chemical Business:
|
|||||||||
|
Agricultural
products
|
41
|
%
|
34
|
%
|
35
|
%
|
|||
|
Industrial
acids and other chemical products
|
33
|
%
|
37
|
%
|
34
|
%
|
|||
|
Mining
products
|
26
|
%
|
29
|
%
|
31
|
%
|
|||
|
100
|
%
|
100
|
%
|
100
|
%
|
||||
|
Percentage
of our consolidated net sales:
|
|||||||||
|
Agricultural
products
|
20
|
%
|
18
|
%
|
21
|
%
|
|||
|
Industrial
acids and other chemical products
|
16
|
%
|
19
|
%
|
20
|
%
|
|||
|
Mining
products
|
13
|
%
|
16
|
%
|
18
|
%
|
|||
|
49
|
%
|
53
|
%
|
59
|
%
|
Agricultural
Products
Our
Chemical Business produces ammonium nitrate at the El Dorado Facility and
anhydrous ammonia, UAN, and ANA at the Cherokee Facility; all of which are
nitrogen based fertilizers. The Cherokee Facility also has the ability to
produce agricultural grade ammonium nitrate. 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 and ranchers 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. Our agricultural markets
include a high concentration of pastureland and row crops, which favor our
products. We sell these agricultural products to farmers, ranchers, fertilizer
dealers and distributors located in the Central and Southeastern United States,
which are in relatively close proximity to the El Dorado and Cherokee
Facilities. We develop our market position in these areas by emphasizing high
quality products, customer service and technical advice. During the past two
years, we have been successful in expanding outside our traditional markets by
barging to distributors on the Tennessee and Ohio rivers, and by railing into
certain Western States. 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 El Dorado
Facility establishes long-term relationships with end-users through its network
of wholesale and retail distribution centers and the Cherokee Facility sells
directly to agricultural customers.
Industrial Acids and Other
Chemical Products
Our
Chemical Business manufactures and sells industrial acids and other chemical
products primarily to the polyurethane, paper, fibers and electronics
industries. We are a major supplier of concentrated nitric acid and mixed
nitrating acids, specialty products used in the manufacture of fibers, gaskets,
fuel additives, ordnance, and other chemical products. In addition, at the El
Dorado Facility, we produce and sell blended and regular nitric acid and we are
a niche market supplier of sulfuric acid, primarily to the region’s key paper
manufacturers. At the Cherokee Facility, we are also a niche market supplier of
industrial and high purity ammonia for many specialty applications, including
chemicals to treat emissions from power plants.
11
We
compete based upon service, price, location of production and distribution
sites, product quality and performance. We also believe we are the largest
domestic merchant marketer of concentrated and blended nitric acids and provide
inventory management as part of the value-added services offered to certain
customers.
The
Baytown Facility is one of the two largest nitric acid manufacturing units in
the United States, with demonstrated capacity exceeding 1,350 short tons per
day. Subsidiaries within our Chemical Business entered into a series of
agreements with Bayer Corporation ("Bayer") (collectively, the "Bayer
Agreement"). Under the Bayer Agreement, El Dorado Nitric Company ("EDNC"), a
subsidiary within our Chemical Business, operates the Baytown Facility at
Bayer's Baytown, Texas operation. Bayer purchases from EDNC all of its
requirements for nitric acid at its Baytown operation for a term through at
least May 2009. EDNC purchases from Bayer certain of its requirements for
materials, utilities and services for the manufacture of nitric acid. Upon
expiration of the initial ten-year term in 2009, 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.
Discussions with Bayer have begun regarding a renewal in 2009.
Mining
Products
Our
Chemical Business manufactures industrial grade ammonium nitrate (“AN”) and 83%
AN solution for the mining industry. The El Dorado Facility is a party to a
long-term cost-plus supply agreement. Under this supply agreement, the El Dorado
Facility supplies Orica USA, Inc. (“Orica”) with a significant volume of
industrial grade ammonium nitrate per year for a term through at least December
2010, with provisions for renewal thereafter.
Major
Customer
The
following summarizes net sales to our major customer relating to our products of
the Chemical Business:
|
2007
|
2006
|
2005
|
|
Net
sales to Orica as a percentage of:
|
||||||||
|
Net
sales of the Chemical Business
|
19
|
%
|
20
|
%
|
19
|
%
|
||
|
Consolidated
net sales
|
9
|
%
|
10
|
%
|
11
|
%
|
Raw
Materials
Anhydrous
ammonia and natural gas represent the primary components in the production of
most of the products of our Chemical Business. Spot natural gas and anhydrous
ammonia costs have fluctuated dramatically in recent years. The following table
shows, for the period indicated, the high and low published prices for natural
gas based upon the daily spot price at the Tennessee 500 pipeline pricing point
and for ammonia based upon the low Tampa metric price per ton as published by
Ferticon and FMB Ammonia reports.
12
|
Daily
Spot Natural Gas Prices Per MMBtu
|
Ammonia
Price Per Metric Ton
|
|
High
|
Low
|
High
|
Low
|
||||
|
2005
|
$15.25
|
$5.50
|
$399
|
$235
|
|||
|
2006
|
$ 9.90
|
$3.54
|
$395
|
$270
|
|||
|
2007
|
$10.59
|
$5.30
|
$460
|
$295
|
As of
March 7, 2008, the published price of natural gas, as described above, was
approximately $9.61 per MMBtu and ammonia was $635 per metric ton. Natural gas
is an integral raw material in the production of anhydrous ammonia. Prices of
raw material feedstocks of natural gas and anhydrous ammonia remain volatile,
and we have pursued a strategy of developing customers that purchase substantial
quantities of products pursuant to sales agreements and/or pricing formulas that
provide for the pass-through of these raw material costs. These pricing
arrangements provide a hedge against the commodity risk inherent in the raw
material feedstocks of natural gas and anhydrous ammonia. In addition, we use
exchange-traded futures contracts to hedge the natural gas requirements for most
sales commitments with firm sales prices.
Interruptions
to the natural gas supply chain by the hurricanes of 2005 continued to
exacerbate natural gas prices into early 2006. The Cherokee Facility was forced
to temporarily curtail production in January and February of 2006 when major
customers reduced purchases due to the high natural gas raw material
pass-through costs. By mid-2006, the Gulf of Mexico supply was back to
approximately 90% of pre-hurricane levels based on a report from the U.S.
Department of the Interior. During 2007, the Cherokee Facility did not curtail
production due to interruptions to their natural gas supply chain.
Under an
agreement, as amended, with its principal supplier of anhydrous ammonia, the El
Dorado Facility will purchase a majority of its anhydrous ammonia requirements
using a market price-based formula plus transportation to the El Dorado Facility
through at least December 31, 2008. We believe that we can obtain anhydrous
ammonia from other sources in the event of an interruption of service under the
above-referenced contract. The Cherokee Facility’s natural gas feedstock
requirements are generally purchased at spot market
price. Periodically, the Cherokee Facility will hedge certain of its
natural gas requirements with exchange-traded futures contracts as discussed
above.
Historically,
the sulfur costs have been relatively stable; however, as of the date of this
report, the recent world sulfur shortages have led to a significant increase in
the cost of this raw material during the second half at 2007 and into
2008.
Seasonality
We
believe that the only seasonal products of our 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 our
agricultural products are distributed. As a result, our Chemical Business
increases its inventory of ammonium nitrate and UAN prior to the beginning of
each planting season. In addition,
the amount and timing of sales to the agricultural markets depend upon weather
conditions and other circumstances beyond our control.
13
Regulatory
Matters
Our
Chemical Business is subject to extensive federal, state and local environmental
laws, rules and regulations as discussed under “Environmental Matters" of this
Item and "Legal Proceedings" of Item 3.
Because
of growing concerns over ammonium nitrate, other nitrogen fertilizers and other
potentially hazardous materials, there have been new and proposed federal, state
and industry requirements to place additional security controls over the
distribution, transportation and handling of these products. Based on our
current requirements, we believe there are no material capital expenditures to
be expended relating to our security controls. However, this expectation could
change in the near future.
We fully
support these initiatives and believe they will not materially affect the
viability of ammonium nitrate as a valued product to the agricultural
industry.
Competition
Our
Chemical Business competes with several chemical companies in our markets, such
as CF Industries, Dyno Nobel North America, Terra Industries and Potash Corp. of
Saskatchewan, many of whom have greater financial and other resources than us.
We believe that competition within the markets served by our Chemical Business
is primarily based upon service, price, location of production and distribution
sites, and product quality and performance.
Employees
As of
December 31, 2007, we employed 1,788 persons. As of that date, our Climate
Control Business employed 1,363 persons, none of whom was represented by a
union, and our Chemical Business employed 360 persons, with 138 represented by
unions under currently unexecuted negotiated agreements which the parties expect
to execute in the near future. Assuming the union agreements are executed in
their current form, the agreements will expire in July through November of
2010.
Environmental
Matters
Our
operations are subject to numerous environmental laws (“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
certain performance obligations, substantial fines and criminal sanctions for
violations. There can be no assurance that material costs or liabilities will
not be incurred by us 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 our Chemical Business have in the
past resulted, and could in the future result, in compliance expenses, cleanup
costs, penalties or other liabilities relating to the handling, manufacture,
use, emission, discharge or disposal of effluents at or from our facilities or
the use or disposal of certain of its chemical products. Historically,
significant expenditures have been incurred by
14
subsidiaries
within our Chemical Business in order to comply with the Environmental Laws and
Health Laws and are reasonably expected to be incurred in the
future.
The
Company has certain facilities in our Chemical Business that contain asbestos
insulation around certain piping and heated surfaces. The asbestos insulation is
in adequate condition to prevent leakage and can remain in place as long as the
facility is operated or remains assembled. The Company plans to maintain the
facilities in an adequate condition to prevent leakage through its standard
repair and maintenance activities.
1. Discharge
Water Matters
The El
Dorado Facility within our Chemical Business generates process wastewater. The
process water discharge and storm-water run off are governed by a state National
Pollutant Discharge Elimination System (“NPDES”) water discharge permit issued
by the Arkansas Department of Environmental Quality (“ADEQ”), which permit is to
be renewed every five years. The ADEQ issued to the El Dorado Facility a NPDES
water discharge permit in 2004, and the El Dorado Facility had until June 1,
2007 to meet the compliance deadline for the more restrictive limits under the
2004 NPDES permit. In order to meet the El Dorado Facility’s June 2007 limits,
the El Dorado Facility has significantly reduced the contaminant levels of its
wastewater.
The El
Dorado Facility has demonstrated its ability to comply with the more restrictive
permit limits, and the rules which support the more restrictive dissolved
minerals rules have been revised to authorize a permit modification to adopt
achievable dissolved minerals permit limits. The ADEQ has agreed to issue a
consent administrative order to authorize the El Dorado Facility to continue
operations without incurring permit violations pending the modification of the
permit to implement the revised rule and to dispose of the El Dorado Facility’s
wastewater into the creek adjacent to the El Dorado Facility. A draft
of the proposed consent administrative order has been prepared by the ADEQ and
submitted to the El Dorado Facility for review. We are currently
reviewing the proposed consent administrative order.
To meet
the June 2007 permit limits, the El Dorado Facility has conducted a study of the
creek adjacent to the El Dorado Facility to determine whether a permit
modification allowing for the discharge into the creek is appropriate. On
September 22, 2006, the Arkansas Pollution Control and Ecology Commission
approved the results of the study that showed that the proposed permit
modification is appropriate and the proposal to allow the El Dorado Facility to
dispose of its wastewater into the creek. A public hearing was
held on the matter on November 13, 2006 with minimal opposition. As a
result, the El Dorado Facility has been discharging its wastewater into the
creek.
In
addition, the El Dorado Facility has entered into a consent administrative order
(“CAO”) that recognizes the presence of nitrate contamination in the shallow
groundwater at the El Dorado Facility. A new CAO to address the shallow
groundwater contamination became effective on November 16, 2006 and requires the
evaluation of the current conditions and remediation based upon a risk
assessment. The CAO requires the El Dorado Facility to continue semi-annual
groundwater monitoring, to continue operation of a groundwater recovery system
and to submit a human health and ecological risk assessment to the ADEQ. The
final remedy for shallow groundwater contamination, should any remediation be
required, will be selected pursuant to the
15
new CAO
and based upon the risk assessment. As an interim measure, the El Dorado
Facility has installed two recovery wells to recycle groundwater and to recover
nitrates. The cost of any additional remediation that may be required will be
determined based on the results of the investigation and risk assessment and
cannot currently be reasonably estimated. Therefore, no liability has been
established at December 31, 2007.
2. Air
Matters
Under the
terms of a consent administrative order relating to air matters (“AirCAO”),
which became effective in February 2004, resolving certain air regulatory
alleged violations associated with the El Dorado Facility’s sulfuric acid plant
and certain other alleged air emission violations, the El Dorado Facility is
required to implement additional air emission controls at the El Dorado Facility
no later than February 2010. We currently estimate the remaining environmental
compliance related expenditures to be approximately $5.6 million, which has been
committed for 2008.
In
December 2006, the El Dorado Facility entered into a new CAO (“2006 CAO”) with
the ADEQ to resolve a problem with ammonia emissions from certain nitric acid
units. The catalyst suppliers had represented the volume of ammonia emissions
anticipated. The representation was the basis for the permitted emission limit,
but the representation of the catalyst suppliers was not accurate. The ADEQ
allowed the El Dorado Facility to re-evaluate the catalyst performance and
required the El Dorado Facility to submit a permit modification with the
appropriate ammonia limits. The permit modification was submitted to
ADEQ on June 11, 2007, and is currently under review. Until the permit is
modified, the 2006 CAO authorizes the El Dorado Facility to continue to operate
certain nitric acid units (even though the El Dorado Facility is in
non-compliance with the permitted emission limit for ammonia), provided that
during this period of time, the El Dorado Facility monitors and reports the
ammonia on a monthly basis.
3. Other
Environmental Matters
In April
2002, Slurry Explosive Corporation (“Slurry”), later renamed Chemex I Corp., a
subsidiary within our Chemical Business, entered into a Consent Administrative
Order (“Slurry Consent Order”) with the Kansas Department of Health and
Environment (“KDHE”), regarding Slurry’s Hallowell, Kansas manufacturing
facility (“Hallowell Facility”). The Slurry Consent Order addressed the release
of contaminants from the facility into the soils and groundwater and surface
water at the Hallowell Facility. There are no known users of the groundwater in
the area. The adjacent strip pit is used for fishing. Under the terms of the
Slurry Consent Order, Slurry is required to, among other things, submit an
environmental assessment work plan to the KDHE for review and approval, and
agree with the KDHE as to any required corrective actions to be performed at the
Hallowell Facility.
In
December 2002, Slurry and Universal Tech Corporation (“UTeC”), both subsidiaries
within our Chemical Business, sold substantially all of their operating assets
but retained ownership of the real property. At December 31, 2002, even though
we continued to own the real property, we did not assess our continuing
involvement with our former Hallowell Facility to be significant and therefore
accounted for the sale as discontinued operations. In connection with this sale,
UTeC leased the real property to the buyer under a triple net long-term lease
agreement.
16
However,
Slurry retained the obligation to be responsible for, and perform the activities
under, the Slurry Consent Order. In addition, certain of our subsidiaries agreed
to indemnify the buyer of such assets for these environmental matters. The
successor (“Chevron”), the prior owner of the Hallowell Facility has agreed,
within certain limitations, to pay and has been paying one-half of the costs
incurred under the Slurry Consent Order subject to reallocation.
Based on
additional modeling of the site, Slurry and Chevron are pursuing a course with
the KDHE of long-term surface and ground water monitoring to track the natural
decline in contamination, instead of the soil excavation proposed previously. On
September 12, 2007, the KDHE approved our proposal to perform two years of
surface and groundwater monitoring and to implement a Mitigation Work Plan to
acquire additional field data in order to more accurately characterize the
nature and extent of contaminant migration off-site. The two-year monitoring
program will terminate in February 2009. As a result of receiving approval from
the KDHE for our proposal, we recognized a reduction in our share of the
estimated costs associated with this remediation by $377,000. This reduction is
included in the net income from discontinued operations of $348,000 for 2007 (in
accordance with Statement of Financial Accounting Standards (“SFAS”)
144.
At
December 31, 2007, the total estimated liability (which is included in current
and noncurrent accrued and other liabilities) in connection with this
remediation matter is approximately $378,000 and Chevron’s share for these costs
(which is included in accounts receivable and other assets) is approximately
$194,000. These amounts are not discounted to their present value. It is
reasonably possible that a change in estimate of our liability and receivable
will occur in the near term.
Risks Related to Us and Our
Business
Cost
and the lack of availability of raw materials could materially affect our
profitability and liquidity.
Our sales
and profits are heavily affected by the costs and availability of primary raw
materials. These primary raw materials, which are purchased from
unrelated third parties, are subject to considerable price volatility.
Historically, when there have been rapid increases in the cost of these primary
raw materials, we have sometimes been unable to timely increase our sales prices
to cover all of the higher costs incurred. While we periodically enter into
exchange-traded futures contracts to hedge against price increases in certain of
these raw materials, there can be no assurance that we will effectively manage
against price fluctuations in those raw materials.
Anhydrous
ammonia and natural gas represent the primary raw material feedstocks in the
production of most of the products of the Chemical Business. Although our
Chemical Business has a program to enter into contracts with certain customers
that provide for the pass-through of raw material costs, we have a substantial
amount of sales that do not provide for the pass-through of raw material costs.
In addition, the Climate Control Business depends on raw materials such as
copper and steel, which have shown considerable price volatility. As a result,
in the future, we may not be able to pass along to all of our customers the full
amount of any increases in raw
17
material
costs. There can be no assurance that future price fluctuations in
our raw materials will not have an adverse effect on our financial condition,
liquidity and results of operations.
Additionally,
we depend on certain vendors to deliver the primary raw materials and other key
components that are required in the production of our products. Any disruption
in the supply of the primary raw materials and other key components could result
in lost production or delayed shipments. We have suspended in the
past, and could suspend in the future, production at our chemical facilities due
to, among other things, the high cost or lack of availability of such primary
raw materials. Accordingly, our financial condition, liquidity and results of
operations could be materially affected in the future by the lack of
availability of primary raw materials and other key components.
Periodically,
our Chemical Business may not generate significant positive cash
flows.
Due, in
part, to extensive capital expenditures, our Chemical Business may not generate
significant positive cash flows periodically. Continuing significant cash flow
expenditures by this business could have a material adverse effect on our
financial condition and liquidity.
Our
Climate Control and Chemical Businesses and their customers are sensitive to
certain economic cycles.
Our
Climate Control Business can be affected by cyclical factors, such as interest
rates, inflation and economic downturns. Our Climate Control Business depends on
sales to customers in the commercial construction and renovation industries,
which are particularly sensitive to these factors. A decline in the economic
activity in the United States has in the past, and could in the future,
have a material adverse effect on our customers in the commercial construction
and renovation industries in which our Climate Control Business sells a
substantial amount of its products. Such a decline could result in a decrease in
revenues and profits, and an increase in bad debts, in our Climate Control
Business.
Our
Chemical Business also can be affected by cyclical factors such as inflation,
global energy policy and costs, global market conditions and economic downturns
in specific industries. Certain sales of our Chemical Business are
sensitive to the level of activity in the agricultural, mining, automotive and
housing industries. A decline in the activity in these industries in the United
States has in the past, and could in the future, have a material adverse effect
on the results of our Chemical Business.
Weather
conditions adversely affect our Chemical Business.
The
agricultural products produced and sold by our Chemical Business have in the
past, and could in the future, to be materially affected by adverse weather
conditions (such as excessive rains or drought) in the primary markets for our
fertilizer and related agricultural products. If any of these unusual weather
events occur during the primary seasons for sales of our agricultural products
(March-June and September-November), this could have a material adverse effect
on the agricultural sales of our Chemical Business and our financial condition
and results of operation.
18
Environmental
and regulatory matters entail significant risk for us.
As
discussed under “Environmental Matters” of Item 1, our Chemical Business is
subject to numerous environmental laws and regulations. The manufacture and
distribution of chemical products are activities, which entail environmental
risks and impose obligations under environmental laws and regulations, many of
which provide for substantial fines and potential criminal sanctions for
violations. Our Chemical Business has in the past, and may in the future, be
subject to fines, penalties and sanctions for violations of environmental laws
and substantial expenditures for cleanup costs and other liabilities relating to
the handling, manufacture, use, emission, discharge or disposal of effluents at
or from the Chemical Business’ facilities. Further, a number of our Chemical
Business’ facilities are dependent on environmental permits to operate, the loss
or modification of which could have a material adverse effect on its operations
and our financial condition.
We
may be required to expand our security procedures and install additional
security equipment for our Chemical Business in order to comply with the
Homeland Security Act of 2002 and possible future government
regulation.
The
chemical industry in general, and producers and distributors of ammonium nitrate
specifically, are scrutinized by the government, industry and public on security
issues. Under the Homeland Security Act of 2002, as well as current and
proposed regulations, we may be required to incur substantial additional costs
relating to security at our chemical facilities, distribution centers, and our
customers, as well as in the transportation of our products. These costs
could have a material impact on our financial condition and results of
operation. The cost of such regulatory changes, if significant enough, could
lead some of our customers to choose alternate products
to ammonium nitrate, which would have a significant impact on our Chemical
Business.
A
substantial portion of our sales is dependent upon a limited number of
customers.
During
2007, four customers of our Chemical Business accounted for 44% of its net sales
and 22% of our consolidated sales, and our Climate Control Business had one
customer that accounted for 17% of its net sales and 8% of our consolidated
sales. The loss of, or a material reduction in purchase levels by, one or more
of these customers could have a material adverse effect on our business and our
results of operations, financial condition and liquidity if we are unable to
replace a customer on substantially similar terms.
There
is intense competition in the Climate Control and Chemical
industries.
Substantially
all of the markets in which we participate are highly competitive with respect
to product quality, price, design innovations, distribution, service,
warranties, reliability and efficiency. We compete with a number of established
companies that have greater financial, marketing and other resources.
Competitive factors could require us to reduce prices or increase spending on
product development, marketing and sales that would have a material adverse
effect on our business, results of operation and financial
condition.
19
We
are effectively controlled by the Golsen Group.
Jack E.
Golsen, our Chairman of the Board and Chief Executive Officer (“CEO”), members
of his immediate family (spouse and children), including Barry H. Golsen, our
Vice Chairman and President, entities owned by them and trusts for which they
possess voting or dispositive power as trustee (collectively, the “Golsen
Group”) beneficially owned as of February 29, 2008, an aggregate of 3,395,743
shares of our common stock and 1,020,000 shares of our voting preferred stock
(1,000,000 of which shares have .875 votes per share, or 875,000 votes), which
together votes as a class and represent approximately 19.5% of the voting power
of our issued and outstanding voting securities as of that date. In
addition, the Golsen Group also beneficially owned options and other convertible
securities that allowed its members to acquire an additional 116,500 shares of
our common stock within 60 days of February 29, 2008. Thus, the Golsen Group may
be considered to effectively control us. As a result, the ability of other
stockholders to influence our management and policies could be
limited.
Loss
of key personnel could negatively affect our business.
We
believe that our performance has been and will continue to be dependent upon the
efforts of our principal executive officers. We cannot promise you that our
principal executive officers will continue to be available. Jack E. Golsen has
an employment agreement with us. No other principal executive has an employment
agreement with us. The loss of some of our principal executive officers could
have a material adverse effect on us. We believe that our future success will
depend in large part on our continued ability to attract and retain highly
skilled and qualified personnel.
We
may have inadequate insurance.
While we
maintain liability insurance, including certain coverage for environmental
contamination, it is subject to coverage limits and policies may exclude
coverage for some types of damages (which may include warranty and product
liability claims). Although there may currently be sources from which such
coverage may be obtained, it may not continue to be available to us on
commercially reasonable terms or the possible types of liabilities that may be
incurred by us may not be covered by our insurance. In addition, our insurance
carriers may not be able to meet their obligations under the policies or the
dollar amount of the liabilities may exceed our policy limits. Even a partially
uninsured claim, if successful and of significant magnitude, could have a
material adverse effect on our business, results of operations, financial
condition and liquidity.
We
have not paid dividends on our outstanding common stock in many
years.
We have
not paid cash dividends on our outstanding common stock in many years, and we do
not currently anticipate paying cash dividends on our outstanding common stock
in the foreseeable future. However, our board of directors has not made a
definitive decision whether or not to pay such dividends in
2008.
20
Terrorist
attacks and other acts of violence or war, and natural disasters (such as
hurricanes, pandemic health crisis, etc.), have and could negatively impact the
U.S. and foreign companies, the financial markets, the industries where we
operate, our operations and profitability.
Terrorist
attacks and natural disasters (such as hurricanes) have in the past, and can in
the future, negatively affect our operations. We cannot predict further
terrorist attacks and natural disasters in the United States and elsewhere.
These attacks or natural disasters have contributed to economic instability in
the United States and elsewhere, and further acts of terrorism, violence, war or
natural disasters could further affect the industries where we operate, our
ability to purchase raw materials, our business, results of operations and
financial condition. In addition, terrorist attacks and natural disasters may
directly impact our physical facilities, especially our chemical facilities, or
those of our suppliers or customers and could impact our sales, our production
capability and our ability to deliver products to our customers. In
the past, hurricanes affecting the Gulf Coast of the United States have resulted
in damages to, or shutdown of, the gas pipeline to the Cherokee Facility,
resulting in that facility being shutdown for several weeks. The
consequences of any terrorist attacks or hostilities or natural disasters are
unpredictable, and we may not be able to foresee events that could have an
adverse effect on our operations.
Restatements and amendments to our
2004 audited financial statements and certain matters related to our disclosure
controls and procedures may present a risk of future restatements and could in
turn lead to legal exposure.
In
response to comments from the Securities and Exchange Commission (“SEC”) to our
2004 Form 10-K, and as a result of changes we made internally, we restated and
amended our 2004 audited financial statements and on December 30, 2005, filed a
Form 10-K/A (Amendment No. 1) for year ended December 31, 2004. As a result of
the restatement and amendments to our 2004 audited financial statements and SEC
comments, we also filed on December 30, 2005, an amended Form 10-Q/A for each of
the quarters ended March 31, 2005 and June 30, 2005.
As a
result of this restatement to our 2004 financial statements, we also revised our
2004 Form 10-K and first two quarters 2005 Form 10-Qs to provide that our
disclosure controls and procedures were not effective as of December 31, 2004,
March 31, 2005 and June 30, 2005, in our Form 10-K/A and Forms 10-Q/A, as a
result of assessing that the change from the LIFO method to the FIFO method of
accounting was not material resulting in the decision at the time of the change
not to disclose and not to restate the prior years financial statements. We
believe that during December 2005, we corrected the weakness to our disclosure
controls and procedures by, among other things, establishing a Disclosure
Committee to maintain oversight activities and to examine and reevaluate our
policies, procedures and criteria to determine materiality of items relative to
our financial statements taken as a whole. Restatements by others have, in some
cases, resulted in the filing of class action lawsuits against such companies
and their management and further inquiries from the SEC. Any similar lawsuit
against us could result in substantial defense and/or liability costs and would
likely consume a material amount of management’s attention that might otherwise
be applied to our business. Under certain circumstances, these costs might not
be covered by, or might exceed the limits of, our insurance
coverage.
21
By letter
received in August 2006 from the SEC, the SEC has made an informal inquiry of us
relating to the change in inventory accounting from LIFO to FIFO resulting in
the restatement of our financial statements, and, at this time, we do not know
if the informal inquiry:
· will rise
to the level of an investigation or proceeding, or
· will
result in an enforcement action, if any, by the SEC.
We
are a holding company and depend, in large part, on receiving funds from our
subsidiaries to fund our indebtedness.
Because
we are a holding company and operations are conducted through our subsidiaries,
principally ThermaClime and its subsidiaries, our ability to make scheduled
payments of principal and interest on our indebtedness depend on operating
performance and cash flows of our subsidiaries and the ability of our
subsidiaries to make distributions and pay dividends to us. Under its loan
agreements, ThermaClime and its subsidiaries may only make distributions and pay
dividends to us under limited circumstances and in limited amounts. If
ThermaClime is unable to make distributions or pay dividends to us, or the
amounts of such distributions or dividends are not sufficient for us to service
our debts, we may not be able to pay the principal or interest, or both, due on
our indebtedness.
Our
net operating loss carryforwards are subject to certain limitations and have not
been audited or approved by the Internal Revenue Service.
Our net
operating loss (“NOL”) carryforwards have resulted from certain historical
losses. At December 31, 2006, we had regular NOL carryforwards of approximately
$49.9 million, all of which we have utilized or anticipate utilizing to reduce
our federal income tax liability for 2007 and 2008. In future periods, our net
income and liquidity will be negatively affected as we recognize and pay income
taxes without the benefit of these NOL carryforwards. In addition, the amount of
these NOL carryforwards utilized has not been audited or approved by the
Internal Revenue Service.
Future
issuance or potential issuance of our common stock could adversely affect the
price of our common stock, our ability to raise funds in new stock offerings and
dilute your percentage interest in our common stock.
Future
sales of substantial amounts of our common stock or equity-related securities in
the public market, or the perception that such sales could occur, could
adversely affect prevailing trading prices of our common stock and could impair
our ability to raise capital through future offerings of equity or
equity-related securities. No prediction can be made as to the effect, if any,
that future sales of shares of common stock or the availability of shares of
common stock for future sale, will have on the trading price of our common
stock. Such future sales could also significantly reduce the percentage
ownership of our existing common stockholders.
22
We are subject to a variety of factors that could discourage other parties from attempting to acquire us.
Our
certificate of incorporation provides for a staggered board of directors and,
except in limited circumstances, a two-thirds vote of outstanding voting shares
to approve a merger, consolidation or sale of all, or substantially all, of our
assets. In addition, we have entered into severance agreements with our
executive officers and some of the executive officers of our subsidiaries that
provide, among other things, that if, within a specified period of time after
the occurrence of a change in control of our company, these officers are
terminated, other than for cause, or the officer terminates his employment for
good reason, we must pay such officer an amount equal to 2.9 times the officer’s
average annual gross salary for the last five years preceding the change in
control.
We have
authorized and unissued (including shares held in treasury) 53,982,012 shares of
common stock and 4,229,415 shares of preferred stock as of December 31, 2007.
These unissued shares could be used by our management to make it more difficult,
and thereby discourage an attempt to acquire control of us.
We have
adopted a preferred share purchase plan, which is designed to ensure that all of
our stockholders receive fair and equal treatment in the event of a proposed
takeover or abusive tender offer.
The
foregoing provisions and agreements are designed to discourage a third party
tender offer or proxy contest for control of us and could have the effect of
making it more difficult to remove incumbent management.
Delaware
has adopted an anti-takeover law which, among other things, will delay for three
years business combinations with acquirers of 15% or more of the outstanding
voting stock of publicly-held companies (such as us), unless (a) the acquirer
owned at least 85% of the outstanding voting stock of such company prior to
commencement of the transaction, or (b) two-thirds of the stockholders, other
than the acquirer, vote to approve the business combination after approval
thereof by the board of directors, and (c) the stockholders decide to opt out of
the statute.
Not
applicable.
Climate
Control Business
Our
Climate Control Business manufactures most of its heat pump products in a
270,000 square foot facility in Oklahoma City, Oklahoma. We lease this facility,
with an option to buy, through May 2016, with options to renew for three
additional five-year periods. For 2007, approximately 87% of the productive
capacity of this manufacturing facility was being utilized, based primarily on
two ten-hour shifts per day and a four-day work week. In addition, we acquired a
new 46,000
23
square
foot building adjacent to our existing heat pump manufacturing facility,
primarily used for storage of raw material inventory, and we renovated 110,000
square feet of an existing facility for a distribution center.
Our
Climate Control Business conducts its fan coil manufacturing operation in a
facility located in Oklahoma City, Oklahoma, consisting of approximately 265,000
square feet. We own this facility subject to a mortgage. For 2007, our Climate
Control Business was using 87% of the productive capacity, based on one ten-hour
shift per day and a four-day work week and a limited second shift in selected
areas. The fan coil manufacturing operation increased the utilization of a
second shift in order to increase its production capacity during
2007.
Our
Climate Control Business conducts its large air handler manufacturing operation
in a facility located in Oklahoma City, Oklahoma, consisting of approximately
110,000 square feet. We own this facility subject to a mortgage. For 2007,
approximately 57% of the productive capacity of this manufacturing facility was
being utilized, based on one eight-hour shift on a five-day work week and a
partial second shift in selected areas.
All of
the properties utilized by our Climate Control Business are considered by our
management to be suitable to meet the current needs of that
business.
Chemical
Business
Our
Chemical Business primarily conducts manufacturing operations (a) on 150 acres
of a 1,400 acre tract of land located at the El Dorado Facility, (b) on 160
acres of a 1,300 acre tract of land located at the Cherokee Facility and (c) on
leased property within Bayer’s complex in the Baytown, Texas. The Company and/or
its subsidiaries own all of its manufacturing facilities except the Baytown
Facility. The Baytown Facility is leased pursuant to a long-term lease with an
unrelated third party. Certain real property and equipment located at the El
Dorado and Cherokee Facilities are being used to secure a $50 million term loan.
For 2007, the following facilities were utilized based on continuous
operation:
|
Percentage
of Capacity
|
|
El
Dorado Facility (1)
|
92
|
%
|
||
|
Cherokee
Facility (2)
|
95
|
%
|
||
|
Baytown
Facility
|
91
|
%
|
(1) The
percentage of capacity for the El Dorado Facility relates to its nitric acid
capacity. The El Dorado Facility has capacity to produce other nitrogen products
in excess of its nitric acid capacity.
(2) The
percentage of capacity for the Cherokee Facility relates to its ammonia
production capacity. The Cherokee Facility has additional capacity for nitric
acid, ammonium nitrate and urea in excess of its ammonia
capacity.
24
In
addition to the El Dorado and Cherokee Facilities, our Chemical Business
distributes its agricultural products through 15 wholesale and retail
distribution centers, with 13 of the centers located in Texas (10 of which we
own and 3 of which we lease); 1 center located in Tennessee (owned); and 1
center located in Missouri (owned).
All of
the properties utilized by our Chemical Business are considered by our
management to be suitable and adequate to meet the current needs of that
business.
1. Environmental See
“Business-Environmental Matters” for a discussion as to:
|
·
|
certain
environmental matters relating to air and water issues at our El Dorado
Facility; and
|
|
·
|
certain
environmental remediation matters at our former Hallowell
Facility.
|
2. Other
Zeller
Pension Plan
In
February 2000, the Company’s board of directors authorized management to proceed
with the sale of the automotive products business, since the automotive products
business was no longer a “core business” of the Company. In May 2000, the
Company sold substantially all of its assets in its automotive products
business. After the authorization by the board, but prior to the sale, the
automotive products business purchased the assets and assumed certain
liabilities of Zeller Corporation (“Zeller”). The liabilities of Zeller assumed
by the automotive products business included Zeller’s pension plan, which is not
a multi-employer pension plan. In June 2003, the principal owner (“Owner”) of
the buyer of the automotive products business was contacted by a representative
of the Pension Benefit Guaranty Corporation (“PBGC”) regarding the plan. The
Owner was informed by the PBGC of a possible under-funding of the plan and a
possible takeover of the plan by the PBGC. The PBGC previously advised the
Company that the PBGC may consider the Company potentially liable for the
under-funding of the Zeller Plan in the event that the plan is taken over by the
PBGC and alleged that the under-funding is approximately $600,000.
Our ERISA counsel has advised us that, based on certain assumptions and
representations made by us to them, they believe that the possibility of an
unfavorable non-appealable verdict against us in a lawsuit if the PBGC attempts
to hold us liable for under-funding of the Zeller Plan is
remote.
MEI
Drafts
Masinexportimport
Foreign Trade Company (“MEI”) has given notice to the Company and Summit Machine
Tool Manufacturing Corp. (“Summit”), a subsidiary of the Company, alleging that
it was owed $1,533,000 in connection with MEI’s attempted collection of ten
non-negotiable bank drafts payable to the order of MEI. The bank drafts were
issued by Aerobit Ltd. (“Aerobit”), a non-U.S. company, which at the time of
issuance of the bank drafts, was a subsidiary of the Company. Each of the bank
drafts has a face value of $153,300, for an aggregate principal face value of
$1,533,000. The bank drafts were issued in September 1992, and had a maturity
date of December 31, 2001. Each bank draft was endorsed by LSB Corp., which at
the time of endorsement, was a subsidiary of the Company.
25
On
October 22, 1990, a settlement agreement between the Company, Summit, and MEI
(the “Settlement Agreement”), was entered into, and in connection with the
Settlement Agreement, Summit issued to MEI obligations totaling $1,533,000. On
May 16, 1992, the Settlement Agreement was rescinded by the Company, Summit, and
MEI at the request of MEI, and replaced with an agreement purportedly
substantially similar to the Settlement Agreement between MEI and Aerobit,
pursuant to which MEI agreed to replace the original $1,533,000 of Summit’s
obligations with Aerobit bank drafts totaling $1,533,000, endorsed by LSB Corp.
Aerobit previously advised us that MEI has not fulfilled the requirements under
the bank drafts for payment thereof. All of the Company’s ownership interest in
LSB Corp. was sold to an unrelated third party in September 2002. Further, all
of the Company’s interest in Aerobit was sold to a separate unrelated third
party, in a transaction completed on or before November 2002. Accordingly,
neither Aerobit, which was the issuer of the bank drafts, nor LSB Corp., which
was the endorser of the bank drafts, are currently subsidiaries of the
Company.
During
2007, Cromus, alleged to be a Romanian company and an assignee of MEI, filed a
lawsuit against us and two of our subsidiaries, Summit Machine Tool
Manufacturing Corp. (“Summit”) and Hercules Energy Mfg. Corp., Jack Golsen, our
CEO, Mike Tepper, an officer of our company, Bank of America Corporation and
others in the New York Supreme Court, in the case styled Cromus, as the assignee of
MEI vs. Summit, Index No. 114890107 (NY Sup. Ct., NY Co. The
complaint seeks $1,533,000 plus interest from 1990, $1,000,000 for failure to
purchase certain equipment and $1,000,000 in punitive damages. We intend to
contest this matter vigorously. As of December 31, 2007, no liability
has been established relating to these alleged damages.
The
Jayhawk Group and the University of Kansas Endowment Fund
During
July 2007, we mailed to all holders of record of our Series 2 Preferred a notice
of redemption of all of the outstanding shares of Series 2 Preferred. The
redemption of our Series 2 Preferred was completed on August 27, 2007, the
redemption date. The terms of the Series 2 Preferred required that for each
share of Series 2 Preferred so redeemed, we would pay, in cash, a
redemption price equal to $50.00 plus $26.25 representing dividends in arrears
thereon pro-rata to the date of redemption. There were 193,295 shares
of Series 2 Preferred outstanding, net of treasury stock, as of the date the
notice of redemption was mailed. Pursuant to the terms of the Series 2
Preferred, the holders of the Series 2 Preferred could convert each share into
4.329 shares of our common stock, which right to convert terminated 10 days
prior to the redemption date. If a holder of the Series 2 Preferred elected to
convert his, her or its shares into our common stock pursuant to its terms, the
Certificate of Designations for the Series 2 Preferred provided, and it is our
position, that the holder that so converts would not be entitled to receive
payment of any dividends in arrears on the shares so converted. The Jayhawk
Group, a former affiliate of ours, converted 155,012 shares of Series 2
Preferred into 671,046 shares of common stock. The Jayhawk Group has advised us
that it may bring legal action against us for all dividends in arrears
(approximately $4 million) on the shares of Series 2 Preferred that it converted
after receipt of the notice of redemption. The Company believes the likelihood
that the Jayhawk Group may recover the dividends in arrears is not probable.
Therefore, no liability has been established at December 31,
2007.
26
During
the first quarter of 2008, the University of Kansas Endowment Charitable Gift
Fund (“KU”) filed a lawsuit against us in the U.S. District Court, for the
District of Kansas at Kansas City, styled The KU Endownment Charitable
Gift Fund vs. LSB Industries, Inc., Case No. 08-CV-2066. KU alleges that
we improperly refused to accept 11,200 shares of Series 2 Preferred, which KU
received as a gift from the controlling party of the Jayhawk Group, in our
issuer exchange tender offer. Under the issuer exchange tender offer,
we offered to exchange each outstanding share of Series 2 Preferred for 7.4
shares of our common stock and a waiver of all dividends in arrears, except for
certain shares of Series 2 Preferred owned by the Jayhawk Group (including its
controlling party, Kent McCarthy) and the Golsen Group pursuant to an agreement
entered into between us and the Jayhawk Group. The gift to KU by the
controlling party of the Jayhawk Group was made after the announcement of the
issuer exchange tender offer, and it is our position, among other things, that
the tender of the shares given as a gift was made contrary to the agreement
between us and the Jayhawk Group and contrary to the terms of our issuer
exchange tender offer. KU alleges, among other things, that it
suffered losses because it was required to convert the 11,200 shares of Series 2
Preferred pursuant to the conversion terms of the Series 2 Preferred, which was
4.3 shares of our common stock for each share of Series 2 Preferred, and that
the conversion was less favorable than the terms of issuer exchange tender
offer. KU alleges that the refusal to accept the 11,200 shares of
Series 2 Preferred was in violation of §14(d) of the Securities Exchange Act of
1934 (“34 Act”), a violation of §10b and Rule 10b-5 and §18 of the 34 Act, the
Kansas Uniform Securities Act and common law fraud. We intend to
vigorously defend this matter. As of December 31, 2007, no liability has been
established relating to this claim. We have placed the carrier under
our Executive Organizational Liability Insurance Policy Including Securities
Liability (“Policy”) on notice of this claim and litigation. This matter is
being defended by our insurance carrier under the Policy under a reservation of
rights. Our Policy is subject to a $250,000 self insured retention for
securities actions.
We
received a letter dated May 23, 2007 from a law firm representing a stockholder
of ours demanding that we investigate potential short-swing profit liability
under Section 16(b) of the Exchange Act of the Jayhawk Group. The stockholder
alleges that the surrender by the Jayhawk Group of 180,450 shares of our Series
2 Preferred in our issuer exchange tender offer in March 2007 was
a sale which was subject to Section 16 and matchable against prior purchases of
Series 2 Preferred by the Jayhawk Group. The Jayhawk Group advised us that they
do not believe that they are liable for short-swing profits under Section 16(b).
The provisions of Section 16(b) provide that if we do not file a lawsuit against
the Jayhawk Group in connection with these Section 16(b) allegations within 60
days from the date of the stockholder’s notice to us, then the stockholder may
pursue a Section 16(b) short-swing profit claim on our behalf. We engaged our
outside corporate/securities counsel to investigate this matter. After
completion of this investigation,
we attempted to settle the matter with the Jayhawk Group but were unable to
reach a resolution satisfactory to all parties. On October 9, 2007, the law firm
representing the stockholder initiated a lawsuit against the Jayhawk Group
pursuing a Section 16(b) short-swing profit claim on our behalf up to
approximately $819,000. During the first quarter of 2008, the parties have
agreed to settle this claim by a payment to us by the Jayhawk Group of $180,000,
of which we will receive approximately $125,000 after attorneys’ fees. This
settlement is subject to a definitive settlement agreement.
27
Securities
and Exchange Commission Inquiry
The SEC
made an informal inquiry to the Company by letter dated August 15, 2006. The
inquiry relates to the restatement of the Company’s consolidated financial
statements for the year ended December 31, 2004 and accounting matters relating
to the change in inventory accounting from LIFO to FIFO. The Company has
responded to the inquiry. At the present time, the informal inquiry is not a
pending proceeding nor does it rise to the level of a government investigation.
Until further communication and clarification with the SEC, if any, the Company
is unable to determine:
|
|
·
|
if
the inquiry will ever rise to the level of an investigation or proceeding,
or
|
|
|
·
|
the
materiality to the Company’s financial position with respect to
enforcement actions, if any, the SEC may have available to
it.
|
Other
Claims and Legal Actions
Wetherell v. Climate
Master, a proposed class action filed by Donna Wetherell, individually
and as a class action representative, Plaintiff, and Climate Master, Inc.,
Defendant, in the Circuit Court of the First Judicial Circuit, Johnson County,
Illinois on September 14, 2007 alleges that certain evaporator coils sold by one
of our subsidiaries in the Climate Control Business, Climate Master, Inc.
(“Climate Master”) in the state of Illinois from 1990 to approximately 2003 were
defective. The complaint requests certification as a class action for the State
of Illinois, which request has not yet been heard by the court. The
plaintiff asserts claims based upon negligence, strict liability, breach of
implied warranties, and the Illinois Consumer Fraud and Deceptive Business
Practices Act. Climate Master has timely filed its pleadings to remove
this action to federal court. Climate Master has also filed its answer denying
the plaintiff’s claims and asserting several affirmative defenses. Climate
Master’s insurers have been placed on notice of this matter. Currently the
Company is unable to determine the amount of damages or the likelihood of any
losses resulting from this claim. In addition, the Company intends to vigorously
defend Climate Master in connection with this matter. Therefore, no
liability has been established at December 31, 2007.
We are
also involved in various other claims and legal actions which in the opinion of
management, after consultation with legal counsel, if determined adversely to
us, would not have a material effect on our business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of our shareholders during the fourth quarter
of 2007.
28
Our
officers serve one-year terms, renewable on an annual basis by the board of
directors. Information regarding the Company's executive officers is as
follows:
|
Jack E. Golsen
(1)
|
Chairman
of the Board and Chief Executive Officer. Mr. Golsen, age 79
first became a director in 1969. His term was renewed for 3 years at the
annual meeting in 2007. Mr. Golsen, founder of the Company, is our
Chairman of the Board of Directors and Chief Executive Officer and has
served in those capacities since our inception in 1969. Mr. Golsen served
as our President from 1969 until 2004. During 1996, he was inducted into
the Oklahoma Commerce and Industry Hall of Honor as one of Oklahoma’s
leading industrialists. Mr. Golsen has a Bachelor of Science degree from
the University of New Mexico. Mr. Golsen is a Trustee of
Oklahoma City University. During his career, he acquired or
started the companies which formed LSB. He has served on the
boards of insurance companies, several banks and was Board Chairman of
Equity Bank for Savings N.A. which was formerly owned by
LSB.
|
|
|
Barry H. Golsen
(1)
|
Vice
Chairman of the Board, President, and President of the Climate Control
Business. Mr. Golsen, age 57, first became a director in 1981. His term
will expire in 2009. Mr. Golsen was elected President of the Company in
2004. Mr. Golsen has served as our Vice Chairman of the Board of Directors
since August 1994, and has been the President of our Climate Control
Business for more than five years. Mr. Golsen also serves as a director of
the Oklahoma branch of the Federal Reserve Bank. Mr. Golsen has both his
undergraduate and law degrees from the University of
Oklahoma.
|
|
|
David
R. Goss
|
Executive
Vice President of Operations and Director. Mr. Goss, age 67, first became
a director in 1971. His term will expire in 2009. Mr. Goss, a certified
public accountant, is our Executive Vice President of Operations and has
served in substantially the same capacity for more than five years. Mr.
Goss is a graduate of Rutgers University.
|
|
|
Tony M. Shelby
|
Executive
Vice President of Finance and Director. Mr. Shelby, age 66, first became a
director in 1971. His term will expire in 2008. Mr. Shelby, a certified
public accountant, is our Executive Vice President of Finance and Chief
Financial Officer, a position he has held for more than five years. Prior
to becoming our Executive Vice President of Finance and Chief Financial
Officer, he served as Chief Financial Officer of a subsidiary of the
Company and was with the accounting firm of Arthur Young & Co., a
predecessor to Ernst & Young LLP. Mr. Shelby is a graduate of Oklahoma
City University.
|
29
|
Jim D.
Jones
|
Senior
Vice President, Corporate Controller and Treasurer. Mr. Jones, age 65, has
been Senior Vice President, Controller and Treasurer since July 2003, and
has served as an officer of the Company since April 1977. Mr. Jones is a
certified public accountant and was with the accounting firm of Arthur
Young & Co., a predecessor to Ernst & Young LLP. Mr. Jones is a
graduate of the University of Central Oklahoma.
|
|
|
David M. Shear
(1)
|
Senior
Vice President and General Counsel. Mr. Shear, age 48, has been Senior
Vice President since July 2004 and General Counsel and Secretary since
1990. Mr. Shear attended Brandeis University, graduating cum laude in
1981. At Brandeis University, Mr. Shear was the founding Editor-In-Chief
of Chronos, the first journal of undergraduate scholarly articles. Mr.
Shear attended the Boston University School of Law, where he was a
contributing Editor of the Annual Review of Banking Law. Mr. Shear acted
as a staff attorney at the Bureau of Competition with the Federal Trade
Commission from 1985 to 1986. From 1986 through 1989, Mr. Shear was an
associate in the Boston law firm of Weiss, Angoff, Coltin, Koski and
Wolf.
|
|
(1)
|
Barry
H. Golsen is the son of Jack E. Golsen and David M. Shear is married to
the niece of Jack E. Golsen.
|
30
PART II
Market
Information
Our
common stock is listed for trading on the American Stock Exchange under the
symbol “LXU”. The following table shows, for the periods indicated, the high and
low bid information for our common stock which reflects inter-dealer prices,
without retail markup, markdown or commission, and may not represent actual
transactions.
|
Year
Ended
|
|
|
December
31,
|
|
2007
|
2006
|
|
Quarter
|
High
|
Low
|
High
|
Low
|
|
First
|
$
|
15.71
|
$
|
11.41
|
$
|
7.48
|
$
|
5.87
|
||||||
|
Second
|
$
|
23.70
|
$
|
14.76
|
$
|
9.19
|
$
|
6.95
|
||||||
|
Third
|
$
|
25.25
|
$
|
17.00
|
$
|
10.25
|
$
|
8.25
|
||||||
|
Fourth
|
$
|
28.85
|
$
|
20.54
|
$
|
13.20
|
$
|
8.50
|
Stockholders
As of
March 7, 2008, we had 698 record holders of our common stock. This number does
not include investors whose ownership is recorded in the name of their brokerage
company.
Dividends
We are a
holding company and, accordingly, our ability to pay cash dividends on our
preferred stock and our common stock depends in large part on our ability to
obtain funds from our subsidiaries. The ability of ThermaClime (which owns
substantially all of the companies comprising the Climate Control Business and
Chemical Business) and its wholly-owned subsidiaries to pay dividends and to
make distributions to us is restricted by certain covenants contained in the $50
million revolving credit facility (the “Working Capital Revolver Loan”) and the
new $50 million loan agreement due 2012 (the “Secured Term Loan”). Under the
terms of these agreements, ThermaClime cannot transfer funds to us in the form
of cash dividends or other distributions or advances, except for:
|
·
|
the
amount of income taxes that ThermaClime would be required to pay if they
were not consolidated with us;
|
|
·
|
an
amount not to exceed fifty percent (50%) of ThermaClime's consolidated net
income during each fiscal year determined in accordance with generally
accepted accounting principles plus amounts paid to us within the first
bullet above, provided that certain other conditions are
met;
|
|
·
|
the
amount of direct and indirect costs and expenses incurred by us on behalf
of ThermaClime pursuant to a certain services
agreement;
|
31
|
·
|
amounts
under a certain management agreement between us and ThermaClime, provided
certain conditions are met, and
|
|
·
|
outstanding
loans entered into subsequent to November 2, 2007 in excess of $2.0
million at any time.
|
As of
December 31, 2007, we have issued and outstanding 1,000,000 shares of Series D
Preferred, 585 shares Non-Cumulative Preferred and 20,000 shares of Series B 12%
Convertible, Cumulative Preferred Stock ("Series B Preferred"). Each share of
preferred stock is entitled to receive an annual dividend, only when declared by
our board of directors, payable as follows:
|
·
|
Series
D Preferred at the rate of $.06 a share payable on October 9, which
dividend is cumulative;
|
|
·
|
Non-Cumulative
Preferred at the rate of $10.00 a share payable April 1, which are
non-cumulative; and
|
|
·
|
Series
B Preferred at the rate of $12.00 a share payable January 1, which
dividend is cumulative.
|
Holders
of our common stock are entitled to receive dividends only when declared by our
board of directors. We have not paid cash dividends on our outstanding common
stock in many years, and we do not currently anticipate paying cash dividends on
our outstanding common stock in the foreseeable future. However, our board of
directors has not made a definitive decision whether or not to pay such
dividends in 2008.
32
|
Years
ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||
|
(Dollars
In Thousands, Except Per Share
Data)
|
|
Selected
Statement of Operations Data:
|
||||||||||||||||||
|
Net
sales
|
$
|
586,407
|
$
|
491,952
|
$
|
397,115
|
$
|
363,984
|
$
|
317,026
|
||||||||
|
Interest
expense (1)
|
$
|
12,078
|
$
|
11,915
|
$
|
11,407
|
$
|
7,393
|
$
|
6,097
|
||||||||
|
Income
from continuing operations before cumulative effect of accounting change
(1) (2)
|
$
|
46,534
|
$
|
15,768
|
$
|
5,634
|
$
|
745
|
$
|
3,705
|
||||||||
|
Cumulative
effect of accounting change
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(536
|
)
|
$
|
-
|
|||||||
|
Net
income
|
$
|
46,882
|
$
|
15,515
|
$
|
4,990
|
$
|
209
|
$
|
3,705
|
||||||||
|
Net
income (loss) applicable to common stock
|
$
|
41,274
|
$
|
12,885
|
$
|
2,707
|
$
|
(2,113
|
)
|
$
|
1,378
|
|||||||
|
Income
(loss) per common share applicable to common
stock:
|
||||||||||||||||||
|
Basic:
|
||||||||||||||||||
|
Income
(loss) from continuing operations before cumulative effect of accounting
change
|
$
|
2.09
|
$
|
.92
|
$
|
.25
|
$
|
(.12
|
)
|
$
|
.11
|
|||||||
|
Net
income (loss) from discontinued operations
|
$
|
.02
|
$
|
(.02
|
)
|
$
|
(.05
|
)
|
$
|
-
|
$
|
-
|
||||||
|
Cumulative
effect of accounting change
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(.04
|
)
|
$
|
-
|
|||||||
|
Net
income (loss)
|
$
|
2.11
|
$
|
.90
|
$
|
.20
|
$
|
(.16
|
)
|
$
|
.11
|
|||||||
|
Diluted:
|
||||||||||||||||||
|
Income
(loss) from continuing operations before cumulative effect of accounting
change
|
$
|
1.82
|
$
|
.77
|
$
|
.22
|
$
|
(.12
|
)
|
$
|
.10
|
|||||||
|
Net
income (loss) from discontinued operations
|
$
|
.02
|
$
|
(.01
|
)
|
$
|
(.04
|
)
|
$
|
-
|
$
|
-
|
||||||
|
Cumulative
effect of accounting change
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(.04
|
)
|
$
|
-
|
|||||||
|
Net
income (loss)
|
$
|
1.84
|
$
|
.76
|
$
|
.18
|
$
|
(.16
|
)
|
$
|
.10
|
|
Selected Balance Sheet
Data:
|
||||||||||||||||||
|
Total
assets
|
$
|
307,554
|
$
|
219,927
|
$
|
188,963
|
$
|
167,568
|
$
|
161,813
|
||||||||
|
Redeemable
preferred stock
|
$
|
56
|
$
|
65
|
$
|
83
|
$
|
97
|
$
|
103
|
||||||||
|
Long-term
debt, including current portion
|
$
|
122,107
|
$
|
97,692
|
$
|
112,124
|
$
|
106,507
|
$
|
103,275
|
||||||||
|
Stockholders'
equity
|
$
|
94,283
|
$
|
43,634
|
$
|
14,861
|
$
|
9,915
|
$
|
8,862
|
||||||||
|
Selected
other data:
|
||||||||||||||||||
|
Cash
dividends declared per common share
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|
(1)
|
In
May 2002, the repurchase of Senior Unsecured Notes using proceeds from a
Financing Agreement was accounted for as a voluntary debt restructuring.
As a result, subsequent interest payments associated with the Financing
Agreement debt were recognized against the unrecognized gain on the
transaction. The Financing Agreement debt was repaid in September
2004.
|
|
(2)
|
Income
from continuing operations before cumulative effect of accounting change
includes a gain on extinguishment of debt of $4.4 million for
2004.
|
33
The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) should be read in conjunction with a review
of the other Items included in this Form 10-K and our December 31, 2007
Consolidated Financial Statements included elsewhere in this report. Certain
statements contained in this MD&A may be deemed to be forward-looking
statements. See "Special Note Regarding Forward-Looking
Statements."
Overview
General
We are a
manufacturing, marketing and engineering company. Our wholly-owned subsidiary,
ThermaClime, through its subsidiaries, owns substantially all of our core
businesses consisting of the:
|
·
|
Climate
Control Business engaged in the manufacturing and selling of a broad range
of air conditioning and heating products in the niche markets we serve
consisting of geothermal and water source heat pumps, hydronic fan coils,
large custom air handlers and other products used in commercial and
residential new building construction, renovation of existing buildings
and replacement of existing
systems.
|
|
·
|
Chemical
Business engaged in the manufacturing and selling of chemical products
produced from three plants located in Arkansas, Alabama and Texas for the
industrial, mining and agricultural
markets.
|
2007
Results
LSB's
2007 sales were $586.4 million compared to $492.0 million in 2006, operating
income was $59.0 million compared to $27.1 million in 2006 and income from
continuing operations was $46.5 million compared to $15.8 million in 2006. Net
income was $46.9 million in 2007 compared to $15.5 million for
2006.
Our
Climate Control Business continued to report strong sales and operating results
due to beginning backlogs and strong new order flow for the year. Our
Climate Control Business net sales were $286.4 million compared to $221.2
million in 2006, a 29.5% increase. Operating income before allocation of
corporate overhead was $34.2 million, a 34.5% increase over the $25.4 million in
2006.
Our
Chemical Business reported improved results in 2007 with net sales of $288.8
million compared to $260.7 million in 2006, a 10.8% increase. Operating income
before allocation of corporate overhead was $35.0 million compared to $9.8
million in 2006, an increase of 257.8%. As indicated above, the
increase in 2007 operating income included certain non-recurring income items
totaling $7.1 million that are discussed below.
34
For 2007,
net income also included a litigation settlement of $3.3 million and insurance
recoveries totaling $3.8 million, which are described more fully below under
Chemical Business.
In
addition, net income for 2007 was impacted by our provision for income taxes.
For 2007 and recent prior years, our provisions for income taxes have included
benefits from the utilization of NOL carryforwards. The net
provisions for income taxes in 2007 and 2006 were $2,540,000 and $901,000,
respectively. The 2007 provision included a current provision for federal income
taxes of $5,260,000 for regular federal income tax and alternative minimum
income tax (“AMT”). The 2007 provision also included a current
provision of state income taxes of $1,980,000 which includes the provision for
2007 state income taxes, as well as, $1,047,000 for uncertain state income tax
positions recognized in accordance with FIN 48.
The 2007
provisions are partially offset by a benefit for deferred income taxes of
$4,700,000 resulting from the reversal of valuation allowance on deferred tax
assets, the benefit of AMT credits, and other temporary differences. At December
31, 2006, we had regular NOL carryforwards of approximately $49.9 million and
other temporary differences. Prior to 2007, we had valuation allowances in place
against the net deferred tax assets arising from the NOL carryforwards and other
temporary differences. As the result of improving financial results during 2007
and our expectation of generating taxable income in the future, we determined
that the valuation allowance was no longer required as of September 30, 2007. As
a result, we reversed the valuation allowance as a benefit for income taxes and
recognized deferred tax assets and deferred tax liabilities. At December 31,
2007, we had net current deferred tax assets of $10.0 million and net
non-current deferred tax liabilities of $5.3 million.
The
existence of the valuation allowance in prior years, and the reversal of the
valuation allowance during 2007, caused our effective tax rate to be
substantially lower in 2007 and prior years than we anticipate it being in
future periods. In future periods we anticipate that our effective tax rate will
more closely approximate the regular federal and state statutory tax rates,
substantially increasing the income tax expense we recognize each
year.
At
December 31, 2007, we have federal NOL carryforwards of only approximately $2.9
million remaining. We anticipate fully utilizing the federal NOL carryforwards
in 2008 at which time we will begin paying federal income taxes at regular
corporate tax rates.
Due to
regular tax NOL carryforwards with a full valuation allowance, the only current
tax expense for 2006 was for federal AMT and state income taxes
as discussed above.
Climate
Control Business
Our
Climate Control Business has consistently generated annual profits and positive
cash flows and continues to do so. As indicated above, Climate Control’s net
sales and operating income for 2007 were higher than in 2006. The
increase in sales and operating income as compared to 2006 is attributable to
strong demand for the geothermal and water source heat pumps, which reported a
sales increase of $30.9 million and hydronic fan coils that reported a sales
increase of $26.3 million.
35
Most of
the products of our Climate Control Business are produced to customer orders
that are placed well in advance of required delivery dates. As a result, our
Climate Control Business maintains a significant backlog that eliminates the
necessity to carry substantial inventories other than for firm customer orders.
As a result of strong order flow in the recent past, our Climate Control backlog
of confirmed orders had increased to high levels and our lead times had pushed
out beyond levels that we consider to be optimum for good customer service. In
order to work the backlog down and to improve product lead times, we increased
production capacity. We invested $7.6 million in 2006, an additional $6.8
million in 2007 and currently have committed approximately $3.2 million for
additional plant and equipment capacity and land for future expansion. At
December 31, 2007, the backlog of confirmed orders was approximately $54 million
compared to $62 million at September 30, 2007 and $80 million at December 31,
2006. We expect to ship substantially all the orders in the backlog within the
next twelve months.
Our
Climate Control Business will continue to launch new products and product
upgrades in an effort to maintain our current market position and to establish
presence in new markets. Climate Control Business's profitability over the last
few years has been affected by operating losses of certain new product lines
being developed during that time. Our emphasis has been to increase the sales
levels of these operations above the breakeven point. During 2007, the results for
these new products reflected modest improvement. Although these new products
have not yet achieved profitability, we continue to believe that these new
products have good long-term prospects.
Management
continues to focus on the following objectives for Climate Control:
|
·
|
increasing
the sales and operating margins of all
products,
|
|
·
|
developing
and introducing new and energy efficient products,
and
|
|
·
|
improving
production and product delivery
performance.
|
Chemical
Business
Our
Chemical Business has production facilities in Baytown, Texas (the “Baytown
Facility”), El Dorado, Arkansas (the “El Dorado Facility”) and Cherokee, Alabama
(the “Cherokee Facility”). The Baytown and El Dorado Facilities produce nitrogen
products from anhydrous ammonia that is delivered by pipeline and sulfuric acid
from recovered elemental sulfur delivered by truck and rail. The
Cherokee Facility produces anhydrous ammonia and nitrogen products from natural
gas that is delivered by pipeline.
As
indicated above, Chemicals net sales and operating income for 2007 were higher
than in 2006. The increase in sales and operating income as compared to 2006 is
attributable to strong demand for agricultural products and consistent demand
for the industrial and mining products, Also operating income for 2007 and 2006
included the following unusual income items:
|
2007
|
2006
|
|
(In
Millions)
|
|
Settlement
of litigation
|
$
|
3.3
|
|
$ |
-
|
|
Insurance
recoveries of business interruption claims
|
3.8
|
|
0.9
|
||
|
Total
|
$
|
7.1
|
|
$ |
0.9
|
36
The $3.3 million reflects the net proceeds of $2.7 million
received by the Cherokee Facility and the retention by the Cherokee Facility of
a disputed $0.6 million accounts payable as a result of the settlement agreement
with Dynegy, Inc. and one of its subsidiaries to settle a previously reported
lawsuit.
The $3.8
million is a result of the settlement of a business interruption claim filed by
the Cherokee Facility with their insurers. The proceeds from this settlement
were used for general working capital purposes.
The
increase in operating income relative to sales (excluding the unusual income
items noted above) is primarily a result of increased gross profit margins,
resulting from higher nitrogen fertilizer demand in our agricultural markets.
Low wheat and corn stocks-to-use ratios, as well as low inventories of other
crops, resulted in strong demand for nitrogen fertilizer in 2007, which has had
a positive effect on the approximate one-third of our sales which are sold in
the agricultural markets.
Our
primary raw material feedstocks, anhydrous ammonia, natural gas and sulfur, are
commodities subject to significant price fluctuations, and are generally
purchased at prices in effect at the time of purchase. Due to the uncertainty of
these commodity markets, we have developed customers that purchase our products
pursuant to agreements and/or pricing formulas that provide for the pass through
of raw material and other variable costs and certain fixed costs. Approximately
60% percent of our Chemical Business’ products sold in 2007 were to those
customers.
Our
Chemical Business uses precious metals as a catalyst in the manufacturing
process. During 2007, we had accumulated precious metals in excess of
our production requirements. Therefore we sold a portion of the excess metals.
As a result, we recognized a gain of $2.0 million which increased gross profit
and operating profit of our Chemical Business compared to
2006. However, this increase to gross profit and operating profit of
$2.0 million was partially offset by a net decrease of $1.8 million due
primarily to the increase in precious metals expense of approximately $1.5
million compared to 2006 as the result of cost increases for these
metals.
Our
Chemical Business continues to focus on growing our non-seasonal industrial
customer base with an emphasis on customers accepting the risk inherent with raw
material costs, while at the same time, maintaining a strong presence in the
seasonal agricultural sector, when the potential for favorable gross profit
margins is available. The operation’s strategy is to maximize production
efficiency of the facilities, thereby lowering the fixed cost of each ton
produced.
Completion of Tender
Offer
During
November 2006, the Company entered into the Jayhawk Agreement with the Jayhawk
Group. Under the Jayhawk Agreement, the Jayhawk Group agreed to tender 180,450
shares of the 346,662 shares of the Series 2 Preferred, if the Company made an
exchange or tender offer for the Series 2 Preferred. In addition, as a condition
to the Jayhawk Group’s obligation to tender such shares of Series 2 Preferred in
an exchange/tender offer, the Jayhawk Agreement further provided that the Golsen
Group would exchange only 26,467 of the 49,550 shares of Series 2
37
Preferred
beneficially owned by them. As a result, only 309,807 of the 499,102 shares of
Series 2 Preferred outstanding would be eligible to participate in an
exchange/tender offer, with the remaining 189,295 being held by the Jayhawk
Group and the Golsen Group.
On
January 26, 2007, our board of directors approved and on February 9, 2007, we
began a tender offer to exchange shares of our common stock for up to 309,807 of
the 499,102 outstanding shares of the Series 2 Preferred. The tender offer
expired on March 12, 2007 and our board of directors accepted the shares
tendered on March 13, 2007. The terms of the tender offer provided for the
issuance by the Company of 7.4 shares of common stock in exchange for each share
of Series 2 Preferred tendered in the tender offer and the waiver of all rights
to dividends in arrears on the Series 2 Preferred tendered. As a result of this
tender offer, we issued 2,262,965 shares of our common stock for 305,807 shares
of Series 2 Preferred that were tendered. As a result, we effectively settled
the dividends in arrears on the Series 2 Preferred tendered totaling
approximately $7.3 million ($23.975 per share). Because the exchange was
pursuant to terms other than the original conversion terms, the transaction was
considered an extinguishment of the preferred stock. In addition, the
transaction qualified as an induced conversion under SFAS
84. Accordingly, we recorded a charge (stock dividend) to accumulated
deficit of approximately $12.3 million, which equaled the excess of the fair
value of the common stock issued over the fair value of the common stock
issuable pursuant to the original conversion terms. To measure fair value, we
used the closing price of our common stock on March 13, 2007, the date the
shares so tendered were accepted by our board of directors.
Included
in the amounts discussed above and pursuant to the Jayhawk Agreement and the
terms of the tender offer, the Jayhawk Group and the Golsen Group tendered
180,450 and 26,467 shares, respectively, of Series 2 Preferred for 1,335,330 and
195,855 shares, respectively, of our common stock. As a result, we effectively
settled the dividends in arrears on these shares of Series 2 Preferred tendered
totaling approximately $4.96 million with $4.33 million relating to the Jayhawk
Group and $0.63 million relating to the Golsen Group.
Stock
Options Receiving Stockholders' Approval
We
adopted SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”) using the
modified prospective method effective January 1, 2006, which required us to
measure and recognize
the cost of employee services received in exchange for an award of equity
instruments based on the grant date fair value of the award. As previously
reported, on June 19, 2006, the Compensation and Stock Option Committee of our
board of directors granted 450,000 shares of non-qualified stock options (the
“Options”) to certain Climate Control Business employees, which were subject to
shareholders’ approval. The option price of the Options is $8.01 per share which
is based on the market value of our common stock at the date the board of
directors granted the shares (June 19, 2006). The Options vest over a ten-year
period at a rate of 10% per year and expire on September 16, 2016 with certain
restrictions. Under SFAS 123(R), the fair value for the Options was estimated,
using an option pricing model, as of the date we received shareholders’ approval
which occurred during our 2007 annual shareholders’ meeting on June 14, 2007.
Under SFAS 123(R) for accounting purposes, the grant date and service inception
date is June 14, 2007.
38
As
previously reported, the total fair value for the Options was estimated to be
approximately $6.9 million, or $15.39 per share, using a Black-Scholes-Merton
option pricing model. As of June 14, 2007, we began amortizing the total
estimated fair value of the Options to selling, general, and administrative
expense (“SG&A”) which will continue through June 18, 2016 (a
weighted-average vesting period of 8.46 years). As a result, we incurred
stock-based compensation expense of $0.4 million for 2007. At December 31, 2007,
the total stock-based compensation expense not yet recognized is approximately
$6.5 million relating to the non-vested options.
During
2005, we accounted for our stock option plans under the recognition and
measurement principles of APB Opinion No. 25 (“APB 25”) and related
interpretations. Under APB 25, stock-based compensation cost was not reflected
in our results of operations, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. If we had applied the fair value recognition
provisions of SFAS 123(R) to stock-based compensation during 2005, using a
Black-Scholes-Merton option pricing model, net income would have decreased by
approximately $0.5 million.
Liquidity and Capital
Resources
The
following is our cash, total interest bearing debt and stockholders’ equity at
December 31,:
|
2007
|
2006
|
|
(in
millions)
|
|
Cash
on hand
|
$
|
58.2
|
$
|
2.3
|
|
|
|
|
|
|||
|
Long-term
debt
|
|||||
|
|
|
||||
|
2007
Debentures due 2012
|
$ | 60.0 | $ |
-
|
|
|
Secured
Term Loan due 2012
|
50.0
|
-
|
|||
|
Senior
Secured Loan due 2009
|
-
|
50.0
|
|||
|
Working
Capital Revolver Loan
|
-
|
26.0
|
|||
|
2006
Debentures due 2011
|
-
|
4.0
|
|||
|
Other
|
12.1
|
17.0
|
|||
|
Total
long-term debt
|
$
|
122.1
|
$
|
97.7
|
|
|
|
|
|
|||
| Total stockholder's equity |
$
|
94.3
|
$
|
43.6
|
As indicated above, our capital structure and liquidity at December 31, 2007, are improved from that at December 31, 2006. Although long-term debt is $24.4 million higher, there is $58 million cash on hand and the $50 million Working Capital Revolver Loan is undrawn and available to fund operations, if needed. Long-term debt, before the use of cash on hand to pay down debt, dropped from 2.2 times stockholders’ equity at December 31, 2006, to 1.3 times at December 31, 2007.
During
2007, we completed the following transactions that favorably affected our
liquidity and capital resources:
39
|
·
|
converted
the remaining $4.0 million of the 7% Convertible Senior Subordinated
Debentures (the “2006 Debentures”) into 564,789 shares of our common
stock;
|
|
·
|
exchanged,
converted or redeemed the remaining 499,102 shares, net of treasury stock,
of Series 2 Preferred, along with all cumulative dividends in
arrears;
|
|
·
|
prepaid
the $50 million Senior Secured Loan due 2009 from proceeds of a new $50
million secured term loan due 2012, at a lower interest rate and less
collateral; and
|
|
·
|
finalized
a private placement of the 5.5% Convertible Senior Subordinated Notes due
2012 (the “2007 Debentures”) pursuant to which we sold $60.0 million
aggregate principal amount to twenty-two qualified institutional
buyers.
|
The 2007
Debentures bear interest at the annual rate of 5.5% and mature on July 1, 2012.
We received net proceeds of approximately $57.0 million, after discounts and
commissions.
We used
the net proceeds from the 2007 Debentures for the following:
|
·
|
$2.0
million to redeem 25,820 outstanding shares of our Series 2 Preferred
(including dividends in arrears);
|
|
·
|
$3.9
million to repay certain outstanding mortgages and equipment
loans;
|
|
·
|
$2.1
million to pay dividends in arrears on our outstanding shares of Series B
Preferred and Series D Preferred,
|
|
·
|
$25.0
million was loaned to ThermaClime to reduce the outstanding borrowing
under the Working Capital Revolver Loan;
and
|
|
·
|
the
remaining balance of approximately $24.0 million invested in money market
investments.
|
In
November 2007, ThermaClime and certain of its subsidiaries entered into the $50
million Secured Term Loan with a certain lender. Proceeds from the
Secured Term Loan were used to repay the Senior Secured Loan due 2009. The
Secured Term Loan matures on November 2, 2012 and accrues interest at a defined
LIBOR rate plus 3%. The interest rate at December 31, 2007 was 7.90%. The
Secured Term Loan requires only quarterly interest payments with the final
payment of interest and principal at maturity.
The
Secured Term Loan is secured by the real property and equipment located at the
El Dorado and Cherokee Facilities. The carrying value of the pledged assets is
approximately $48 million at December 31, 2007.
The
Secured Term Loan borrowers are subject to numerous covenants under the
agreement including, but not limited to, limitation on the incurrence of certain
additional indebtedness and liens, limitations on mergers, acquisitions,
dissolution and sale of assets, and limitations on declaration of dividends and
distributions to us, all with certain exceptions.
The
Working Capital Revolver Loan is a $50.0 million credit facility that provides
for advances to ThermaClime and its subsidiaries based upon specified
percentages of eligible accounts receivable and inventories. At December 31,
2007, there were no borrowings outstanding under this loan and approximately
$0.8 million of the line was being used for issued and outstanding letters of
credit. Historically, ThermaClime’s primary cash needs have been for working
capital
40
and
capital expenditures. ThermaClime and its subsidiaries depend upon their Working
Capital Revolver Loan, internally generated cash flows, and secured property and
equipment financing in order to fund operations and pay
obligations. In connection with the new Secured Term Loan due 2012,
the lenders of the Working Capital Revolver Loan released their second position
security liens to the assets which collateralize the Term Loan and agreed to
certain other modifications to the Working Capital Revolver Loan agreement,
including, among other things, a .25% reduction to the interest
rate.
The
Working Capital Revolver Loan and the Secured Term Loan have financial covenants
that are discussed below under “Loan Agreements – Terms and
Conditions”.
ThermaClime’s
ability to maintain borrowing availability under its Working Capital Revolver
Loan depends on its ability to comply with the terms and conditions of its loan
agreements and its ability to generate cash flow from operations. ThermaClime is
restricted under its credit agreements as to the funds it may transfer to the
Company and its non-ThermaClime affiliates and certain ThermaClime subsidiaries.
This limitation does not prohibit payment to the Company of amounts due under a
Services Agreement, Management Agreement and a Tax Sharing
Agreement.
Income Taxes
In 2007
and prior years, our effective tax rate has been minimal due to the availability
of NOL carryforwards. At December 31, 2007, we have federal NOL
carryforwards of only approximately $2.9 million remaining. We
anticipate fully utilizing the federal NOL carryforwards in 2008 and we will
begin paying federal income taxes at regular corporate tax
rates.
Filing
Requirements Pursuant to Sarbanes Oxley
As of
June 29, 2007, our public float held by non-affiliates exceeded the $75 million
threshold but was less than the $700 million threshold. As a result, we became
an accelerated filer on December 31, 2007. Therefore, we have been and will
continue to incur additional costs to meet the requirements as an accelerated
filer for the year ended December 31, 2007 and future periods.
Capital
Expenditures
General
Cash used
for capital expenditures in 2007 was $14.8 million, including $5.8 million
primarily for product equipment and other upgrades and for additional capacity
in our Climate Control Business and $8.6 million for our Chemical Business,
primarily for process and reliability improvements of existing facilities. As
discussed below, our current commitment for 2008 includes additional spending
for production equipment in our Climate Control Business and spending for
process and reliability improvement in our Chemical Business, including $5.6
million related to certain air emissions abatement.
41
Other
capital expenditures for 2008 are believed to be discretionary and are dependent
upon an adequate amount of liquidity and/or obtaining acceptable funding. We
have carefully managed those expenditures to projects necessary to execute our
business plans and those for environmental and safety compliance.
Current
Commitments
As of the
date of this report, we have committed capital expenditures of approximately
$14.1 million for 2008. The expenditures include $10.9 million for our Chemical
Business and $3.2 million for our Climate Control Business. We plan to fund
these expenditures from working capital, which may include utilizing our Working
Capital Revolver Loan.
The
committed capital expenditures for our Chemical Business includes approximately
$5.6 million for certain capital expenditures required to expand capacity and
bring the El Dorado Facility’s sulfuric acid plant air emissions to lower
limits.
Certain
events relating to our Chemical Business
Pryor Facility - We are
evaluating the feasibility of activating all or a portion of our ammonia and
urea chemical plant in Pryor, Oklahoma (the “Pryor Facility”). The feasibility
study is based on producing and marketing approximately 325,000 tons of UAN
fertilizer per year. A final decision to activate the Pryor Facility has not
been made. If we decide to activate the Pryor Facility and the activation
project is approved by our board of directors, this project could take
approximately twelve months to obtain the necessary permits and complete the
plant improvements. The preliminary estimated total cost to activate the Pryor
Facility is approximately $15 million to $20 million with approximately
one-half of these costs to be expensed as incurred.
El Dorado Facility - El Dorado Chemical Company (“EDC”) produces
industrial grade ammonium nitrate for Orica USA, Inc. (“Orica”) under a
multi-year supply agreement which contract includes required minimum annual and
monthly volumes. Orica has notified EDC that it will significantly reduce its
expected purchases for the month of March 2008 below the required minimum
monthly volume. It is currently unknown when Orica will resume
purchasing at the contractual volumes. Under the terms of the contract, Orica
must pay liquidated damages if it fails to purchase the minimum monthly volume,
which liquidated damages compensate EDC for product not taken at the minimum
monthly contractual volume. Orica has indicated that it believes the contract
may not require the payment of certain components of the normal
formula price to EDC when Orica pays liquidated damages in lieu of purchasing
product at the minimum monthly contractual level. The amount in question is
approximately $230,000 for March 2008, although
Orica has agreed to pay such amount to EDC.
Baytown Facility - The Baytown Facility is operated by EDNC, a
subsidiary within our Chemical Business, under the Bayer Agreement with Bayer
and a leveraged lease agreement with a financial institution (“lessor”) all of
which expire in June 2009. Under the lease agreement, EDNC, as lessee, has the
right to acquire the leased facility by exercising a fixed price purchase option
(“purchase option”). The option price is approximately $17.6 million. Under the
agreements between EDNC and Bayer, Bayer may, at its option, require
EDNC to
42
exercise
the purchase option or refuse to allow EDNC to exercise the purchase
option. If Bayer directs EDNC to exercise the purchase option, Bayer
is responsible to pay the option price to the lessor. We have had preliminary
discussions with Bayer regarding a renewal of the Bayer Agreement between EDNC
and Bayer which may require EDNC to exercise the purchase option
under the lease agreement. If required by Bayer as a condition to renewing the
agreements with Bayer, we may, in our sole discretion, agree to pay the purchase
option as part of the renewal agreements, provided the economics of the
transaction are acceptable to us. For 2007, the Baytown Facility contributed
approximately 19% of the net sales of our Chemical Business and approximately 9%
of our consolidated net sales.
Stock
Repurchase Authorization
Our board
of directors enacted a stock repurchase authorization for an unstipulated number
of shares for an indefinite period of time commencing March 12, 2008. The stock
repurchase authorization will remain in effect until such time as of our board
of directors decides to end it.
Dividends
We are a
holding company and, accordingly, our ability to pay cash dividends on our
preferred stock and our common stock depends in large part on our ability to
obtain funds from our subsidiaries. The ability of ThermaClime (which owns
substantially all of the companies comprising the Climate Control Business and
Chemical Business) and its wholly-owned subsidiaries to pay dividends and to
make distributions to us is restricted by certain covenants contained in the $50
million Working Capital Revolver Loan and the new $50 million Secured Term Loan.
Under the terms of these agreements, ThermaClime cannot transfer funds to us in
the form of cash dividends or other distributions or advances, except
for:
|
·
|
the
amount of income taxes that ThermaClime would be required to pay if they
were not consolidated with us;
|
|
·
|
an
amount not to exceed fifty percent (50%) of ThermaClime's consolidated net
income during each fiscal year determined in accordance with generally
accepted accounting principles plus amounts paid to us within the first
bullet above, provided that certain other conditions are
met;
|
|
·
|
the
amount of direct and indirect costs and expenses incurred by us on behalf
of ThermaClime pursuant to a certain services
agreement;
|
|
·
|
amounts
under a certain management agreement between us and ThermaClime, provided
certain conditions are met, and
|
|
·
|
outstanding
loans entered into subsequent to November 2, 2007 in excess of $2.0
million at any time.
|
We have not paid cash dividends on our outstanding common stock in many years. Pursuant to our exchange/tender offer in March 2007, we issued approximately 2.3 million shares of our common stock in exchange for approximately 0.3 million shares of the Series 2 Preferred in accordance with the terms of the Series 2 Preferred. As a result, we effectively settled the dividends in arrears totaling approximately $7.3 million. Based on the terms of the tender offer,
43
we
recorded a charge (stock dividend) to accumulated deficit of approximately $12.3
million, which equaled the excess of the fair value of the common stock issued
over the fair value of the common stock issuable pursuant to the original
conversion terms of the Series 2 Preferred.
During
2007, we paid cash dividends of approximately $678,000 on the 25,820 shares of
Series 2 Preferred, which we redeemed pursuant to the notice of redemption we
mailed to all holders of record of our Series 2 Preferred on July 12, 2007. The
holders of 167,475 shares of our Series 2 Preferred exercised their right to
convert each share into 4.329 shares of our common stock. For the holders that
converted the shares of Series 2 Preferred into common stock, it is our position
that the holders were not entitled to any dividends in arrears on those shares
so converted. See “Related Party Transactions” of this MD&A as to certain
comments made by the Jayhawk Group relating to our redemption and amounts paid
to the Golsen Group as a result of the redemption and shares issued to the
Jayhawk Group as a result of conversions of its Series 2 Preferred.
In
addition, our board of directors declared and we paid dividends on the Series B
Preferred, Series D Preferred and noncumulative redeemable preferred stock
totaling approximately $1,890,000, $360,000 and $6,000, respectively. These
dividends were paid with a portion of the net proceeds of the 2007 Debentures
and working capital. As a result, there were no unpaid dividends in arrears at
December 31, 2007. See “Related Party Transactions” of this MD&A for a
discussion as to the Golsen Group’s ownership of the Series B Preferred and
Series D Preferred.
We do not
currently anticipate paying cash dividends on our outstanding common stock in
the foreseeable future. However, our board of directors has not made a
definitive decision whether or not to pay such dividends in 2008.
Compliance
with Long-Term Debt Covenants
As
discussed below under “Loan Agreements - Terms and Conditions”, the Secured Term
Loan and Working Capital Revolver Loan, as amended, of ThermaClime and its
subsidiaries require, among other things, that ThermaClime meet certain
financial covenants. ThermaClime's forecasts for 2008 indicate that ThermaClime
will be able to meet all required financial covenant tests for the year ending
December 31, 2008.
Loan Agreements - Terms and
Conditions
5.5% Convertible Senior Subordinated
Debentures – As previously reported and as discussed above under
“Liquidity and Capital Resources,” on June 28, 2007, we completed a private
placement to twenty-two qualified institutional buyers, pursuant to which we
sold $60.0 million aggregate principal amount of the 2007 Debentures. We
received net proceeds of approximately $57 million, after discounts and
commissions. The 2007 Debentures bear interest at the rate of 5.5% per year
and mature on July 1, 2012. Interest is payable in arrears on January 1 and
July 1 of each year, beginning on January 1, 2008. In addition, the
2007 Debentures are unsecured obligations and are subordinated in right of
payment to all of our existing and future senior indebtedness, including
indebtedness under our revolving debt facilities. The 2007 Debentures are
effectively subordinated to all present and future liabilities, including trade
payables, of our subsidiaries.
44
The 2007 Debentures are convertible by the holders in whole or in part into shares of our common stock prior to their maturity. The conversion rate of the 2007 Debentures for the holders electing to convert all or any portion of a debenture is 36.4 shares of our common stock per $1,000 principal amount of debentures (representing a conversion price of $27.47 per share of common stock), subject to adjustment under certain conditions as set forth in the Indenture.
Working Capital Revolver Loan
– ThermaClime’s Working Capital Revolver Loan is available to fund its working
capital requirements, if necessary. Under the Working Capital Revolver Loan,
ThermaClime and its subsidiaries may borrow on a revolving basis up to $50.0
million based on specific percentages of eligible accounts receivable and
inventories. In connection with the Secured Term Loan (discussed below), the
Working Capital Revolver Loan was amended. The amendment includes the release of
the lenders second position security liens to the assets that collateralize the
Secured Term Loan and certain other modifications to the terms of the Working
Capital Revolver Loan, including among other things, an interest rate reduction
of .25% and an extended maturity date of April 13, 2012. As a result of using a
portion of the proceeds from the 2007 Debentures to pay down the Working Capital
Revolver Loan, at December 31, 2007, there were no outstanding borrowings. At
March 7, 2008, the net credit available for additional borrowings under our
Working Capital Revolver Loan was approximately $49.2 million. The Working
Capital Revolver Loan requires that ThermaClime meet certain financial covenants
measured quarterly. ThermaClime was in compliance with those covenants for the
twelve-month period ended December 31, 2007.
Secured Term Loan - In November 2007,
ThermaClime and certain of its subsidiaries entered into the $50 million Secured
Term Loan with a certain lender. Proceeds from the Secured Term Loan
were used to repay the previous Senior Secured Loan as discussed above under
“Liquidity and Capital Resources.” The Secured Term Loan matures on
November 2, 2012.
The
Secured Term Loan accrues interest at a defined LIBOR rate plus 3%. The interest
rate at December 31, 2007 was 7.90%. The Secured Term Loan requires only
quarterly interest payments with the final payment of interest and principal at
maturity.
The
Secured Term Loan is secured by the real property and equipment located at the
El Dorado and Cherokee Facilities. The carrying value of the pledged assets is
approximately $48 million at December 31, 2007.
The
Secured Term Loan borrowers are subject to numerous covenants under the
agreement including, but not limited to, limitation on the incurrence of certain
additional indebtedness and liens, limitations on mergers, acquisitions,
dissolution and sale of assets, and limitations on declaration of dividends and
distributions to us, all with certain exceptions. At December 31, 2007, the
carrying value of the restricted net assets of ThermaClime and its subsidiaries
was approximately $60 million. The Secured Term Loan borrowers are also subject
to a minimum fixed charge coverage ratio and a maximum leverage ratio, both
measured quarterly on a trailing twelve-month basis. The Secured Term Loan
borrowers were in compliance with these financial covenants for the year ended
December 31, 2007.
45
The
maturity date of the Secured Term Loan can be accelerated by the lender upon the
occurrence of a continuing event of default, as defined.
A
prepayment premium equal to 1% of the principal amount prepaid is due to the
lender should the borrowers elect to prepay on or prior to November 6, 2009.
This premium is reduced to 0.5% during the following twelve-month period and is
eliminated thereafter.
Cross - Default Provisions -
The Working Capital Revolver Loan agreement and the Secured Term Loan contain
cross-default provisions. If ThermaClime fails to meet the financial covenants
of the Secured Term Loan, the lender may declare an event of default, making the
debt due on demand. If this should occur, there are no assurances that we would
have funds available to pay such amount or that alternative borrowing
arrangements would be available. Accordingly, ThermaClime could be required to
curtail operations and/or sell key assets. These actions could result in the
recognition of losses that may be material.
Seasonality
We
believe that our only seasonal products are fertilizer and related chemical
products sold by our Chemical Business 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 our
agricultural products are distributed. As a result, our Chemical Business
increases its inventory of agricultural products prior to the beginning of each
planting season. In addition, the amount and timing of sales to the agricultural
markets depend upon weather conditions and other circumstances beyond our
control.
Related Party
Transactions
Jayhawk
Jayhawk
Capital Management, L.L.C., and certain of its affiliates (collectively, the
“Jayhawk Group”), a former significant shareholder and affiliate, were
participants to various investment transactions in certain issues of the
Company’s debt and equity securities during the past several years, which both
increased and decreased their ownership interest in the Company. During August
2007, the two directors appointed by the holders of our Series 2 Preferred were
no longer eligible to serve on our board and as of December 31, 2007, the
Jayhawk Group had decreased its ownership in our debt and equity securities to
the level whereby they are no longer considered a related party. However, the
Jayhawk Group was a participant in the following transactions related to our
debt and equity securities during the period it was considered a related
party:
During
2006, a member of the Jayhawk Group purchased $1,000,000 principal amount of the
2006 Debentures. In April 2007, the Jayhawk Group converted all of such 2006
Debentures into 141,040 shares of our common stock, at the conversion rate of
141.04 shares per $1,000 principal amount of 2006 Debentures (representing a
conversion price of $7.09 per share pursuant to the Indenture covering the 2006
Debentures). During 2007, we paid the Jayhawk Group $70,000 of which $46,000
relates to interest earned on the 2006 Debentures and $24,000 relates to
additional consideration paid to convert the 2006 Debentures.
46
On
March 25, 2003, the Jayhawk Group purchased from us in a private placement
pursuant to Rule 506 of Regulation D under the Securities Act, 450,000 shares of
common stock and a warrant for the purchase of up to 112,500 shares of common
stock at an exercise price of $3.49 per share. In connection with
such sale, we entered into a Registration Rights Agreement with the Jayhawk
Group, dated March 23, 2003. During 2007, the Jayhawk Group exercised the
warrant and purchased 112,500 shares of our common stock at the exercise price
of $3.49 per share. The aggregate 562,500 shares of our common stock were
registered for resale under the Form S-1 Registration Statement, No. 333-145721,
declared effective by the SEC on November 19, 2007.
During
November 2006, we entered into an agreement (the “Jayhawk Agreement”) with the
Jayhawk Group. Under the Jayhawk Agreement, the Jayhawk Group agreed, that if we
made an exchange or tender offer for the Series 2 Preferred, to tender 180,450
shares of the 346,662 shares of Series 2 Preferred owned by the Jayhawk Group
upon certain conditions being met. The Jayhawk Agreement further provided that
the Golsen Group would exchange or tender 26,467 shares of Series 2 Preferred
beneficially owned by them, as a condition to the Jayhawk Group’s tender of
180,450 of its shares of Series 2 Preferred. Pursuant to the Jayhawk Agreement
and the terms of our exchange tender offer, during March 2007, the Jayhawk Group
and members of the Golsen Group tendered 180,450 and 26,467 shares,
respectively, of Series 2 Preferred for 1,335,330 and 195,855 shares,
respectively, of our common stock in our tender offer. As a result, we
effectively settled the dividends in arrears totaling approximately $4.96
million, with $4.33 million relating to the Jayhawk Group and $0.63 million
relating to the Golsen Group.
We
received a letter, dated May 23, 2007, from a law firm representing a
stockholder of ours demanding that we investigate potential short-swing profit
liability under Section 16(b) of the Exchange Act of the Jayhawk Group. The
stockholder alleges that the surrender by the Jayhawk Group of 180,450 shares of
our Series 2 Preferred in our issuer exchange tender offer in March 2007 was a
sale which was subject to Section 16 and matchable against prior purchases
of Series 2 Preferred by the Jayhawk Group. The Jayhawk Group advised us that
they do not believe that they are liable for short-swing profits under
Section 16(b). The provisions of Section 16(b) provide that if we do
not file a lawsuit against the Jayhawk Group in connection with these
Section 16(b) allegations within 60 days from the date of the stockholder’s
notice to us, then the stockholder may pursue a Section 16(b) short-swing
profit claim on our behalf. After completion of the investigation of this matter
by our outside corporate/securities counsel, we attempted to settle this matter
with the Jayhawk Group, but were unable to reach a resolution satisfactory to
all parties. On October 9, 2007, the law firm representing the stockholder
initiated a lawsuit against the Jayhawk Group pursing a Section 16(b)
short-swing profit claim on our behalf up to $819,000. During the first quarter
of
2008, the parties have agreed to settle this claim by a payment to us by the
Jayhawk Group of $180,000, of which we will receive approximately $125,000 after
attorneys’ fees. This settlement is subject to a definitive
settlement agreement.
The
redemption of all of our outstanding Series 2 Preferred was completed on
August 27, 2007. The holders of shares of Series 2 Preferred had the right
to convert each share into 4.329 shares of our common stock, which right to
convert terminated 10 days prior to the redemption date. The Certificate of
Designations for the Series 2 Preferred provided, and it is our position, that
the holders of Series 2 Preferred that elected to convert shares of Series 2
Preferred into our common
47
stock
prior to the scheduled redemption date were not entitled to receive payment of
any dividends in arrears on the shares so converted. As a result, holders that
elected to convert shares of Series 2 Preferred were not entitled to any
dividends in arrears as to the shares of Series 2 Preferred converted. On or
about August 16, 2007, the Jayhawk Group elected to convert the 155,012
shares of Series 2 Preferred held by it, and we issued to the Jayhawk Group
671,046 shares of our common stock as a result of such conversion.
The
Company has been advised by the Jayhawk Group, in connection with the Jayhawk
Group’s conversion of its holdings of Series 2 Preferred, the Jayhawk Group may
bring legal proceedings against us for all dividends in arrears on the
Series 2 Preferred that the Jayhawk Group converted after receiving a
notice of redemption. The 155,012 shares of Series 2 Preferred converted by the
Jayhawk Group after we issued the notice of redemption for the Series 2
Preferred would have been entitled to receive approximately $4.0 million of
dividends in arrears on the August 27, 2007 redemption date, if such shares
were outstanding on the redemption date and had not been converted and into
common stock.
As a
holder of Series 2 Preferred, the Jayhawk Group participated in the nomination
and election of two individuals to serve on our board of directors in accordance
with the terms of the Series 2 Preferred. As the result of the exchanges,
conversions and redemption of the Series 2 Preferred during 2007, resulting in
less than 140,000 shares of Series 2 Preferred being outstanding, the right of
the holders of Series 2 Preferred to nominate and elect two individuals to serve
on our board of directors terminated pursuant to the terms of the Series 2
Preferred. Therefore the two independent directors elected by the holders of our
Series 2 Preferred no longer serve as directors on our board of directors and
the Jayhawk Group is no longer considered an affiliate of ours.
Golsen
Group
In
connection with the completion of our March 2007 tender offer for our
outstanding shares of our Series 2 Preferred, members of the Golsen Group
tendered 26,467 shares of Series 2 Preferred in exchange for our issuance to
them of 195,855 shares of our common stock. As a result, we effectively
settled approximately $0.63 million in dividends in arrears on
the shares of Series 2 Preferred tendered. The tender by the Golsen Group was a
condition to Jayhawk’s Agreement to tender shares of Series 2 Preferred in the
tender offer. See discussion above under “Jayhawk.”
After our
exchange tender offer of our Series 2 Preferred, the Golsen Group held 23,083
shares of Series 2 Preferred. Pursuant to our redemption of the remaining
outstanding Series 2 Preferred during August 2007, the Golsen Group redeemed
23,083 shares of Series 2 Preferred and received the cash redemption amount of
approximately $1.76 million pursuant to the terms of our redemption of all of
our outstanding Series 2 Preferred. The redemption price was $50.00 per share of
Series 2 Preferred, plus $26.25 per share in dividends in arrears pro-rata to
the date of redemption. The holders of shares of Series 2 Preferred had the
right to convert each share into 4.329 shares of our common stock, which right
to convert terminated 10 days prior to the redemption date. Holders that
converted shares of Series 2 Preferred were not entitled to any dividends in
arrears as to the shares of Series 2 Preferred converted.
48
Cash
Dividends
As
discussed above, during 2007, we paid cash dividends to the Golsen Group of
approximately $606,000 related to 23,083 shares of Series 2 Preferred
redeemed.
In
September 2007, we paid the dividends in arrears on our outstanding
preferred stock utilizing a portion of the net proceeds of the sale of the 2007
Debentures and working capital, including approximately $2,250,000 of dividends
in arrears on our Series B Preferred and our Series D Preferred, all
of the outstanding shares of which are owned by the Golsen Group.
Quail
Creek Bank
Bernard
Ille, a member of our board of directors, is a director of Quail Creek Bank,
N.A. (the “Bank”). The Bank was a lender to one of our subsidiaries. During
2007, the subsidiary made interest and principal payments on outstanding debt
owed to the Bank in the respective amount of $.1 million and $3.3 million in
2007. At December 31, 2006, the subsidiary’s loan payable to the Bank was
approximately $3.3 million, (none at December 31, 2007) with an annual
interest rate of 8.25%. The loan was secured by certain of the subsidiary’s
property, plant and equipment. This loan was paid in full in June 2007 utilizing
a portion of the net proceeds of our sale of the 2007 Debentures.
Critical Accounting Policies
and Estimates
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amount of assets, liabilities, revenues and
expenses, and disclosures of contingencies. In addition, the more critical areas
of financial reporting impacted by management's judgment, estimates and
assumptions include the following:
Changes in Accounting
Estimates
|
·
|
as
discussed under “Overview - 2007 Results”, we reversed the valuation
allowance on our deferred tax balances which resulted in recognition of a
deferred tax benefit of $4,700,000 which is included in our provision for
income taxes and
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·
|
the
recognition of $1.0 million of additional state income taxes included in
our provision for income taxes as discussed above under “Overview - 2007
Results”.
|
The net
effect of these changes in accounting estimates increased income from continuing
operations and net income by $3.7 million for 2007. In addition, these changes
in accounting estimates increased basic and diluted net income per share by
$0.19 and $0.16, respectively, for 2007.
Receivables and Credit Risk -
Our sales to contractors and independent sales representatives are generally
subject to a mechanics lien in the Climate Control Business. Our other sales are
generally unsecured. Credit is extended to customers based on an evaluation of
the customer's financial condition and other factors. Credit losses are provided
for in the
49
financial
statements based on historical experience and periodic assessment of outstanding
accounts receivable, particularly those accounts which are past due (determined
based upon how recently payments have been received). Our periodic assessment of
accounts and credit loss provisions are based on our best estimate of amounts
that are not recoverable. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising our
customer bases and their dispersion across many different industries and
geographic areas, however, six customers account for approximately 26% of our
total net receivables at December 31, 2007. We do not believe this concentration
in these six customers represents a significant credit risk due to the financial
stability of these customers. At December 31, 2007 and 2006, our allowance for
doubtful accounts of $1.3 million and $2.3 million, respectively, were netted
against our accounts receivable.
Inventory Valuations -
Inventories are priced at the lower of cost or market, with cost being
determined using the first-in, first-out (“FIFO”) basis. Finished goods and
work-in-process inventories include material, labor and manufacturing overhead
costs. At December 31, 2007 and 2006, the carrying value of certain
nitrogen-based inventories produced by our Chemical Business was reduced to
market because cost exceeded the net realizable value by $13,000 and $426,000,
respectively. In addition, the carrying value of certain slow-moving inventory
items (primarily Climate Control products) was reduced to market because cost
exceeded the net realizable value by $460,000 and $829,000 at December 31, 2007
and 2006, respectively.
Precious Metals - Precious metals are used
as a catalyst in the Chemical Business manufacturing process. Precious
metals are carried at cost, with cost being determined using the FIFO
basis. As of December 31, 2007 and 2006, precious metals were $10.9 million and
$6.4 million, respectively, and are included in supplies, prepaid items and
other in the consolidated balance sheets. Because some of the
catalyst consumed in the production process cannot be readily recovered and the
amount and timing of recoveries are not predictable, we follow the practice of
expensing precious metals as they are consumed. For 2007, 2006 and 2005, the
amounts expensed for precious metals were approximately $6.4 million, $4.8
million and $3.1 million, respectively. These precious metals expenses are
included in cost of sales. Occasionally, during major maintenance and/or capital
projects, we may be able to perform procedures to recover precious metals
(previously expensed) which have accumulated over time within the manufacturing
equipment. For 2007, 2006 and 2005, we recognized recoveries of precious
metals at historical FIFO costs of approximately $1.8 million, $2.1 million and
$1.6 million, respectively. When we accumulate precious metals in excess of our
production requirements, we may sell a portion of the excess metals. We
recognized gains of $2.0 million for 2007 (none in 2006 and 2005) from the sale
of excess precious metals. These recoveries and gains are reductions to cost of
sales.
Impairment of Long-Lived Assets and
Goodwill - Long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amounts may not be
recoverable and goodwill is reviewed for impairment at least annually. If assets
to be held and used are considered to be impaired, the impairment to be
recognized is the amount by which the carrying amounts of the assets exceed the
fair values of the assets as measured by the present value of future net cash
flows expected to be generated by the assets or their appraised value. Assets to
be disposed of are reported at the lower of the carrying amounts of the assets or fair
50
values less costs to sell.
At December 31, 2007, we had no long-lived assets that met the criteria presented
in SFAS 144 to be
classified as assets held for sale. We have
considered impairment of our long-lived assets and goodwill. The
timing of impairments cannot be predicted with reasonable
certainty and are primarily dependent on market conditions outside our control.
Should sales prices permanently decline dramatically without a similar decline
in the raw material costs or should other matters, including the environmental
requirements and/or operating requirements set by Federal and State agencies
change substantially from our current expectations, a provision for impairment
may be required based upon such event or events. See Item 1
"Business-Environmental Matters." Based on estimates obtained from external
sources and internal estimates based on inquiry and other techniques, we
recognized impairments relating to certain non-core equipment of $120,000
relating to Corporate assets during 2005 (none in 2007 and 2006) and $250,000,
$286,000 and $117,000 relating to certain capital spare parts and idle assets in
our Chemical Business during 2007, 2006 and 2005, respectively. These
impairments are included in other expense in the consolidated statements of
income.
Accrued Insurance Liabilities -
We are self-insured up to certain limits for group health, workers’
compensation and general liability insurance claims. Above these limits, we have
commercial insurance coverage for our contractual exposure on group health
claims and statutory limits under workers’ compensation obligations. We also
carry excess umbrella insurance of $50 million for most general liability risks
excluding environmental risks. We have a separate $30 million insurance policy
covering pollution liability at our El Dorado and Cherokee Facilities. Our
accrued insurance liabilities are based on estimates of claims, which include
the incurred claims amounts plus estimates of future claims development
calculated by applying our historical claims development factors to our incurred
claims amounts. We also consider the reserves established by our insurance
adjustors and/or estimates provided by attorneys handling the claims, if any. In
addition, our accrued insurance liabilities include estimates of incurred, but
not reported, claims and other insurance-related costs. At December 31, 2007 and
2006, our accrued insurance liabilities were $3.0 million and $1.6 million,
respectively, and are included in accrued and other liabilities in the
consolidated balance sheets. It is possible that the actual development of
claims could exceed our estimates. Amounts recoverable from our insurance
carriers over the self-insured limits are included in accounts
receivable.
Product Warranty - Our Climate
Control Business sells equipment for which we provide warranties covering
defects in materials and workmanship. Generally, the base warranty coverage for
most of the manufactured equipment is limited to 18 months from the date of
shipment or 12 months from the date of start-up, whichever is shorter, and to 90
days for spare parts. In some cases, the customer may purchase an extended
warranty. Our accounting policy and methodology for warranty arrangements is to
periodically measure and recognize the expense and liability for such warranty
obligations using a percentage of net sales, based on historical warranty costs.
It is possible that future warranty costs could exceed our estimates. At
December 31, 2007 and 2006, our accrued product warranty obligations were $1.9
million and $1.3 million, respectively and are included in current and
noncurrent accrued and other liabilities in the consolidated balance
sheets.
51
Plant Turnaround Costs - We
expense the costs as they are incurred relating to planned major maintenance
activities (“Turnarounds”) of our Chemical Business as described as the direct
expensing method within Financial Accounting Standards Board (“FASB”) Staff
Position No. AUG AIR-1.
Executive Benefit Agreements -
We have entered into benefit agreements with certain key executives.
Costs associated with these individual benefit agreements are accrued when they
become probable over the estimated remaining service period. Total costs accrued
equal the present value of specified payments to be made after benefits become
payable. In 1992, we entered into individual benefit agreements with certain key
executives (“1992 Agreements”) that provide for annual benefit payments for life
(in addition to salary). The liability for these benefits under the 1992
Agreements is $1,040,000 and $979,000 as of December 31, 2007 and 2006,
respectively, and is included in current and noncurrent accrued and other
liabilities in the consolidated balance sheets.
In 1981,
we entered into individual death benefit agreements with certain key executives.
In addition, as part of the 1992 Agreements, should the executive die prior to
attaining the age of 65, we will pay the beneficiary named in the agreement in
120 equal monthly installments aggregating to an amount specified in the
agreement. In 2005, we entered into a death benefit agreement with our CEO. As
of December 31, 2007, the liability for death benefits is $2.1 million ($1.4
million at December 31, 2006) which is included in current and noncurrent
accrued and noncurrent liabilities in the consolidated balance
sheets.
Environmental and Regulatory
Compliance - The Chemical Business is subject to specific federal and
state regulatory and environmental compliance laws and guidelines. We have
developed policies and procedures related to environmental and regulatory
compliance. We must continually monitor whether we have maintained compliance
with such laws and regulations and the operating implications, if any, and
amount of penalties, fines and assessments that may result from noncompliance.
At December 31, 2007, liabilities totaling $0.4 million have been accrued
relating to a consent administrative order (“CAO”) covering the El Dorado
Facility and a CAO covering our former Hallowell facility. These liabilities are
included in current and noncurrent accrued and other liabilities and are based
on current estimates that may be revised in the near term based on results from
our surface and groundwater monitoring and mitigation work plan. In addition, we
will be required to make capital expenditures as it relates to the
AirCAO.
Asset Retirement Obligations -
We are obligated to monitor certain discharge water outlets at our Chemical
Business facilities should we discontinue the operations of a
facility. We also have certain facilities in our Chemical Business
that contain asbestos insulation around certain piping and heated surfaces which
we plan to maintain in an adequate condition to prevent leakage through our
standard repair and maintenance activities. We do not believe the annual costs
of the required monitoring and maintenance activities would be significant and
we currently have no plans to discontinue the use of these facilities and the
remaining life of the facilities is indeterminable, an asset retirement
liability has not been recognized. Currently, there is insufficient information
to estimate the fair value of the asset retirement obligations. However, we will
continue to review these obligations and record a liability when a reasonable
estimate of the fair value can be made in accordance with FIN
47.
52
Income Taxes - We account for
income taxes in accordance with SFAS 109 and we adopted FIN No. 48 – Accounting
for Uncertainty in Income Taxes (“FIN 48”) on January 1, 2007. We
recognize deferred tax assets and liabilities for the expected future tax
consequences attributable to tax net operating loss (“NOL”) carryforwards, tax
credit carryforwards, and differences between the financial statement carrying
amounts and the tax basis of our assets and liabilities. We establish
valuation allowances if we believe it is more-likely-than-not that some or all
of deferred tax assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. We
do not recognize a tax benefit unless we conclude that it is more likely than
not that the benefit will be sustained on audit by the taxing authority based
solely on the technical merits of the associated tax position. If the
recognition threshold is met, we recognize a tax benefit measured at the largest
amount of the tax benefit that, in our judgment, is greater than 50% likely to
be realized. We record interest related to unrecognized tax positions
in interest expense and penalties in operating other expense.
Income
tax benefits credited to equity relate to tax benefits associated with amounts
that are deductible for income tax purposes but do not affect earnings. These
benefits are principally generated from employee exercises of non-qualified
stock options.
Contingencies - We accrue for
contingent losses when such losses are probable and reasonably estimable. In
addition, we recognize contingent gains when such gains are realized. We are a
party to various litigation and other contingencies, the ultimate outcome of
which is not presently known. Should the ultimate outcome of these contingencies
be adverse, such outcome could create an event of default under ThermaClime's
Working Capital Revolver Loan and the Secured Term Loan and could
adversely impact our liquidity and capital resources.
Revenue Recognition - We
recognize revenue for substantially all of our operations at the time title to
the goods transfers to the buyer and there remains no significant future
performance obligations by us. Revenue relating to construction contracts is
recognized using the percentage-of-completion
method based primarily on contract costs incurred to date compared with total
estimated contract costs. Changes to total estimated contract costs or losses,
if any, are recognized in the period in which they are determined. Sales of
warranty contracts are recognized as revenue ratably over the life of the
contract. See discussion above under “Product Warranty” for our accounting
policy for recognizing warranty expense.
Recognition of Insurance Recoveries
- If an insurance claim relates to a recovery of our losses, we recognize
the recovery when it is probable and reasonably estimable. If our insurance
claim relates to a contingent gain, we recognize the recovery when it is
realized.
Management's
judgment and estimates in these areas are based on information available from
internal and external resources at that time. Actual results could differ
materially from these estimates and judgments, as additional information becomes
known.
53
Results of
Operations
The
following Results of Operations should be read in conjunction with our
Consolidated Financial Statements for the years ended December 31, 2007, 2006
and 2005 and accompanying notes and the discussions above under “Overview” And
“Liquidity and Capital Resources.”
The
following table contains certain information about our continuing operations in
different industry segments for each of the three years ended December
31:
|
2007
|
2006
|
2005
|
|
(In
Thousands)
|
|
Net
sales:
|
|||||||||||
|
Climate
Control
|
$
|
286,365
|
$
|
221,161
|
$
|
156,859
|
|||||
|
Chemical
|
288,840
|
260,651
|
233,447
|
||||||||
|
Other
|
11,202
|
10,140
|
6,809
|
||||||||
|
$
|
586,407
|
$
|
491,952
|
$
|
397,115
|
||||||
|
Gross
profit:
|
|||||||||||
|
Climate
Control
|
$
|
83,638
|
$
|
65,496
|
$
|
48,122
|
|||||
|
Chemical
|
44,946
|
22,023
|
16,314
|
||||||||
|
Other
|
4,009
|
3,343
|
2,330
|
||||||||
|
$
|
132,593
|
$
|
90,862
|
$
|
66,766
|
||||||
|
Operating
income (loss):
|
|||||||||||
|
Climate
Control
|
$
|
34,194
|
$
|
25,428
|
$
|
14,097
|
|||||
|
Chemical
|
35,011
|
9,785
|
7,591
|
||||||||
|
General
corporate expense and other business operations, net
|
(10,194
|
)
|
(8,074
|
)
|
(6,835
|
)
|
|||||
|
59,011
|
27,139
|
14,853
|
|||||||||
|
Interest
expense
|
(12,078
|
)
|
(11,915
|
)
|
(11,407
|
)
|
|||||
|
Non-operating
income, net:
|
|||||||||||
|
Climate
Control
|
2
|
1
|
-
|
||||||||
|
Chemical
|
109
|
311
|
362
|
||||||||
|
Corporate
and other business operations
|
1,153
|
312
|
1,199
|
||||||||
| Provision for income taxes | (2,540 | ) | (901 | ) | (118 | ) | |||||
|
Equity
in earnings of affiliate - Climate Control
|
877
|
|
821
|
|
745
|
|
|||||
|
Income
from continuing operations
|
$
|
46,534
|
$
|
15,768
|
$
|
5,634
|
54
Year Ended December 31, 2007
Compared to Year Ended December 31, 2006
Net
Sales
The
following table contains certain information about our net sales in different
industry segments for 2007 and 2006:
|
2007
|
2006
|
Change
|
Percentage
Change |
|
(Dollars
In Thousands)
|
|
Net
sales:
|
||||||||||||||
|
Climate
Control:
|
||||||||||||||
|
Geothermal
and water source heat pumps
|
$
|
165,115
|
$
|
134,210
|
$
|
30,905
|
23.0
|
%
|
||||||
|
Hydronic
fan coils
|
85,815
|
59,497
|
26,318
|
44.2
|
%
|
|||||||||
|
Other
HVAC products
|
35,435
|
27,454
|
7,981
|
29.1
|
%
|
|||||||||
|
Total
Climate Control
|
$
|
286,365
|
$
|
221,161
|
$
|
65,204
|
29.5
|
%
|
||||||
|
Chemical:
|
||||||||||||||
|
Agricultural
products
|
$
|
117,158
|
$
|
89,735
|
$
|
27,423
|
30.6
|
%
|
||||||
|
Industrial
acids and other chemical products
|
95,754
|
95,208
|
546
|
0.6
|
%
|
|||||||||
|
Mining
products
|
75,928
|
75,708
|
220
|
0.3
|
%
|
|||||||||
|
Total
Chemical
|
$
|
288,840
|
$
|
260,651
|
$
|
28,189
|
10.8
|
%
|
||||||
|
Other
|
$
|
11,202
|
$
|
10,140
|
$
|
1,062
|
10.5
|
%
|
||||||
|
Total
net sales
|
$
|
586,407
|
$
|
491,952
|
$
|
94,455
|
19.2
|
%
|
Climate
Control Business
|
·
|
Net
sales of our geothermal and water source heat pump products increased
primarily as a result of increases in original equipment manufacturer
(“OEM”), export and commercial shipments. In total, the number of
geothermal and water source heat pump products shipments increased
by approximately 10% in 2007 as compared to 2006. In addition, an
increase of approximately 13% relates to the change in product mix and
price increases. The price increases were instituted in response to rising
raw material and component purchase prices. Due to the significant backlog
of customer orders at the time the price increases were put into effect,
the impact of customer price increases trail cost increases in raw
material and component purchase prices. In 2007, the impact of price
increases is estimated to be approximately 4%. We continue to maintain a
market share leadership position based on data supplied by the
Air-Conditioning and Refrigeration
Institute;
|
|
·
|
Net
sales of our hydronic fan coils increased primarily due to a 16% increase
in the number of units sold due to an increase in large customer orders as
well as a 25% increase in average unit sales prices as the result of the
change in product mix, lower discounting, and higher selling prices driven
by raw material cost increases;
|
|
·
|
Net
sales of our other HVAC products increased primarily as the result of
engineering and construction services due to work completed on
construction contracts.
|
55
Chemical
Business
The El
Dorado and Cherokee Facilities produce all the chemical products described in
the table above and the Baytown Facility produces only nitric acid products. The
volume of tons sold and the sales prices for the Chemical Business increased 3%
and 7%, respectively, compared with 2006.
|
·
|
Overall,
volume at the El Dorado Facility remained essentially the same while sales
prices increased 10%. However, our product mix shifted in 2007 from
industrial acids products to agricultural products driven by increased
agricultural demand. The increase in sales prices includes a 17% increase
relating to our nitrogen fertilizer
products.
|
|
·
|
Overall
volume at the Cherokee Facility increased 7% and sales prices increased
11%. The Cherokee Facility also experienced the same market-driven demand
for nitrogen fertilizer products in 2007, which resulted in a 54% increase
in volume and a 32% increase in sales prices relating to these products.
Additionally, there were low demand and production curtailments
experienced throughout the first quarter of 2006 as the result of
reduction in orders from several key customers due to the high cost of
natural gas caused by the effects of Hurricane
Katrina.
|
|
·
|
Volume
increased 5% while sales prices remained essentially the same at the
Baytown Facility.
|
Other - Net sales classified
as “Other” consists of sales of industrial machinery and related components. The
increase in net sales relates primarily to increased customer demand for our
machine tool products.
Gross
Profit
Gross
profit by industry segment represents net sales less cost of sales. The
following table contains certain information about our gross profit in different
industry segments for 2007 and 2006:
|
2007
|
2006
|
Change
|
Percentage
Change |
|
(Dollars
In Thousands)
|
|
Gross
profit:
|
||||||||||||||
|
Climate
Control
|
$
|
83,638
|
$
|
65,496
|
$
|
18,142
|
27.7
|
%
|
||||||
|
Chemical
|
44,946
|
22,023
|
22,923
|
104.1
|
%
|
|||||||||
|
Other
|
4,009
|
3,343
|
666
|
19.9
|
%
|
|||||||||
|
$
|
132,593
|
$
|
90,862
|
$
|
41,731
|
45.9
|
%
|
|
Gross
profit percentage (1):
|
|||||||||
|
Climate
Control
|
29.2
|
%
|
29.6
|
%
|
(0.4
|
)%
|
|||
|
Chemical
|
15.6
|
%
|
8.4
|
%
|
7.2
|
%
|
|||
|
Other
|
35.8
|
%
|
33.0
|
%
|
2.8
|
%
|
|||
|
Total
|
22.6
|
%
|
18.5
|
%
|
4.1
|
%
|
(1) As a
percentage of net sales
56
The
increase in gross profit in our Climate Control Business was a direct result of
the increase in sales volume, change in product mix, and price increases as
discussed above. Our gross profit percentage as a percentage of sales decreased
by 0.4% primarily due to raw material costs increases being incurred ahead of
customer price increases becoming effective as well as changes in product mix.
The
increase in gross profit of our Chemical Business relates primarily to improved
margins on agricultural products sold by the El Dorado and Cherokee Facilities.
Comparing 2007 with 2006, there was little change in the cost of the El Dorado
and Cherokee Facilities’ primary feedstocks, ammonia and natural
gas. As a result, the higher selling prices and volumes as discussed
above are the primary reasons for the increase in the gross profit
percentage.
During
2007 and 2006, we recorded the realization of losses on certain nitrogen-based
inventories of approximately $0.4 million and $1.0 million, respectively. In
addition, during 2007, we realized insurance recoveries of approximately $3.8
million relating to a business interruption claim associated with the Cherokee
Facility. In 2006, we realized insurance recoveries of approximately $0.9
million relating to a business interruption claim associated with the El Dorado
Facility. The above transactions contributed to an increase in gross profit for
each respective period.
As
discussed above under “Overview-Chemical Business,” our Chemical Business uses
precious metals as a catalyst in the manufacturing process. During 2007, we had
accumulated precious metals in excess of our production requirements. Therefore
we sold a portion of the excess metals. As a result, we recognized a gain of
$2.0 million which increased gross profit compared to 2006. However, this
increase in gross profit of $2.0 million was partially offset by a decrease of
$1.8 million due primarily to the increase in precious metals expense of
approximately $1.5 million compared to 2006 as the result of cost increases for
these metals.
The
increase in gross profit classified as “Other” (see discussion above) is due
primarily to the increase in sales as discussed above.
Operating
Income
Our chief
operating decision makers use operating income by industry segment for purposes
of making decisions which include resource allocations and performance
evaluations. Operating income by industry segment represents gross profit by
industry segment less SG&A incurred by each industry segment plus other
income and other expense earned/incurred by each industry segment before general
corporate expenses and other business operations, net. General corporate
expenses and other business operations, net consist of unallocated portions of
gross profit, SG&A, other income and other expense. The following table
contains certain information about our operating income for 2007 and
2006:
57
|
2007
|
2006
|
Change
|
|
(In
Thousands)
|
|
Operating
income:
|
|||||||||||
|
Climate
Control
|
$
|
34,194
|
$
|
25,428
|
$
|
8,766
|
|||||
|
Chemical
|
35,011
|
9,785
|
25,226
|
||||||||
|
General
corporate expense and other business operations, net
|
(10,194
|
)
|
(8,074
|
)
|
(2,120
|
)
|
|||||
|
$
|
59,011
|
$
|
27,139
|
$
|
31,872
|
Operating Income - Climate Control:
The net increase in operating income of our Climate Control Business
resulted primarily from the net increase of gross profit of $18.1 million as
discussed above. This increase in operating income was partially offset
primarily by increased personnel cost of $1.8 million as the result of increased
number of personnel and group healthcare costs, increased commissions and
warranty expenses of $1.6 million and $1.1 million, respectively, due to
increased sales volume and distribution/product mix increased shipping and
handling costs of $0.7 million due to increased sales volume and rising fuel
costs and increased consulting fees of $0.5 million primarily due to efforts to
promote governmental support in the geothermal market. In addition, our Climate
Control Business recognized income of $1.2 million in 2006 relating to an
arbitration award received relating to an arbitration case involving a
subsidiary within the Climate Control Business.
Operating Income - Chemical:
The net increase of our Chemical Business’ operating income primarily
relates to the net increase in gross profit of $22.9 million as discussed above.
Also as discussed above under “Overview - Chemical Business”, our Chemical
Business recognized income of approximately $3.3 million relating to a
litigation settlement during 2007.
General Corporate Expense and Other
Business Operations, Net: The net increase of $2.1 million in our general
corporate expense and other business operations, net relates primarily to an
increase of professional fees of $1.3 million primarily as the result of costs
incurred associated with the evaluation and audit of our internal controls and
procedures and related documentation for Sarbanes-Oxley requirements and an
increase of $1.0 million in personnel costs due, in part, to increased group
health care costs which was partially offset by the increase of $0.7 million in
gross profit classified as “Other” as discussed above.
Interest
Expense - Interest expense was $12.1 million for 2007 compared to $11.9
million for 2006, an increase of $0.2 million. This net increase includes $2.0
million relating to the 2007 Debentures, $0.6 million relating to the Secured
Term Loan and the $0.6 million change in the fair value of our interest rate
caps. This increase was partially offset by a decrease of $1.3 million as the
result of the conversions of the 2006 Debentures during 2006 and 2007, a
decrease of $1.1 million primarily due the pay down of the Working Capital
Revolver Loan during 2007, and a decrease of $0.6 million as the result of the
acquisition of the 10.75% Senior Unsecured Notes during 2006.
58
Provision
For Income Taxes - The provision for income taxes for 2007 was $2.5
million compared to $0.9 million for 2006. The increase of $1.6 million was
primarily the result of an increase in the federal and state income taxes
resulting from increased
taxable income and additional prior year state income taxes recorded under FIN
48. This increase was partially offset by the benefit of deferred taxes from the
reversal of valuation allowances discussed above under “Overview - 2007
Results”.
Net Loss
(Income) From Discontinued Operations - Net income from discontinued
operations was $0.3 million for 2007 compared to a net loss from discontinued
operations of $0.3 million for 2006. The loss incurred in 2006
relates primarily to provisions for our estimated costs to investigate and
delineate a site in Hallowell, Kansas as a result of meetings with the KDHE
during 2006. However, on September 12, 2007, the KDHE approved our proposal to
perform surface and groundwater monitoring and to implement a mitigation work
plan to acquire additional field data. As a result of receiving approval from
the KDHE for our proposal, net income from discontinued operations for 2007
relates primarily to the reduction of our liability for the estimated costs
associated with this remediation.
Year Ended December 31, 2006
Compared to Year Ended December 31, 2005
Net
Sales
The
following table contains certain information about our net sales in different
industry segments for 2006 and 2005:
|
2006
|
2005
|
Change
|
Percentage
Change |
|
(Dollars
In Thousands)
|
|
Net
sales:
|
||||||||||||||
|
Climate
Control:
|
||||||||||||||
|
Geothermal
and water source heat pumps
|
$
|
134,210
|
$
|
85,268
|
$
|
48,942
|
57.4
|
%
|
||||||
|
Hydronic
fan coils
|
59,497
|
53,564
|
5,933
|
11.1
|
%
|
|||||||||
|
Other
HVAC products
|
27,454
|
18,027
|
9,427
|
52.3
|
%
|
|||||||||
|
Total
Climate Control
|
$
|
221,161
|
$
|
156,859
|
$
|
64,302
|
41.0
|
%
|
||||||
|
Chemical:
|
||||||||||||||
|
Industrial
acids and other chemical products
|
$
|
95,208
|
$
|
80,228
|
$
|
14,980
|
18.7
|
%
|
||||||
|
Agricultural
products
|
89,735
|
80,638
|
9,097
|
11.3
|
%
|
|||||||||
|
Mining
products
|
75,708
|
72,581
|
3,127
|
4.3
|
%
|
|||||||||
|
Total
Chemical
|
$
|
260,651
|
$
|
233,447
|
$
|
27,204
|
11.7
|
%
|
||||||
|
Other
|
$
|
10,140
|
$
|
6,809
|
$
|
3,331
|
48.9
|
%
|
||||||
|
Total
net sales
|
$
|
491,952
|
$
|
397,115
|
$
|
94,837
|
23.9
|
%
|
59
Climate
Control Business
|
·
|
Net
sales of our geothermal and water source heat pump products increased
primarily as a result of a 52% increase in the number of units sold in the
commercial and residential markets due to customer demand representing an
approximate 4% gain in market share based on data supplied by the
ARI;
|
|
·
|
Net
sales of our hydronic fan coils increased primarily due to a 10% increase
in overall average unit sales prices as the result of lowering discounting
and higher selling prices driven by raw material cost
increases;
|
|
·
|
Net
sales of our other HVAC products increased as the result of an increase in
the number of larger custom air handlers sold primarily relating to three
large projects.
|
Chemical
Business
The El
Dorado and Cherokee Facilities produce all the chemical products described in
the table above and the Baytown Facility produces only industrial acids
products. Overall, volume of tons sold for the Chemical Business increased 12%
while sales prices remained consistent with 2005.
|
·
|
Volume
at the El Dorado Facility increased 14% primarily related to agricultural
products as the result of the loss of production during the first half of
2005 as discussed below, to industrial acid and other chemical products
due to spot sales opportunities, and to mining products relating to the
growth of coal mining in the mining
industry;
|
|
·
|
Volume
at the Baytown Facility increased 24% as the result of a closing of a
chemical facility within our market and other various spot sales
opportunities;
|
|
·
|
Volume
at the Cherokee Facility decreased 6% resulting from the suspension of
production during the first half of January 2006 as the result of a
reduction in orders from several key customers due to the increased
natural gas costs and further production curtailments throughout the first
quarter of 2006.
|
Other - Net sales classified
as “Other” consists of sales of industrial machinery and related components. The
increase in net sales relates primarily to increased customer demand for our
machine tool products.
60
Gross
Profit
Gross
profit by industry segment represents net sales less cost of sales. The
following table contains certain information about our gross profit in different
industry segments for 2006 and 2005:
|
2006
|
2005
|
Change
|
Percentage
Change |
|
(Dollars
In Thousands)
|
|
Gross
profit:
|
||||||||||||||
|
Climate
Control
|
$
|
65,496
|
$
|
48,122
|
$
|
17,374
|
36.1
|
%
|
||||||
|
Chemical
|
22,023
|
16,314
|
5,709
|
35.0
|
%
|
|||||||||
|
Other
|
3,343
|
2,330
|
1,013
|
43.5
|
%
|
|||||||||
|
$
|
90,862
|
$
|
66,766
|
$
|
24,096
|
36.1
|
%
|
|
Gross
profit percentage (1):
|
|||||||||
|
Climate
Control
|
29.6
|
%
|
30.7
|
%
|
(1.1
|
)%
|
|||
|
Chemical
|
8.4
|
%
|
7.0
|
%
|
1.4
|
%
|
|||
|
Other
|
33.0
|
%
|
34.2
|
%
|
(1.2
|
)%
|
|||
|
Total
|
18.5
|
%
|
16.8
|
%
|
1.7
|
%
|
|
(1)
|
As
a percentage of net sales
|
The
increase in gross profit in our Climate Control Business was a direct result of
the increase in sales volume as discussed above. The decline in our
gross profit percentage was primarily due to raw material costs increases being
incurred ahead of customer price increases becoming effective.
The net
increase in gross profit of our Chemical Business relates primarily
to:
|
·
|
The
Cherokee Facility as the result of not incurring the disruptions at the
plant caused by the rise in natural gas costs due to the hurricanes in the
U.S. Gulf in 2005 and a decrease in electricity costs as a result of
a negotiated reduction in utility rates in
2006;
|
|
·
|
The
Baytown Facility due primarily to the increase in sales volume as
discussed above;
|
|
·
|
The
El Dorado Facility as the result of the increase in sales volume as
discussed above.
|
As
previously reported, beginning in October 2004 and continuing into June 2005,
the Chemical Business’ results were adversely affected as a result of the loss
of production due to a mechanical failure of one of the four nitric acid plants
at the El Dorado Facility. The plant was restored to normal production in June
2005. We recognized insurance recoveries of $0.9 million and $1.9 million under
our business interruption insurance policy relating to this claim for 2006 and
2005, respectively, which is recorded as a reduction to cost of sales. The
negative impact on gross profit resulting from the lost production was
approximately $4.1 million in 2005.
The
increase in gross profit classified as “Other” (see discussion above) is due
primarily to the increase in sales as discussed above.
61
Operating
Income
Our chief
operating decision makers use operating income by industry segment for purposes
of making decisions which include resource allocations and performance
evaluations. Operating income by industry segment represents gross profit by
industry segment less SG&A incurred by each industry segment plus other
income and other expense earned/incurred by each industry segment before general
corporate expenses and other business operations, net. General corporate
expenses and other business operations, net consist of unallocated portions of
gross profit, SG&A, other income and other expense. The following table
contains certain information about our operating income for 2006 and
2005:
|
2006
|
2005
|
Change
|
|
(In
Thousands)
|
|
Operating
income:
|
|||||||||||
|
Climate
Control
|
$
|
25,428
|
$
|
14,097
|
$
|
11,331
|
|||||
|
Chemical
|
9,785
|
7,591
|
2,194
|
||||||||
|
General
corporate expense and other business operations, net
|
(8,074
|
)
|
(6,835
|
)
|
(1,239
|
)
|
|||||
|
$
|
27,139
|
$
|
14,853
|
$
|
12,286
|
Operating Income - Climate Control:
The net increase in operating income of our Climate Control Business
resulted primarily from the net increase of gross profit of $17.4 million as
discussed above, an arbitration award of $1.2 million received in 2006 relating
to the arbitration case involving a subsidiary within the Climate Control
Business, and a decrease in professional fees of $1.0 million primarily as the
result of fees incurred during 2005 relating to this arbitration case. This
increase in operating income was partially offset by increased shipping and
handling costs of $3.9 million due to increased sales volume and rising fuel
costs, increased commissions of $1.8 million due to increased sales volume and
distribution mix and increased personnel cost of $1.6 million as the result of
increased number of personnel and higher incentives, and increased warranty
costs of $0.7 million due to the increased sales volume.
Operating Income - Chemical:
The net increase of our Chemical Business’ operating income primarily
relates to the net increase in gross profit of $5.7 million as discussed above.
This increase in operating income was partially offset by an increase in
handling costs of $0.8 million due primarily to increased sales volume and an
increase in professional fees of $0.4 million relating to legal costs associated
with ammonium nitrate anti-dumping tariffs. In addition, we recognized gains of
$1.6 million from certain property insurance claims in 2005.
General Corporate Expense and Other
Business Operations, Net: The net increase in our general corporate
expense and other business operations, net relates primarily to an increase of
$0.6 million in personnel costs relating to increased group health care costs of
$0.4 million and commissions of $0.3 million on the increased sales classified
as “Other” as discussed above, an increase in professional fees of $0.6 million
due, in part, for assistance in our evaluation of our internal controls and
procedures and related documentation for Sarbanes-Oxley requirements, a
litigation settlement of $0.3 million relating to an asserted financing fee, and
a decrease in gains of $0.7 million from the sales of corporate assets. The
increase was partially offset by the increase in gross profit classified as
“Other” of $1.0 million and a refund of $0.4 million relating to insurance
brokerage fees.
62
Interest
Expense - Interest expense was $11.9 million for 2006 compared to $11.4
million for 2005, an increase of $0.5 million. This net increase in interest
expense includes $1.1 million relating to the 2006 Debentures sold in March 2006
and $0.3 million of additional consideration paid in conjunction with the
conversion of a portion of the 2006 Debentures during 2006 which was partially
offset by a decrease of $0.8 million relating to the Notes which were purchased
or redeemed during 2006.
Non-Operating
Other Income, net - Our non-operating other income, net was $0.6 million
for 2006 compared to $1.6 million for 2005. In 2005, we recognized net proceeds
from life insurance policies of $1.2 million.
Provision
For Income Taxes - Due to NOL carryforwards, provisions for income taxes
consist of federal alternative minimum taxes and state income taxes for 2006 and
federal alternative minimum taxes for 2005.
Net Loss
From Discontinued Operations - Net loss from discontinued operations
includes provisions of $0.2 million and $0.6 million for 2006 and 2005,
respectively, for our share of estimated environmental remediation costs to
investigate and delineate a site in Hallowell, Kansas as
a result of meetings with the KDHE. There are no income tax benefits related to
these expenses.
Cash Flow From Continuing
Operating Activities
Historically,
our primary cash needs have been for operating expenses, working capital and
capital expenditures. We have financed our cash requirements primarily through
internally generated cash flow, borrowings under our revolving credit
facilities, secured asset financing and the sale of assets. See additional
discussion concerning cash flows from our Climate Control and Chemical
Businesses in "Liquidity and Capital Resources."
For 2007,
net cash provided by continuing operating activities was $46.8 million,
including net income (which includes insurance recoveries of $3.8 million under
our business interruption insurance policy and a litigation settlement of $3.3
million), plus depreciation and amortization, deferred income taxes, and other
adjustments offset by cash used by the following changes in assets and
liabilities:
Accounts
receivable increased a net $4.4 million including:
|
·
|
an
increase of $2.4 million relating to the Chemical Business as the result
of increased sales at the Cherokee Facility as discussed above under
“Results of Operations” and a portion of the business interruption
insurance claim discussed above under “Overview – Chemical
Business”,
|
|
·
|
an
increase of $0.7 million relating to group health insurance claims in
excess of our self-insured limits,
|
|
·
|
a
net increase of $0.5 million relating to the Climate Control Business due
primarily to increased sales of hydronic fan coils and other HVAC products
relating to engineering and construction services as discussed above under
“Results of Operations” which was partially offset by a decrease in the
average number of days our receivable balances were outstanding relating
to our heat pump product customers,
and
|
63
|
·
|
an
increase of $0.6 million relating to the timing of payments received from
our customers of industrial
machinery.
|
Inventories
increased a net $11.0 million including:
|
·
|
a
net increase of $5.3 million relating to the Climate Control Business
primarily relating to heat pump and hydronic fan coil products due
primarily to increased levels of raw materials and finished goods on hand
as the result of the expansion of our facilities to meet customer demands
and the increase in number of construction contracts in progress partially offset
by a decrease in inventories held by our large custom air handler
operation as a result of an increase in sales and a decrease in production
during the fourth quarter of 2007,
|
|
·
|
an
increase of $3.9 million in the Chemical Business relating primarily to
the Cherokee Facility as a result of a significant amount of inventory on
hand which was not delivered to a customer until January 2008 and a
reduction of inventory on hand at the end of 2006 due to a Turnaround
performed in December 2006, and
|
|
·
|
an
increase of $1.8 million relating to our industrial machinery to meet
customer demand.
|
Other
supplies and prepaid items increased $4.9 million primarily due to an increase
in the cost of precious metals and additional metals purchased and recovered net
of the amount consumed in the manufacturing process and sold by our Chemical
Business.
Accounts
payable decreased $5.1 million primarily due to:
|
·
|
a
decrease of $3.9 million in our Chemical Business resulting primarily from
the payment of invoices relating to the Baytown Facility’s property taxes
and scheduled lease billings and the payment of invoices relating to a
Turnaround performed in December 2006 at the Cherokee Facility
and
|
|
·
|
a
decrease of $1.5 million in our Climate Control Business resulting
primarily from a decrease in the average number of days
outstanding partially offset by an increase in purchases of raw materials
to manufacture primarily hydronic fan coil and air handler
products.
|
Customer
deposits increased $6.6 million primarily due to:
|
·
|
an
increase of $7.8 million in our Chemical Business due to the increase in
deposits received on sales commitments by the Cherokee and El Dorado
Facilities partially offset by
|
|
·
|
a
decrease of $1.3 million in our Climate Control Business due primarily as
the result of recognizing the sales of large custom air handlers
associated with those deposits.
|
The
decrease in deferred rent expense of $0.9 million is due to the scheduled lease
payments in 2007 exceeding the rent expense recognized on a straight-line
basis.
The
increase in other current and noncurrent liabilities of $8.7 million
includes:
|
·
|
an
increase of $4.0 million of accrued income and property taxes due
primarily to the increase in income taxes resulting from increased taxable
income, increase in uncertain tax positions under FIN 48, and taxes in
additional state
jurisdictions,
|
64
|
·
|
an
increase of $1.3 million of accrued insurance due primarily to changes in our insurance programs and as
a result of an increase in group insurance claims as of December 31,
2007,
|
|
·
|
an
increase of $1.2 million of accrued payroll and related benefits primarily
relating to the Climate Control Business as the result of increases in the
number of personnel and compensation
incentives,
|
|
·
|
an
increase of $1.0 million of deferred revenue on extended warranty
contracts as the result of an increase in sales of our water source heat
pump products, and
|
|
·
|
and
a net increase of $1.2 million due to other individually immaterial
items.
|
Cash Flow from Continuing
Investing Activities
Net cash
used by continuing investing activities was $11.8 million for 2007, which
included $14.8 million for capital expenditures of which $5.8 million are for
the benefit of our Climate Control Business and $8.6 million are for our
Chemical Business and the purchase of interest rate cap contracts for $0.6
million. These expenditures were partially offset by proceeds from restricted
cash of $3.5 million, which was primarily used to pay down debt.
Cash Flow from Continuing
Financing Activities
Net cash
provided by continuing financing activities was $21.2 million, which primarily
consisted of:
|
·
|
net
proceeds of $57.0 million from the 2007 Debentures as discussed above
under “Liquidity and Capital
Resources”,
|
|
·
|
proceeds
of $50.0 million from the Secured Term Loan as discussed above under
“Liquidity and Capital Resources”,
|
|
·
|
net
proceeds of $2.4 million from other long-term debt primarily for working
capital purposes,
|
|
·
|
proceeds
of $1.9 million from the exercise of stock options and a
warrant,
|
|
·
|
excess
tax benefit of $1.7 million on stock options exercised, offset in part, by
the
|
|
·
|
payoff
of the Senior Secured Loan of $50.0 million as discussed above under
“Liquidity and Capital Resources”,
|
|
·
|
payments
of $26.4 million on revolving debt facilities, net of proceeds, primarily
from the use of proceeds from the 2007
Debentures,
|
|
|
·
|
payments
of $9.2 million on other long-term debt and debt issuance
costs,
|
|
·
|
dividend
payments of $2.9 million on preferred
stock,
|
|
·
|
payments
of $2.1 million on short-term financing and drafts payable, net of
proceeds, and
|
|
|
·
|
payments
of $1.3 million to acquire non-redeemable preferred
stock.
|
Off-Balance Sheet
Arrangements
We do not
have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K under the Securities Exchange Act of 1934, as amended, except for
the following:
65
Cepolk
Holding, Inc. (“CHI”), a subsidiary of the Company, is a limited partner and has
a 50% equity interest in Cepolk Limited Partnership (“Partnership”) which is
accounted for on the equity method. The Partnership owns an energy savings
project located at the Ft. Polk Army base in Louisiana (“Project”). At December
31, 2007, our investment was $3.4 million. For 2007, distributions received from
this Partnership were $0.8 million and our equity in earnings was $0.9 million.
As of December 31, 2007, the Partnership and general partner to the Partnership
is indebted to a term lender (“Lender”) of the Project with a term extending to
December 2010 (“Loan”). CHI has pledged its limited partnership interest in the
Partnership to the Lender as part of the Lender’s collateral securing all
obligations under the Loan. This guarantee and pledge is limited to CHI’s
limited partnership interest and does not expose CHI or the Company to liability
in excess of CHI’s limited partnership interest. No liability has been
established for this pledge since it was entered into prior to adoption of FIN
45. CHI has no recourse provisions or available collateral that would enable CHI
to recover its partnership interest should the Lender be required to perform
under this pledge.
66
Aggregate Contractual
Obligations
Our
aggregate contractual obligations as of December 31, 2007 are summarized in the
following table.
Payments Due in the Year
Ending December 31,
|
Contractual
Obligations
|
Total
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
|
(In
Thousands)
|
|
Long-term
debt:
|
|||||||||||||||||||||||||||
|
5.5%
Convertible Senior Subordinated Notes
|
$
|
60,000
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
60,000
|
$
|
-
|
|||||||||||||
|
Secured
Term Loan due 2012
|
50,000
|
-
|
-
|
-
|
-
|
50,000
|
-
|
||||||||||||||||||||
|
Capital
leases
|
1,230
|
514
|
236
|
253
|
165
|
62
|
-
|
||||||||||||||||||||
|
Other
|
10,877
|
529
|
806
|
900
|
954
|
1,010
|
6,678
|
||||||||||||||||||||
|
Total
long-term debt
|
122,107
|
1,043
|
1,042
|
1,153
|
1,119
|
111,072
|
6,678
|
||||||||||||||||||||
|
Interest
payments on long-term debt (1)
|
38,828
|
8,063
|
7,988
|
7,909
|
7,828
|
5,536
|
1,504
|
||||||||||||||||||||
|
Capital
expenditures (2)
|
14,067
|
14,067
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Operating
leases:
|
|||||||||||||||||||||||||||
|
Baytown
Facility lease
|
16,054
|
11,173
|
4,881
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Other
operating leases
|
12,127
|
3,351
|
2,859
|
1,962
|
1,310
|
1,004
|
1,641
|
||||||||||||||||||||
|
Exchange-traded
futures contracts
|
15,953
|
15,953
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||
|
Accrued
contractual manufacturing obligations
|
1,548
|
1,548
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||
|
Purchase
obligations
|
2,784
|
1,044
|
1,044
|
696
|
-
|
-
|
-
|
||||||||||||||||||||
|
Contractual
obligations included in noncurrent accrued and other
liabilities
|
3,071
|
-
|
115
|
94
|
97
|
159
|
2,606
|
||||||||||||||||||||
|
Total
|
$
|
226,539
|
$
|
56,242
|
$
|
17,929
|
$
|
11,814
|
$
|
10,354
|
$
|
117,771
|
$
|
12,429
|
|
(1
|
)
|
The
estimated interest payments relating to variable interest rate debt are
based on the effective interest rates at December 31,
2007.
|
|
(2
|
)
|
Capital
expenditures include only non-discretionary amounts in our 2008 capital
expenditure budget.
|
67
Availability of Company's
Loss Carry-Overs
For a
discussion on our net operating loss carry-overs, see Note 12 of Notes to
Consolidated Financial Statements.
General
Our
results of operations and operating cash flows are impacted by changes in market
interest rates and changes in market prices of copper, steel, anhydrous ammonia
and natural gas.
Forward Sales Commitments
Risk
Periodically
our Climate Control and Chemical Businesses enter into forward sales commitments
of products for deliveries in future periods. As a result, we could be exposed
to embedded losses should our product costs exceed the firm sales prices. At
December 31, 2007, we had no embedded losses associated with sales commitments
with firm sales prices.
Interest Rate
Risk
Our
interest rate risk exposure results from our debt portfolio which is impacted by
short-term rates, primarily variable rate-based borrowings from commercial
banks, and long-term rates, primarily fixed-rate notes, some of which prohibit
prepayment or require substantial prepayment penalties.
In 2005,
we purchased two interest rate cap contracts for a cost of $590,000 to help
minimize our interest rate risk exposure relating to the Working Capital
Revolver Loan. These contracts set a maximum three-month LIBOR base rate of
4.59% on $30 million of debt and mature in March 2009. In April 2007, we
purchased two interest rate cap contracts for a cost of $621,000 to help
minimize our interest rate risk exposure associated with debt. These contracts
set a maximum three-month LIBOR base rate of 5.35% on $50 million of debt and
mature in April 2012. These contracts are free-standing derivatives and are
accounted for on a mark-to-market basis in accordance with SFAS No.133. At
December 31, 2007, the market value of these contracts was
$426,000.
Commodity Price
Risk
Our
Climate Control Business buys substantial quantities of copper and steel for use
in manufacturing processes and our Chemical Business buys substantial quantities
of anhydrous ammonia and natural gas as feedstocks generally at market prices.
Periodically, our Climate Control Business enters into exchange-traded futures
for copper and our Chemical Business enters into exchange-traded futures for
natural gas, which contracts are generally accounted for on a mark-to-market
basis in accordance with SFAS 133. At December 31, 2007, our purchase
commitments under these contracts were for 3,875,000 pounds of copper through
December 2008 at a weighted-average cost of $3.02 per pound ($11.7 million) and
a weighted-average
68
market
value of $3.04 per pound ($11.8 million). In addition, our Chemical Business had
purchase commitments under these contracts for 530,000 MMBtu of natural gas
through April 2008 at a weighted-average cost of $7.98 per MMBtu ($4.2 million)
and a weighted-average market value of $7.51 per MMBtu ($4.0
million).
69
The
following table presents principal amounts and related weighted-average interest
rates by maturity date for our interest rate sensitive financial instruments and
our purchase commitments under exchange-traded futures contracts and related
weighted-average contract costs by contract terms as of December 31,
2007.
|
Years
ending December 31,
|
|
(Dollars
In Thousands, Except For Per Pound And
MMBtu)
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
|
Expected
maturities of long-term
debt (1):
|
|||||||||||||||||||||||||||
|
Variable
rate debt
|
$
|
155
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
50,000
|
$
|
-
|
$
|
50,155
|
|||||||||||||
|
Weighted-average
|
|||||||||||||||||||||||||||
|
interest
rate
|
7.89
|
%
|
7.90
|
%
|
7.90
|
%
|
7.90
|
%
|
7.90
|
%
|
-
|
%
|
7.90
|
%
|
|||||||||||||
|
Fixed
rate debt
|
$
|
888
|
$
|
1,042
|
$
|
1,153
|
$
|
1,119
|
$
|
61,072
|
$
|
6,678
|
$
|
71,952
|
|||||||||||||
|
Weighted-average
|
|||||||||||||||||||||||||||
|
interest
rate
|
5.73
|
%
|
5.71
|
%
|
5.69
|
%
|
5.66
|
%
|
5.76
|
%
|
6.81
|
%
|
5.85
|
%
|
|||||||||||||
|
Exchange-traded
futures contracts:
|
|||||||||||||||||||||||||||
|
Copper:
|
|||||||||||||||||||||||||||
|
Total
cost of contracts
|
$
|
11,722
|
$
|
11,722
|
|||||||||||||||||||||||
|
Weighted-average
cost per pound
|
$
|
3.02
|
$
|
3.02
|
|||||||||||||||||||||||
|
Natural
gas:
|
|||||||||||||||||||||||||||
|
Total
cost of contracts
|
$
|
4,231
|
$
|
4,231
|
|||||||||||||||||||||||
|
Weighted-average
cost per MMBtu
|
$
|
7.98
|
$
|
7.98
|
|
(1)
|
The
variable and fixed rate debt balances and weighted-average interest rate
are based on the aggregate amount of debt outstanding as of December 31,
2007.
|
70
Due to
their short-term nature, the carrying values of financial instruments classified
as cash, restricted cash, accounts receivable, accounts payable, short-term
financing and drafts payable, and accrued and other liabilities approximated
their estimated fair values. Carrying values for our interest rate cap contracts
and exchange-traded futures contracts approximate their fair value since they
are accounted for on a mark-to-market basis. Carrying values for variable rate
borrowings are believed to approximate their fair value. Fair values for fixed
rate borrowings, other than the 5.5% Senior Convertible Senior Subordinated
Notes (“2007 Debentures”) and the 7% Senior Convertible Senior Subordinated
Notes (“2006 Debentures”), 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 while also taking into
consideration our current credit worthiness. The estimated fair value of the
2007 and 2006 Debentures are based on the conversion rate and market price of
our common stock at December 31, 2007 and 2006, respectively. The following
table shows the estimated fair value and carrying value of our borrowings
at:
|
December
31, 2007
|
December
31, 2006
|
|
Estimated
Fair Value |
Carrying
Value |
Estimated
Fair Value |
Carrying
Value |
|
(In
Thousands)
|
|
Variable
Rate:
|
||||||||||||
|
Secured
Term Loan
|
$
|
50,000
|
$
|
50,000
|
$
|
-
|
$
|
-
|
||||
|
Working
Capital Revolver Loan
|
-
|
-
|
26,048
|
26,048
|
||||||||
|
Senior
Secured Loan (1)
|
-
|
-
|
53,774
|
50,000
|
||||||||
|
Other
bank debt and equipment financing
|
155
|
155
|
2,517
|
2,517
|
||||||||
|
Fixed
Rate:
|
||||||||||||
|
5.5%
Convertible Senior Subordinated Notes
|
61,632
|
60,000
|
-
|
-
|
||||||||
|
Other
bank debt and equipment financing
|
12,298
|
11,952
|
14,853
|
15,127
|
||||||||
|
7%
Convertible Senior Subordinated Notes
|
-
|
-
|
6,543
|
4,000
|
||||||||
|
$
|
124,085
|
$
|
122,107
|
$
|
103,735
|
$
|
97,692
|
(1) The
Senior Secured Loan had a variable interest rate not to exceed 11% or 11.5%
depending on ThermaClime’s leverage ratio.
We have
included the financial statements and supplementary financial information
required by this item immediately following Part IV of this report and hereby
incorporate by reference the relevant portions of those statements and
information into this Item 8.
None.
71
As previously
reported, we had noted various significant deficiencies in our disclosure
controls and
procedures. At December 31, 2007, however, we identified one significant
deficiency relating to controls over electronic spreadsheets. To mitigate this
lack of controls over spreadsheets, we implemented additional review and
approval procedures over these spreadsheets. In evaluating the
effectiveness of our
disclosure controls and procedures at December 31, 2007 as discussed
below, management considered these mitigating controls and controls
involving financial review procedures.
As of the
end of the period covered by this report, we carried out an evaluation, with the
participation of our Principal Executive Officer and Principal Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15 under the Securities Exchange
Act of 1934). Based upon that evaluation, we have concluded, with the
participation of our Principal Executive Officer and our Principal Financial
Officer, that our disclosure controls and procedures were
effective. There were no changes to our internal control over
financial reporting during the quarter ended December 31, 2007 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system was designed to
provide reasonable assurance to our management and board of directors regarding
the preparation and fair presentation of published financial statements. All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control – Integrated Framework. Based on our assessment,
we believe that, as of December 31, 2007, our internal control over financial
reporting is effective based on those criteria.
Our
independent registered public accounting firm has issued an attestation report
on our internal control over financial reporting. This
report appears on the following page.
72
Report of
Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders of LSB Industries, Inc.
We have
audited LSB Industries, Inc.’s internal control over financial reporting as of
December 31, 2007 based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). LSB Industries, Inc.’s management is responsible
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, LSB Industries, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of LSB
Industries, Inc. as of December 31, 2007 and 2006, and the related consolidated
statements of income, stockholders'
73
equity,
and cash flows for each of the three years in the period ended December 31, 2007
of LSB Industries, Inc. and our report dated March 13, 2008 expressed an
unqualified opinion thereon.
ERNST
& YOUNG LLP
Oklahoma
City, Oklahoma
March 13,
2008
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,
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our
Climate Control Business has developed leadership positions in niche
markets by offering extensive product lines, customized products and
improved technologies,
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we
have developed the most extensive line of water source heat pumps and
hydronic fan coils in the United States,
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we
have used geothermal technology in the climate control industry to create
the most energy efficient climate control systems commercially available
today,
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we
are a leading provider of geothermal and water source heat pumps to the
commercial construction and renovation markets in the United
States,
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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,
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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 our geothermal products,
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our
Climate Control Business is a leading provider of hydronic fan
coils,
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the
amount of capital expenditures relating to the Climate Control
Business,
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obtaining
raw materials for our Climate Control Business,
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the
majority of raw material cost increases, if any, will be passed to our
customers in the form of higher prices as product price increases are
implemented and take effect and while we believe we will have sufficient
materials, a shortage of raw materials could impact production of our
Climate Control products,
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our
Climate Control Business manufactures a broader line of geothermal and
water source heat pump and fan coil products than any other manufacturer
in the United States,
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we
are competitive as to price, service, warranty and product performance in
our Climate Control Business,
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our
Climate Control Business will continue to launch new products and product
upgrades in an effort to maintain and increase our current market position
and to establish a presence in new markets,
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shipping
substantially all of our backlog at December 31, 2007 within the next
twelve months,
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increasing
the sales and operating margins of all products, developing and
introducing new and energy efficient products, and
increasing production to meet customer demand in the Climate Control
Business,
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our
performance has been and will continue to be dependent upon the efforts of
our principal executive officers and our future success will depend in
large part on our continued ability to
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attract
and retain highly skilled and qualified personnel,
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our NOL carryforwards and unrecognized tax benefits relating to
NSOs to be utilized to reduce
federal income tax payments for 2008,
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not
paying dividends on our common stock in the foreseeable
future,
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the
concentration relating to receivable accounts of six customers at December
31, 2007 does not represent a significant credit risk due to the financial
stability of these customers,
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important
components of our strategy for competing in the commercial and
institutional renovation and replacement markets include the breadth of
our product line coupled with customization capability provided by a
flexible manufacturing process,
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the
annual United States market for water source heat pumps and hydronic fan
coils to be approximately $589 million based on data supplied by the
ARI,
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these
investments have and will increase our capacity to produce and distribute
our Climate Control products,
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the new products of our Climate
Control Business have good long-term
prospects,
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our
Chemical Business has established leading regional market positions, which
is a key element in the success of this business,
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sales
prices of our agricultural products have only a moderate correlation to
the anhydrous ammonia and natural gas feedstock costs and reflect market
conditions for like and competing nitrogen sources, which can compromise
our ability to recover our full cost to produce the product in this
market,
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the
lack of sufficient non-seasonal sales volume to operate our manufacturing
facilities at optimum levels can preclude the Chemical Business from
reaching full performance potential,
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our
primary efforts to improve the results of our Chemical Business include
maintaining the current level of non-seasonal sales volumes with an
emphasis on customers that will accept the commodity risk inherent with
natural gas and anhydrous ammonia, while maintaining a strong presence in
the agricultural sector,
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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,
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as
of the date of this report, the recent world sulfur shortages have led to
a significant increase in the cost of this raw material during the second
half at 2007 and into 2008,
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our
Chemical Business’ strategy is to maximize production efficiency of the
facilities, thereby lowering the fixed cost of each ton
produced,
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our
primary efforts to improve the results of our Chemical Business include
maintaining the current level of non-seasonal sales volumes with an
emphasis on customers that will accept the commodity risk inherent with
natural gas and anhydrous ammonia, while maintaining a strong presence in
the agricultural sector,
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certain
capital expenditures required to expand capacity and bring the El Dorado
Facility’s sulfuric acid plant air emissions to lower
limits,
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other
capital expenditures for 2008 are discretionary and dependent upon an
adequate amount of liquidity and/or obtaining acceptable
funding,
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fully
utilizing the regular NOL carryforwards in 2008 at which time we will
begin recognizing and paying federal income taxes at regular corporate tax
rates,
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76
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the
agricultural products are the only seasonal products,
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we
are the largest domestic merchant marketer of concentrated and blended
nitric acids,
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competition
within the Chemical Business is primarily based on service, price,
location of production and distribution sites, and product quality and
performance,
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the
amount of additional expenditures relating to the Air
CAO,
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the
annual costs of required monitoring and maintenance activities would not
be significant relating to certain facilities in our Chemical
Business,
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the
estimated costs to activate the Pryor Facility,
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our
Chemical Business to focus on growing our non-seasonal industrial customer
base with the emphasis on customers that accept the risk inherent with raw
material costs, while maintaining a strong presence in the seasonal
agricultural sector,
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obtaining
our requirements for raw materials in 2008,
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the
amount of committed capital expenditures for 2008,
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new
and proposed requirements to place additional security controls over
ammonium nitrate and other nitrogen fertilizers will not materially affect
the viability of ammonium nitrate as a valued product,
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under
the terms of an agreement with a supplier, the El Dorado Facility
purchasing a majority of its anhydrous ammonia requirements through at
least December 31, 2008,
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ability
to obtain anhydrous ammonia from other sources in the event of an
interruption of service under our existing purchase
agreement,
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using
the Working Capital Revolver Loan to fund our working capital
requirements,
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outcomes
of various contingencies adversely impacting our liquidity and capital
resources,
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meeting
all required covenant tests for all quarters and the year ending in 2008,
and
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environmental
and health laws and enforcement policies thereunder could result, in
compliance expenses, cleanup costs, penalties or other liabilities
relating to the handling, manufacture, use, emission, discharge or
disposal of pollutants or other substances at or from our facilities or
the use or disposal of certain of its chemical
products.
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While we
believe the expectations reflected in such Forward-Looking Statements are
reasonable, we 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,
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decline
in general economic conditions, both domestic and
foreign,
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material
reduction in revenues,
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material
increase in interest rates,
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ability
to collect in a timely manner a material amount of
receivables,
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increased
competitive pressures,
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changes
in federal, state and local laws and regulations, especially environmental
regulations, or in interpretation of such, pending,
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additional
releases (particularly air emissions) into the
environment,
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material
increases in equipment, maintenance, operating or labor costs not
presently anticipated by us,
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the
requirement to use internally generated funds for purposes not presently
anticipated,
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the
inability to pay or secure additional financing for planned capital
expenditures,
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77
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the
cost for the purchase of anhydrous ammonia and natural
gas,
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changes
in competition,
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the
loss of any significant customer,
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changes
in operating strategy or development plans,
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inability
to fund the working capital and expansion of our
businesses,
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adverse
results in any of our pending litigation,
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inability
to obtain necessary raw materials,
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other
factors described in "Management's Discussion and Analysis of Financial
Condition and Results of Operation" contained in this report,
and
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other
factors described in “Risk
Factors”.
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Given
these uncertainties, all parties are cautioned not to place undue reliance on
such Forward-Looking Statements. We disclaim 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.
78
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
General
The
Certificate of Incorporation and By-laws of the Company provide for the division
of the Board of Directors into three classes, each class consisting as nearly as
possible of one-third of the whole. The term of office of one class of directors
expires each year; with each class of directors elected for a term of three
years and until the shareholders elect their qualified successors.
The
Company’s By-laws provide that the Board of Directors, by resolution from time
to time, may fix the number of directors that shall constitute the whole Board
of Directors. The By-laws presently provide that the number of directors may
consist of not less than 3 nor more than 13. The Board of Directors currently
has set the number of directors at 13.
Directors
Raymond B. Ackerman, age 85.
Mr. Ackerman first became a director in 1993. His term will expire in 2008. From
1952 until his retirement in 1992, Mr. Ackerman served as Chairman of the Board
and President of Ackerman McQueen, Inc., the largest advertising and public
relations firm headquartered in Oklahoma. He currently serves as Chairman
Emeritus of the firm. He retired as a Rear Admiral in the United States Naval
Reserve. He is a graduate of Oklahoma City University, and in 1996, was awarded
an honorary doctorate from the school. He was elected to the Oklahoma Hall of
Fame in 1993 and the Oklahoma Commerce and Industry Hall of Fame in
1998.
Robert C. Brown, M.D., age 76.
Dr. Brown first became a director in 1969. His term will expire in 2009. Dr.
Brown has practiced medicine for many years and is Vice President and Treasurer
of Plaza Medical Group, P.C. and President and Chief Executive Officer of
ClaimLogic L.L.C. Dr. Brown received both his undergraduate and medical degrees
from Tufts University after which he spent two years in the United States Navy
as a doctor and over three years at the Mayo Clinic. Dr. Brown is also a
Clinical Professor at University of Oklahoma Medical School.
Charles A. Burtch, age 72. Mr.
Burtch first became a director in 1999. His term will expire in 2010. Mr. Burtch
was formerly Executive Vice-President and West Division Manager of BankAmerica,
where he managed BankAmerica’s asset-based lending division for the western
third of the United States. He retired in 1998 and has since been engaged as a
private investor. Mr. Burtch is a graduate of Arizona State
University.
Robert A. Butkin, age
55. Mr. Butkin first became a director in August 2007. His term will
expire in 2010. Mr. Butkin is currently a Professor of Law at the
University of Tulsa College of Law. He was Dean of the Tulsa College of Law from
2005 to 2007. Mr. Butkin also serves as President of BRJN Capital Corporation a
private investment company. Mr. Butkin served as Assistant Attorney General for
the State of Oklahoma from 1987 to 1993, and served from 1995
79
to
2005 as the State Treasurer of Oklahoma. He has served in various
organizations, including holding the presidency of the Southern State Treasurers
Association. He chaired the Banking, Collateral and Cash Management
Committee for the National Association of State Treasurers. In addition,
from 1981 to 1995, he served on the Board of Citizens Bank of Velma, Oklahoma,
and he served as Chairman of the Board of that bank from 1991 to 1994. He
attended and received a Bachelor of Arts degree from Yale College. He received
his Juris Doctorate from the University of Pennsylvania Law School in
Philadelphia in 1978.
Barry H. Golsen, J.D., age 57.
Mr. Golsen first became a director in 1981. His term will expire in 2009. Mr.
Golsen was elected President of the Company in 2004. Mr. Golsen has served as
our Vice Chairman of the Board of Directors since August 1994, and has been the
President of our Climate Control Business for more than five years. Mr. Golsen
also serves as a director of the Oklahoma branch of the Federal Reserve Bank.
Mr. Golsen has both his undergraduate and law degrees from the University of
Oklahoma.
Jack E. Golsen, age 79. Mr.
Golsen first became a director in 1969. His term will expire in 2010. Mr.
Golsen, founder of the Company, is our Chairman of the Board of Directors and
Chief Executive Officer and has served in that capacity since our inception in
1969. Mr. Golsen served as our President from 1969 until 2004. During 1996, he
was inducted into the Oklahoma Commerce and Industry Hall of Honor as one of
Oklahoma’s leading industrialists. Mr. Golsen has a Bachelor of Science degree
from the University of New Mexico. Mr. Golsen is a Trustee of Oklahoma City
University. During his career, he acquired or started the companies which formed
the Company. He has served on the boards of insurance companies, several banks
and was Board Chairman of Equity Bank for Savings N.A. which was formerly owned
by the Company.
David R. Goss, age 67. Mr.
Goss first became a director in 1971. His term will expire in 2009. Mr. Goss, a
certified public accountant, is our Executive Vice President of Operations and
has served in substantially the same capacity for more than five years. Mr. Goss
is a graduate of Rutgers University.
Bernard G. Ille, age 81. Mr.
Ille first became a director in 1971. His term will expire in 2008. Mr. Ille
served as President and Chief Executive Officer of United Founders Life from
1966 to 1988. He served as President and Chief Executive Officer of First Life
Assurance Company from 1988, until it was acquired by another company in 1994.
During his tenure as President of these two companies, he served as Chairman of
the Oklahoma Guaranty Association for ten years and was President of the
Oklahoma Association of Life Insurance Companies for two terms. He was a
director of Landmark Land Company, Inc., which was the parent company of First
Life. He is also a director for Quail Creek Bank, N.A. Mr. Ille is currently
President of BML Consultants and a private investor. He is a graduate of the
University of Oklahoma.
Donald W. Munson, age 75. Mr.
Munson first became a director in 1997. His term will expire in 2008. From 1988,
until his retirement in 1992, Mr. Munson served as President and Chief Operating
Officer of Lennox Industries. Prior to 1998, he served as Executive Vice
President of Lennox Industries’ Division Operations, President of Lennox Canada
and Managing Director of Lennox Industries’ European Operations. Prior to
joining Lennox Industries, Mr. Munson served
80
in
various capacities with the Howden Group, a company located in Scotland, and The
Trane Company, including serving as the managing director of various companies
within the Howden Group and Vice President Europe for The Trane Company. He is
currently a consultant. Mr. Munson is a resident of England. He has degrees in
mechanical engineering and business administration from the University of
Minnesota.
Ronald V. Perry, age 58. Mr.
Perry first became a director in August 2007. His term will expire in
2008. Mr. Perry currently serves as President of Prime Time Travel,
which he founded in 1979. Mr. Perry has served in various charitable and civic
organizations. Mr. Perry is also a past President of the Oklahoma City Food Bank
and has served as President of the OKC Food Bank Board of Directors. In 2007,
the mayor of Oklahoma City appointed Mr. Perry to serve as a commissioner on the
Oklahoma City Convention and Visitors Bureau. Mr. Perry graduated from Oklahoma
State University, with a Bachelor’s degree in Business
Administration.
Horace G. Rhodes, age 80. Mr.
Rhodes first became a director in 1996. His term will expire in 2010. Mr. Rhodes
is the Chairman of the law firm of Kerr, Irvine, Rhodes & Ables and has
served in such capacity and has practiced law for many years. From 1972 until
2001, he served as Executive Vice President and General Counsel for the
Association of Oklahoma Life Insurance Companies and since 1982 served as
Executive Vice President and General Counsel for the Oklahoma Life and Health
Insurance Guaranty Association. Mr. Rhodes received his undergraduate and law
degrees from the University of Oklahoma.
Tony M. Shelby, age 66. Mr.
Shelby first became a director in 1971. His term will expire in 2008. Mr.
Shelby, a certified public accountant, is our Executive Vice President of
Finance and Chief Financial Officer, a position he has held for more than five
years. Prior to becoming our Executive Vice President of Finance and Chief
Financial Officer, he served as Chief Financial Officer of a subsidiary of the
Company and was with the accounting firm of Arthur Young & Co., a
predecessor to Ernst & Young LLP. Mr. Shelby is a graduate of Oklahoma City
University.
John A. Shelley, age 57. Mr.
Shelley first became a director in 2005. His term will expire in 2009. Mr.
Shelley is the President and Chief Executive Officer of The Bank of Union (“Bank
of Union”) located in Oklahoma. He has held this position since 1997. Prior to
1997, Mr. Shelley held various senior level positions in financial institutions
in Oklahoma including the position of President of Equity Bank for Savings,
N.A., a savings and loan that was owned by the Company prior to 1994. Mr.
Shelley is a graduate of the University of Oklahoma.
Directors
Whose Term Expired in 2007
Grant J. Donovan, age 51. Mr.
Donovan was a director from 2002 to August 2007. Mr. Donovan is President and
founder of Galehead, Inc., a company specializing on the collections of accounts
receivable in the international maritime trade business. Mr. Donovan received
his MBA from Stanford University and his undergraduate degree in Civil
Engineering from the University of Vermont. He currently is on the board of
directors of EngenderHealth, an international aid organization (established over
50 years ago), focused on improving women’s healthcare.
81
N. Allen Ford, age 65. Mr.
Ford was a director from 2002 to August 2007. Mr. Ford joined the University of
Kansas in 1976 where his teaching and research duties focus mainly on taxation.
At the University of Kansas, he has won several teaching awards and is the Larry
D. Horner/KPMG Peat Marwick Distinguished Professor of Accounting. He received
his Ph.D. in Accounting from the University of Arkansas.
The terms
of the $3.25 Convertible Exchangeable Class C Preferred Stock, Series 2 (“
Series 2 Preferred”) provided that if and so long as at least 140,000 shares of
Series 2 Preferred were outstanding, whenever dividends on the Series 2
Preferred were in arrears and unpaid in an amount equal to at least six
quarterly dividends:
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the
number of members of the Board of Directors of the Company shall be
increased by two effective as of the time of election of such
directors;
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the
Company shall, upon the written request of the record holder of 10% of the
shares of Series 2 Preferred, call a special meeting of the Series 2
Preferred holders for the purpose of electing such two additional
directors;
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the
Series 2 Preferred holders have the exclusive right to vote for and elect
such two additional directors; and
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the
term of office for such additional directors will terminate immediately
upon the termination of the right of the Series 2 Preferred holders to
vote for such directors, subject to the requirements of Delaware
law.
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In March
2002, the holders of the Series 2 Preferred elected Mr. Allen Ford and Mr. Grant
Donovan to serve as members of the Board of Directors pursuant to the terms of
the Series 2 Preferred. On August 21, 2007, as a result of conversions of the
Series 2 Preferred prior to the August 27, 2007 redemption date for the Series 2
Preferred, less than 140,000 shares of Series 2 Preferred remained outstanding,
and Messrs. Donovan and Ford’s terms as members of the Board of Directors
automatically terminated on that date.
Family
Relationships
Jack E.
Golsen is the father of Barry H. Golsen and Steve J. Golsen and the
brother-in-law of Dr. Robert C. Brown. Dr. Robert C. Brown is the uncle of Barry
H. Golsen and Steve J. Golsen. David M. Shear is the nephew by marriage to Jack
E. Golsen and son-in-law of Dr. Robert C. Brown. Steve J. Golsen is the Chief
Operating Officer of our Climate Control Business. Heidi Brown Shear, Senior
Vice President and General Counsel of the Company, is the daughter of Dr. Robert
C. Brown and spouse of David M. Shear. As of December 31, 2007, we employed
1,788 persons, of which these 4 employees are relatives of Jack E.
Golsen.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Exchange Act of 1934, as amended (the “Exchange Act”), requires the
Company’s directors, officers, and beneficial owners of more than 10% of the
Company’s common stock to file with the Securities and Exchange Commission
reports of holdings and changes in beneficial ownership of the Company’s stock.
Based solely on a review of copies of the Forms 3, 4 and 5 and amendments
thereto furnished to the Company with respect to 2007, or
82
written
representations that no Form 5 was required to be filed, the Company believes
that during 2007 all directors and officers of the Company and beneficial owners
of more than 10% of the Company’s common stock filed timely their required Forms
3, 4, or 5, except (a) Kent C. McCarthy, Jayhawk Institutional Partners, L.P.,
Jayhawk Capital Management LLC, Jack Golsen, Barry Golsen, Steve Golsen, SBL
LLC, Tony Shelby, Grant Donovan, and Allen Ford each inadvertently filed one
late Form 4 late to report the exchange of shares of $3.25 Convertible
Exchangeable Class C Preferred, Series 2 Stock for shares of common stock
pursuant to the Company’s issuer tender offer completed on March 13, 2007, (b)
David Goss inadvertently filed one late Form 4 to report one transaction, (c)
each of Bernard Ille and Charles Burtch inadvertently filed one late Form 4 to
report two transactions and (d) Raymond Ackerman filed a late Form 5 to report
three gifts.
Code
of Ethics
The Chief
Executive Officer, the Chief Financial Officer, the principal accounting
officer, and the controller of the Company and each of the our subsidiaries, or
persons performing similar functions, are subject to our Code of
Ethics.
We and
each of our subsidiary companies have adopted an amended Statement of Policy
Concerning Business Conduct applicable to our employees. Our Code of Ethics and
Amended Statement of Policy Concerning Business Conduct are available on our
website at http://www.lsb-okc.com. We will post any amendments to these
documents, as well as any waivers that are required to be disclosed pursuant to
the rules of either the Securities and Exchange Commission or the AMEX, on our
website.
Audit
Committee
We have
has a separately-designated standing audit committee established in accordance
with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee
are Messrs. Bernard Ille (Chairman), Charles Burtch, Horace Rhodes, and Ray
Ackerman. The Board has determined that each member of the Audit Committee is
independent, as defined in the listing standards of the AMEX as of the Company’s
fiscal year end. During 2007, the Audit Committee had nine
meetings.
Audit
Committee Financial Expert
While the
Board of Directors endorses the effectiveness of our Audit Committee, its
membership does not presently include a director that qualifies for designation
as an “audit committee financial expert.” However, each of the current members
of the Audit Committee is able to read and understand fundamental financial
statements and at least one of its members is “financially sophisticated” as
defined by applicable AMEX rules. The Board of Directors believes that the
background and experience of each member of the Audit Committee is sufficient to
fulfill the duties of the Audit Committee. For these reasons, although members
of our Audit Committee are not professionally engaged in the practice of
accounting or auditing, our Board of Directors has concluded
that the ability of our Audit Committee to perform its duties is not impaired by
the absence of an “audit committee financial expert.”
83
Compensation
and Stock Option Committee
The
Compensation and Stock Option Committee (the “Compensation Committee”) has three
members and met two times during 2007. The Committee is comprised of
non-employee, independent directors in accordance with the rules of the
AMEX. The Board has adopted a Compensation and Stock Option Committee
Charter which governs the responsibilities of the Compensation
Committee. This charter is available on the Company’s website at
www.lsb-okc.com, and
is also available from the Company upon request.
The
Compensation Committee’s responsibilities include, among other duties, the
responsibility to:
|
·
|
establish
the base salary, incentive compensation and any other compensation for the
Company’s executive officers;
|
|
·
|
administer
the Company’s management incentive and stock-based compensation plans,
non-qualified death benefits, salary continuation and welfare plans, and
discharge the duties imposed on the Compensation Committee by the terms of
those plans; and
|
|
·
|
perform
other functions or duties deemed appropriate by the
Board.
|
Decisions
regarding non-equity compensation of non-executive officers of the Company and
the executive officers of the Company named in the Summary Compensation Table
(the “named executive officers”) other than the Chief Executive Officer and the
President, are made by the Company’s Chief Executive Officer and presented for
approval or modification by the Committee.
The
agenda for meetings of the Compensation Committee is determined by its Chairman
with the assistance of the Company’s Chief Executive Officer. Committee meetings
are regularly attended by the Chief Executive Officer. At each
Compensation Committee meeting, the Compensation Committee also meets in
executive session without the Chief Executive Officer. The
Committee’s Chairman reports to the Board the Compensation Committee’s
recommendations on compensation for the Chief Executive Officer and the
President. The Chief Executive Officer may be delegated authority to
fulfill certain administrative duties regarding the compensation
programs.
The
Compensation Committee has authority under its charter to retain, approve fees
for, and terminate advisors, consultants and agents as it deems necessary to
assist in the fulfillment of its responsibilities. If an outside
consultant is engaged, the Compensation Committee reviews the total fees paid to
such outside consultant by the Company to ensure that the consultant maintains
its objectivity and independence when rendering advice to the Compensation
Committee. For 2007, no outside consultants were engaged by the
Compensation Committee.
84
ITEM
11. EXECUTIVE COMPENSATION
Compensation
Discussion and Analysis
Overview
of Compensation Program
Our
long-term success depends on our ability to efficiently operate our facilities,
to continue to develop our product lines and technologies, and to focus on
developing our product markets. To achieve these goals, it is
important that we be able to attract, motivate, and retain highly talented
individuals who are committed to our values and goals.
The
Compensation Committee has responsibility for the establishment in consultation
with management, of our compensation philosophy for its senior executive
officers and the implementation and oversight of a compensation program
consistent with the philosophy. This group of senior executive officers includes
the named executive officers, as well as our other executives.
A primary
objective of the Compensation Committee is to ensure that the compensation paid
to the senior executive officers is fair, reasonable, and competitive and
provides incentives for superior performance. The Compensation
Committee is responsible for approval of all decisions for the direct
compensation, including the base salary and bonuses, stock options and other
benefit programs for the Company’s senior executive officers, including the
named executive officers.
In
general, the day to day administration of savings, health and welfare plans and
policies are handled by a team of the legal and finance department employees.
The Compensation Committee (or Board) remains responsible for key policy changes
outside of the day to day requirements necessary to maintain these plans and
policies.
Compensation
Philosophy and Objectives
The
Compensation Committee believes that the most effective executive compensation
program rewards the executive’s achievements and contribution towards the
Company achieving its long-term strategic goals. However, the Compensation
Committee does not believe that executive compensation should be tied to
specific numeric or formulaic financial goals or stock price achievement by the
Company. The Compensation Committee recognizes that, given the volatility of the
market in which we do business, our economic performance in any given time frame
may not be an accurate measurement of our senior executive officer’s
performance. The Compensation Committee values both personal contribution and
teamwork as factors to be rewarded. The Compensation Committee believes that it
is important to align executives’ interests with those of stockholders through
the use of stock option incentive programs. The Compensation Committee evaluates
both performance and compensation to ensure that we maintain our ability to
attract and retain highly talented employees in key positions, and that
compensation provided to key employees will remain competitive relative to our
other senior executive officers. The Compensation Committee believes that
executive compensation packages should include both cash and stock-based
compensation, as well as other benefit programs to encourage senior executive
officers to remain with the Company and have interests aligned with
85
those of
the Company. Based on the foregoing, the Committee bases it executive
compensation program on the following criteria:
|
·
|
Compensation
should be based on the level of job responsibility, executive performance,
and Company performance.
|
|
·
|
Compensation
should enable us to attract and retain key
talent.
|
|
·
|
Compensation
should be competitive with compensation offered by other companies that
compete with us for talented
individuals.
|
|
·
|
Compensation
should reward performance.
|
|
·
|
Compensation
should motivate executives to achieve our strategic and operational
goals.
|
Setting
Executive Compensation
The
Committee sets annual cash and non-cash executive compensation to reward the
named executive officers for achievement and to motivate the named executive
officers to achieve long-term business objectives. The Compensation Committee is
unable to use peer group comparisons in determining the compensation package
because of the diverse nature of our lines of business. Although the
Compensation Committee has not engaged outside consultants to assist in
conducting its annual review of the total compensation program, it may do so in
the future. The Compensation Committee consulted some generally available
compensation information for companies of our size. The Compensation Committee
did not engage consultants to prepare specialized reports for their use. The
Compensation Committee considered base salary and current bonus awards in
determining overall compensation. The Compensation Committee does not have a
policy allocating long term and currently paid compensation. The Compensation
Committee also considered the allocation between cash and non-cash compensation
amounts, but does not have a specific formula or required allocation between
such compensation amounts. The Compensation Committee compares the Chief
Executive Officer’s total compensation to the total compensation of our other
named executive officers over time. However, the Compensation Committee has not
established a target ratio between total compensation of the Chief Executive
Officer and the median total compensation level for the next lower tier of
management. The Compensation Committee also considers internal pay equity among
the named executive officers and in relation to next lower tier of management in
order to maintain compensation levels that are consistent with the individual
contributions and responsibilities of those executive officers. The Compensation
Committee does not consider amounts payable under severance agreements when
setting the compensation of the named executive officers.
Role
of Executive Officers in Compensation Decisions
Our Chief
Executive Officer annually reviews the performance of each of our named
executive officers (other than the Chief Executive Officer and the President)
and presents to the Compensation Committee recommendations with respect to
salary, bonuses and other benefit items. The Committee considers and
reviews such recommendations and exercises its discretion in accepting or
modifying the recommended compensation. In determining compensation
for the Chief Executive Officer and the President, the Compensation Committee
reviews the responsibilities and performance of each of them. Such review
includes interviewing both the Chief
Executive Officer and the President and consideration of the Compensation
Committee’s interaction with the Chief Executive Officer and the President
during the applicable year.
86
2007
Executive Compensation Components
For the
fiscal year ended December 31, 2007, the principal components of
compensation for the named executive officers were:
|
·
|
base
salary;
|
|
·
|
cash
bonus;
|
|
·
|
death
benefit and salary continuation programs;
and
|
|
·
|
perquisites
and other personal benefits.
|
The
Compensation Committee did not consider the new award of stock options as part
of the 2007 compensation because there were a de minimus number of shares
available for grants under the option plans in effect.
Base
Salary
We
provide the named executive officers and other senior executive officers with
base salary to compensate them for services rendered during the year. We do not
have a defined benefit or retirement plan for its executives. This
factor is considered when setting the base compensation for senior executive
officers.
Base
salaries are determined for the named executive officers in the discretion of
the Compensation Committee based upon the recommendations of the Chief Executive
Officer’s assessment of the executive’s compensation, both individually and
relative to the other senior executive officers and based upon an assessment of
the individual performance of the executive during the proceeding
year. In determining the base salary for the Chief Executive Officer
and the President, the Compensation Committee exercises its judgment based on
its interactions with such senior executive officers and the Compensation
Committee’s assessment of such officers’ contribution to the Company’s
performance and other leadership achievements.
Bonuses
The
Compensation Committee may award cash bonuses to the named executive officers to
reward outstanding performance. No bonus is guaranteed, and there is no defined
range of bonus amounts that the Compensation Committee may award. Bonus awards
are made at the Compensation Committee’s discretion based upon an assessment of
an individual’s overall contribution to the Company.
Death
Benefit and Salary Continuation Plans
The
Company sponsors non-qualified arrangements to provide a death benefit to the
designated beneficiary of certain key employees (including certain of the named
executive officers) in the event of such executive’s death (the “Death Benefit
Plans”). We also have a non-qualified arrangement with certain key employees
(including certain of the named executive officers) of
87
the
Company and its subsidiaries to provide compensation to such individuals in the
event that they are employed by the Company at age 65 (the “Salary Continuation
Plans”).
Attributed
costs of the personal benefits described above for the named executive officers
for the fiscal year ended December 31, 2007, are discussed in footnote (1) and
included in column (i) of the “Summary Compensation Table.”
The
Committee believes that the Death Benefit and Salary Continuation Plans are
significant factors in:
|
·
|
enabling
the Company to retain its named executive
officers;
|
|
·
|
encouraging
our named executive officers to render outstanding service;
and
|
|
·
|
maintaining
competitive levels of total
compensation.
|
Perquisites
and Other Personal Benefits
The
Company and the Compensation Committee believe that perquisites are necessary
and appropriate parts of total compensation that contribute to our ability to
attract and retain superior executives. Accordingly, the Company and the
Compensation Committee provided a limited number of perquisites that are
reasonable and consistent with our overall compensation program. The
Compensation Committee periodically reviews the levels of perquisites provided
to the named executive officers. We currently provide the named executive
officers with the use of our automobiles, provide cell phones that are used
primarily for business purposes, and pay the country club dues for certain of
the executive officers. The executive officers are expected to use
the country club in large part for business purposes.
Severance
Agreements
We have
entered into Change of Control Severance Agreements with certain key employees,
including the named executive officers. The Severance Agreements are designed to
promote stability and continuity of senior management. Information regarding
applicable payments under such agreements for the named executive officers is
provided under the heading “Potential Payments Upon Termination or
Change-In-Control.”
Employment
Agreement
We have
no employment agreements with our named executive officers, except with Jack E.
Golsen, our Chief Executive Officer. The terms of Mr. Golsen’s employment
agreement are described below under “Employment Agreement.” We believe that Mr.
Golsen’s employment agreement promotes stability in our senior management and
encourages Mr. Golsen to provide superior service to us. The
current term of the Employment Agreement expires March 21, 2011.
Ownership
Guidelines
At this
time, we have not established any guidelines which require our executive
officers to acquire and hold our common stock. However, our named
executive officers have historically acquired and maintained a significant
ownership position in our common stock.
88
Tax
and Accounting Implications
Deductibility
of Executive Compensation - As part of its role, the Committee reviews and
considers the deductibility of executive compensation under Section 162(m) of
the Internal Revenue Code, which provides that the Company may not deduct
compensation of more than $1,000,000 that is paid to certain
individuals. We believe that compensation paid to the named executive
officers is fully deductible for federal income tax purposes. For
2007, there was no payment of compensation in excess of $1,000,000 for any named
executive officer.
Accounting
for Stock-Based Compensation – Beginning on January 1, 2006, the Company began
accounting for stock-based payments, including its incentive and nonqualified
stock options in accordance with the requirements of SFAS 123(R).
The
Compensation and Stock Option Committee of the Company has reviewed and
discussed the Compensation Discussion and Analysis with management and, based on
such review and discussions, the Compensation and Stock Option Committee
recommended to the Board that the Compensation Discussion and Analysis be
included herein.
Submitted
by the Compensation and Stock Option Committee of the Company’s Board of
Directors.
Charles
A. Burtch
Bernard
G. Ille
Horace G.
Rhodes
89
The
following table summarizes the total compensation paid or earned by each of the
named executive officers for the fiscal year ended December 31,
2007.
Summary
Compensation Table
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|||||||||
|
Name and Principal Position |
Year
|
Salary
($) |
Bonus
($) |
Stock
Awards
($)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Change
in
Pension
Value
and Nonqualified Deferred Compensation Earnings
($)
|
All
Other Compensation ($) (1)
|
Total
($)
|
|||||||||
|
Jack
E. Golsen,
Chairman
of the Board
of
Directors and
Chief
Executive Officer
|
2007
|
523,400
|
50,000
|
-
|
-
|
-
|
-
|
645,010
|
1,218,410
|
|||||||||
|
2006
|
497,400
|
-
|
-
|
-
|
-
|
615,168
|
1,112,568
|
|||||||||||
|
Tony
M. Shelby,
Executive
Vice President
of
Finance and Chief Financial Officer
|
2007
|
255,000
|
90,000
|
-
|
-
|
-
|
-
|
22,773
|
367,773
|
|||||||||
|
2006
|
245,000
|
40,000
|
-
|
-
|
-
|
-
|
22,428
|
307,428
|
||||||||||
|
Barry
H. Golsen,
Vice
Chairman of the Board of Directors, President, and President of the
Climate Control Business
|
2007
|
433,100
|
100,000
|
-
|
-
|
-
|
-
|
22,191
|
555,291
|
|||||||||
|
2006
|
413,600
|
40,000
|
-
|
-
|
-
|
-
|
9,515
|
463,115
|
||||||||||
|
David
R. Goss,
Executive
Vice President
of
Operations
|
2007
|
240,500
|
55,000
|
-
|
-
|
-
|
-
|
12,361
|
307,861
|
|||||||||
|
2006
|
233,000
|
35,000
|
-
|
-
|
-
|
-
|
14,146
|
282,146
|
||||||||||
|
David
M. Shear,
Senior
Vice President and General Counsel
|
2007
|
240,000
|
75,000
|
-
|
-
|
-
|
-
|
9,961
|
324,961
|
|||||||||
|
2006
|
225,000
|
35,000
|
-
|
-
|
-
|
-
|
4,628
|
264,628
|
(1) As
discussed below under “1981 Agreements” and “2005 Agreement,” the Company
entered into individual death benefit agreements in 1981 and a death benefit
agreement in 2005. Reported compensation for the death benefit under these
agreements is the greater of:
|
·
|
the
expense incurred associated with our accrued death benefit liability;
or
|
|
·
|
the
prorata portion of life insurance premium expense to fund the undiscounted
death benefit.
|
Amounts
accrued under these agreements are not paid until the death of the named
executive officer.
90
As
discussed below under “1992 Agreements”, the Company entered into benefit
agreements in 1992 which include a death benefit until the employee reaches age
65 or benefits for life commencing when the employee reaches age 65.
Compensation for these benefits is the greater of:
|
·
|
the
expense incurred associated with our accrued benefit liability
or
|
|
·
|
the
prorata portion of life insurance premium expense to fund the undiscounted
death benefit.
|
The
amounts set forth under “All Other Compensation” are comprised of compensation
relating to these agreements and perquisites for 2007 and 2006, as
follows:
2007:
|
1981
Agreements |
1992
Agreements |
2005
Agreement |
Other (1)
|
Total
|
|
Jack
E. Golsen
|
$
|
194,982
|
$
|
-
|
$
|
444,047
|
$
|
$5,981
|
$
|
$645,010
|
||||
|
Tony
M. Shelby
|
$
|
7,250
|
$
|
8,201
|
$
|
-
|
$
|
$7,322
|
$
|
$22,773
|
||||
|
Barry
H. Golsen
|
$
|
4,655
|
$
|
2,745
|
$
|
-
|
$
|
$4,791
|
$
|
$22,191
|
||||
|
David
R. Goss
|
$
|
8,510
|
$
|
416
|
$
|
-
|
$
|
$3,435
|
$
|
$12,361
|
||||
|
David
M. Shear
|
$
|
-
|
$
|
6,258
|
$
|
-
|
$
|
$3,703
|
$
|
$9,961
|
(1) Amount relates to the personal use of automobiles, cell phones and country club dues.
The
Company did not grant plan-based awards to the named executive officers during
2007 or 2006.
Employment
Agreement
We have
an employment agreement with Jack E. Golsen, which requires the Company to
employ Mr. Golsen as an executive officer of the Company. The employment
agreement may be terminated by either party by written notice at least one year
prior to the expiration of the then current term. The current term of the
employment agreement expires March 21, 2011, but will be automatically renewed
for up to three additional three-year periods. Under the terms of such
employment agreement, Mr. Golsen shall:
|
·
|
be
paid an annual base salary at his 1995 base rate, as adjusted from time to
time by the Compensation and Stock Option Committee, but such shall never
be adjusted to an amount less than Mr. Golsen’s 1995 base
salary,
|
|
·
|
be
paid an annual bonus in an amount as determined by the Compensation and
Stock Option Committee, and
|
|
·
|
receive
from the Company certain other fringe benefits (vacation; health and
disability insurance).
|
91
The employment agreement provides that Mr. Golsen’s employment may not be terminated, except:
|
·
|
upon
conviction of a felony involving moral turpitude after all appeals have
been exhausted (“Conviction”),
|
|
·
|
Mr.
Golsen’s serious, willful, gross misconduct or willful, gross negligence
of duties resulting in material damage to the Company and its
subsidiaries, taken as a whole, unless Mr. Golsen believed, in good faith,
that such action or failure to act was in the Company’s or its
subsidiaries’ best interest (“Misconduct”),
and
|
|
·
|
Mr.
Golsen’s death.
|
However,
no termination for a Conviction or Misconduct may occur unless and until the
Company has delivered to Mr. Golsen a resolution duly adopted by an affirmative
vote of three-fourths of the entire membership of the Board of Directors at a
meeting called for such purpose after reasonable notice given to Mr. Golsen
finding, in good faith, that Mr. Golsen violated such item.
If Mr.
Golsen’s employment is terminated for reasons other than due to a Conviction or
Misconduct, then he shall, pursuant to the employment agreement, in addition to
his other rights and remedies, receive and the Company shall pay to Mr.
Golsen:
|
·
|
a
cash payment, on the date of termination, a sum equal to the amount of Mr.
Golsen’s annual base salary at the time of such termination and the amount
of the last bonus paid to Mr. Golsen prior to such termination times the
number of years remaining under the then current term of the employment
agreement, and
|
|
·
|
provide
to Mr. Golsen all of the fringe benefits that the Company was obligated to
provide during his employment under the employment agreement for the
remainder of the term of the employment
agreement.
|
If there
is a change in control (as defined in the severance agreement between Mr. Golsen
and the Company as discussed below under “Severance Agreements”) and within 24
months after such change in control Mr. Golsen is terminated, other than for
Cause (as defined in the severance agreement), then in such event, the severance
agreement between Mr. Golsen and the Company shall be controlling.
In the
event Mr. Golsen becomes disabled and is not able to perform his duties under
the employment agreement as a result thereof for a period of 12 consecutive
months within any two-year period, the Company shall pay Mr. Golsen his full
salary for the remainder of the term of the employment agreement and thereafter
60% of such salary until Mr. Golsen’s death.
1981
Agreements
During
1981, the Company entered into individual death benefit agreements (the “1981
Agreements”) with certain key employees (including certain of the named
executive officers). As relating to the named executive officers, under the 1981
Agreements, the designated beneficiary of the officer will receive a monthly
benefit for a period of 10 years if the officer dies while in
92
the
employment of the Company or a wholly-owned subsidiary of the Company. The 1981
Agreements provide that the Company may terminate the agreement as to any
officer at anytime prior to the officer’s death. The Company has purchased life
insurance on the life of each officer covered under the 1981 Agreements to
provide a source of funds for the Company’s obligations under the 1981
Agreements. The Company is the owner and sole beneficiary of each of the
insurance policies and the proceeds are payable to the Company upon the death of
the officer.
The
following table sets forth the amounts of annual benefits payable to the
designated beneficiary or beneficiaries of the named executive officer’s under
the 1981 Agreements.
|
Name
of Individual
|
Amount
of Annual Payment
|
|
Jack
E. Golsen
|
$
|
175,000
|
||
|
Tony
M. Shelby
|
$
|
35,000
|
||
|
Barry
H. Golsen
|
$
|
30,000
|
||
|
David
R. Goss
|
$
|
35,000
|
1992
Agreements
During
1992, the Company entered into individual benefit agreements with certain key
employees of the Company and its subsidiaries (including certain of the named
executive officers) to provide compensation to such individuals in the event
that they are employed by the Company or a subsidiary of the Company at age 65
(the “1992 Agreements”). As relating to the named executive officers, under the
1992 Agreements, the officer is eligible to receive a designated benefit
(“Benefit”) as set forth in the 1992 Agreements. The officer will receive the
Benefit beginning at the age 65 for the remainder of the officer’s life. If
prior to attaining the age 65, the officer dies while in the employment of the
Company or a subsidiary of the Company, the designated beneficiary of the
officer will receive a monthly benefit (“Death Benefit”) for a period of ten
years. The 1992 Agreements provide that the Company may terminate the agreement
as to any officer at any time and for any reason prior to the death of the
officer. The Company has purchased insurance on the life of each officer covered
under the 1992 Agreements. The Company is the owner and sole beneficiary of each
insurance policy, and the proceeds are payable to the Company to provide a
source of funds for the Company’s obligations under the 1992 Agreements. Under
the terms of the 1992 Agreements, if the officer becomes incapacitated prior to
retirement or prior to reaching age 65, the officer may request the Company to
cash-in any life insurance on the life of such officer purchased to fund the
Company’s obligations under the 1992 Agreements. Jack E. Golsen does not
participate in the 1992 Agreements. The following table sets forth the amounts
of annual benefits payable to the named executive officers under the 1992
Agreements and the net cash surrender value of the associated life insurance
policies at December 31, 2007.
93
|
Name of Individual |
Amount of
Annual
Benefit
|
Amount of Annual
Death
Benefit
|
Amount
of
Net Cash Surrender Value |
|
Jack
E. Golsen
|
N/A
|
N/A
|
N/A
|
||||||
|
Tony
M. Shelby
|
$
|
15,605
|
N/A
|
|
$
|
-
|
|||
|
Barry
H. Golsen
|
$
|
17,480
|
$
|
11,596
|
$
|
25,885
|
|||
|
David
R. Goss
|
$
|
17,403
|
N/A
|
$
|
44,926
|
||||
|
David
M. Shear
|
$
|
17,822
|
$
|
7,957
|
$
|
-
|
2005
Agreement
During
2005, the Company entered into a death benefit agreement (“2005 Agreement”) with
Jack E. Golsen. This agreement replaced existing benefits that were payable to
Mr. Golsen under a split dollar insurance policy purchased by the Company on Mr.
Golsen’s life in 1996 and a second policy purchased in 2002. The 2005 Agreement
provides that, upon Mr. Golsen’s death, the Company will pay to Mr. Golsen’s
family or designated beneficiary $2.5 million to be funded from the net proceeds
received by the Company under certain life insurance policies on Mr. Golsen’s
life that were purchased and are owned by the Company. The life insurance
policies provide an aggregate stated death benefit to the Company, as
beneficiary, of $7 million. The 2005 Agreement requires that the Company is
obligated to keep in existence no less than $2.5 million of the stated death
benefit.
401(k)
Plan
We
maintain The LSB Industries, Inc. Savings Incentive Plan (the “401(k) Plan”) for
the employees (including the named executive officers) of the Company and its
subsidiaries, excluding employees covered under union agreements and certain
other employees. As relating to the named executive officers, the 401(k) Plan is
funded by the officer’s contributions. The Company and its subsidiaries make no
contributions to the 401(k) Plan for any of the named executive officers. The
amount that an officer may contribute to the 401(k) Plan equals a certain
percentage of the employee’s compensation, with the percentage based on the
officer’s income and certain other criteria as required under Section 401(k) of
the Internal Revenue Code. The Company or subsidiary deducts the amounts
contributed to the 401(k) Plan from the officer’s compensation each pay period,
in accordance with the officer’s instructions, and pays the amount into the
401(k) Plan for the officer’s benefit. The salary and bonus set forth in the
Summary Compensation Table above include any amounts contributed during the 2007
and 2006 fiscal years pursuant to the 401(k) Plan by the named executive
officers.
94
Outstanding
Equity Awards At December 31, 2007
|
Options
Awards (1)
|
|||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
||||||
|
Name
|
Number
of
Securities Underlying Unexercised Options (#) (2)
Exercisable(2)
|
Number
of
Securities Underlying Unexercised Options (#)
Unexercisable |
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)
|
Option
Exercise Price ($)
|
Option
Expiration Date(2) |
||||||
|
Jack
E. Golsen
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Tony
M. Shelby
|
100,000
15,000
|
-
-
|
-
-
|
1.25
2.73
|
7/8/2009
11/29/2011
|
||||||
|
Barry
H. Golsen
|
55,000
11,250
|
-
-
|
-
-
|
1.25
2.73
|
7/8/2009
11/29/2011
|
||||||
|
David
R. Goss
|
100,000
15,000
|
-
-
|
-
-
|
1.25
2.73
|
7/8/2009
11/29/2011
|
||||||
|
David
M. Shear
|
50,544
15,000
|
-
-
|
-
-
|
1.25
2.73
|
7/8/2009
11/29/2011
|
||||||
(1) There
were no unvested stock awards at December 31, 2007.
(2) Options
expiring on July 8, 2009 were granted on July 8, 1999, and were fully vested on
July 7, 2003. Options expiring on November 29, 2011, were granted on
November 29, 2001 and were fully vested on November 28, 2005.
Options Exercised in 2007
(1)
|
Option
Awards
|
||||
|
(a)
|
(b)
|
(c)
|
||
|
Name |
Number
of
Shares
Acquired
on Exercise
(#)
|
Value
Realized
on
Exercise
($)
|
||
|
Jack
E. Golsen
|
176,500
|
3,854,760
|
||
|
Tony
M. Shelby
|
-
|
-
|
||
|
Barry
H. Golsen
|
-
|
-
|
||
|
David
R. Goss
|
-
|
-
|
||
|
David
M. Shear
|
35,000
|
810,980
|
||
(1) There
were no stock awards that vested in 2007
95
Severance
Agreements
We have
entered into severance agreements with each of the named executive officers and
certain other officers. Each severance agreement provides (among other things)
that if, within 24 months after the occurrence of a change in control (as
defined) of the Company, the Company terminates the officer’s employment other
than for cause (as defined), or the officer terminates his employment for good
reason (as defined), the Company must pay the officer an amount equal to 2.9
times the officer’s base amount (as defined). The phrase “base amount” means the
average annual gross compensation paid by the Company to the officer and
includable in the officer’s gross income during the most recent five year period
immediately preceding the change in control. If the officer has been employed by
the Company for less than five years, the base amount is calculated with respect
to the most recent number of taxable years ending before the change in control
that the officer worked for the Company.
The
severance agreements provide that a “change in control” means a change in
control of the Company of a nature that would require the filing of a Form 8-K
with the SEC and, in any event, would mean when:
|
·
|
any
individual, firm, corporation, entity, or group (as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended) becomes the
beneficial owner, directly or indirectly, of 30% or more of the combined
voting power of the Company’s outstanding voting securities having the
right to vote for the election of directors, except acquisitions
by:
|
|
·
|
any
person, firm, corporation, entity, or group which, as of the date of the
severance agreement, has that ownership,
or
|
|
·
|
Jack
E. Golsen, his wife; his children and the spouses of his children; his
estate; executor or administrator of any estate, guardian or custodian for
Jack E. Golsen, his wife, his children, or the spouses of his children,
any corporation, trust, partnership, or other entity of which Jack E.
Golsen, his wife, children, or the spouses of his children own at least
80% of the outstanding beneficial voting or equity interests, directly or
indirectly, either by any one or more of the above-described persons,
entities, or estates; and certain affiliates and associates of any of the
above-described persons, entities, or
estates;
|
|
·
|
individuals
who, as of the date of the severance agreement, constitute the Board of
Directors of the Company (the “Incumbent Board”) and who cease for any
reason to constitute a majority of the Board of Directors except that any
person becoming a director subsequent to the date of the severance
agreement, whose election or nomination for election is approved by a
majority of the Incumbent Board (with certain limited exceptions), will
constitute a member of the Incumbent Board;
or
|
|
·
|
the
sale by the Company of all or substantially all of its
assets.
|
Except
for the severance agreement with Jack E. Golsen, the termination of an officer’s
employment with the Company “for cause” means termination because
of:
|
·
|
the
mental or physical disability from performing the officer’s duties for a
period of 120 consecutive days or one hundred eighty days (even though not
consecutive) within a 360 day
period;
|
|
·
|
the
conviction of a felony;
|
96
|
·
|
the
embezzlement by the officer of Company assets resulting in substantial
personal enrichment of the officer at the expense of the Company;
or
|
|
·
|
the
willful failure (when not mentally or physically disabled) to follow a
direct written order from the Company’s Board of Directors within the
reasonable scope of the officer’s duties performed during the 60 day
period prior to the change in
control.
|
The
definition of “Cause” contained in the severance agreement with Jack E. Golsen
means termination because of:
|
·
|
the
conviction of Mr. Golsen of a felony involving moral turpitude after all
appeals have been completed; or
|
|
·
|
if
due to Mr. Golsen’s serious, willful, gross misconduct or willful, gross
neglect of his duties has resulted in material damages to the Company and
its subsidiaries, taken as a whole, provided
that:
|
|
·
|
no
action or failure to act by Mr. Golsen will constitute a reason for
termination if he believed, in good faith, that such action or failure to
act was in the Company’s or its subsidiaries’ best interest,
and
|
|
·
|
failure
of Mr. Golsen to perform his duties hereunder due to disability shall not
be considered willful, gross misconduct or willful, gross negligence of
his duties for any purpose.
|
The
termination of an officer’s employment with the Company for “good reason” means
termination because of:
|
·
|
the
assignment to the officer of duties inconsistent with the officer’s
position, authority, duties, or responsibilities during the 60 day period
immediately preceding the change in control of the Company or any other
action which results in the diminishment of those duties, position,
authority, or responsibilities;
|
|
·
|
the
relocation of the officer;
|
|
·
|
any
purported termination by the Company of the officer’s employment with the
Company otherwise than as permitted by the severance agreement;
or
|
|
·
|
in
the event of a change in control of the Company, the failure of the
successor or parent company to agree, in form and substance satisfactory
to the officer, to assume (as to a successor) or guarantee (as to a
parent) the severance agreement as if no change in control had
occurred.
|
Except
for the severance agreement with Jack E. Golsen, each severance agreement runs
until the earlier of: (a) three years after the date of the severance agreement,
or (b) the officer’s normal retirement date from the Company; however, beginning
on the first anniversary of the severance agreement and on each annual
anniversary thereafter, the term of the severance agreement automatically
extends for an additional one-year period, unless the Company gives notice
otherwise at least 60 days prior to the anniversary date. The severance
agreement with Jack E. Golsen is effective for a period of three years from the
date of the severance agreement; except that, commencing on the date one year
after the date of such severance agreement and on each anniversary thereafter,
the term of such severance agreement shall be automatically extended so as to
terminate three years from such renewal date, unless the Company gives notices
otherwise at least one year prior to the renewal date.
97
Potential
Payments Upon Termination or Change-In-Control(1)
The
following table reflects the amount that would have been payable to each of the
named executive officers under the applicable severance agreement if the
respective trigger event had occurred on December 31, 2007.
Severance
Pay Trigger Event
|
Name and Executive
Benefit
and
Payments
Upon
Separation
|
Voluntary Termination ($)
|
Involuntary Other
Than
For
Cause
Termination
($)
|
Involuntary For
Cause Termination
($)
|
Involuntary
Other Than For
Cause Termination
-
Change of
Control ($)
|
Voluntary
For
Good Reason Termination
-
Change of Control
($)
|
Disability/ Incapacitation
($)
|
Death ($)
|
|||||||
|
Jack
E. Golsen:
|
||||||||||||||
|
Salary
|
-
|
1,701,050
|
-
|
1,521,866
|
1,521,866
|
3,318,356
|
-
|
|||||||
|
Bonus
|
-
|
162,500
|
-
|
-
|
-
|
-
|
-
|
|||||||
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
4,250,000
|
|||||||
|
Other
|
-
|
58,300
|
-
|
-
|
-
|
-
|
58,300
|
|||||||
|
Tony
M. Shelby:
|
||||||||||||||
|
Salary
|
-
|
-
|
-
|
819,890
|
819,890
|
-
|
-
|
|||||||
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
350,000
|
|||||||
|
Other
|
271,205
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||
|
Barry
H. Golsen:
|
||||||||||||||
|
Salary
|
-
|
-
|
-
|
1,325,075
|
1,325,075
|
-
|
-
|
|||||||
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
415,962
|
|||||||
|
David
R. Goss:
|
||||||||||||||
|
Salary
|
-
|
-
|
-
|
785,087
|
785,087
|
-
|
-
|
|||||||
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
350,000
|
|||||||
|
Other
|
268,538
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||
|
David
M. Shear:
|
||||||||||||||
|
Salary
|
-
|
-
|
-
|
728,023
|
728,023
|
-
|
-
|
|||||||
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
79,568
|
|||||||
(1) This
amount does not include the amount realizable under outstanding stock options
granted to the named executive officers, all of which are fully
vested. See “Outstanding Equity Awards at December 31,
2007.”
Compensation
of Directors
In 2007,
we compensated our non-employee directors for their services as directors on our
Board. Certain non-employee directors also served on the Board of Directors of
our subsidiary, ThermaClime, without additional compensation. Directors who are
employees of the Company receive no compensation for their services as
directors.
98
The
following table summarizes the compensation paid by us to our non-employee
directors during the year end December 31, 2007. Messrs. Perry and
Butkin became directors on August 16, 2007. Messrs. Donovan and
Ford’s service as directors terminated on August 21, 2007.
Director Compensation
Table
|
(a)
|
(b)
|
(h)
|
|
Name
|
Fees
Earned
or
Paid
in
Cash
($)
(1)
|
Total
($)
|
|
Raymond
B. Ackerman
|
37,500
|
37,500
|
|
Robert
C. Brown, M.D.
|
37,500
|
37,500
|
|
Charles
A. Burtch
|
37,000
|
37,000
|
|
Robert
A. Butkin
|
20,378
|
20,378
|
|
Grant
J. Donovan
|
12,000
|
12,000
|
|
N.
Allen Ford
|
12,000
|
12,000
|
|
Bernard
G. Ille
|
37,500
|
37,500
|
|
Donald
W. Munson
|
37,500
|
37,500
|
|
Ronald
V. Perry
|
20,378
|
20,378
|
|
Horace
G. Rhodes
|
37,500
|
37,500
|
|
John
A. Shelley
|
37,500
|
37,500
|
(1) This
amount includes as to each director, an annual fee of $10,000 for services as a
director ($3,753 each for Mr. Butkin and Mr. Perry who began serving in August
2007) and $500 for each Board meeting attended during 2007. This amount also
includes the following fees earned during 2007:
|
·
|
Mr.
Ackerman received $25,000 for his services on the Audit Committee and
Public Relations and Marketing
Committee.
|
|
·
|
Dr.
Brown received $25,000 for his services on the Benefits and Programs
Committee.
|
|
·
|
Mr.
Burtch received $25,000 for his services on the Audit Committee and
Compensation and Stock Option
Committee.
|
|
·
|
Mr.
Butkin received $15,625 for his services on the Business Development
Committee.
|
|
·
|
Mr.
Ille received $25,000 for his services on the Audit Committee,
Compensation and Stock Option Committee and Public Relations and Marketing
Committee.
|
|
·
|
Mr.
Munson received $25,000 for his services on the Business Development
Committee.
|
|
·
|
Mr.
Perry received $15,625 for his services on the Public Relations and
Marketing Committee.
|
|
·
|
Mr.
Rhodes received $25,000 for his services on the Audit Committee and
Compensation and Stock Option
Committee.
|
|
·
|
Mr.
Shelley received $25,000 for his services on the Public Relations and
Marketing Committee.
|
99
(2) There were no other equity or non-equity compensation awarded related to directorships.
Compensation
Committee Interlocks and Insider Participation
The
Compensation and Stock Option Committee has the authority to set the
compensation of all of our officers. This Committee generally considers and
approves the recommendations of the Chief Executive Officer. The Chief Executive
Officer does not make a recommendation regarding his own salary, and does not
make any recommendation as to the President’s salary. The members of the
Compensation and Stock Option Committee are the following non-employee
directors: Charles A. Burtch, Bernard G. Ille and Horace G. Rhodes. Neither Mr.
Burtch, Mr. Ille or Mr. Rhodes is, or ever has been, an officer or employee of
the Company or any of its subsidiaries.
The
following table sets forth the information as of December 31, 2007, with respect
to our equity compensation plans.
|
Equity
Compensation Plan Information
|
||||
|
Plan Category |
Number of securities to
be issued upon
exercise of outstanding options, warrants and
rights
(a)
|
Weighted-average exercise price of outstanding options, warrants and rights (b)
|
Number
of securities
remaining available for
future issuance
under
equity
compensation
plans
(excluding securities reflected in column (a)) (c)
|
|
|
Equity
compensation plans approved by stockholders (1)
|
935,404
|
$
|
4.56
|
303,000
|
|||
|
Equity
compensation plans not approved by stockholders (2)
|
438,500
|
$
|
1.78
|
-
|
|||
|
Total
|
1,373,904
|
$
|
3.67
|
303,000
|
(1) Stock Options Receiving
Stockholders' Approval in 2007 As previously reported, on June
19, 2006, the Compensation and Stock Option Committee granted non-qualified
stock options for the purchase of up to 450,000 shares of common stock (the
“Options”) to certain Climate Control Business employees which were subject to
shareholders’ approval. These Options were approved by our shareholders on June
14, 2007. The option exercise price of the Options is $8.01 per share, which is
based on the market value of our common stock on the date the Options were
granted. The Options vest over a ten-year period at a rate of 10% per year, and
expire on September 16, 2016 with certain restrictions. Under SFAS 123(R), the
fair value for the Options was estimated, using an option pricing model, as of
the date we received shareholders’ approval which occurred during our 2007
annual shareholders’ meeting on June 14, 2007. Under SFAS 123(R) for accounting
purposes, the grant date and service inception date is June 14,
2007.
100
As
previously reported, the total fair value for the Options was estimated to be
approximately $6.9 million, or $15.39 per share, using a Black-Scholes-Merton
option pricing model. As of June 14, 2007, we began amortizing the total
estimated fair value of the Options to SG&A which will continue through June
2016 (the remaining vesting period). As a result, we incurred stock-based
compensation expense of $0.4 million for 2007.
(2) Non-Stockholder Approved
Plans From time to time, the Compensation Committee and/or the Board of
Directors has approved the grants of certain nonqualified stock options as the
Board has determined to be in our best interest to compensate directors,
officers, or employees for service to the Company. Unless otherwise indicated
below, the price of each such option is equal to the market value of our common
stock at the date of grant and each option expires ten years from the grant
date. All outstanding options under these plans were exercisable at December 31,
2007.
The
equity compensation plans, which have not been approved by the stockholders, are
the following:
|
·
|
Effective
December 1, 2002, we granted nonqualified options to purchase up to an
aggregate 112,000 shares of common stock to former employees of two former
subsidiaries. These options were part of the employees’ severance
compensation arising from the sale of the former subsidiaries’ assets.
Each recipient of a grant received options for the same number of shares
and having the same exercise price as under the recipient’s vested
incentive stock options which expired upon the sale. Each nonqualified
option was exercisable as of the date of grant and has a term of ten years
from the original date of grant. As of December 31, 2007, 3,000 shares are
issuable at an exercise price of $4.188 per share and expire April 22,
2008.
|
|
·
|
On
November 7, 2002, we granted to an employee of the Company a nonqualified
stock option to acquire 50,000 shares of common stock in consideration of
services rendered to the Company. As of December 31, 2007, 10,000 shares
are issuable at an exercise price of $2.62 per
share.
|
|
·
|
On
November 29, 2001, we granted to employees of the Company nonqualified
stock options to acquire 102,500 shares of common stock in consideration
of services to the Company. As of December 31, 2007, 22,500 shares are
issuable at an exercise price of $2.73 per
share.
|
|
·
|
On
July 20, 2000, we granted nonqualified options to a former employee of the
Company to acquire 185,000 shares of common stock in consideration of
services to the Company. As of December 31, 2007, 100,000 shares are
issuable under the following options: 60,000 shares at $1.375 and 40,000
shares at $1.25. These options were for the same number of shares and the
same exercise prices as under the stock options held by the former
employee prior to leaving the Company. These options were fully vested at
the date of grant and expire nine years from the date of
grant.
|
101
|
·
|
On
July 8, 1999, in consideration of services to the Company, we granted
nonqualified stock options to acquire 371,500 shares of common stock at an
exercise price of $1.25 per share to Jack E. Golsen (176,500 shares),
Barry H. Golsen (55,000 shares) and Steven J. Golsen (35,000 shares),
David R. Goss (35,000 shares), Tony M. Shelby (35,000 shares), and David
M. Shear (35,000 shares) and also granted to certain other employees
nonqualified stock options to acquire a total of 165,000 shares of common
stock at an exercise price of $1.25 per share in consideration of services
to the Company. As of December 31, 2007, 245,000 shares are
issuable.
|
|
·
|
On
April 22, 1998, we granted to certain employees nonqualified stock options
to acquire shares of common stock at an exercise price of $4.188 per share
in consideration of services to the Company. As of December 31, 2007,
58,000 shares are issuable under outstanding options under these
agreements.
|
Security
Ownership of Certain Beneficial Owners
The
following table sets forth certain information as of February 29, 2008,
regarding the ownership of our voting common stock and voting preferred stock by
each person (including any “group” as used in Section 13(d)(3) of the Securities
Act of 1934, as amended) that we know to be beneficial owner of more than 5% of
our voting common stock and voting preferred stock. A person is deemed to be the
beneficial owner of shares of the Company which he or she could acquire within
60 days of February 29, 2008.
|
Name
and Address
of
Beneficial
Owner
|
Title
of
Class
|
Amounts
of
Shares
Beneficially
owned
(1)
|
Percent
of
Class+
|
|
Jack
E. Golsen and certain
members of his family (2) |
Common
Voting
Preferred
|
4,428,909
1,020,000
|
(3)
(4)
(5)
|
20.0%
99.9%
|
||
|
O’Shaughnessy
Asset Management, LLC
|
Common
|
1,105,253
|
5.2%
|
|||
|
Winslow
Management Company LLC
|
Common
|
1,085,599
|
5.1%
|
+ Because
of the requirements of the SEC as to the method of determining the amount of
shares an individual or entity may own beneficially, the amount shown for an
individual may include shares also considered beneficially owned by others. Any
shares of stock which a person does not own, but which he or she has the right
to acquire within 60 days of February 29, 2008 are deemed to be outstanding for
the purpose of computing the percentage of outstanding stock of the class owned
by such person but are not deemed to be outstanding for the purpose of computing
the percentage of the class owned by any other person.
(1) We
based the information with respect to beneficial ownership on information
furnished by the above-named individuals or entities or contained in filings
made with the Securities and Exchange Commission or the Company’s
records.
102
(2) Includes
Jack E. Golsen (“J. Golsen”) and the following members of his family: wife,
Sylvia H. Golsen; son, Barry H. Golsen (“B. Golsen”) (a director, Vice Chairman
of the Board of Directors, and President of the Company and its climate control
business); son, Steven J. Golsen (“S. Golsen”) (executive officer of several
subsidiaries of the Company), Golsen Family LLC (“LLC”) which is wholly-owned by
J. Golsen (45.92% owner), Sylvia H. Golsen (45.92% owner), B. Golsen (2.72%
owner), S. Golsen (2.72% owner), and Linda F. Rappaport (2.72% owner and
daughter of J. Golsen (“L. Rappaport”)), and SBL Corporation (“SBL”) which
is wholly-owned by the LLC (49% owner), B. Golsen (17% owner), S. Golsen (17%
owner), and L. Rappaport (17% owner). J Golsen and Sylvia H. Golsen are the
managers of the LLC and share voting and dispositive power over the shares
beneficially owned by the LLC. J. Golsen and B. Golsen as the only directors and
officers of SBL share the voting and dispositive power of the shares
beneficially owned by SBL and its wholly owned subsidiary, Golsen Petroleum Corp
(“GPC”). See “Description of Capital Stock.” The address of Jack E. Golsen,
Sylvia H. Golsen, and Barry H. Golsen is 16 South Pennsylvania Avenue, Oklahoma
City, Oklahoma 73107; and Steven J. Golsen’s address is 7300 SW 44th Street,
Oklahoma City, Oklahoma 73179. SBL’s address is 16 South Pennsylvania Avenue,
Oklahoma City, Oklahoma 73107
(3) Includes
(a) the following shares over which J. Golsen has the sole voting and
dispositive power: (i) 4,000 shares that he has the right to acquire upon
conversion of a promissory note; (ii) 263,320 shares of common stock owned
of record by certain trusts for the benefit of B. Golsen, S. Golsen and L.
Rappaport over which J. Golsen is the trustee of each of these trusts; and
(iii) 198,006 shares held in certain trusts for the grandchildren and great
grandchildren of J. Golsen and Sylvia H. Golsen over which J. Golsen is the
trustee; (b) 667,276 shares owned of record by the LLC and 133,333 shares
that the LLC has the right to acquire upon the conversion of 4,000 shares of the
Series B Preferred owned of record by the LLC; (c) 241,639 shares over
which B. Golsen has the sole voting and dispositive power, 533 shares owned of
record by B. Golsen’s wife, over which he shares the voting and dispositive
power, and 66,250 shares that he has the right to acquire within the next 60
days under the Company’s stock option plans; (d) 228,915 shares over which
S. Golsen has the sole voting and dispositive power and 46,250 shares that he
has the right to acquire within the next 60 days under the Company’s stock
option plans; (e) 1,512,099 shares owned of record by SBL, 400,000 shares
that SBL has the right to acquire upon conversion of 12,000 shares of Series B
Preferred owned of record by SBL, and 250,000 shares that SBL has to right to
acquire upon conversion of 1,000,000 shares of the Series D Preferred owned of
record by SBL and (f) 283,955 shares owned of record by GPC, which is a
wholly-owned subsidiary of SBL, and 133,333 shares that GPC has the right to
acquire upon conversion of 4,000 shares of Series B Preferred owned of record by
GPC. See “Certain Relationships and Related Transactions”.
(4) J.
Golsen and Sylvia H. Golsen disclaim beneficial ownership of the shares over
which B. Golsen and S. Golsen each have sole voting and investment
power. Sylvia H. Golsen, B. Golsen and S. Golsen disclaim beneficial
ownership of the shares that J. Golsen has sole voting and investment power over
as noted in footnote (3)(a) above. B. Golsen and S. Golsen disclaim
beneficial ownership of the shares owned of record by the LLC, except to the
extent of their respective pecuniary interest therein. S. Golsen disclaims
beneficial ownership of the shares owned of record by SBL and GPC and all shares
beneficially owned by SBL through the LLC, except to the extent of his pecuniary
interest therein.
103
(5) Includes:
(a) 4,000 shares of Series B Preferred owned of record by the LLC;
(b) 12,000 shares of Series B Preferred owned of record by SBL;
(c) 4,000 shares Series B Preferred owned of record by SBL’s wholly-owned
subsidiary, GPC, over which SBL, J. Golsen, and B. Golsen share the voting and
dispositive power and (d) 1,000,000 shares of Series D Preferred owned of
record by SBL.
Security
Ownership of Management
The
following table sets forth certain information obtained from our directors and
our directors and executive officers as a group as to their beneficial ownership
of our voting common stock and voting preferred stock as of February 29,
2008.
|
Name
of
Beneficial
Owner
|
Title
of Class
|
Amount
of Shares
Beneficially Owned (1) |
Percent
of
Class+ |
|
Raymond
B. Ackerman
|
Common
|
16,450
|
(2)
|
*
|
||||
|
Robert
C. Brown, M.D.
|
Common
|
130,329
|
(3)
|
*
|
||||
|
Charles
A. Burtch
|
Common
|
9,000
|
(4)
|
*
|
||||
|
Robert
A. Butkin(5)
|
Common
|
400
|
(5)
|
*
|
||||
|
Barry
H. Golsen
|
Common
Voting
Preferred
|
3,688,418
1,020,000
|
(6)
(7)
|
16.7
99.9
|
%
%
|
|||
|
Jack
E. Golsen
|
Common
Voting
Preferred
|
3,845,322
1,020,000
|
(7)
(7)
|
17.5
99.9
|
%
%
|
|||
|
David
R. Goss
|
Common
|
251,594
|
(8)
|
1.2
|
%
|
|||
|
Bernard
G. Ille
|
Common
|
45,000
|
(9)
|
*
|
||||
|
Jim
D. Jones
|
Common
|
150,252
|
(10)
|
*
|
||||
|
Donald
W. Munson
|
Common
|
6,740
|
(11)
|
*
|
||||
|
Ronald
V. Perry (12)
|
Common
|
-
|
-
|
|||||
|
Horace
G. Rhodes
|
Common
|
16,000
|
(13)
|
*
|
||||
|
David
M. Shear
|
Common
|
105,581
|
(14)
|
*
|
||||
|
Tony
M. Shelby
|
Common
|
245,810
|
(15)
|
1.2
|
%
|
|||
|
John
A. Shelley
|
Common
|
-
|
-
|
|||||
|
Directors
and Executive
Officers as a group number (15
persons)
|
Common
Voting
Preferred
|
5,130,900
1,020,000
|
(16)
|
22.8
99.9
|
%
%
|
104
* Less
than 1%.
+ See
footnote “+” to the table under “Security Ownership of Certain Beneficial
Owners.”
(2) This
amount includes 1,450 shares held by Mr. Ackerman’s trust over which
Mr. Ackerman possesses sole voting and dispositive power and 15,000 shares
that Mr. Ackerman may acquire pursuant to currently exercisable
non-qualified stock options.
(3) The
amount includes (a) 59,516 shares are held in a joint account owned by a trust,
of which Dr. Brown’s wife is the trustee, and by a trust, of which
Dr. Brown is the trustee. As trustees, Dr. Brown and his wife share voting
and dispositive power over these shares, (b) 50,727 shares owned by Robert C.
Brown, M.D in a corporation wholly-owed by Dr. Brown and (c) 20,086 shares held
by the Robert C. Brown, M.D Inc. Employee Profit Savings Plan, of which Dr.
Brown serves as the trustee. Dr. Brown has sole voting and dispositive power
over the shares described in (b) and (c). The amount shown does not include
shares owned directly, or through trusts, by the children of Dr. Brown and
the son-in-law of Dr. Brown, David M. Shear, all of which Dr. Brown
disclaims beneficial ownership.
(4) These
shares may be acquired by Mr. Burtch pursuant to currently exercisable
non-qualified stock options.
(5) These
shares are held in certain trusts over which Mr. Butkin has voting and
dispositive power. Mr. Butkin was appointed to our board of directors on
August 16, 2007.
(6) See
footnotes (3), (4), and (5) of the table under “Security Ownership of Certain
Beneficial Owners” for a description of the amount and nature of the shares
beneficially owned by B. Golsen.
(7) See
footnotes (3), (4), and (5) of the table under “Security Ownership of Certain
Beneficial Owners” for a description of the amount and nature of the shares
beneficially owned by J. Golsen.
(8) Mr. Goss
has the sole voting and dispositive power over these shares, which include 600
shares held in a trust of which Mr. Goss is trustee and 115,000 shares that
Mr. Goss has the right to acquire pursuant to currently exercisable stock
options granted under our stock option plans.
(9) The
amount includes (a) 25,000 shares of common stock, including 15,000 shares
that Mr. Ille may purchase pursuant to currently exercisable non-qualified
stock options, over which Mr. Ille has the sole voting and dispositive
power, and (b) 20,000 shares owned of record by Mr. Ille’s wife,
voting and dispositive power of which are shared by Mr. Ille and his
wife.
(10) Mr. Jones
and his wife share voting and dispositive power over these shares which include
115,000 shares that Mr. Jones has the right to acquire pursuant to
currently exercisable stock options granted under our stock option
plans.
105
(11) Mr. Munson
has the sole voting and dispositive power over these shares.
(12) Mr. Perry
was appointed to our board of directors on August 16, 2007.
(13) Mr. Rhodes
has sole voting and dispositive power over these shares, which include 15,000
shares that may be acquired by Mr. Rhodes pursuant to currently exercisable
non-qualified stock options.
(14) These
shares are held in a joint account owned Mr. Shear’s revocable trust of which
Mr. Shear is the trustee and by Mr. Shear’s spouse’s revocable trust of which
his spouse is the trustee. As trustees, Mr. Shear and his wife share
voting and dispositive power over these shares.
This
amount does not include, and Mr. Shear disclaims beneficial ownership of,
the shares beneficially owned by Mr. Shear’s wife, which consist of 22,988
shares, the beneficial ownership of which is disclaimed by her, that are held by
trusts of which she is the trustee.
(15) Mr. Shelby
has the sole voting and dispositive power over these shares, which include
115,000 shares that Mr. Shelby has the right to acquire pursuant to currently
exercisable stock options granted under our stock option plans.
(16) The
shares of common stock include 465,250 shares of common stock that executive
officers and directors have the right to acquire within 60 days under our stock
option plans and 920,666 shares of common stock that executive officers,
directors, or entities controlled by our executive officers and directors, have
the right to acquire within 60 days under other convertible
securities.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Policy
as to Related Party Transaction
Pursuant
to the Audit Committee Charter, adopted in 2003, our Audit Committee is to
review any related party transactions involving any of our directors and
executive officers. The following related party transactions were reviewed by
the Audit Committee or the Board of Directors as a whole.
Related
Party Transactions
Jayhawk
Jayhawk
Capital Management, L.L.C., and certain of its affiliates (collectively, the
“Jayhawk Group”), a former significant shareholder and affiliate, were
participants to various investment transactions in certain issues of the
Company’s debt and equity securities during the past several years, which both
increased and decreased their ownership interest in the
Company. During August 2007, the two directors appointed by the
holders of our Series 2 Preferred were no longer eligible to serve on our board
and as of December 31, 2007, the Jayhawk Group had decreased its ownership in
our debt and equity securities to the level whereby they are no longer
considered
106
a related
party. However, the Jayhawk Group was a participant in the following
transactions related to our debt and equity securities during the period it was
considered a related party:
During
2006, a member of the Jayhawk Group purchased $1,000,000 principal amount of the
2006 Debentures. In April 2007, the Jayhawk Group converted all of such 2006
Debentures into 141,040 shares of our common stock, at the conversion rate of
141.04 shares per $1,000 principal amount of 2006 Debentures (representing a
conversion price of $7.09 per share pursuant to the Indenture covering the 2006
Debentures). During 2007, we paid the Jayhawk Group $70,000 of which $46,000
relates to interest earned on the 2006 Debentures and $24,000 relates to
additional consideration paid to convert the 2006 Debentures.
On
March 25, 2003, the Jayhawk Group purchased from us in a private placement
pursuant to Rule 506 of Regulation D under the Securities Act, 450,000 shares of
common stock and a warrant for the purchase of up to 112,500 shares of common
stock at an exercise price of $3.49 per share. In connection with
such sale, we entered into a Registration Rights Agreement with the Jayhawk
Group, dated March 23, 2003. During 2007, the Jayhawk Group exercised the
warrant and purchased 112,500 shares of our common stock at the exercise price
of $3.49 per share. The aggregate 562,500 shares of common stock were registered
for resale under the Form S-1 Statement, No. 333-145721, declared
effective by the SEC on November 19, 2007.
During
November 2006, we entered into an agreement (the “Jayhawk Agreement”) with the
Jayhawk Group. Under the Jayhawk Agreement, the Jayhawk Group agreed, that if we
made an exchange or tender offer for the Series 2 Preferred, to tender 180,450
shares of the 346,662 shares of Series 2 Preferred owned by the Jayhawk Group
upon certain conditions being met. The Jayhawk Agreement further provided that
the Golsen Group would exchange or tender 26,467 shares of Series 2 Preferred
beneficially owned by them, as a condition to the Jayhawk Group’s tender of
180,450 of its shares of Series 2 Preferred. Pursuant to the Jayhawk Agreement
and the terms of our exchange tender offer, during March 2007, the Jayhawk Group
and members of the Golsen Group tendered 180,450 and 26,467 shares,
respectively, of Series 2 Preferred for 1,335,330 and 195,855 shares,
respectively, of our common stock in our tender offer. As a result, we
effectively settled the dividends in arrears totaling approximately $4.96
million, with $4.33 million relating to the Jayhawk Group and $0.63 million
relating to the Golsen Group.
We
received a letter, dated May 23, 2007, from a law firm representing a
stockholder of ours demanding that we investigate potential short-swing profit
liability under Section 16(b) of the Exchange Act of the Jayhawk Group. The
stockholder alleges that the surrender by the Jayhawk Group of 180,450 shares of
our Series 2 Preferred in our issuer exchange tender offer in March 2007 was a
sale which was subject to Section 16 and matchable against prior purchases
of Series 2 Preferred by the Jayhawk Group. The Jayhawk Group advised us that
they do not believe that they are liable for short-swing profits under
Section 16(b). The provisions of Section 16(b) provide that if we do
not file a lawsuit against the Jayhawk Group in connection with these
Section 16(b) allegations within 60 days from the date of the stockholder’s
notice to us, then the stockholder may pursue a Section 16(b) short-swing
profit claim on our behalf. After completion of the investigation of this matter
by our outside corporate/securities counsel, we attempted to
107
settle
this matter with the Jayhawk Group, but were unable to reach a resolution
satisfactory to all parties. On October 9, 2007, the law firm representing
the stockholder initiated a lawsuit against the Jayhawk Group pursing a
Section 16(b) short-swing profit claim on our behalf up to $819,000.
During the first quarter of 2008,
the parties have agreed to settle this claim by a payment to us by the Jayhawk
Group of $180,000, of which we will receive approximately $125,000 after
attorneys’ fees. This settlement is subject to a definitive
settlement agreement.
The
redemption of all of our outstanding Series 2 Preferred was completed on
August 27, 2007. The holders of shares of Series 2 Preferred had the right
to convert each share into 4.329 shares of our common stock, which right to
convert terminated 10 days prior to the redemption date. The Certificate of
Designations for the Series 2 Preferred provided, and it is our position, that
the holders of Series 2 Preferred that elected to convert shares of Series 2
Preferred into our common stock prior to the scheduled redemption date were not
entitled to receive payment of any dividends in arrears on the shares so
converted. As a result, holders that elected to convert shares of Series 2
Preferred were not entitled to any dividends in arrears as to the shares of
Series 2 Preferred converted. On or about August 16, 2007, the Jayhawk
Group elected to convert the 155,012 shares of Series 2 Preferred held by it,
and we issued to the Jayhawk Group 671,046 shares of our common stock as a
result of such conversion.
The
Company has been advised by the Jayhawk Group, in connection with the Jayhawk
Group’s conversion of its holdings of Series 2 Preferred, the Jayhawk Group may
bring legal proceedings against us for all dividends in arrears on the
Series 2 Preferred that the Jayhawk Group converted after receiving a
notice of redemption. The 155,012 shares of Series 2 Preferred converted by the
Jayhawk Group after we issued the notice of redemption for the Series 2
Preferred would have been entitled to receive approximately $4.0 million of
dividends in arrears on the August 27, 2007 redemption date, if such shares
were outstanding on the redemption date and had not been converted and into
common stock.
As a
holder of Series 2 Preferred, the Jayhawk Group participated in the nomination
and election of two individuals to serve on our board of directors in accordance
with the terms of the Series 2 Preferred. As the result of the exchanges,
conversions and redemption of the Series 2 Preferred during 2007, resulting in
less than 140,000 shares of Series 2 Preferred being outstanding, the right of
the holders of Series 2 Preferred to nominate and elect two individuals to serve
on our board of directors terminated pursuant to the terms of the Series 2
Preferred. Therefore the two independent directors elected by the holders of our
Series 2 Preferred no longer serve as directors on our board of directors and
the Jayhawk Group is no longer considered an affiliate of ours.
Golsen
Group
In
connection with the completion of our March 2007 tender offer for our
outstanding shares of our Series 2 Preferred, members of the Golsen Group
tendered 26,467 shares of Series 2 Preferred in exchange for our issuance to
them of 195,855 shares of our common stock. As a result, we effectively
settled approximately $0.63 million in dividends in arrears on the shares
of Series 2 Preferred tendered. The tender by the Golsen Group was a condition
to Jayhawk’s Agreement to tender shares of Series 2 Preferred in the tender
offer. See discussion above under “Jayhawk.”
108
After our
exchange tender offer for our Series 2 Preferred, the Golsen Group held 23,083
shares of Series 2 Preferred. Pursuant to our redemption of the
remaining outstanding Series 2 Preferred during August 2007, the Golsen Group
redeemed 23,083 shares of Series 2 Preferred and received the cash redemption
amount of approximately $1.76 million pursuant to the terms f our redemption of
all of our outstanding Series 2 Preferred. The redemption price was $50.00 per
share of Series 2 Preferred, plus $26.25 per share in dividends in arrears
pro-rata to the date of redemption. The holders of shares of Series 2 Preferred
had the right to convert each share into 4.329 shares of our common stock, which
right to convert terminated 10 days prior to the redemption date. Holders that
converted shares of Series 2 Preferred were not entitled to any dividends in
arrears as to the shares of Series 2 Preferred converted.
During
2007, certain subsidiaries of the Company remodeled their offices and paid
$13,000 for the replacement of carpet and flooring to a company (“Designer
Rugs”) owned by Linda Golsen Rappaport, the daughter of Jack E. Golsen, our
Chairman and Chief Executive Officer, and sister of Barry H. Golsen, our
President.
The
Golsen Group pays us approximately $6,000 each year for the use of approximately
600 square feet of office space in our corporate offices.
Steve
Golsen, Chief Operating Officer of our Climate Control Business, 2007
compensation was approximately $389,000, which included $150,000 bonus and
$6,000 automobile allowance. Heidi Brown Shear, Vice President and
Managing Counsel to the Company, 2007 compensation was approximately $130,000,
which included $25,000 bonus and $3,900 automobile allowance. In
addition, Heidi Brown Shear realized approximately $215,000 value in 2007 from
the exercise of non-qualified stock options. Steve Golsen is the son
of Jack Golsen and the brother to Barry Golsen. Heidi Brown Shear is
the daughter of Robert C. Brown, a Director, and spouse of David Shear, Senior
Vice President and General Counsel of the Company. As of December 31, 2007, we
employed 1,788 persons, of which 4 are relatives of Jack Golsen.
Cash
Dividends
As
discussed above, during 2007, we paid cash dividends to the Golsen Group of
approximately $606,000 related to 23,083 shares of Series 2 Preferred
redeemed.
In
September 2007, we paid the dividends in arrears on our outstanding
preferred stock utilizing a portion of the net proceeds of the sale of the 2007
Debentures and working capital, including approximately $2,250,000 of dividends
in arrears on our Series B Preferred and our Series D Preferred, all
of the outstanding shares of which are owned by the Golsen Group.
Northwest
Northwest
Internal Medicine Associates (“Northwest”), a division of Plaza Medical Group,
P.C., has an agreement with the Company to perform medical examinations of the
management and supervisory personnel of the Company and its subsidiaries. Each
year, we pay Northwest $2,000 a month to perform such examinations, under the
agreement. Dr. Robert C. Brown (a director of the Company) is Vice
President and Treasurer of Plaza Medical Group, P.C.
109
Quail
Creek Bank
Bernard
Ille, a member of our board of directors, is a director of Quail Creek Bank,
N.A. (the “Bank”). The Bank was a lender to one of our subsidiaries. During
2007, the subsidiary made interest and principal payments on outstanding debt
owed to the Bank in the respective amount of $.1 million and $3.3 million in
2007. At December 31, 2006, the subsidiary’s loan payable to the Bank was
approximately $3.3 million, (none at December 31, 2007) with an annual
interest rate of 8.25%. The loan was secured by certain of the subsidiary’s
property, plant and equipment. This loan was paid in full in June 2007 utilizing
a portion of the net proceeds of our sale of the 2007 Debentures.
The Audit
Committee of our Board of Directors or our Board of Directors reviewed each of
the above noted transactions prior to the completion of the transaction
discussed, except that neither the Audit Committee or the Board of Directors
reviewed the compensation of Steve Golsen or Heidi Brown Shear. Steve
Golsen is not an officer or director of the Company and Heidi Brown Shear’s
compensation was approved by the Compensation Committee of our Board of
Directors.
Board
Independence
The Board
of Directors has determined that each of Messrs. Ackerman, Burtch,
Butkin, Ille, Munson, Rhodes, Perry and Shelley is an “independent
director” in accordance with the current listing standards of the
AMEX.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit
Fees
The
aggregate fees billed by Ernst & Young LLP for professional services
rendered for the audit of the Company’s annual financial statements for the
fiscal years ended December 31, 2007 and 2006, for the reviews of the financial
statements included in the Company’s Quarterly Reports on Form 10-Q for those fiscal
years, and for review of documents filed with the SEC for those fiscal years
were approximately $1,635,057and
$914,100, respectively.
Audit-Related
Fees
Ernst
& Young LLP billed the Company $95,000and
$223,540 during 2007 and 2006, respectively, for audit-related
services, which included benefit plan audit and accounting consultations which
included assistance with our internal control documentation, the issuance of the
2006 and 2007 Debentures, and the exchange tender offer during
2007.
Tax
Fees
Ernst
& Young LLP billed $249,887 and
$136,795 during 2007 and 2006, respectively, for tax services to
the Company, and included tax return review and preparation and tax
consultations and planning.
110
All Other
Fees
The
Company did not engage its accountants to provide any other services for the
fiscal years ended December 31, 2007 and 2006.
Engagement
of the Independent Registered Public Accounting Firm
The Audit
Committee is responsible for approving all engagements with Ernst & Young
LLP to perform audit or non-audit services for us prior to us engaging Ernst
& Young LLP to provide those services. All of the services under the
headings Audit Related, Tax Services, and All Other Fees were approved by the
Audit Committee in accordance with paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X of the Exchange Act. The Audit Committee of the Company’s Board
of Directors has considered whether Ernst & Young LLP’s provision of the
services described above for the fiscal years ended December 31, 2007 and 2006
is compatible with maintaining its independence.
111
PART IV
(a) (1) Financial
Statements
The
following consolidated financial statements of the Company appear immediately
following this Part IV:
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-
2
|
|
|
Consolidated
Balance Sheets at December 31, 2007 and 2006
|
F-3
|
|
|
Consolidated
Statements of Income for each of the three years in the period ended
December 31, 2007
|
F-5
|
|
|
Consolidated
Statements of Stockholders' Equity for each of the three years in the
period ended December 31, 2007
|
F-6
|
|
|
Consolidated
Statements of Cash Flows for each of the three years in the period ended
December 31, 2007
|
F-8
|
|
|
Notes
to Consolidated Financial Statements
|
F-10
|
|
|
Quarterly
Financial Data (Unaudited)
|
F-73
|
(a) (2) Financial Statement
Schedules
The
Company has included the following schedules in this report:
|
I - Condensed Financial Information of
Registrant
|
F-75
|
|
|
II - Valuation and Qualifying
Accounts
|
F-80
|
We have
omitted all other schedules because the conditions requiring their filing do not
exist or because the required information appears in our Consolidated Financial
Statements, including the notes to those statements.
112
(a)(3)
Exhibits
|
3(i).1
|
Restated
Certificate of Incorporation, as amended, which the Company hereby
incorporates by reference from Exhibit 3(i).1 to the Company’s Form S-1
Registration Statement, file no. 333-145721, effective November 11,
2007.
|
|
3(i).2
|
Restated
Bylaws, dated December 19, 2007, which the Company hereby incorporates by
reference from Exhibit 3.2 to the Company’s Form 8-K, filed December 20,
2007.
|
|
4.1
|
Specimen
Certificate for the Company's Non-cumulative Preferred Stock, having a par
value of $100 per share which the Company incorporates by reference from
Exhibit 4.1 to the company’s Form 10-K for the fiscal year ended December
31, 2005.
|
|
4.2
|
Specimen
Certificate for the Company's Series B Preferred Stock, having a par value
of $100 per share, which the Company hereby incorporates by reference from
Exhibit 4.27 to the Company's Registration Statement No.
33-9848.
|
|
4.3
|
Specimen
of Certificate of Series D 6% Cumulative, Convertible Class C Preferred
Stock which the Company hereby incorporates by reference from Exhibit 4.1
to the Company's Form 10-Q for the fiscal quarter ended September 30,
2001.
|
|
4.4
|
Specimen
Certificate for the Company's Common Stock, which the Company incorporates
by reference from Exhibit 4.4 to the Company's Registration Statement No.
33-61640.
|
|
4.5
|
Renewed
Rights Agreement, dated January 6, 1999 between the Company and Bank One,
N.A., which the Company hereby incorporates by reference from Exhibit No.
1 to the Company's Form 8-A Registration Statement, dated January 27,
1999.
|
|
4.6
|
Redemption
Notice, dated July 12, 2007, for the LSB Industries, Inc.’s $3.25
Convertible Exchangeable Class C Preferred Stock, Series 2 which the
Company hereby incorporates by reference from Exhibit 99.1 to the
Company’s Form 8-K, dated July 11, 2007.
|
|
4.7
|
Amended
and Restated Loan and Security Agreement by and among LSB Industries,
Inc., ThermaClime, Inc. and each of its subsidiaries that are Signatories,
the lenders and Wells Fargo Foothill, Inc. which the Company hereby
incorporates by reference from Exhibit 4.2 to the Company’s Form 10-Q for
the fiscal quarter ended September 30, 2007.
|
|
4.8
|
Loan
Agreement, dated September 15, 2004 between ThermaClime, Inc. and certain
subsidiaries of ThermaClime, Inc., Cherokee Nitrogen Holdings, Inc., Orix
Capital Markets, L.L.C. and LSB Industries, Inc. (“Loan Agreement”) which
the Company hereby incorporates by reference from Exhibit 4.1 to the
Company’s Form 8-K, dated September 16, 2004. The Loan Agreement lists
numerous Exhibits and Schedules that are attached thereto, which will be
provided to the Commission upon the commission’s
request.
|
113
|
4.9
|
First
Amendment, dated February 18, 2005 to Loan Agreement, dated as of
September 15, 2004, among ThermaClime, Inc., and certain subsidiaries of
ThermaClime, Cherokee Nitrogen Holdings, Inc., and Orix Capital Markets,
L.L.C. which the Company hereby incorporates by reference from Exhibit
4.21 to the Company’s Form 10-K for the year ended December 31,
2004.
|
|
4.10
|
Waiver
and Consent, dated as of January 1, 2006 to the Loan Agreement dated as of
September 15, 2004 among ThermaClime, Inc., and certain subsidiaries of
ThermaClime, Inc., Cherokee Nitrogen Holdings, Inc., Orix Capital Markets,
L.L.C. and LSB Industries, Inc. which the Company hereby incorporates by
reference from Exhibit 4.23 to the Company’s Form 10-K for the year ended
December 31, 2005.
|
|
4.11
|
Consent
of Orix Capital Markets, LLC and the Lenders of the Senior Credit
Agreement, dated May 12, 2006, to the interest rate of a loan between LSB
and ThermaClime and the utilization of the loan proceeds by ThermaClime
and the waiver of related covenants which the Company hereby incorporates
by reference from Exhibit 4.2 to the Company’s Form 10-Q for the fiscal
quarter ended June 30, 2006.
|
|
4.12
|
Indenture,
dated March 3, 2006, by and among the Company and UMB Bank, which the
Company hereby incorporates by reference from Exhibit 99.2 to the
Company’s Form 8-K, dated March 14, 2006.
|
|
4.13
|
Registration
Rights Agreement, dated March 3, 2006, by and among the Company and the
Purchasers set fourth in the signature pages which the Company hereby
incorporates by reference from Exhibit 99.3 to the Company’s Form 8-K,
dated March 14, 2006.
|
|
4.14
|
Term
Loan Agreement, dated as of November 2, 2007, among LSB Industries, Inc.,
ThermaClime, Inc. and certain subsidiaries of ThermaClime, Inc., Cherokee
Nitrogen Holdings, Inc., the Lenders, the Administrative and Collateral
Agent and the Payment Agent which the Company hereby incorporates by
reference from Exhibit 4.1 to the Company’s Form 10-Q for the fiscal
quarter ended September 30, 2007.
|
|
4.15
|
Certificate
of 5.5% Senior Subordinated Convertible Debentures due 2012 which the
Company hereby incorporates by reference from Exhibit 4.1 to the Company’s
Form 8-K, dated June 28, 2007.
|
|
4.16
|
Indenture,
dated June 28, 2007, by and among the Company and UMB Bank, n.a.
which the Company hereby incorporates by reference from Exhibit 4.2 to the
Company’s Form 8-K, dated June 28, 2007
|
|
4.17
|
Registration
Rights Agreement, dated June 28, 2007, by and among the Company and
the Purchasers set forth in the signature pages thereto which the Company
hereby incorporates by reference from Exhibit 4.3 to the Company’s Form
8-K, dated June 28, 2007.
|
|
4.18
|
Registration
Rights Agreement, dated March 25, 2003 among LSB Industries, Inc., Kent C.
McCarthy, Jayhawk Capital management, L.L.C., Jayhawk Investments, L.P.
and Jayhawk Institutional Partners, L.P., which the Company hereby
incorporates by reference from Exhibit 10.49 to the Company's Form 10-K
for the fiscal year ended December 31,
2002.
|
114
|
10.1
|
Limited
Partnership Agreement dated as of May 4, 1995 between the general partner,
and LSB Holdings, Inc., an Oklahoma Corporation, as limited partner which
the Company hereby incorporates by reference from Exhibit 10.11 to the
Company's Form 10-K for the fiscal year ended December 31, 1995. See SEC
file number 001-07677.
|
|
10.2
|
Form
of Death Benefit Plan Agreement between the Company and the employees
covered under the plan, which the Company incorporates by reference from
Exhibit 10.2 to the company’s Form 10-K for the fiscal year ended December
31, 2005.
|
|
10.3
|
The
Company's 1993 Stock Option and Incentive Plan, which the Company
incorporates by reference, which the Company incorporates by reference
from Exhibit 10.3 to the company’s Form 10-K for the fiscal year ended
December 31, 2005.
|
|
10.4
|
First
Amendment to Non-Qualified Stock Option Agreement, dated March 2, 1994 and
Second Amendment to Stock Option Agreement, dated April 3, 1995 each
between the Company and Jack E. Golsen, which the Company hereby
incorporates by reference from Exhibit 10.1 to the Company's Form 10-Q for
the fiscal quarter ended March 31, 1995. See SEC file number
001-07677.
|
|
10.5
|
Non-Qualified
Stock Option Agreement, dated April 22, 1998 between the Company and
Robert C. Brown, M.D., which the Company hereby incorporates by reference
from Exhibit 10.43 to the Company’s Form 10-K for the fiscal year ended
December 31, 1998. The Company entered into substantially identical
agreements with Bernard G. Ille, Raymond B. Ackerman, Horace G. Rhodes,
and Donald W. Munson. The Company will provide copies of these agreements
to the Commission upon request. See SEC file number
001-07677.
|
|
10.6
|
The
Company's 1998 Stock Option and Incentive Plan, which the Company hereby
incorporates by reference from Exhibit 10.44 to the Company's Form 10-K
for the year ended December 31, 1998. See SEC file number
001-07677.
|
|
10.7
|
LSB
Industries, Inc. Outside Directors Stock Option Plan, which the Company
hereby incorporates by reference from Exhibit "C" to the LSB Proxy
Statement, dated May 24, 1999 for Annual Meeting of Stockholders. See SEC
file number 001-07677.
|
|
10.8
|
Nonqualified
Stock Option Agreement, dated November 7, 2002 between the Company and
John J. Bailey Jr, which the Company hereby incorporates by reference from
Exhibit 55 to the Company's Form 10-K/A Amendment No.1 for the fiscal year
ended December 31, 2002.
|
|
10.9
|
Nonqualified
Stock Option Agreement, dated November 29, 2001 between the Company and
Dan Ellis, which the Company hereby incorporates by reference from Exhibit
10.56 to the Company's Form 10-K/A Amendment No.1 for the fiscal year
ended December 31, 2002.
|
115
|
10.10
|
Nonqualified
Stock Option Agreement, dated July 20, 2000 between the Company and Claude
Rappaport for the purchase of 80,000 shares of common stock, which the
Company hereby incorporates by reference from Exhibit 10.57 to the
Company's Form 10-K/A Amendment No.1 for the fiscal year ended December
31, 2002. Substantially similar nonqualified stock option agreements were
entered into with Mr. Rappaport (40,000 shares at an exercise price of
$1.25 per share, expiring on July 20, 2009), (5,000 shares at an exercise
price of $5.362 per share, expiring on July 20, 2007), and (60,000 shares
at an exercise price of $1.375 per share, expiring on July 20, 2009),
copies of which will be provided to the Commission upon
request.
|
|
10.11
|
Nonqualified
Stock Option Agreement, dated July 8, 1999 between the Company and Jack E.
Golsen, which the Company hereby incorporates by reference from Exhibit
10.58 to the Company's Form 10-K/A Amendment No.1 for the fiscal year
ended December 31, 2002. Substantially similar nonqualified stock options
were granted to Barry H. Golsen (55,000 shares), Steven J. Golsen (35,000
shares), David R. Goss (35,000 shares), Tony M. Shelby (35,000 shares),
David M. Shear (35,000 shares), Jim D. Jones (35,000 shares), and four
other employees (130,000 shares), copies of which will be provided to the
Commission upon request.
|
|
10.12
|
Nonqualified
Stock Option Agreement, dated June 19, 2006, between LSB Industries, Inc.
and Dan Ellis which the Company hereby incorporates by reference from
Exhibit 99.1 to the Company’s Form S-8, dated September 10,
2007.
|
|
10.13
|
Nonqualified
Stock Option Agreement, dated June 19, 2006, between LSB Industries, Inc.
and John Bailey which the Company hereby incorporates by reference from
Exhibit 99.2 to the Company’s Form S-8, dated September 10,
2007.
|
|
10.14
|
Severance
Agreement, dated January 17, 1989 between the Company and Jack E. Golsen.
which the Company hereby incorporates by reference from Exhibit 10.13 to
the Company’s Form 10-K for the year ended December 31, 2005. The Company
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.
|
|
10.15
|
Employment
Agreement and Amendment to Severance Agreement dated January 12, 1989
between the Company and Jack E. Golsen, dated March 21, 1996 which the
Company hereby incorporates by reference from Exhibit 10.15 to the
Company's Form 10-K for fiscal year ended December 31, 1995. See SEC file
number 001-07677.
|
|
10.16
|
First
Amendment to Employment Agreement, dated April 29, 2003 between the
Company and Jack E. Golsen, which the Company hereby incorporates by
reference from Exhibit 10.52 to the Company's Form 10-K/A Amendment No.1
for the fiscal year ended December 31,
2002.
|
116
|
10.17
|
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 the Company'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. See SEC file number
001-07677.
|
|
10.18
|
First
Amendment to Baytown Nitric Acid Project and 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
the Company's Form 10-K for the year ended December 31, 1998. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF #7927, DATED JUNE 9, 1999 GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. See SEC file number
001-07677.
|
|
10.19
|
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 the Company'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. See SEC file number
001-07677.
|
|
10.20
|
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 the Company'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. See SEC file number
001-07677.
|
|
10.21
|
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 Landes Bank, 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 the
Company'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. See SEC file number
001-07677.
|
117
|
10.22
|
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 the Company's Form
10-Q for the fiscal quarter ended June 30, 1997. See SEC file number
001-07677.
|
|
10.23
|
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 the Company's Form 10-Q for
the fiscal quarter ended June 30, 1997. See SEC file number
001-07677.
|
|
10.24
|
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 the Company's Form 10-Q for the fiscal quarter ended June
30, 1997. See SEC file number 001-07677.
|
|
10.25
|
Loan
Agreement dated December 23, 1999 between Climate Craft, Inc. and the City
of Oklahoma City, which the Company hereby incorporates by reference from
Exhibit 10.49 to the Company's Amendment No. 2 to its 1999 Form 10-K. See
SEC file number 001-07677.
|
|
10.26
|
Assignment,
dated May 8, 2001 between Climate Master, Inc. and Prime Financial
Corporation, which the Company hereby incorporates by reference from
Exhibit 10.2 to the Company's Form 10-Q for the fiscal quarter ended March
31, 2001.
|
|
10.27
|
Agreement
for Purchase and Sale, dated April 10, 2001 by and between Prime Financial
Corporation and Raptor Master, L.L.C. which the Company hereby
incorporates by reference from Exhibit 10.3 to the Company's Form 10-Q for
the fiscal quarter ended March 31, 2001.
|
|
10.28
|
Amended
and Restated Lease Agreement, dated May 8, 2001 between Raptor Master,
L.L.C. and Climate Master, Inc. which the Company hereby incorporates by
reference from Exhibit 10.4 to the Company's Form 10-Q for the fiscal
quarter ended March 31, 2001.
|
|
10.29
|
Option
Agreement, dated May 8, 2001 between Raptor Master, L.L.C. and Climate
Master, Inc., which the Company hereby incorporates by reference from
Exhibit 10.5 to the Company's Form 10-Q for the fiscal quarter ended March
31, 2001.
|
|
10.30
|
First
Amendment to Amended and Restated Lease Agreement, dated April 1, 2007,
between Raptor Master, L.L.C. and Climate Master, Inc.
|
|
10.31
|
Stock
Purchase Agreement, dated September 30, 2001 by and between Summit
Machinery Company and SBL Corporation, which the Company hereby
incorporates by reference from Exhibit 10.1 to the Company' Form 10-Q for
the fiscal quarter ended September 30,
2001.
|
118
|
10.32
|
Asset
Purchase Agreement, dated October 22, 2001 between Orica USA, Inc. and El
Dorado Chemical Company and Northwest Financial Corporation, which the
Company hereby incorporates by reference from Exhibit 99.1 to the
Company's Form 8-K dated December 28, 2001. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF 12179, DATED MAY 24, 2006, GRANTING A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
|
|
10.33
|
AN
Supply Agreement, dated November 1, 2001 between Orica USA, Inc. and El
Dorado Company, which the Company hereby incorporates by reference from
Exhibit 99.2 to the Company's Form 8-K dated December 28, 2001. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF 12179, DATED MAY 24, 2006, AND CF 19661 DATED
MARCH 23, 2007, GRANTING A REQUEST FOR CONFIDENTIAL TREATMENT UNDER
THE FREEDOM OF INFORMATION ACT AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
|
|
10.34
|
Second
Amendment to AN Supply Agreement, executed August 24, 2006, to be
effective as of January 1, 2006, between Orica USA, Inc. and El Dorado
Company which the Company hereby incorporates by reference from Exhibit
10.1 to the Company’s Form 10-Q for the
fiscal quarter ended September 30, 2006. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A
COMMISSION ORDER CF 19661, DATED MARCH 23, 2007,
GRANTING REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION
ACT.
|
|
10.35
|
Agreement,
dated August 1, 2007,
between El Dorado Chemical Company and United
Steelworkers of America International
Union AFL-CIO and its Local 13-434.
|
|
10.36
|
Agreement,
dated October 17, 2007,
between El Dorado Chemical Company and International Association of
Machinists and Aerospace Workers, AFL-CIO Local No. 224.
|
|
10.37
|
Agreement,
dated November 12, 2007,
between United
Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied
Industrial and Service Workers International
Union, AFL-CIO, CLC, on
behalf of Local
No. 00417
and Cherokee Nitrogen Company.
|
|
10.38
|
Warrant,
dated May 24, 2002 granted by the Company to a Lender for the right to
purchase up to 132,508 shares of the Company's common stock at an exercise
price of $0.10 per share, which the Company hereby incorporates by
reference from Exhibit 99.1 to the Company's Form 8-K, dated May 24, 2002.
Four substantially similar Warrants, dated May 24, 2002 for the purchase
of an aggregate additional 463,077 shares at an exercise price of $0.10
were issued. Copies of these Warrants will be provided to the Commission
upon request.
|
119
|
10.39
|
Asset
Purchase Agreement, dated as of December 6, 2002 by and among Energetic
Systems Inc. LLC, UTeC Corporation, LLC, SEC Investment Corp. LLC,
DetaCorp Inc. LLC, Energetic Properties, LLC, Slurry Explosive
Corporation, Universal Tech Corporation, El Dorado Chemical Company, LSB
Chemical Corp., LSB Industries, Inc. and Slurry Explosive Manufacturing
Corporation, LLC, which the Company hereby incorporates by reference from
Exhibit 2.1 to the Company's Form 8-K, dated December 12, 2002. The asset
purchase agreement contains a brief list identifying all schedules and
exhibits to the asset purchase agreement. Such schedules and exhibits are
not filed, and the Registrant agrees to furnish supplementally a copy of
the omitted schedules and exhibits to the commission upon
request.
|
|
10.40
|
Anhydrous
Ammonia Sales Agreement, dated effective January 3, 2005 between Koch
Nitrogen Company and El Dorado Chemical Company which the Company hereby
incorporates by reference from Exhibit 10.41 to the Company’s Form 10-K
for the year ended December 31, 2004. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF# 26082, DATED NOVEMBER 16, 2007, GRANTING CONFIDENTIAL
TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT.
|
|
10.41
|
First
Amendment to Anhydrous Ammonia Sales Agreement, dated effective August
29, 2005, between Koch Nitrogen Company and El Dorado Chemical
Company, which the Company hereby incorporates by reference from Exhibit
10.42 to the Company's Form 10-K for the fiscal year ended December 31,
2005, filed March 31, 2006. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF# 18274, DATED MARCH 23, 2007, AND CF# 20082
DATED NOVEMBER 16, 2007, GRANTING A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
|
|
10.42
|
Purchase
Confirmation, dated July 1, 2006, between Koch Nitrogen Company and
Cherokee Nitrogen Company, which the Company hereby incorporates by
reference from Exhibit 10.40 to the Company’s Form 10-K for the fiscal
year ended December 31, 2006. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF# 20082, DATED NOVEMBER 16, 2007, GRANTING CONFIDENTIAL
TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT AND THE SECURITIES EXCHANGE ACT, AS
AMENDED.
|
|
10.43
|
Second
Amendment to Anhydrous Ammonia Sales Agreement, dated November 3,
2006, between Koch Nitrogen Company and El Dorado Chemical
Company, which the Company hereby incorporates by reference from Exhibit
10.41 to the Company’s Form 10-K for the fiscal year ended December 31,
2006.. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF
COMMISSION ORDER CF# 20082, DATED NOVEMBER 16, 2007, GRANTING CONFIDENTIAL
TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF
INFORMATION ACT AND THE SECURITIES EXCHANGE ACT, AS
AMENDED.
|
120
|
10.44
|
Warrant
Agreement, dated March 25, 2003 between LSB Industries, Inc. and Jayhawk
Institutional Partners, L.P., which the Company hereby incorporates by
reference from Exhibit 10.51 to the Company's Form 10-K for the fiscal
year ended December 31, 2002.
|
|
10.45
|
Subscription
Agreement, dated March 25, 2003 by and between LSB Industries, Inc. and
Jayhawk Institutional Partners, L.P., which the Company hereby
incorporates by reference from Exhibit 10.50 to the Company's Form 10-K
for the fiscal year ended December 31, 2002.
|
|
10.46
|
Second
Amendment and Extension of Stock Purchase Option, effective July 1, 2004,
between LSB Holdings, Inc., an Oklahoma corporation and Dr. Hauri AG, a
Swiss corporation, which the Company hereby incorporates by reference from
Exhibit 10.1 to the Company’s Form 10-Q for the fiscal quarter ended
September 30, 2004.
|
|
10.47
|
Purchase
Agreement, dated March 3, 2006, by and among the Company and the investors
identified on the Schedule of Purchasers which the Company hereby
incorporates by reference from Exhibit 99.1 to the Company’s Form 8-K,
dated March 14, 2006.
|
|
10.48
|
Exchange
Agreement, dated October 6, 2006, between LSB Industries, Inc., Paul
Denby, Trustee of the Paul Denby Revocable Trust, U.A.D. 10/12/93, The
Paul J. Denby IRA, Denby Enterprises, Inc., Tracy Denby, and Paul Denby
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, 2006.
Substantially similar Exchange Agreements (each having the same exchange
rate) were entered with the following individuals or entities on the dates
indicated for the exchange of the number of shares of LSB’s Series 2
Preferred noted: October 6, 2006 - James W. Sight (35,428 shares of Series
2 Preferred), Paul Denby, Trustee of the Paul Denby Revocable Trust,
U.A.D. 10/12/93 (25,000 shares of Series 2 Preferred), The Paul J. Denby
IRA (11,000 shares of Series 2 Preferred), Denby Enterprises, Inc. (4,000
shares of Series 2 Preferred), Tracy Denby (1,000 shares of Series 2
Preferred); October 12, 2006 - Harold Seidel (10,000 shares of Series 2
Preferred); October 11, 2006 -Brent Cohen (4,000 shares of Series 2
Preferred), Brian J. Denby and Mary Denby (1,200 shares of
Series 2 Preferred), Brian J. Denby, Trustee, Money Purchase Pension Plan
(5,200 shares of Series 2 Preferred), Brian Denby, Inc. Profit Sharing
Plan (600 shares of Series 2 Preferred); October 25, 2006 -
William M. and Laurie Stern ( 400 shares of Series 2 Preferred), William
M. Stern Revocable Living Trust, UTD July 9, 1992 (1,570 shares of Series
2 Preferred), the William M. Stern IRA (2,000 shares of Series 2
Preferred), and William M. Stern, Custodian for David Stern (1,300 shares
of Series 2 Preferred), John Cregan (500 shares of Series 2 Preferred),
and Frances Berger (1,350 shares of Series 2 Preferred). Copies of the
foregoing Exchange Agreements will be provided to the Commission upon
request.
|
|
10.49
|
Purchase
Agreement, dated June 28, 2007, by and among the Company and the
investors identified on the Schedule of Purchasers attached thereto which
the Company hereby incorporates by reference from Exhibit 10.1 to the
Company’s Form 8-K, dated June 28,
2007.
|
121
|
10.50
|
Agreement,
dated November 10, 2006 by and among LSB Industries, Inc., Kent C.
McCarthy, Jayhawk Capital Management, L.L.C., Jayhawk Institutional
Partners, L.P. and Jayhawk Investments, L.P., which the Company hereby
incorporates by reference from Exhibit 99d1 to the Company’s Schedule
TO-I, filed February 9, 2007.
|
|
14.1
|
Code
of Ethics for CEO and Senior Financial Officers of Subsidiaries of LSB
Industries, Inc., which the Company hereby incorporates by reference from
Exhibit 14.1 to the Company’s Form 10-K for the fiscal year ended December
31, 2003.
|
|
21.1
|
Subsidiaries
of the Company.
|
|
23.1
|
Consent
of Independent Registered Public Accounting
Firm.
|
|
31.1
|
Certification
of Jack E. Golsen, Chief Executive Officer, pursuant to Sarbanes-Oxley Act
of 2002, Section 302.
|
|
31.2
|
Certification
of Tony M. Shelby, Chief Financial Officer, pursuant to Sarbanes-Oxley Act
of 2002, Section 302.
|
|
32.1
|
Certification
of Jack E. Golsen, Chief Executive Officer, furnished pursuant to
Sarbanes-Oxley Act of 2002, Section 906.
|
|
32.2
|
Certification
of Tony M. Shelby, Chief Financial Officer, furnished pursuant to
Sarbanes-Oxley Act of 2002, Section 906.
|
122
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
LSB
INDUSTRIES, INC.
|
|
Dated:
|
By:
|
/s/
Jack E. Golsen
|
|||
| March 13, 2008 | Jack
E. Golsen
Chairman
of the Board and
Chief
Executive Officer
(Principal
Executive Officer)
|
||||
|
Dated:
|
By:
|
/s/
Tony M. Shelby
|
|||
| March 13, 2008 | Tony
M. Shelby
Executive
Vice President of Finance
and
Chief Financial Officer
(Principal
Financial Officer)
|
||||
|
Dated:
|
By:
|
/s/
Jim D. Jones
|
|||
| March 13, 2008 | Jim
D. Jones
Senior
Vice President,
Corporate
Controller and Treasurer
(Principal
Accounting Officer)
|
||||
123
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
|
Dated:
|
By:
/s/ Jack E. Golsen
|
|
March
13, 2008
|
Jack
E. Golsen, Director
|
|
Dated:
|
By:
/s/ Tony M. Shelby
|
|
March
13, 2008
|
Tony
M. Shelby, Director
|
|
Dated:
|
By:
/s/ Barry H. Golsen
|
|
March
13, 2008
|
Barry
H. Golsen, Director
|
|
Dated:
|
By:
/s/ David R. Goss
|
|
March
13, 2008
|
David
R. Goss, Director
|
|
Dated:
|
By:
/s/ Raymond B. Ackerman
|
|
March
13, 2008
|
Raymond
B. Ackerman, Director
|
|
Dated:
|
By:
/s/ Robert C. Brown MD
|
|
March
13, 2008
|
Robert
C. Brown MD, Director
|
|
Dated:
|
By:
/s/ Charles A. Burtch
|
|
March
13, 2008
|
Charles
A. Burtch, Director
|
|
Dated:
|
By:
/s/ Robert A. Butkin
|
|
March
13, 2008
|
Robert
A. Butkin, Director
|
|
Dated:
|
By:
/s/Bernard G. Ille
|
|
March
13, 2008
|
Bernard
G. Ille, Director
|
|
Dated:
|
By:
/s/ Donald W. Munson
|
|
March
13, 2008
|
Donald
W. Munson, Director
|
|
Dated:
|
By:
/s/ Ronald V. Perry
|
|
March
13, 2008
|
Ronald
V. Perry, Director
|
|
Dated:
|
By:
/s/ Horace G. Rhodes
|
|
March
13, 2008
|
Horace
G. Rhodes, Director
|
|
Dated:
|
By:
/s/ John A. Shelley
|
|
March
13, 2008
|
John
A. Shelley, Director
|
LSB
Industries, Inc.
Consolidated
Financial Statements
And
Schedules for Inclusion in Form 10-K
For the
Fiscal Year ended December 31, 2007
|
Page
|
|
|
Financial
Statements
|
F -
2
|
|
F -
3
|
|
|
F -
5
|
|
|
F -
6
|
|
|
F -
8
|
|
|
F -
10
|
|
|
F -
73
|
|
|
Financial Statement
Schedules
|
|
|
|
|
|
F -
75
|
|
|
|
|
|
F -
80
|
Public
Accounting Firm
The Board
of Directors and Stockholders of LSB Industries, Inc.
We have
audited the accompanying consolidated balance sheets of LSB Industries, Inc. as
of December 31, 2007 and 2006, and the related consolidated statements of
income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2007. Our audits also included the financial statement
schedules listed in the Index at Item 15(a)(2). These financial statements and
schedules are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 financial statements referred to above present fairly, in all
material respects, the consolidated financial position of LSB Industries, Inc.
at December 31, 2007 and 2006, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2007, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), LSB Industries, Inc.’s internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 13, 2008
expressed an unqualified opinion thereon.
As
discussed in Notes 2, 12 and 14 to the consolidated financial statements, in
2006 the Company adopted Statement of Financial Accounting Standards No. 123
(Revised), “Share-Based Payment,” and in 2007, the Company adopted Financial
Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes.”
ERNST & YOUNG LLP
Oklahoma
City, Oklahoma
March 13,
2008
|
December
31,
|
|
2007
|
2006
|
|
(In
Thousands)
|
|
Assets
|
||||||
|
Current
assets:
|
||||||
|
Cash
and cash equivalents
|
$
|
58,224
|
$
|
2,255
|
||
|
Restricted
cash
|
203
|
2,479
|
||||
|
Accounts
receivable, net
|
70,577
|
67,571
|
||||
|
Inventories
|
56,876
|
45,449
|
||||
|
Supplies,
prepaid items and other:
|
||||||
|
Prepaid
insurance
|
3,350
|
3,443
|
||||
|
Precious
metals
|
10,935
|
6,406
|
||||
|
Supplies
|
3,849
|
3,424
|
||||
|
Other
|
1,464
|
1,468
|
||||
|
Total
supplies, prepaid items and other
|
19,598
|
14,741
|
||||
|
Deferred
income taxes
|
10,030
|
-
|
||||
|
Total
current assets
|
215,508
|
132,495
|
||||
|
Property,
plant and equipment, net
|
79,692
|
76,404
|
||||
|
Other
assets:
|
||||||
|
Noncurrent
restricted cash
|
-
|
1,202
|
||||
|
Debt
issuance and other debt-related costs, net
|
4,639
|
2,221
|
||||
|
Investment
in affiliate
|
3,426
|
3,314
|
||||
|
Goodwill
|
1,724
|
1,724
|
||||
|
Other,
net
|
2,565
|
2,567
|
||||
|
Total
other assets
|
12,354
|
11,028
|
||||
|
$
|
307,554
|
$
|
219,927
|
(Continued
on following page)
|
December
31,
|
|
2007
|
2006
|
|
(In
Thousands)
|
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
39,060
|
$
|
42,870
|
|||
|
Short-term
financing and drafts payable
|
919
|
2,986
|
|||||
|
Accrued
and other liabilities
|
38,942
|
26,816
|
|||||
|
Current
portion of long-term debt
|
1,043
|
11,579
|
|||||
|
Total
current liabilities
|
79,964
|
84,251
|
|||||
|
Long-term
debt
|
121,064
|
86,113
|
|||||
|
Noncurrent
accrued and other liabilities:
|
|||||||
|
Deferred
income taxes
|
5,330
|
-
|
|||||
|
Other
|
6,913
|
5,929
|
|||||
|
12,243
|
5,929
|
||||||
|
Commitments
and contingencies (Note 13)
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Series
B 12% cumulative, convertible preferred stock, $100 par value; 20,000
shares issued and outstanding
|
2,000
|
2,000
|
|||||
|
Series
2 $3.25 convertible, exchangeable Class C preferred stock, $50
stated value; 517,402 shares issued at December 31, 2006
|
-
|
25,870
|
|||||
|
Series
D 6% cumulative, convertible Class C preferred stock, no par value;
1,000,000 shares issued and outstanding
|
1,000
|
1,000
|
|||||
|
Common
stock, $.10 par value; 75,000,000 shares authorized, 24,466,506 shares
issued (20,215,339 at December 31, 2006)
|
2,447
|
2,022
|
|||||
|
Capital
in excess of par value
|
123,336
|
79,838
|
|||||
|
Accumulated
other comprehensive loss
|
(411
|
)
|
(701
|
)
|
|||
|
Accumulated
deficit
|
(16,437
|
)
|
(47,962
|
)
|
|||
|
111,935
|
62,067
|
||||||
|
Less
treasury stock, at cost:
|
|||||||
|
Series
2 preferred, 18,300 shares at December 31, 2006
|
-
|
797
|
|||||
|
Common
stock, 3,448,518 shares (3,447,754 at December 31, 2006)
|
17,652
|
17,636
|
|||||
|
Total
stockholders’ equity
|
94,283
|
43,634
|
|||||
|
$
|
307,554
|
$
|
219,927
|
See
accompanying notes.
|
Year
ended December 31,
|
|||||
|
2007
|
2006
|
2005
|
|||
|
(In
Thousands, Except Per Share
Amounts)
|
|||||
|
Net
sales
|
$
|
586,407
|
$
|
491,952
|
$
|
397,115
|
|||||
|
Cost
of sales
|
453,814
|
401,090
|
330,349
|
||||||||
|
Gross
profit
|
132,593
|
90,862
|
66,766
|
||||||||
|
Selling,
general and administrative expense
|
75,033
|
64,134
|
53,453
|
||||||||
|
Provisions
for losses on accounts receivable
|
858
|
426
|
810
|
||||||||
|
Other
expense
|
1,186
|
722
|
332
|
||||||||
|
Other
income
|
(3,495
|
)
|
(1,559
|
)
|
(2,682
|
)
|
|||||
|
Operating
income
|
59,011
|
27,139
|
14,853
|
||||||||
|
Interest
expense
|
12,078
|
11,915
|
11,407
|
||||||||
|
Non-operating
other income, net
|
(1,264
|
)
|
(624
|
)
|
(1,561
|
)
|
|||||
|
Income
from continuing operations before provisions for income taxes and equity
in earnings of affiliate
|
48,197
|
15,848
|
5,007
|
||||||||
|
Provisions
for income taxes
|
2,540
|
|
901
|
|
118
|
|
|||||
|
Equity
in earnings of affiliate
|
(877
|
) |
(821
|
) |
(745
|
) | |||||
|
Income
from continuing operations
|
46,534
|
15,768
|
5,634
|
||||||||
|
Net
loss (income) from discontinued operations
|
(348
|
)
|
253
|
644
|
|||||||
|
Net
income
|
46,882
|
15,515
|
4,990
|
||||||||
|
Dividends,
dividend requirements and stock dividends on preferred
stock
|
5,608
|
2,630
|
2,283
|
||||||||
|
Net
income applicable to common stock
|
$
|
41,274
|
$
|
12,885
|
$
|
2,707
|
|||||
|
Income
(loss) per common share:
|
|||||||||||
|
Basic:
|
|||||||||||
|
Income
from continuing operations
|
$
|
2.09
|
$
|
.92
|
$
|
.25
|
|||||
|
Net
income (loss) from discontinued operations
|
.02
|
(.02
|
)
|
(.05
|
)
|
||||||
|
Net
income
|
$
|
2.11
|
$
|
.90
|
$
|
.20
|
|||||
|
Diluted:
|
|||||||||||
|
Income
from continuing operations
|
$
|
1.82
|
$
|
.77
|
$
|
.22
|
|||||
|
Net
income (loss) from discontinued operations
|
.02
|
(.01
|
)
|
(.04
|
)
|
||||||
|
Net
income
|
$
|
1.84
|
$
|
.76
|
$
|
.18
|
See
accompanying notes.
|
Common Stock
Shares
|
Non-
Redeemable
Preferred
Stock
|
Common Stock
Par
Value
|
Capital in Excess
of
Par
Value
|
Accumulated
Other
Comprehensive
Loss
|
Accumulated Deficit
|
Treasury Stock
-
Preferred
|
Treasury Stock
-
Common
|
Total |
|
(In
Thousands)
|
|
Balance
at December 31, 2004
|
16,401
|
$
|
34,177
|
$
|
1,640
|
$
|
57,352
|
$
|
(1,280
|
)
|
$
|
(65,323
|
)
|
$
|
(200
|
)
|
$
|
(16,451
|
)
|
$
|
9,915
|
|||||||
|
Net
income
|
4,990
|
4,990
|
||||||||||||||||||||||||||
|
Amortization
of cash flow hedge
|
290
|
290
|
||||||||||||||||||||||||||
|
Total
comprehensive income
|
5,280
|
|||||||||||||||||||||||||||
|
Exercise
of stock warrants
|
586
|
59
|
(59
|
)
|
-
|
|||||||||||||||||||||||
|
Exercise
of stock options
|
89
|
8
|
240
|
248
|
||||||||||||||||||||||||
|
Acquisition
of 13,300 shares of non-redeemable preferred stock
|
(597
|
)
|
(597
|
)
|
||||||||||||||||||||||||
|
Conversion
of 156 shares of redeemable
preferred
stock to common stock
|
6
|
1
|
14
|
15
|
||||||||||||||||||||||||
|
Balance
at December 31, 2005
|
17,082
|
34,177
|
1,708
|
57,547
|
(990
|
)
|
(60,333
|
)
|
(797
|
)
|
(16,451
|
)
|
14,861
|
|||||||||||||||
|
Net
income
|
15,515
|
15,515
|
||||||||||||||||||||||||||
|
Amortization
of cash flow hedge
|
289
|
289
|
||||||||||||||||||||||||||
|
Total
comprehensive income
|
15,804
|
|||||||||||||||||||||||||||
|
Dividends
paid on preferred stock
|
(262
|
)
|
(262
|
)
|
||||||||||||||||||||||||
|
Conversion
of debentures to common stock
|
1,977 |
198 |
12,812 |
13,010 |
||||||||||||||||||||||||
|
Exercise
of stock options
|
374
|
38
|
1,445
|
(1,185
|
)
|
298
|
||||||||||||||||||||||
|
Exchange
of 104,548 shares of non-redeemable preferred
stock for 773,655 shares of common stock
|
774 |
(5,227 |
) |
77 |
8,032 |
(2,882 |
) |
- |
||||||||||||||||||||
|
Acquisition
of 1,600 shares of non-redeemable preferred
stock
|
(80
|
)
|
(15
|
)
|
(95
|
)
|
||||||||||||||||||||||
|
Conversion
of 188 shares of redeemable preferred stock
to common stock
|
8
|
1
|
17
|
18
|
||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
20,215
|
28,870
|
2,022
|
79,838
|
(701
|
)
|
(47,962
|
)
|
(797
|
)
|
(17,636
|
)
|
43,634
|
(Continued
on following page)
F-6
|
Common Stock
Shares
|
Non-
Redeemable
Preferred
Stock
|
Common Stock
Par
Value
|
Capital in Excess
of
Par
Value
|
Accumulated
Other
Comprehensive
Loss
|
Accumulated Deficit
|
Treasury Stock
-
Preferred
|
Treasury Stock
-
Common
|
Total |
|
Net
income
|
$
|
46,882
|
$
|
46,882
|
|||||||||||||||||||||||||
|
Amortization
of cash flow hedge
|
290
|
290
|
|||||||||||||||||||||||||||
|
Total
comprehensive income
|
47,172
|
||||||||||||||||||||||||||||
|
Dividends
paid on preferred stock
|
(2,934
|
)
|
(2,934
|
)
|
|||||||||||||||||||||||||
|
Cumulative
effect adjustment in accordance with
FIN 48
|
(120 |
) |
(120 |
) |
|||||||||||||||||||||||||
|
Stock-based
compensation
|
421
|
421
|
|||||||||||||||||||||||||||
|
Conversion
of debentures to common stock
|
565 |
57 |
3,681 |
3,738 |
|||||||||||||||||||||||||
|
Exercise
of stock options
|
582
|
58
|
1,480
|
(16
|
)
|
1,522
|
|||||||||||||||||||||||
|
Exercise
of warrant
|
113
|
12
|
381
|
393
|
|||||||||||||||||||||||||
|
Income
tax benefit from exercise of stock options
|
1,740 |
1,740 |
|||||||||||||||||||||||||||
|
Exchange
of 305,807 shares of non-redeemable preferred stock for 2,262,965 shares
of common stock
|
2,263 |
(15,290 |
) |
226 |
27,367 |
(12,303 |
) |
- |
|||||||||||||||||||||
|
Conversion
of 167,475 shares of non-redeemable preferred stock for 724,993 shares of
common stock
|
725 |
(8,374 |
) |
72 |
8,301 |
(1 |
) |
||||||||||||||||||||||
|
Redemption
of 25,820 shares of non-redeemable preferred stock
|
(1,291 |
) |
(1,291 |
) |
|||||||||||||||||||||||||
|
Cancellation
of 18,300 shares of non-redeemable preferred stock (1)
|
(915 |
) |
118 |
797 |
- |
||||||||||||||||||||||||
|
Conversion
of 98 shares of redeemable preferred stock to common stock
|
4 |
9 |
9 |
||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
24,467
|
$
|
3,000
|
$
|
2,447
|
$
|
123,336
|
$
|
(411
|
)
|
$
|
(16,437
|
)
|
$
|
-
|
$
|
(17,652
|
)
|
$
|
94,283
|
See
accompanying notes.
|
(1)
These shares represent the shares of Series 2 Preferred previously held as
treasury stock. As the result of the cancellation, no shares of Series 2
Preferred were issued and outstanding at December 31,
2007.
|
|
Year
ended December 31,
|
|||||
|
2007
|
2006
|
2005
|
|||
|
(In
Thousands)
|
|||||
|
Net
income
|
$
|
46,882
|
$
|
15,515
|
$
|
4,990
|
|||||
|
Adjustments
to reconcile net income to net cash provided by continuing operating
activities:
|
|||||||||||
|
Net
loss (income) from discontinued operations
|
(348
|
)
|
253
|
644
|
|||||||
|
Deferred
income taxes
|
(4,700
|
)
|
-
|
-
|
|||||||
|
Loss
(gains) on sales and disposals of property and equipment
|
378
|
(12
|
)
|
(714
|
)
|
||||||
|
Gain
on property insurance recoveries
|
-
|
-
|
(1,618
|
)
|
|||||||
|
Depreciation
of property, plant and equipment
|
12,271
|
11,381
|
10,875
|
||||||||
|
Amortization
|
2,082
|
1,168
|
1,151
|
||||||||
|
Stock-based
compensation
|
421
|
-
|
-
|
||||||||
|
Provisions
for losses on accounts receivable
|
858
|
426
|
810
|
||||||||
|
Provisions
for (realization of) losses on inventory
|
(384
|
)
|
(711
|
)
|
239
|
||||||
|
Provisions
for impairment on long-lived assets
|
250
|
286
|
237
|
||||||||
|
Provision
for (realization of) losses on firm sales commitments
|
(328
|
)
|
328
|
-
|
|||||||
|
Equity
in earnings of affiliate
|
(877
|
)
|
(821
|
)
|
(745
|
)
|
|||||
|
Distributions
received from affiliate
|
765
|
875
|
488
|
||||||||
|
Changes
in fair value of interest rate caps
|
580
|
44
|
162
|
||||||||
|
Other
|
-
|
-
|
59
|
||||||||
|
Cash
provided (used) by changes in assets and liabilities (net
of effects of discontinued operations):
|
|||||||||||
|
Accounts
receivable
|
(4,392
|
)
|
(18,066
|
)
|
(8,664
|
)
|
|||||
|
Inventories
|
(11,044
|
)
|
(7,287
|
)
|
(8,888
|
)
|
|||||
|
Other
supplies and prepaid items
|
(4,857
|
)
|
(1,871
|
)
|
798
|
||||||
|
Accounts
payable
|
(5,110
|
)
|
11,183
|
3,990
|
|||||||
|
Customer
deposits
|
6,587
|
1,011
|
(1,494
|
)
|
|||||||
|
Deferred
rent expense
|
(931
|
)
|
122
|
6,047
|
|||||||
|
Other
current and noncurrent liabilities
|
8,696
|
3,868
|
2,608
|
||||||||
|
Net
cash provided by continuing operating activities
|
46,799
|
17,692
|
10,975
|
||||||||
|
Cash
flows from continuing investing activities
|
|||||||||||
|
Capital
expenditures
|
(14,808
|
)
|
(14,701
|
)
|
(15,315
|
)
|
|||||
|
Proceeds
from property insurance recoveries
|
-
|
-
|
2,888
|
||||||||
|
Proceeds
from sales of property and equipment
|
271
|
147
|
2,355
|
||||||||
|
Proceeds
from (deposits of) current and noncurrent restricted cash
|
3,478
|
(3,504
|
)
|
(19
|
)
|
||||||
|
Purchase
of interest rate cap contracts
|
(621
|
)
|
-
|
(590
|
)
|
||||||
|
Other
assets
|
(168
|
)
|
(363
|
)
|
107
|
||||||
|
Net
cash used by continuing investing activities
|
(11,848
|
)
|
(18,421
|
)
|
(10,574
|
)
|
(Continued
on following page)
|
Year
ended December 31,
|
|
2007
|
2006
|
2005
|
|
(In
Thousands)
|
|
Cash
flows from continuing financing activities
|
|||||||||||
|
Proceeds
from revolving debt facilities
|
$
|
529,766
|
$
|
460,335
|
$
|
363,671
|
|||||
|
Payments
on revolving debt facilities, including fees
|
(556,173
|
)
|
(466,445
|
)
|
(359,226
|
)
|
|||||
|
Proceeds
from 5.5% convertible debentures, net of fees
|
56,985
|
-
|
-
|
||||||||
|
Proceeds
from Secured Term Loan
|
50,000
|
-
|
-
|
||||||||
|
Proceeds
from 7% convertible debentures, net of fees
|
-
|
16,876
|
-
|
||||||||
|
Proceeds
from other long-term debt, net of fees
|
2,424
|
8,218
|
3,584
|
||||||||
|
Payments
on Senior Secured Loan
|
(50,000
|
)
|
-
|
-
|
|||||||
|
Acquisition
of 10.75% Senior Unsecured Notes
|
-
|
(13,300
|
)
|
-
|
|||||||
|
Payments
on other long-term debt
|
(7,781
|
)
|
(6,853
|
)
|
(3,267
|
)
|
|||||
|
Payments
of debt issuance costs
|
(1,403
|
)
|
(356
|
)
|
(225
|
)
|
|||||
|
Proceeds
from short-term financing and drafts payable
|
1,456
|
3,984
|
5,061
|
||||||||
|
Payments
on short-term financing and drafts payable
|
(3,523
|
)
|
(3,788
|
)
|
(5,978
|
)
|
|||||
|
Proceeds
from exercise of stock options
|
1,522
|
298
|
248
|
||||||||
|
Proceeds
from exercise of warrant
|
393
|
-
|
-
|
||||||||
|
Excess
income tax benefit on stock options exercised
|
1,740
|
-
|
-
|
||||||||
|
Dividends
paid on preferred stock
|
(2,934
|
)
|
(262
|
)
|
-
|
||||||
|
Acquisition
of non-redeemable preferred stock
|
(1,292
|
)
|
(95
|
)
|
(597
|
)
|
|||||
|
Net
cash provided (used) by continuing financing activities
|
21,180
|
(1,388
|
)
|
3,271
|
|||||||
|
Cash
flows of discontinued operations:
|
|||||||||||
|
Operating
cash flows
|
(162
|
)
|
(281
|
)
|
(39
|
)
|
|||||
|
Net
increase (decrease) in cash and cash equivalents
|
55,969
|
(2,398
|
)
|
3,633
|
|||||||
|
Cash
and cash equivalents at beginning of year
|
2,255
|
4,653
|
1,020
|
||||||||
|
Cash
and cash equivalents at end of year
|
$
|
58,224
|
$
|
2,255
|
$
|
4,653
|
Supplemental
cash flow information:
|
Cash
payments for:
|
|||||||||||
|
Interest
on long-term debt and other
|
$
|
9,162
|
$
|
11,084
|
$
|
10,291
|
|||||
|
Income
taxes, net of refunds
|
$
|
1,646
|
$
|
445
|
$
|
-
|
|||||
|
Noncash
investing and financing activities:
|
|||||||||||
|
Receivable
from sale of property and equipment
|
$
|
-
|
$
|
182
|
$
|
-
|
|||||
|
Debt
issuance costs
|
$
|
3,026
|
$
|
1,190
|
$
|
-
|
|||||
|
Accounts
payable and other long-term debt associated with purchases of property,
plant and equipment
|
$
|
1,937
|
$
|
149
|
$
|
1,036
|
|||||
|
Debt
issuance costs associated with 7% convertible debentures converted to
common stock
|
$
|
266
|
$
|
998
|
$
|
-
|
|||||
|
7%
convertible debentures converted to common stock
|
$
|
4,000
|
$
|
14,000
|
$
|
-
|
|||||
|
Series
2 preferred stock converted to common stock of which $12,303,000 and
$2,882,000 was charged to accumulated deficit in 2007 and 2006,
respectively
|
$ |
27,593 |
$ |
8,109 |
$ |
- |
See
accompanying notes.
The
accompanying consolidated financial statements include the accounts of LSB
Industries, Inc. (the “Company”, “We”, “Us”, or “Our”) and its subsidiaries. We
are a manufacturing, marketing and engineering company which is primarily
engaged, through our wholly-owned subsidiary ThermaClime, Inc. (“ThermaClime”)
and its subsidiaries, in the manufacture and sale of geothermal and water source
heat pumps and air handling products (the “Climate Control Business”) and the
manufacture and sale of chemical products (the “Chemical Business”). The Company
and ThermaClime are holding companies with no significant assets or operations
other than cash and cash equivalents and our investments in our subsidiaries.
Entities that are 20% to 50% owned and for which we have significant influence
are accounted for on the equity method. All material intercompany accounts and
transactions have been eliminated.
2. Summary
of Significant Accounting Policies
Use of Estimates - The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles (“GAAP”) 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.
During
2007, we had the following changes in accounting estimates:
|
·
|
as
discussed in Note 12, we reversed the valuation allowance on our deferred
tax balances which resulted in recognition of a deferred tax benefit of
$4,700,000 which is included in our provision for income taxs
and
|
|
·
|
the
recognition of $1,005,000 of additional state income taxes included in our
provision for income taxes as discussed in Note 12 – Income
Taxes.
|
The net
effect of these changes in accounting estimates increased income from continuing
operations and net income by $3,695,000 for 2007. In addition, these changes in
accounting estimates increased basic and diluted net income per share by $0.19
and $0.16, respectively, for 2007.
Cash and Cash Equivalents -
Short-term investments, which consist of highly liquid investments with
original maturities of three months or less, are considered cash equivalents. We
primarily utilize a cash management system with a series of separate accounts
consisting of several “zero-balance” disbursement accounts for funding of
payroll and accounts payable. As a result of our cash management system, checks
issued, but not presented to the banks for payment, may create negative book
cash balances. At December 31, 2006, outstanding checks in excess of related
book cash balances (negative book cash balances) of $5,849,000 were included in
current portion of long-term debt because these accounts were funded primarily
by our Working Capital Revolver Loan.
Current and Noncurrent Restricted
Cash - Restricted cash consists of cash balances that are legally
restricted or designated by the Company for specific purposes. At December 31,
2007, we had restricted cash of $203,000 primarily to fund an unrealized loss on
exchange-traded
2. Summary
of Significant Accounting Policies (continued)
futures
contracts. At December 31, 2006, we had restricted cash totaling $3,681,000 of
which $1,202,000 is classified as noncurrent since it was used for capital
expenditures in the Climate Control Business. A portion of the current
restricted cash was used for working capital while the remaining balance was to
fund an unrealized loss on exchange-traded futures contracts.
Accounts Receivable and Credit
Risk - Sales to contractors and independent sales representatives are
generally subject to a mechanic’s lien in the Climate Control Business. Other
sales are generally unsecured. Credit is extended to customers based on an
evaluation of the customer’s financial condition and other factors. Credit
losses are provided for in the consolidated financial statements based on
historical experience and periodic assessment of outstanding accounts
receivable, particularly those accounts which are past due (determined based
upon how recently payments have been received). Our periodic assessment of
accounts and credit loss provisions are based on our best estimate of amounts
that are not recoverable.
Inventories - Inventories are
priced at the lower of cost or market, with cost being determined using the
first-in, first-out (“FIFO”) basis. Finished goods and work-in-process
inventories include material, labor, and manufacturing overhead costs. At
December 31, 2007 and 2006, we had inventory reserves for certain slow-moving
inventory items (primarily Climate Control products) and inventory reserves for
certain nitrogen-based inventories provided by our Chemical Business because
cost exceeded the net realizable value.
Precious Metals - Precious
metals are used as a catalyst in the Chemical Business manufacturing
process. Precious metals are carried at cost, with cost being determined
using the FIFO basis. Because some of the catalyst consumed in the
production process cannot be readily recovered and the amount and timing of
recoveries are not predictable, we follow the practice of expensing precious
metals as they are consumed. Occasionally, during major maintenance or capital
projects, we may be able to perform procedures to recover precious metals
(previously expensed) which have accumulated over time within the manufacturing
equipment.
Property, Plant and Equipment -
Property, plant and equipment are carried at cost. For financial
reporting purposes, depreciation is primarily computed using the straight-line
method over the estimated useful lives of the assets. Leases meeting capital
lease criteria have been capitalized and included in property, plant and
equipment. Amortization of assets under capital leases is included in
depreciation expense. No provision for depreciation is made on construction in
progress or capital spare parts until such time as the relevant assets are put
into service. Maintenance, repairs and minor renewals are charged to operations
while major renewals and improvements are capitalized in property, plant and
equipment.
Impairment of Long-Lived Assets -
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amounts may not be recoverable. If
assets to be held and used are considered to be impaired, the impairment to be
recognized is the amount by which the carrying amounts of the assets exceed the
fair values of the assets as measured by the present value of future net cash
flows expected to be generated by the assets or their appraised value. Assets to
be disposed of are reported at the lower of the carrying amounts
2. Summary
of Significant Accounting Policies (continued)
of the
assets or fair values less costs to sell. At December 31, 2007, we had no
long-lived assets that met the criteria presented in Statement of Financial
Accounting Standards (“SFAS”) 144 to be classified as assets held for
sale.
We have
obtained estimates from external sources and made internal estimates based on
inquiry and other techniques of the fair values of certain capital spare parts
and idle assets in our Chemical Business and certain non-core equipment included
in our Corporate assets in order to determine recoverability of the carrying
amounts of such assets.
Debt Issuance and Other Debt-Related
Costs - Debt issuance and other debt-related costs are amortized over the
term of the associated debt instrument except for the cost of interest rate
caps. Interest rate cap contracts that are free-standing derivatives are
accounted for on a mark-to-market basis in accordance with SFAS
133.
Goodwill - Goodwill is
reviewed for impairment at least annually in accordance with SFAS 142. As of
December 31, 2007 and 2006, goodwill was $1,724,000 of which $103,000 and
$1,621,000 relates to business acquisitions in prior periods in the Climate
Control and Chemical Businesses, respectively.
Accrued Insurance Liabilities -
We are self-insured up to certain limits for group health, workers’
compensation and general liability claims. Above these limits, we have
commercial insurance coverage for our contractual exposure on group health
claims and statutory limits under workers’ compensation obligations. We also
carry excess umbrella insurance of $50 million for most general liability risks
excluding environmental risks. We have a separate $30 million insurance policy
covering pollution liability at our El Dorado and Cherokee Facilities. Our
accrued insurance liabilities are based on estimates of claims, which include
the incurred claims amounts plus estimates of future claims development
calculated by applying our historical claims development factors to our incurred
claims amounts. We also consider the reserves established by our insurance
adjustors and/or estimates provided by attorneys handling the claims, if any. In
addition, our accrued insurance liabilities include estimates of incurred, but
not reported, claims and other insurance-related costs. Accrued insurance
liabilities are included in accrued and other liabilities. It is possible that
the actual development of claims could exceed our estimates. Amounts recoverable
from our insurance carriers over the self-insured limits are included in
accounts receivable.
Product Warranty - Our Climate
Control Business sells equipment that has an expected life, under normal
circumstances and use that extends over several years. As such, we provide
warranties after equipment shipment/start-up covering defects in materials and
workmanship.
Generally,
the base warranty coverage for most of the manufactured equipment in the Climate
Control Business is limited to eighteen months from the date of shipment or
twelve months from the date of start-up, whichever is shorter, and to ninety
days for spare parts. The warranty provides that most equipment is required to
be returned to the factory or an authorized
2. Summary
of Significant Accounting Policies (continued)
representative
and the warranty is limited to the repair and replacement of the defective
product, with a maximum warranty of the refund of the purchase price.
Furthermore, companies within the Climate Control Business generally disclaim
and exclude warranties related to merchantability or fitness for any particular
purpose and disclaim and exclude any liability for consequential or incidental
damages. In some cases, the customer may purchase or a specific product may be
sold with an extended warranty. The above discussion is generally applicable to
such extended warranties, but variations do occur depending upon specific
contractual obligations, to certain system components, and local
laws.
Our
accounting policy and methodology for warranty arrangements is to periodically
measure and recognize the expense and liability for such warranty obligations
using a percentage of net sales, based upon our historical warranty costs. It is
possible that future warranty costs could exceed our estimates.
Changes
in our product warranty obligation are as follows:
|
Balance at Beginning of Year |
Additions-
Charged to Costs and Expenses |
Deductions- Costs Incurred |
Balance at End of
Year
|
|
(In
Thousands)
|
|
2007
|
$
|
1,251
|
$
|
3,325
|
$
|
2,632
|
$
|
1,944
|
|||||
|
2006
|
$
|
861
|
$
|
2,199
|
$
|
1,809
|
$
|
1,251
|
|||||
|
2005
|
$
|
897
|
$
|
1,491
|
$
|
1,527
|
$
|
861
|
Plant Turnaround Costs - We
expense the costs as they are incurred relating to planned major maintenance
activities (“Turnarounds”) of our Chemical Business as described as the direct
expensing method within Financial Accounting Standards Board (“FASB”) Staff
Position No. AUG AIR-1.
Executive Benefit Agreements -
We have entered into benefit agreements with certain key
executives. Costs associated with these individual benefit agreements
are accrued when they become probable over the estimated remaining service
period. Total costs accrued equal the present value of specified payments to be
made after benefits become payable.
Income Taxes - We account for
income taxes in accordance with SFAS 109 and we adopted FIN No. 48 – Accounting
for Uncertainty in Income Taxes (“FIN 48”) on January 1, 2007. We
recognize deferred tax assets and liabilities for the expected future tax
consequences attributable to tax net operating loss (“NOL”) carryforwards, tax
credit carryforwards, and differences between the financial statement carrying
amounts and the tax basis of our assets and liabilities. We establish
valuation allowances if we believe it is more-likely-than-not that some or all
of deferred tax assets will not be realized. Deferred tax assets and liabilities
are measured using
2. Summary
of Significant Accounting Policies (continued)
enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. We do not recognize a tax
benefit unless we conclude that it is more likely than not that the benefit will
be sustained on audit by the taxing authority based solely on the technical
merits of the associated tax position. If the recognition threshold is met, we
recognize a tax benefit measured at the largest amount of the tax benefit that,
in our judgment, is greater than 50% likely to be realized. We record
interest related to unrecognized tax positions in interest expense and penalties
in operating other expense.
Income
tax benefits credited to equity relate to tax benefits associated with amounts
that are deductible for income tax purposes but do not affect earnings. These
benefits are principally generated from employee exercises of non-qualified
stock options.
Contingencies - We accrue for
contingent losses when such losses are probable and reasonably estimable. In
addition, we recognize contingent gains when such gains are realized. Our
Chemical Business is subject to specific federal and state regulatory and
environmental compliance laws and guidelines. We have developed policies and
procedures related to environmental and regulatory compliance. We must
continually monitor whether we have maintained compliance with such laws and
regulations and the operating implications, if any, and amount of penalties,
fines and assessments that may result from noncompliance. Loss contingency
liabilities are included in current and noncurrent accrued and other liabilities
and are based on current estimates that may be revised in the near
term.
Asset Retirement Obligations -
We are obligated to monitor certain discharge water outlets at our Chemical
Business facilities should we discontinue the operations of a
facility. We also have certain facilities in our Chemical Business
that contain asbestos insulation around certain piping and heated surfaces which
we plan to maintain in an adequate condition to prevent leakage through our
standard repair and maintenance activities. We do not believe the annual costs
of the required monitoring and maintenance activities would be significant and
we currently have no plans to discontinue the use of these facilities and the
remaining life of the facilities is indeterminable, an asset retirement
liability has not been recognized. Currently, there is insufficient information
to estimate the fair value of the asset retirement obligations. However, we will
continue to review these obligations and record a liability when a reasonable
estimate of the fair value can be made in accordance of FASB Interpretation
(“FIN”) 47.
Stock Options - Effective
January 1, 2006, we adopted SFAS 123(R) using the modified prospective method.
Since all outstanding stock options were fully vested at December 31, 2005, the
adoption of SFAS 123(R) did not impact our consolidated financial statements.
During 2005, we accounted for those plans under the recognition and measurement
principles of APB Opinion No. 25 (“APB 25”) and related interpretations. Under
APB 25, stock-based compensation cost was not reflected in our results of
operations, as all options granted under those plans had an exercise price equal
to the market value of the underlying common stock on the date of grant.
2. Summary of Significant
Accounting Policies (continued)
We issue
new shares of common stock upon the exercise of stock options. See
“Non-Qualified Stock Option Plans” within Note 14 - Stockholders’ Equity for
discussion of non-qualified stock options granted in 2006 but were subject to
shareholders’ approval which approval was received in 2007.
The
following table illustrates the effect on net income applicable to common stock
and net income per share if we had applied the fair value recognition provisions
of SFAS 123(R) to stock-based compensation during 2005. The fair value for these
options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for 2005: risk-free interest rates of 4.64%; a dividend yield of 0;
volatility factors of the expected market price of our common stock of .75; and
a weighted average expected life of the options of 7.36 years.
For
purposes of pro forma disclosures, the estimated fair value of the qualified and
non-qualified stock options was amortized to expense over the options’ vesting
period. Since our board of directors in 2005 approved the acceleration of the
vesting schedule of both qualified and non-qualified stock options that were
unvested at December 31, 2005, the remaining portion (unvested) of the pro forma
stock-based compensation expense prior to the acceleration is included in the
deduction amount below.
|
Year
ended
December
31, 2005
|
|
(In
Thousands, Except
Per
Share Amounts)
|
|
Net
income applicable to common stock, as reported
|
$
|
2,707
|
||
|
Less
total stock-based compensation expense determined under fair value based
method for all awards, net of related tax effects
|
(530
|
)
|
||
|
Pro
forma net income applicable to common stock
|
$
|
2,177
|
||
|
Net
income per share:
|
||||
|
Basic-as
reported
|
$
|
.20
|
||
|
Basic-pro
forma
|
$
|
.16
|
||
|
Diluted-as
reported
|
$
|
.18
|
||
|
Diluted-pro
forma
|
$
|
.15
|
Revenue Recognition - We
recognize revenue for substantially all of our operations at the time title to
the goods transfers to the buyer and there remain no significant future
performance obligations by us. Revenue relating to construction contracts is
recognized using the percentage-of-completion method based primarily on contract
costs incurred to date compared with total estimated contract costs. Changes to
total estimated contract costs or losses, if any, are recognized in the period
in which they are determined. Sales of warranty contracts are recognized as
revenue ratably over the life of the contract. See discussion above under
“Product Warranty” for our accounting policy for recognizing warranty
expense.
2. Summary
of Significant Accounting Policies (continued)
Recognition of Insurance Recoveries -
If an insurance claim relates to a recovery of our losses, we recognize
the recovery when it is probable and reasonably estimable. If our insurance
claim relates to a contingent gain, we recognize the recovery when it is
realized.
Cost of Sales - Cost of sales
includes materials, labor and overhead costs to manufacture the products sold
plus inbound freight, purchasing and receiving costs, inspection costs, internal
transfer costs and warehousing costs (excluding certain handling costs directly
related to loading product being shipped to customers in our Chemical Business
which are included in selling, general and administrative expense). In addition,
recoveries and gains from precious metals (Chemical Business), sales of material
scrap (Climate Control Business), and business interruption insurance claims are
reductions to cost of sales.
Selling, General and Administrative
Expense - Selling, general and administrative expense (“SG&A”)
includes costs associated with the sales, marketing and administrative
functions. Such costs include personnel costs, including benefits, advertising
costs, commission expenses, warranty costs, office and occupancy costs
associated with the sales, marketing and administrative functions. SG&A also
includes outbound freight in our Climate Control Business and certain handling
costs directly related to product being shipped to customers in our Chemical
Business. These handling costs primarily consist of personnel costs for loading
product into transportation equipment, rent and maintenance costs related to the
transportation equipment, and certain indirect costs.
Shipping and Handling Costs -
For the Chemical Business in 2007, 2006 and 2005, shipping costs of
$15,209,000, $17,448,000 and $10,564,000, respectively, are included in net
sales as these costs relate to amounts billed to our customers. In addition, in
2007, 2006, and 2005, handling costs of $5,249,000, $4,950,000 and $4,177,000,
respectively, are included in SG&A as discussed above under “Selling,
General and Administrative Expense.” For the Climate Control Business, shipping
and handling costs of $11,057,000, $10,326,000 and $6,396,000 are included in
SG&A for 2007, 2006 and 2005, respectively.
Advertising Costs - Costs in
connection with advertising and promotion of our products are expensed as
incurred. Such costs amounted to $1,791,000 in 2007, $1,233,000 in 2006 and
$1,402,000 in 2005.
Derivatives, Hedges and Financial
Instruments - We account for derivatives in accordance with SFAS 133,
which requires the recognition of derivatives in the balance sheet and the
measurement of these instruments at fair value. Changes in fair value of
derivatives are recorded in results of operations unless the normal purchase or
sale exceptions apply or hedge accounting is elected.
In 1997,
we entered into an interest rate forward agreement to effectively fix the
interest rate of a long-term lease commitment (not for trading purposes). In
1999, we executed a long-term lease agreement (initial lease term of ten years)
and terminated the forward agreement at a net cost of
2. Summary
of Significant Accounting Policies (continued)
$2.8
million. We historically accounted for this cash flow hedge under the deferral
method (as an adjustment of the initial term lease rentals). Upon adoption of
SFAS 133 in 2001, the remaining deferred cost amount was reclassified from other
assets to accumulated other comprehensive loss and is being amortized to
operations over the term of the lease arrangement. At December 31, 2007
and 2006, accumulated other comprehensive loss consisted of the remaining
deferred cost of $411,000 and $701,000, respectively. The amounts amortized were
$290,000, $289,000 and $290,000 for 2007, 2006 and 2005, respectively, and are
included in SG&A. There were no income tax benefits allocated to these
expenses. For 2008, we currently expect approximately $290,000 to be amortized
to operations.
In March
2005, we purchased two interest rate cap contracts for a cost of $590,000. In
April 2007, we purchased two interest rate cap contracts for a cost of $621,000.
These contracts are free-standing derivatives and are accounted for on a
mark-to-market basis in accordance with SFAS 133. At December 31, 2007, and
2006, the market values of these contracts were $426,000 and $385,000,
respectively, and are included in other assets in the accompanying consolidated
balance sheets. The changes in the value of these contracts are included in
interest expense. For 2005 and 2007, cash used to purchase these interest rate
cap contracts are included in cash used by continuing investing activities in
the accompanying consolidated statements of cash flows.
Raw
materials for use in our manufacturing processes include copper used by our
Climate Control Business and natural gas used by our Chemical Business. As part
of our raw material price risk management, we periodically enter into
exchange-traded futures contracts for these materials, which contracts are
generally accounted for on a mark-to-market basis in accordance with SFAS 133.
At December 31, 2007 and 2006, the unrealized losses on the futures contracts
were $172,000 and $408,000, respectively, and are included in accrued and other
liabilities in the accompanying consolidated balance sheets. The unrealized
losses are classified as current liabilities as the term of these contracts are
for periods of twelve months or less. For 2007 and 2006, we incurred losses of
$1,317,000 and $1,516,000, respectively, on such contracts. For 2005, we
recognized gains of $931,000. These losses and gains are included in cost of
sales. In addition, the cash flows relating to these contracts are included in
cash flows from continuing operating activities.
Income per Common Share - Net
income applicable to common stock is computed by adjusting net income by the
amount of preferred stock dividends, dividend requirements and stock dividends.
Basic income per common share is based upon net income applicable to common
stock and the weighted-average number of common shares outstanding during each
year. Diluted income per share is based on net income applicable to common stock
plus preferred stock dividends and dividend requirements on preferred stock
assumed to be converted, if dilutive, and interest expense including
amortization of debt issuance cost, net of income taxes, on convertible debt
assumed to be converted, if dilutive, and the weighted-average number of common
shares and dilutive common equivalent shares outstanding, and the assumed
conversion of dilutive convertible securities outstanding.
2. Summary
of Significant Accounting Policies (continued)
The
following is a summary of certain transactions which affected basic income per
share or diluted income per share, if dilutive:
During
2007,
|
·
|
we
sold $60 million of the 5.5% Convertible Senior Subordinated Notes due
2012 (the “2007 Debentures”);
|
|
·
|
the
remaining $4,000,000 of the 7% Convertible Senior Subordinated Debentures
due 2011 (the “2006 Debentures”) was converted into 564,789 shares of
common stock;
|
|
·
|
we
issued 2,262,965 shares of common stock for 305,807 shares of our Series 2
$3.25 convertible, exchangeable Class C preferred stock (“Series 2
Preferred”) that were tendered pursuant to a tender
offer;
|
|
·
|
we
redeemed 25,820 shares of our Series 2 Preferred and issued 724,993 shares
of common stock for 167,475 shares of our Series 2
Preferred;
|
|
·
|
we
received shareholders’ approval in granting 450,000 shares of
non-qualified stock options on June 14,
2007;
|
|
·
|
we
issued 582,000 and 112,500 shares of our common stock as the result of the
exercise of stock options and a warrant,
respectively;
|
|
·
|
we
paid cash dividends of approximately $678,000 on the shares of Series 2
Preferred which we redeemed as discussed above;
and
|
|
·
|
we
paid cash dividends on the Series B 12% cumulative, convertible preferred
stock (“Series B Preferred”), Series D 6% cumulative, convertible Class C
preferred stock (“Series D Preferred”) and noncumulative redeemable
preferred stock (“Noncumulative Preferred”) totaling approximately
$1,890,000, $360,000 and $6,000,
respectively.
|
During
2006,
|
·
|
we
sold $18 million of the 2006
Debentures;
|
|
·
|
$14
million of the 2006 Debentures was converted into 1,977,499 shares our
common stock;
|
|
·
|
we
issued 374,400 shares of our common stock as the result of the exercise of
stock options;
|
|
·
|
104,548
shares of our Series 2 Preferred was exchanged for 773,655 shares of our
common stock; and
|
|
·
|
we
paid partial cash dividends totaling approximately $262,000 on certain
preferred stock.
|
During
2005,
|
·
|
we
issued 586,140 shares of our common stock as the result of the exercise of
warrants (under a cashless exercise provision) held by lenders of loans
under a financing agreement;
|
|
·
|
we
issued 88,900 shares of our common stock as a result of the exercise of
stock options;
|
|
·
|
we
granted 61,500 shares of qualified stock options;
and
|
|
·
|
we
acquired 13,300 shares of our Series 2
Preferred.
|
2. Summary
of Significant Accounting Policies (continued)
The
following table sets forth the computation of basic and diluted net income per
share:
|
2007
|
2006
|
2005
|
(Dollars
In Thousands, Except Per Share Amounts)
|
Numerator:
|
|||||||||||
|
Net
income
|
$
|
46,882
|
$
|
15,515
|
$
|
4,990
|
|||||
|
Dividends
and dividend requirements on Series B Preferred
|
(240
|
)
|
(240
|
)
|
(240
|
)
|
|||||
|
Dividend
requirements on shares of Series 2 Preferred which did not exchange
pursuant to tender offer or redemption in 2007 or exchange agreements in
2006
|
(272 |
) |
(547 |
) |
(566 |
) |
|||||
|
Dividends
and dividend requirements on shares of Series 2 Preferred which were
redeemed in 2007
|
(59
|
)
|
(84
|
)
|
(84
|
)
|
|||||
|
Dividend
requirements and stock dividend on shares of Series 2 Preferred pursuant
to tender offer in 2007 (1)
|
(4,971
|
)
|
(993
|
)
|
(993
|
)
|
|||||
|
Dividend
requirements and stock dividend on shares of Series 2 Preferred pursuant
to exchange agreements in 2006 (2)
|
-
|
(705
|
)
|
(340
|
)
|
||||||
|
Dividends
and dividend requirements on Series D Preferred
|
(60
|
)
|
(60
|
)
|
(60
|
)
|
|||||
|
Dividends
on Noncumulative Preferred
|
(6
|
)
|
(1
|
)
|
-
|
||||||
|
Total
dividends, dividend requirements and stock dividends on preferred
stock
|
(5,608
|
)
|
(2,630
|
)
|
(2,283
|
)
|
|||||
|
Numerator
for basic net income per share - net income applicable to common
stock
|
41,274
|
12,885
|
2,707
|
||||||||
|
Dividends
and dividend requirements on preferred stock assumed to be converted, if
dilutive
|
637
|
1,925
|
-
|
||||||||
|
Interest
expense including amortization of debt issuance costs, net of income
taxes, on convertible debt assumed to be converted, if
dilutive
|
1,276 |
1,083 |
- |
||||||||
|
Numerator
for diluted net income per common share
|
$
|
43,187
|
$
|
15,893
|
$
|
2,707
|
|||||
|
Denominator:
|
|||||||||||
|
Denominator
for basic net income per common share - weighted-average
shares
|
19,579,664
|
14,331,963
|
13,617,418
|
||||||||
|
Effect
of dilutive securities:
|
|||||||||||
|
Convertible
preferred stock
|
1,478,012
|
3,112,483
|
38,390
|
||||||||
|
Convertible
notes payable
|
1,200,044
|
2,100,325
|
4,000
|
||||||||
|
Stock
options
|
1,160,100
|
1,261,661
|
1,195,320
|
||||||||
|
Warrants
|
77,824
|
65,227
|
51,583
|
||||||||
|
Dilutive
potential common shares
|
3,915,980
|
6,539,696
|
1,289,293
|
||||||||
|
Denominator
for dilutive net income per common share – adjusted weighted-average
shares and assumed conversions
|
23,495,644
|
20,871,659
|
14,906,711
|
||||||||
|
Basic
net income per common share
|
$
|
2.11
|
$
|
.90
|
$
|
.20
|
|||||
|
Diluted
net income per common share
|
$
|
1.84
|
$
|
.76
|
$
|
.18
|
2. Summary
of Significant Accounting Policies (continued)
(1) As
discussed in Note 15 - Non-Redeemable Preferred Stock, in February 2007 we began
a tender offer to exchange shares of our common stock for up to 309,807 of the
499,102 outstanding shares of the Series 2 Preferred. The tender offer expired
on March 12, 2007 and our board of directors accepted the shares tendered on
March 13, 2007. Because the exchanges under the tender offer were pursuant to
terms other than the original terms, the transactions were considered
extinguishments of the preferred stock. In addition, the transactions qualified
as induced conversions under SFAS 84. In accordance with Emerging Issues Task
Force (“EITF”) Topic No. D-42, the excess of the fair value of the common stock
issued over the fair value of the securities issuable pursuant to the original
conversion terms was subtracted from net income in computing net income per
share. Because our Series 2 Preferred are cumulative and the dividend
requirements have been included in computing net income per share in previous
periods and as an element of the exchange transactions, we effectively settled
the dividends in arrears, the amount subtracted from net income in 2007
represents the excess of the fair value of the common stock issued over the fair
value of the securities issuable pursuant to the original conversion terms less
the dividends in arrears as March 13, 2007.
(2) As
discussed in Note 15 - Non-Redeemable Preferred Stock, during October 2006, we
entered into several separate individually negotiated agreements (“Exchange
Agreements”) with certain holders of our Series 2 Preferred. Because the
exchanges were pursuant to terms other than the original terms, the transactions
were considered extinguishments of the preferred stock. In addition, the
transactions qualified as induced conversions under SFAS 84. In accordance with
EITF Topic No. D-42, the excess of the fair value of the common stock issued
over the fair value of the securities issuable pursuant to the original
conversion terms was subtracted from net income in computing net income per
share. Because our Series 2 Preferred are cumulative and the dividend
requirements have been included in computing net income per share in previous
years and as an element of the exchange transactions, we effectively settled the
dividends in arrears, the amount subtracted from net income in 2006 represents
the excess of the fair value of the common stock issued over the fair value of
the securities issuable pursuant to the original conversion terms less the
dividends in arrears as of the date of the Exchange Agreements plus the 2006
dividend requirements prior to the date of the Exchange Agreements.
2. Summary
of Significant Accounting Policies (continued)
The
following weighted-average shares of securities were not included in the
computation of diluted net income per common share as their effect would have
been antidilutive:
|
2007
|
2006
|
2005
|
|
Series
B Preferred
|
-
|
-
|
666,666
|
||||||||
|
Series
2 Preferred not pursuant to tender offer in 2007 or exchange agreements in
2006
|
-
|
-
|
853,309
|
||||||||
|
Series
2 Preferred pursuant to tender offer in 2007 (1)
|
261,090
|
-
|
1,323,839
|
||||||||
|
Series
2 Preferred pursuant to exchange agreements in 2006 (1)
|
-
|
348,366
|
452,588
|
||||||||
|
Series
D Preferred
|
-
|
-
|
250,000
|
||||||||
|
Stock
options
|
240,068
|
-
|
-
|
||||||||
|
501,158
|
348,366
|
3,546,402
|
(1) In
accordance with EITF Topic No. D-53, the shares associated with the tender offer
in 2007 and the exchange agreements in 2006 were considered separately from
other convertible shares of securities in computing net income per common share
for 2007 and 2006, respectively.
Recently Issued Accounting
Pronouncements - In July 2006, the FASB issued FIN No. 48 -
Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 requires that
realization of an uncertain income tax position must be “more likely than not”
(i.e. greater than 50% likelihood) the position will be sustained upon
examination by taxing authorities before it can be recognized in the financial
statements. Further, FIN 48 prescribes the amount to be recorded in the
financial statements as the amount most likely to be realized assuming a review
by tax authorities having all relevant information and applying current
conventions. FIN 48 also clarifies the financial statement classification of
tax-related penalties and interest and sets forth new disclosures regarding
unrecognized tax benefits. On January 1, 2007, we adopted FIN 48. See Note 12 -
Income Taxes for the impact on our consolidated financial statements as the
result of implementing FIN 48.
In
September 2006, the FASB issued SFAS No. 157 - Fair Value Measurements
(“SFAS 157”). SFAS 157 is definitional and disclosure oriented and addresses how
companies should approach measuring fair value when required by GAAP; it does
not create or modify any current GAAP requirements to apply fair value
accounting. SFAS 157 provides a single definition for fair value that is to be
applied consistently for all accounting applications, and also generally
describes and prioritizes according to reliability the methods and input used in
valuations. SFAS 157 prescribes various disclosures about financial statement
categories and amounts which are measured at fair value, if such disclosures are
not already specified elsewhere in GAAP. The new measurement and disclosure and
requirements of SFAS 157 are effective for the Company in the first quarter of
2008 and we currently do not expect a significant impact from adopting SFAS
157.
2. Summary
of Significant Accounting Policies (continued)
In
February 2007, the FASB issued SFAS No. 159 - The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”). This statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. SFAS 159 is effective for the Company beginning in the first
quarter of 2008 and we currently do not expect a significant impact from
adopting SFAS 159.
3. Accounts
Receivable
|
December
31,
|
|
2007
|
2006
|
|
(In
Thousands)
|
|
Trade
receivables
|
$
|
68,234
|
$
|
68,165
|
|||
|
Insurance
claims
|
2,469
|
219
|
|||||
|
Other
|
1,182
|
1,456
|
|||||
|
|
71,885
|
69,840
|
|||||
|
Allowance
for doubtful accounts
|
(1,308
|
)
|
(2,269
|
)
|
|||
|
$
|
70,577
|
$
|
67,571
|
Concentrations
of credit risk with respect to trade receivables are limited due to the large
number of customers comprising our customer bases and their dispersion across
many different industries and geographic areas, however, six customers account
for approximately 26% of our total net receivables at December 31, 2007. We do
not believe this concentration in these six customers represents a significant
credit risk due to the financial stability of these customers.
4. Inventories
|
Finished
Goods
|
Work-in-Process
|
Raw
Materials
|
Total |
|
(In
Thousands)
|
|
December
31, 2007:
|
||||||||||||
|
Climate
Control products
|
$
|
9,025
|
$
|
3,569
|
$
|
19,412
|
$
|
32,006
|
||||
|
Chemical
products
|
15,409
|
-
|
5,718
|
21,127
|
||||||||
|
Industrial
machinery and components
|
3,743
|
-
|
-
|
3,743
|
||||||||
|
$
|
28,177
|
$
|
3,569
|
$
|
25,130
|
$
|
56,876
|
|||||
|
December
31, 2006:
|
||||||||||||
|
Climate
Control products
|
$
|
6,910
|
$
|
3,205
|
$
|
16,631
|
$
|
26,746
|
||||
|
Chemical
products
|
11,443
|
-
|
5,361
|
16,804
|
||||||||
|
Industrial
machinery and components
|
1,899
|
-
|
-
|
1,899
|
||||||||
|
$
|
20,252
|
$
|
3,205
|
$
|
21,992
|
$
|
45,449
|
4. Inventories
(continued)
At
December 31, 2007 and 2006, inventory reserves for certain slow-moving inventory
items (primarily Climate Control products) were $460,000 and $829,000,
respectively. In addition, inventory reserves for certain nitrogen-based
inventories provided by our Chemical Business were $13,000 and $426,000 at
December 31, 2007 and 2006, respectively, because cost exceeded the net
realizable value.
Changes
in our inventory reserves are as follows:
|
Balance at Beginning of Year |
Additions-
Provision for (realization of) losses
|
Deductions- Write-offs/ disposals |
Balance at End of
Year
|
|
(In
Thousands)
|
|
2007
|
$
|
1,255
|
$
|
(384
|
)
|
$
|
398
|
$
|
473
|
|||||||
|
2006
|
$
|
2,423
|
$
|
(711
|
)
|
$
|
457
|
$
|
1,255
|
|||||||
|
2005
|
$
|
2,185
|
$
|
239
|
$
|
1
|
$
|
2,423
|
The
provision for losses are included in cost of sales (realization of losses are
reductions to cost of sales) in the accompanying consolidated statements of
income.
5. Precious
Metals
Precious
metals are used as a catalyst in the Chemical Business manufacturing process. As
of December 31, 2007 and 2006, precious metals were $10,935,000 and $6,406,000,
respectively, and are included in supplies, prepaid items and other in the
accompanying consolidated balance sheets. For 2007, 2006 and 2005, the amounts
expensed for precious metals were approximately $6,352,000, $4,823,000 and
$3,100,000, respectively. These precious metals expenses are included in cost of
sales in the accompanying consolidated statements of income. Occasionally,
during major maintenance and/or capital projects, we may be able to perform
procedures to recover precious metals (previously expensed) which had
accumulated over time within our manufacturing equipment. For 2007, 2006
and 2005, we recognized recoveries of precious metals at historical FIFO costs
of approximately $1,783,000, $2,082,000 and $1,615,000, respectively. When we
accumulate precious metals in excess of our production requirements, we may sell
a portion of the excess metals. We recognized gains of $2,011,000 for 2007 (none
in 2006 and 2005) from the sale of excess precious metals. These recoveries and
gains are reductions to cost of sales.
6. Property,
Plant and Equipment
|
Useful
lives
|
December
31,
|
|
in
years
|
2007
|
2006
|
|
(In
Thousands)
|
|
Machinery,
equipment and automotive
|
3-25
|
$
|
151,633
|
$
|
141,362
|
|||
|
Buildings
and improvements
|
3-30
|
27,510
|
25,867
|
|||||
|
Furniture,
fixtures and store equipment
|
3-10
|
7,458
|
7,182
|
|||||
|
Assets
under capital leases
|
3-12
|
1,907
|
1,056
|
|||||
|
Construction
in progress
|
N/A
|
6,648
|
7,077
|
|||||
|
Capital
spare parts
|
N/A
|
1,662
|
2,123
|
|||||
|
Land
|
N/A
|
2,194
|
2,194
|
|||||
|
199,012
|
186,861
|
|||||||
|
Less
accumulated depreciation
|
119,320
|
110,457
|
||||||
|
$
|
79,692
|
$
|
76,404
|
Machinery,
equipment and automotive primarily includes the categories of property and
equipment and estimated useful lives as follows: chemical processing plants and
plant infrastructure (15-25 years); production, fabrication, and assembly
equipment (7-15 years); certain processing plant components (3-10 years); and
trucks, automobiles, trailers, and other rolling stock (3-7 years). At December
31, 2007 and 2006, assets under capital leases consist of $1,907,000 and
$961,000 of machinery, equipment and automotive, respectively, and $95,000 of
furniture, fixtures and store equipment at December 31, 2006. Accumulated
depreciation for assets under capital leases were $244,000 and $118,000 at
December 31, 2007 and 2006, respectively.
7. Debt
Issuance and Other Debt-Related Costs, net
Debt
issuance and other debt-related costs, which are included in other assets in the
accompanying consolidated balance sheets, include debt issuance costs of
$4,213,000 and $1,836,000, net of accumulated amortization of $2,368,000 and
$3,681,000 as of December 31, 2007 and 2006, respectively.
During
2007, we incurred debt issuance costs of $4,429,000 which includes $3,224,000
relating to the 2007 Debentures and $1,139,000 relating to the $50 million loan
agreement (“Secured Term Loan”). In addition, the remaining portion of the 2006
Debentures was converted into our common stock. As a result of the conversions,
approximately $266,000 of the remaining debt issuance costs, net of
amortization, associated with the 2006 Debentures were charged against capital
in excess of par value in 2007. Also, the Senior Secured Loan due in
2009 was repaid with the proceeds from the Secured Term Loan. As a
result, approximately $1,331,000 of the remaining debt issuance and other
debt-related costs, net of amortization, associated with the Senior Secured Loan
was charged to interest expense in 2007.
7. Debt
Issuance and Other Debt-Related Costs, net (continued)
In 2006,
we incurred debt issuance costs of $1,480,000 relating to the 2006 Debentures.
During 2006, a portion of the 2006 Debentures were converted into our common
stock. As a result of the conversions, approximately $998,000 of the debt
issuance costs, net of amortization, associated with the 2006 Debentures was
charged against capital in excess of par value.
Also see
discussion in “Derivatives, Hedges and Financial Instruments” of Note 2
concerning our interest rate cap contracts.
8. Investment
in Affiliate
Cepolk
Holding, Inc. (“CHI”), a subsidiary of the Company, is a limited partner and has
a 50% equity interest in Cepolk Limited Partnership (“Partnership”) which is
accounted for on the equity method. The Partnership owns an energy savings
project located at the Ft. Polk Army base in Louisiana
(“Project”). At December 31, 2007 and 2006, our investment was $3,426,000 and
$3,314,000, respectively. As of December 31, 2007, the Partnership and general
partner to the Partnership is indebted to a term lender (“Lender”) of the
Project. CHI has pledged its limited partnership interest in the Partnership to
the Lender as part of the Lender’s collateral securing all obligations under the
loan. This guarantee and pledge is limited to CHI’s limited partnership interest
and does not expose CHI or the Company to liability in excess of CHI’s limited
partnership interest. No liability has been established for this pledge since it
was entered into prior to adoption of FIN 45. CHI has no recourse provisions or
available collateral that would enable CHI to recover its partnership interest
should the Lender be required to perform under this pledge.
9. Current and Noncurrent Accrued and Other Liabilities
|
December
31,
|
|
2007
|
2006
|
|
(In
Thousands)
|
|
Customer
deposits
|
$
|
9,525
|
$
|
2,938
|
||
|
Accrued
payroll and benefits
|
5,362
|
4,170
|
||||
|
Deferred
income taxes
|
5,330
|
-
|
||||
|
Accrued
income and property taxes
|
5,247
|
1,217
|
||||
|
Deferred
rent expense
|
4,300
|
5,231
|
||||
|
Deferred
revenue on extended warranty contracts
|
3,387
|
2,426
|
||||
|
Accrued
insurance
|
2,975
|
1,646
|
||||
|
Accrued
commissions
|
2,256
|
2,565
|
||||
|
Accrued
death benefits
|
2,051
|
1,446
|
||||
|
Accrued
warranty costs
|
1,944
|
1,251
|
||||
|
Accrued
contractual manufacturing obligations
|
1,548
|
1,801
|
||||
|
Accrued
precious metals costs
|
1,359
|
1,068
|
||||
|
Accrued
interest
|
1,056
|
422
|
||||
|
Accrued
executive benefits
|
1,040
|
979
|
||||
|
Accrued
environmental remediation costs
|
411
|
1,432
|
||||
|
Other
|
3,394
|
4,153
|
||||
|
51,185
|
32,745
|
|||||
|
Less
noncurrent portion
|
12,243
|
5,929
|
||||
|
Current
portion of accrued and other liabilities
|
$
|
38,942
|
$
|
26,816
|
||
10. Redeemable
Preferred Stock
At
December 31, 2007 and 2006, we had 585 shares and 683 shares, respectively,
outstanding of Noncumulative Preferred. Each share of Noncumulative Preferred,
$100 par value, is convertible into 40 shares of our common stock at the option
of the holder at any time and entitles the holder to one vote. The Noncumulative
Preferred is redeemable at par at the option of the holder or the Company. The
Noncumulative Preferred provides for a noncumulative annual dividend of 10%,
payable when and as declared. During 2007 and 2006, our board of directors
declared and we paid dividends totaling $6,000 ($10.00 per share) and $1,000
($1.24 per share), respectively, on the then outstanding Noncumulative
Preferred. At December 31, 2007 and 2006, the Noncumulative Preferred was
$56,000 and $65,000, respectively, and is classified as accrued and other
liabilities in the accompanying consolidated balance sheets.
11. Long-Term Debt
|
December
31,
|
|
2007
|
2006
|
|
(In
Thousands)
|
|
Working
Capital Revolver Loan due 2012 (A)
|
$
|
-
|
26,048
|
|||
|
5.5%
Convertible Senior Subordinated Notes due 2012 (B)
|
60,000
|
-
|
||||
|
Secured
Term Loan due 2012 (C)
|
50,000
|
-
|
||||
|
Senior
Secured Loan (D)
|
-
|
50,000
|
||||
|
7%
Convertible Senior Subordinated Notes (E)
|
-
|
4,000
|
||||
|
Other,
with current interest rates of 4.25% to 9.36%, most of which is secured by
machinery, equipment and real estate (F)
|
12,107
|
17,644
|
||||
|
122,107
|
97,692
|
|||||
|
Less
current portion of long-term debt
|
1,043
|
11,579
|
||||
|
Long-term
debt due after one year
|
$
|
121,064
|
$
|
86,113
|
(A) ThermaClime
and its subsidiaries (the “Borrowers”) are parties to a $50 million revolving
credit facility (the “Working Capital Revolver Loan”) that provides for advances
based on specified percentages of eligible accounts receivable and inventories
for ThermaClime, and its subsidiaries. In November 2007, in connection with the
Secured Term Loan (discussed below under (C)), the Working Capital Revolver Loan
was amended. This amendment included, among other things, the release
of the lenders’ second position security liens to the assets which collateralize
the Secured Term Loan, an interest rate reduction of .25% and a revised maturity
date of April 13, 2012. The Working Capital Revolver Loan, as amended, accrues
interest at a base rate (generally equivalent to the prime rate) plus .50% or
LIBOR plus 1.75%. The interest rate at December 31, 2007 was 6.45%. Interest is
paid monthly. The facility provides for up to $8.5 million of letters of credit.
All letters of credit outstanding reduce availability under the facility. As a
result of using a portion of the proceeds from the 2007 Debentures (discussed
below under (B)) to pay down the Working Capital Revolver Loan, amounts
available for additional borrowing under the Working
Capital Revolver Loan at December 31, 2007 were $49.2 million. Under the Working
Capital Revolver Loan, as amended, the lender also requires the Borrowers to pay
a letter of credit fee equal to 1% per annum of the undrawn amount of all
outstanding letters of credit, an unused line fee equal to .375% per annum for
the excess amount available under the facility not drawn and various other
audit, appraisal and valuation charges.
In March
2005, we purchased two interest rate cap contracts which set a maximum
three-month LIBOR base rate of 4.59% on $30 million and mature on March 29,
2009.
The
lender may, upon an event of default, as defined, terminate the Working Capital
Revolver Loan and make the balance outstanding due and payable in full, if any.
The Working Capital Revolver Loan is secured by the assets of all the
ThermaClime entities other than El Dorado Nitric Company and its subsidiaries
(“EDNC”) but excluding the assets securing the Secured Term Loan discussed in
(C) below and certain distribution-related assets of EDC. EDNC is neither a
borrower nor guarantor of the Working Capital Revolver Loan. The carrying value
of the pledged assets is approximately $183 million at December 31,
2007.
11. Long-Term
Debt (continued)
A
prepayment premium of $1,000,000 is due to the lender should the Borrowers elect
to prepay the facility prior to April 13, 2008. This premium is reduced to
$500,000 during the following twelve-month period ending April 12, 2009 and is
reduced to $250,000 during the following twelve-month period ending April 12,
2010 and is eliminated thereafter.
The
Working Capital Revolver Loan, as amended, requires ThermaClime to meet certain
financial covenants measured quarterly. ThermaClime was in compliance with those
covenants during 2007. The Working Capital Revolver Loan also contains covenants
that, among other things, limit the Borrowers’ (which does not include the
Company) ability, without consent of the lender, to:
|
·
|
incur
additional indebtedness,
|
|
·
|
incur
liens,
|
|
·
|
make
restricted payments or loans to affiliates who are not
Borrowers,
|
|
·
|
engage
in mergers, consolidations or other forms of recapitalization, or dispose
assets.
|
The
Working Capital Revolver Loan also requires all collections on accounts
receivable be made through a bank account in the name of the lender or their
agent.
In
connection with the redemption of ThermaClime’s 10.75% Senior Unsecured Notes
(“the Notes”) in July 2006 as discussed in (E) below, the lenders of the Working
Capital Revolver Loan and the Senior Secured Loan provided consents to permit
ThermaClime to borrow $6.4 million from the Company for the purpose of redeeming
the Notes.
(B) On
June 28, 2007, we entered into a purchase agreement with each of twenty two
qualified institutional buyers (“QIBs”), pursuant to which we sold $60 million
aggregate principal amount of the 2007 Debentures in a private placement to the
QIBs pursuant to the exemptions from the registration requirements of the
Securities Act of 1933, as amended (the “Act”), afforded by Section 4(2) of
the Act and Regulation D promulgated under the Act. The 2007 Debentures are
eligible for resale by the investors under Rule144A under the Act. We received
net proceeds of approximately $57 million, after discounts and commissions. In
connection with the closing, we entered into an indenture (the “Indenture”) with
UMB Bank, as trustee (the “Trustee”), governing the 2007 Debentures. The Trustee
receives customary compensation from us for such services.
The 2007
Debentures bear interest at the rate of 5.5% per year and mature on July 1,
2012. Interest is payable in arrears on January 1 and July 1 of each
year, beginning on January 1, 2008.
The 2007
Debentures are unsecured obligations and are subordinated in right of payment to
all of our existing and future senior indebtedness, including indebtedness under
our revolving debt facilities. The 2007 Debentures are effectively subordinated
to all present and future liabilities, including trade payables, of our
subsidiaries.
11. Long-Term
Debt (continued)
The 2007 Debentures are convertible by the holders in whole or in part into shares of our common stock prior to their maturity. The conversion rate of the 2007 Debentures for the holders electing to convert all or any portion of a debenture is 36.4 shares of our common stock per $1,000 principal amount of debentures (representing a conversion price of $27.47 per share of common stock), subject to adjustment under certain conditions as set forth in the Indenture.
We may
redeem some or all of the 2007 Debentures at any time on or after July 2,
2010, at a price equal to 100% of the principal amount of the 2007 Debentures,
plus accrued and unpaid interest, all as set forth in the Indenture. The
redemption price will be payable at our option in cash or, subject to certain
conditions, shares of our common stock (valued at 95% of the weighted average of
the closing sale prices of the common stock for the 20 consecutive trading days
ending on the fifth trading day prior to the redemption date), subject to
certain conditions being met on the date we mail the notice of
redemption.
If a
designated event (as defined in the Indenture) occurs prior to maturity, holders
of the 2007 Debentures may require us to repurchase all or a portion of their
2007 Debentures for cash at a repurchase price equal to 101% of the principal
amount of the 2007 Debentures plus any accrued and unpaid interest, as set forth
in the Indenture. If a fundamental change (as defined in the Indenture) occurs
on or prior to June 30, 2010, under certain circumstances, we
will pay, in addition to the repurchase price, a make-whole premium on the 2007
Debentures converted in connection with, or tendered for repurchase upon, the
fundamental change. The make-whole premium will be payable in our common stock
or the same form of consideration into which our common stock has been exchanged
or converted in the fundamental change. The amount of the make-whole premium, if
any, will be based on our stock price on the effective date of the fundamental
change. No make-whole premium will be paid if our stock price in connection with
the fundamental change is less than or equal to $23.00 per share.
At
maturity, we may elect, subject to certain conditions as set forth in the
Indenture, to pay up to 50% of the principal amount of the outstanding 2007
Debentures, plus all accrued and unpaid interest thereon to, but excluding, the
maturity date, in shares of our common stock (valued at 95% of the weighted
average of the closing sale prices of the common stock for the 20 consecutive
trading days ending on the fifth trading day prior to the maturity date), if the
common stock is then listed on an eligible market, the shares used to pay
the 2007 Debentures and any interest thereon are freely tradable,
and certain required opinions of counsel are received.
We have
currently invested a portion of the net proceeds in money market investments and
have used a portion of the net proceeds to redeem our outstanding shares of
Series 2 Preferred; to repay certain outstanding mortgages and equipment loans;
to pay dividends in arrears on our outstanding shares of Series B Preferred and
Series D Preferred, all of which were owned by an affiliate; and the balance to
initially reduce the outstanding borrowings under the Working Capital Revolver
Loan. See Note 21 - Related Party Transactions for a discussion of amounts paid
to affiliates and former affiliates in connection with the redemption and the
dividends. In addition, we intend to use the remaining portion of the net
proceeds for certain discretionary capital expenditures and general working
capital purposes.
11. Long-Term Debt (continued)
In
connection with using a portion of the net proceeds of the 2007 Debentures to
initially reduce the outstanding borrowings under the Working Capital Revolver
Loan, ThermaClime entered into a $25 million demand promissory note (“Demand
Note”) with the Company. In addition, the Company, ThermaClime, and certain of
its subsidiaries entered into a subordination agreement with the lender of the
Senior Secured Loan which, among other things, states that the Demand Note is
unsecured and subordinated to the Senior Secured Loan and allows for payments on
the Demand Note by ThermaClime to the Company provided there is no potential
default or event of default, as defined in the Senior Secured Loan.
In
conjunction with the 2007 Debentures, we entered into a Registration Rights
Agreement (the “5.5% Registration Rights Agreement”) with the
QIBs. The term of the 5.5% Registration Rights Agreement ends on the
earlier of the date that all registrable securities, as defined in the
agreement, have ceased to be registrable securities and July 1,
2010.
In
connection with the 5.5% Registration Rights Agreement, we were required to
file, and did file, a registration statement (“5.5% Registration Statement”),
which registration statement was declared effective by the Securities and
Exchange Commission (“SEC”) on November 19, 2007.
We are obligated to update the 5.5% Registration Statement by filing a post-effective amendment. The filing of a post-effective amendment is required upon the filing of a Form 10-K or upon a “fundamental change” in the information described in the 5.5% Registration Statement. Pursuant to the terms of the 5.5% Registration Rights Agreement, the deadline for filing a post-effective amendment is determined by the event that triggers the obligation to file the post-effective amendment, as follows:
|
·
|
within
10 business days after filing a Form 10-K with the
SEC;
|
|
·
|
within
10 business days after filing such report or reports disclosing a
fundamental change to the SEC.
|
We are
required to use commercially reasonable efforts to cause the post-effective
amendment to be declared effective as promptly as is practicable, but in any
event, no later than 60 days (90 days if the post-effective amendment is
reviewed by the SEC) after such post-effective amendment is required to be
filed. If, in spite of our commercially reasonable efforts, a
post-effective amendment is not declared effective within the number of days
required, the liquidated damages will accrue under the 5.5% Rights Agreement as
described below, beginning on the first day after the post-effective amendment
is required to be effective. However, we are permitted to suspend the
availability of the 5.5% Registration Statement or prospectus for purposes of
updating the information therein (a “Deferral Period”) without incurring or
accruing any liquidated damages, unless the Deferral Period exceeds (a) 30 days
in any 90 day period, or (b) 90 days in any 12 month period, in which case,
beginning on the first day following the last permissible day of the Deferral
Period, liquidated damages at the rates of 0.25% and 0.5% shall apply, as
described below, until the termination of the Deferral Period.
11. Long-Term
Debt (continued)
If the
post-effective amendment to the 5.5% Registration Statement is not declared
effective by the appropriate time period described above, the following
liquidated damages, shall accrue for each day thereafter until the 5.5%
Registration Statement is declared effective:
|
·
|
0.25%
– Damages shall accrue at an annual percentage rate equal to 0.25% of the
aggregate principal amount of each debenture, from the first day of the
accrual period up to and including the 90th
day (approximately $411 per day or a total of $36,900 at the end of 90
days); and
|
|
·
|
0.5%
– Damages shall accrue at an annual percentage rate equal to 0.5% of the
aggregate principal amount of each debenture, from and after the 91st day
of the accrual period (approximately $822 per day), until the 5.5%
Registration Statement is declared effective. The 5.5%
Registration Rights Agreement provides no limitation to the maximum amount
of liquidation damages. The 5.5% Registration Rights Agreement does not
require us to issue shares of our equity securities relating to liquidated
damages.
|
Liquidated
damages are payable with respect to debentures that are outstanding as of the
beginning of a liquidated damages accrual period. If a debenture has
been converted into common stock prior to the beginning of a liquidated damages
accrual period, no liquidated damages are payable with respect to the common
stock issued upon such conversion.
(C) In
November 2007, ThermaClime and certain of its subsidiaries entered into a $50
million loan agreement (the “Secured Term Loan”) with a certain
lender. Proceeds from the Secured Term Loan were used to repay the
previous senior secured loan discussed in (D) below. The Secured Term Loan
matures on November 2, 2012.
The
Secured Term Loan accrues interest at a defined LIBOR rate plus 3%. The interest
rate at December 31, 2007 was 7.90%. The Secured Term Loan requires
only quarterly interest payments with the final payment of interest and
principal at maturity.
The
Secured Term Loan is secured by the real property and equipment located at our
El Dorado and Cherokee Facilities. The carrying value of the pledged assets is
approximately $48 million at December 31, 2007.
The
Secured Term Loan borrowers are subject to numerous covenants under the
agreement including, but not limited to, limitation on the incurrence of certain
additional indebtedness and liens, limitations on mergers, acquisitions,
dissolution and sale of assets, and limitations on declaration of dividends and
distributions to us, all with certain exceptions. At December 31, 2007, the
carrying value of the restricted net assets of ThermaClime and its subsidiaries
was approximately $60 million. The Secured Term Loan borrowers are also subject
to a minimum fixed charge coverage ratio and a maximum leverage ratio, both
measured quarterly on a trailing twelve-month basis. The Secured Term
Loan borrowers were in compliance with these financial covenants for the year
ended December 31, 2007.
11. Long-Term
Debt (continued)
The
maturity date of the Secured Term Loan can be accelerated by the lender upon the
occurrence of a continuing event of default, as defined.
A
prepayment premium equal to 1% of the principal amount prepaid is due to the
lender should the borrowers elect to prepay on or prior to November 6, 2009.
This premium is reduced to 0.5% during the following twelve-month period and is
eliminated thereafter.
(D) In
September 2004, ThermaClime and certain of its subsidiaries completed a $50
million term loan (“Senior Secured Loan”) with a certain lender. The Senior
Secured Loan accrued interest at the applicable LIBOR rate, as defined, plus an
applicable LIBOR margin, as defined or, at the election of the borrowers, the
alternative base rate, as defined, plus an applicable base rate margin, as
defined, with the annual interest rate not to exceed 11% or 11.5% depending on
the leverage ratio. For 2007, the effective interest rate was 11%. In November
2007, the Senior Secured Loan was repaid with the proceeds from the Secured Term
Loan discussed above under (C).
(E) On
March 14, 2006, we completed a private placement to six QIBs pursuant to which
we sold $18 million aggregate principal amount of the 2006 Debentures. We used a
placement agent for this transaction which we paid a fee of 6% of the aggregate
gross proceeds received in the financing. Other offering expenses in connection
with the transaction were $.4 million. As a result, the total debt issuance
costs related to this transaction were $1.5 million. The 2006 Debentures are no
longer outstanding. As of April 30, 2007, all of the outstanding 2006 Debentures
were converted into our common stock, plus, in certain cases, payment of
additional consideration relating to offers received from holders and accepted
by us as discussed below.
During
2006, $14 million of the 2006 Debentures were converted into 1,977,499 shares of
our common stock at the conversion price of $7.08 per share. Several of the
conversions related to offers received from holders and accepted by us which
included the stated conversion price of $7.08 per share plus an additional
consideration totaling $277,000 which was paid to these holders. Because these
offers met the criteria within SFAS 84-Induced Conversions of Convertible Debt,
the additional consideration of $277,000 was expensed and is included in
interest expense in our consolidated statement of income. During 2007, the
remaining $4 million of the 2006 Debentures (which includes $1 million that was
held by Jayhawk Capital Management and other Jayhawk entities, through their
manager, Kent McCarthy (the “Jayhawk Group”), were converted into 564,789 shares
of our common stock at the average conversion price of $7.082 per
share.
Approximately
$13.6 million of the net proceeds have been used to purchase or redeem all of
the outstanding Notes held by unrelated third parties and Jayhawk at
ThermaClime’s carrying value (which includes $1 million that was held by
Jayhawk) including accrued interest of $.3 million. The remaining balance was
used for the purchase of other higher interest rate debt and for general
corporate purposes.
11. Long-Term
Debt (continued)
The 2006
Debentures were convertible by holders, in whole or in part, into shares of the
Company’s common stock prior to their maturity on March 1, 2011. Holders of 2006
Debentures electing to convert all or any portion of a 2006 Debenture would
obtain the following conversion rate per $1,000 principal amount of 2006
Debentures during the dates indicated:
|
Shares
Per $1,000
Principal Amount |
Conversion
Price
Per Share
|
|
Prior
to September 1, 2006
|
125.00
|
$
|
8.00
|
|||
|
September
1, 2006 – February 28, 2007
|
141.25
|
$
|
7.08
|
|||
|
March
1, 2007 - August 31, 2007
|
141.04
|
$
|
7.09
|
|||
|
September
1, 2007 - February 29, 2008
|
137.27
|
$
|
7.28
|
|||
|
March
1, 2008 - August 31, 2008
|
133.32
|
$
|
7.50
|
|||
|
September
1, 2008 - February 28, 2009
|
129.23
|
$
|
7.74
|
|||
|
March
1, 2009 - March 1, 2011
|
125.00
|
$
|
8.00
|
The
conversion price was subject to anti-dilution provisions designed to maintain
the value of the 2006 Debentures in the event we had taken certain actions with
respect to our common stock, as described below, that effect all of the holders
of our common stock equally and that could have a dilutive effect on the value
of the conversion rights of the holders of the 2006 Debentures or that confer a
benefit upon our current stockholders not otherwise available to the holders of
the 2006 Debentures. In this regard, the 2006 Debentures provided that the
conversion rate of the 2006 Debentures would be adjusted upon the occurrence of
any of the following events:
|
(a)
|
the
payment or issuance of common stock as a dividend or distribution on our
common stock;
|
|
(b)
|
the
issuance to all holders of common stock of rights, warrants or options to
purchase our common stock (other than pursuant to our preferred share
rights plan) for a period expiring within 45 days of the record date for
such distribution at a price less than the average of the closing sale
price for the 10 trading days preceding the declaration date for such
distribution; provided that the conversion price will be readjusted to the
extent that such rights, warrants or options are not
exercised;
|
|
(c)
|
subdivisions,
splits or combinations of our common
stock;
|
|
(d)
|
distributions
to the holders of our common stock of a portion of our assets (including
shares of capital stock or assets of a subsidiary) or debt or other
securities issued by us or certain rights to purchase our securities
(excluding dividends or distributions covered by clauses (a) or (b) above
or our preferred share rights plan); provided, however, that if we
distribute capital stock of, or similar equity interests in, a subsidiary
or other business unit of ours, the conversion rate will be adjusted based
on the market value of the securities so distributed
relative to the market value of our common stock, in each case based on
the average closing sale prices of those securities for the 10 trading
days commencing on and including the fifth trading day after the date on
which “ex-dividend trading” commences for such distribution on the NASDAQ
National Market or such other national or regional exchange or market on
which the securities are then listed or
quoted;
|
11. Long-Term
Debt (continued)
|
(e)
|
tender
or exchange offer made by the Company or any subsidiary for all or any
portion of the common stock and such shall require the payment to
stockholders of consideration per share of common stock having a fair
market value that exceeds the last reported closing sale
price;
|
|
(f)
|
the
Company, by dividend or otherwise, makes a distribution in cash to all
holders of its common stock; and
|
|
(g)
|
the
tender or exchange offer made by a person other than the Company or a
subsidiary for more than 50% of the Company’s common stock and shall
involve a payment by such person of consideration per share of common
stock having a fair market value (as determined by the Company’s board of
directors, whose determination is conclusive) that exceeds the closing
price of a share of common stock and as of the offer expiration time the
Company’s board of directors is not recommending rejection of the
offer.
|
The
Indenture provides that the conversion rate of the 2006 Debentures is subject to
adjustment upon the occurrence of any of seven different events as described
above. The first four of these events [subparagraphs (a)-(d)] are standard
anti-dilution events as described in paragraph 8 of EITF 05-2. The last three
events [subparagraphs (e), (f) and (g)] are not considered standard
anti-dilution provisions as discussed in paragraph 8 of EITF 05-2; however,
these events triggering an anti-dilution conversion rate adjustment were within
the control of the Company. For those that are not also an event of equity
restructuring as defined in SFAS 123(R), they were evaluated as contingent
beneficial conversion features (“BCF”). We planned to recognize a BCF if and
when a triggering event occurred, until then it was accounted for as a
contingent event and no accounting was warranted. None of the conversion rate
adjustments occurred during the term of the debt (all of the debt was converted
during 2006 and 2007 as discussed above), thus there is no requirement to
account for the contingent BCF.
To the
extent that we had a rights plan in effect upon conversion of the 2006
Debentures into common stock, holders of 2006 Debentures would have received, in
addition to the common stock, the rights under the rights plan unless the rights
have separated from the common stock at the time of conversion, in which case
the conversion rate will be adjusted as if we distributed to the holders of our
common stock, a portion of our assets, or debt or other securities or rights as
set forth under clause (d) above, subject to readjustment in the event of the
expiration, termination or redemption of such rights.
Our board
of directors had reserved the right to increase the conversion rate if our board
of directors determines (a) that an increase would be in our best interests or
(b) it advisable to avoid or diminish any income tax to holders of common stock
resulting from any stock or rights distribution.
11. Long-Term
Debt (continued)
(F) Amounts
include capital lease obligations of $1,230,000 and $767,000 at December 31,
2007 and 2006, respectively.
Maturities
of long-term debt for each of the five years after December 31, 2007 are as
follows (in thousands):
|
2008
|
$
|
1,043
|
|||
|
2009
|
1,042
|
||||
|
2010
|
1,153
|
||||
|
2011
|
1,119
|
||||
|
2012
|
111,072
|
||||
|
Thereafter
|
6,678
|
||||
|
$
|
122,107
|
12. Income
Taxes
Provisions
(benefits) for income taxes are as follows:
|
2007
|
2006
|
2005
|
|
(In
Thousands)
|
|
Current:
|
|||||||||||
|
Federal
|
$
|
5,260
|
$
|
312
|
$
|
||||||
|
State
|
1,980
|
589
|
118
|
||||||||
|
Total
Current
|
$
|
7,240
|
$
|
901
|
$
|
118
|
|
Deferred:
|
|||||||||||
|
Federal
|
$
|
(4,095
|
)
|
$
|
-
|
$
|
-
|
||||
|
State
|
(605
|
)
|
-
|
-
|
|||||||
|
Total
Deferred
|
$
|
(4,700
|
)
|
$
|
-
|
$
|
-
|
||||
|
Provisions
for income taxes
|
$
|
2,540
|
$
|
901
|
$
|
118
|
The
current provision for federal income taxes of $5,260,000 for 2007 includes
regular federal income
tax
and alternative minimum income tax (“AMT”). The
current provision of state income taxes of $1,980,000 for 2007 includes the
provision for 2007 state income taxes, as well as $1,047,000 for uncertain state
income tax positions recognized in accordance with FIN 48 as discussed
below.
12. Income Taxes
(continued)
The
2007 benefit for deferred taxes of $4,700,000 results from the reversal of
valuation allowance on deferred tax assets, the benefit of AMT credits, and
other temporary differences. At December 31, 2006, we had regular NOL
carryforwards of approximately $49.9 million. We account for income taxes under
the provisions of SFAS 109 which requires recognition of future tax benefits
(NOL carryforwards and other temporary differences) subject to a valuation
allowance if it is determined that it is more-likely-than-not that such asset
will not be realized. In determining whether it is more-likely-than-not that we
will not realize such tax asset, SFAS 109 requires that all negative and
positive evidence be considered (with more weight given to evidence that is
“objective and verifiable”) in making the determination. Prior to
2007, we had valuation allowances in place against the net deferred tax assets
arising from the NOL carryforwards and other temporary
differences. Prior to 2007, management considered certain negative
evidence in determining that it was “more-likely-than-not” that the net deferred
tax assets would not be utilized in the foreseeable future, thus a valuation
allowance was required. The negative evidence considered primarily included our
history of losses, both as to amount and trend and uncertainties surrounding our
ability to generate sufficient taxable income to utilize these NOL
carryforwards.
As
the result of improving financial results during 2007 including some unusual
transactions (settlement of pending litigation and insurance recovery of
business interruption claim) and our expectation of generating taxable income in
the future, we determined in the third quarter that there was sufficient
objective and verifiable evidence to conclude that it was more-likely-than-not
that we would be able to realize the net deferred tax assets. As a result, we
reversed the valuation allowances as a benefit for income taxes and recognized
deferred tax assets and deferred tax liabilities. At December 31, 2007, we had
net current deferred tax assets of $10.0 million and net non-current deferred
tax liabilities of $5.3 million.
Due
to regular tax NOL carryforwards, the only current tax expense for 2006 and 2005
was for federal AMT and state income taxes as shown above.
At December 31,
2007, we have federal NOL carryforwards of approximately $2.9 million that begin
expiring in 2026 and state tax NOL carryforwards of approximately $28.9 million
that begin expiring in 2024. We
anticipate fully utilizing the federal NOL carryforwards in 2008 at which time
we will begin paying federal income taxes at regular corporate tax
rates.
When
non-qualified stock options (“NSOs”) are exercised, the grantor of the options
is permitted to deduct the spread between the fair market value and the exercise
price of the NSOs as compensation expense in determining taxable income. Under
SFAS 109, income tax benefits related to stock-based compensation deductions in
excess of the compensation expense recorded for financial reporting purposes are
not recognized in earnings as a reduction of income tax expense for financial
reporting purposes. As a result, during 2007, the stock-based compensation
deduction recognized in our income tax return will exceed the stock-based
compensation expense recognized in earnings. The excess tax benefit realized
(i.e., the resulting reduction in the current tax liability) related to the
excess stock-based compensation tax deduction of
12. Income Taxes
(continued)
$1,740,000
is accounted for as an increase in capital in excess of par value rather than a
decrease in the provision for income taxes.
SFAS
123(R) specifies that if the grantor of NSOs will not currently reduce its tax
liability from the excess tax benefit deduction taken at the time of the taxable
event (option exercised) because it has a NOL carryforward that is increased by
the excess tax benefit, then the tax benefit should not be recognized until the
deduction actually reduces current taxes payable. As
of December 31, 2007, we have approximately $2,325,000
in unrecognized federal
and state tax
benefits
resulting from the exercise of NSOs since the effective date of SFAS 123(R) on
January 1, 2006. We estimate that a significant portion of this benefit
will be realized in 2008 when our current tax liability is reduced by these
items.
12. Income Taxes
(continued)
Temporary
differences and carryforwards which gave rise to deferred tax assets and
liabilities at December 31, 2007 and 2006 include:
|
2007
|
2006
|
|
(In
Thousands)
|
|
Deferred
tax assets
|
|||||||
|
Amounts
not deductible for tax purposes:
|
|||||||
|
Allowance
for doubtful accounts
|
$
|
906
|
$
|
1,286
|
|||
|
Asset
impairment
|
902
|
769
|
|||||
|
Inventory
reserves
|
204
|
646
|
|||||
|
Deferred
compensation
|
2,700
|
2,123
|
|||||
|
Other
accrued liabilities
|
2,439
|
1,928
|
|||||
|
Uncertain
income tax positions
|
655
|
-
|
|||||
|
Other
|
512
|
607
|
|||||
|
Capitalization
of certain costs as inventory for tax purposes
|
900
|
881
|
|||||
|
Net
operating loss carryforwards
|
779
|
19,236
|
|||||
|
Alternative
minimum tax credit carryforwards
|
3,911
|
1,288
|
|||||
|
Total
deferred tax assets
|
13,908
|
28,764
|
|||||
|
Less
valuation allowance on deferred tax assets
|
-
|
18,932
|
|||||
|
Net
deferred tax assets
|
$
|
13,908
|
$
|
9,832
|
|||
|
Deferred
tax liabilities
|
|||||||
|
Accelerated
depreciation used for tax purposes
|
$
|
7,273
|
$
|
8,017
|
|||
|
Excess
of book gain over tax gain resulting from sale of land
|
541
|
403
|
|||||
|
Investment
in unconsolidated affiliate
|
1,394
|
1,412
|
|||||
|
Total
deferred tax liabilities
|
$
|
9,208
|
$
|
9,832
|
|||
|
Net
deferred tax assets
|
$
|
4,700
|
$
|
-
|
|||
|
Consolidated
balance sheet classification:
|
|||||||
|
Net
current deferred tax assets
|
$
|
10,030
|
$
|
-
|
|||
|
Net
non-current deferred tax liabilities
|
(5,330
|
)
|
-
|
||||
|
Net
deferred tax assets
|
$
|
4,700
|
$
|
-
|
|||
|
Net
deferred tax assets by tax jurisdiction:
|
|||||||
|
Federal
|
$
|
3,921
|
$
|
-
|
|||
|
State
|
779
|
-
|
|||||
|
Net
deferred tax assets
|
$
|
4,700
|
$
|
-
|
12. Income Taxes
(continued)
Detailed
below are the differences between the amount of the provision for income taxes
and the amount which would result from the application of the federal statutory
rate to “Income from continuing operations before provision for income taxes”
for the year ended December 31:
|
2007
|
2006
|
2005
|
|
(In
Thousands)
|
|
Provision
for income taxes at federal statutory rate
|
$
|
17,176
|
$
|
5,834
|
$
|
2,058
|
|||||
|
Changes
in the valuation allowance related to deferred tax assets
|
(18,476
|
)
|
(5,950
|
)
|
(1,743
|
)
|
|||||
|
Effect
of discontinued operations and other
|
403
|
58
|
(249
|
)
|
|||||||
|
Federal
alternative minimum tax
|
-
|
312
|
118
|
||||||||
|
State
current and
deferred income taxes
|
1,939
|
383
|
-
|
||||||||
|
Provision
for uncertain tax positions
|
1,047
|
-
|
-
|
||||||||
|
Permanent
differences
|
451
|
264
|
(66
|
)
|
|||||||
|
Provision
for income taxes
|
$
|
2,540
|
$
|
901
|
$
|
118
|
On
January 1, 2007, we adopted FIN 48, which requires that realization of an
uncertain income tax position must be “more likely than not” (i.e., greater than
50% likelihood) that the position will be sustained upon examination by taxing
authorities before it can be recognized in the financial statements. Further,
FIN 48 prescribes the amount to be recorded in the financial statements as the
amount most likely to be realized assuming a review by tax authorities having
all relevant information and applying current conventions. FIN 48 also clarifies
the financial statement classification of tax-related penalties and interest and
sets forth new disclosures regarding unrecognized tax benefits.
We
believe that we do not have any material uncertain tax positions that meet the
FIN 48 more likely than not recognition criteria other than the failure to file
state income tax returns in some jurisdictions where we or some of our
subsidiaries may have a filing responsibility (i.e, nexus). As of
December 31, 2006 we had a $300,000 accrued for an uncertain tax position
related to state income taxes. As a result of the implementation of FIN 48, we
recognized a $120,000 increase in the liability for uncertain tax positions
related to state income taxes, which was accounted for as an increase to the
January 1, 2007 accumulated deficit balance. In 2007, we
commissioned a nexus study by an independent public accounting firm to determine
if we and our subsidiaries had any activities that would create nexus and to
calculate the potential additional state income tax liability in accordance with
FIN 48. As a result of this nexus study, we recognized additional
current state income tax expense of $1,047,000 in 2007,
partially
offset by
a deferred tax benefit of $536,000 from
additional state NOL
carryforwards. In
addition to the FIN 48 liability recorded as a result of the nexus study, we
reclassified $150,000 of state income tax from the current payable account to
the FIN 48 liability. This reclassification related to state tax liabilities
that we had accrued during 2006, but did not become uncertain until 2007. A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
12. Income Taxes
(continued)
|
Balance
at January 1, 2007
|
$
|
420
|
||
|
Additions
based on tax positions related to the current year
|
192
|
|||
|
Additions
based on tax positions of prior years
|
1,031
|
|||
|
Reductions
for tax positions of prior years
|
(26
|
)
|
||
|
Settlements
|
-
|
|||
|
Balance
at December 31, 2007
|
$
|
1,617
|
If the
tax benefit of these uncertain tax positions were recognized in the financial
statements it would decrease the annual effective tax rate by reducing the total
state tax provision by approximately $700,000, net of federal
expense.
We
recognize interest accrued related to unrecognized tax benefits in interest
expense and penalties as other expense. During
the year ended December 31, 2007, we
recognized $253,000 in interest and penalties associated with unrecognized tax
benefits (none in 2006 or 2005). We had
approximately $315,000 and $30,000 for the payment of interest and penalties
accrued at December 31, 2007 and 2006, respectively.
We plan
to negotiate voluntary disclosure agreements and file prior year tax returns
with various taxing authorities in 2008. Therefore, we anticipate that the total
amounts of unrecognized tax benefits will decrease by approximately $1.4 million
by December 31, 2008 as a result of state tax payments made as part of the
voluntary disclosure agreement process.
We and
certain of our subsidiaries file income tax returns in the U.S. federal
jurisdiction and various state jurisdictions. The federal tax returns for 1994
through 2003 remain subject to examination for the purpose of determining the
amount of remaining tax NOL and other carryforwards. With few exceptions, the
2004-2007 years remain open for all purposes of examination by the IRS and other
major tax jurisdictions.
13. Commitments and Contingencies
Capital and Operating Leases -
We and our subsidiaries lease certain property, plant and equipment under
capital leases and non-cancelable operating leases in accordance with SFAS 13.
Leased assets meeting capital lease criteria have been capitalized and the
present value of the related lease payments is included in long-term debt.
Future minimum payments on leases, including the Baytown Facility lease
(“Baytown Lease”) discussed below, with initial or remaining terms of one year
or more at December 31, 2007, are as follows (in thousands):
|
Operating
Leases
|
|
Capital
Leases
|
Baytown
Lease
|
Others |
Total |
|
2008
|
$
|
599
|
$
|
11,173
|
$
|
3,351
|
$
|
15,123
|
|||||||
|
2009
|
285
|
4,881
|
2,859
|
8,025
|
|||||||||||
|
2010
|
282
|
-
|
1,962
|
2,244
|
|||||||||||
|
2011
|
176
|
-
|
1,310
|
1,486
|
|||||||||||
|
2012
|
64
|
-
|
1,004
|
1,068
|
|||||||||||
|
Thereafter
|
-
|
-
|
1,641
|
1,641
|
|||||||||||
|
Total
minimum lease payments
|
1,406
|
$
|
16,054
|
$
|
12,127
|
$
|
29,587
|
||||||||
|
Less
amounts representing interest
|
176
|
||||||||||||||
|
Present
value of minimum lease payments
included in long-term debt
|
$
|
1,230
|
Rent
expense under all operating lease agreements, including month-to-month leases,
was $13,793,000 in 2007, $12,587,000 in 2006 and $12,205,000 in 2005. Renewal
options are available under certain
of the lease agreements for various periods at approximately the existing annual
rental amounts.
Baytown Facility - Our wholly
owned subsidiary, EDNC operates a nitric acid plant (the “Baytown Facility”) at
a Baytown, Texas chemical facility in accordance with a series of agreements
with Bayer Corporation (“Bayer”) (collectively, the “Bayer Agreement”). Under
the terms of the Bayer Agreement, EDNC is leasing the Baytown Facility pursuant
to a leveraged lease (the “Baytown Lease”) from an unrelated third party with an
initial lease term of ten years. Upon expiration of the initial ten-year term in
2009, 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. The total amount of future minimum payments
due under the Baytown Lease is being charged to rent expense on the
straight-line method over the initial ten-year term of the lease. The difference
between rent expense recorded and the amount paid is charged to deferred rent
expense which is included in accrued and other liabilities in the accompanying
consolidated balance sheets. The Company and its subsidiaries have not provided
a residual value guarantee on the value of the equipment related to the Baytown
Lease and Bayer has the unilateral right to determine if the fixed-price
purchase option is exercised in 2009. If Bayer decides to exercise the purchase
option, they must also fund it. EDNC’s ability to perform on its lease
commitments is contingent upon Bayer’s performance under the Bayer Agreement.
One of our subsidiaries has guaranteed the performance of EDNC’s obligations
under the Bayer Agreement. Discussions with Bayer have begun
regarding a renewal in 2009.
13. Commitments
and Contingencies (continued)
Purchase and Sales Commitments -
Under an agreement, as amended, with its principal supplier of anhydrous
ammonia, the El Dorado Chemical Company (“EDC”) will purchase a majority of its
anhydrous ammonia requirements using a market price-based formula plus
transportation to the chemical production facility located in El Dorado,
Arkansas (the “El Dorado Facility”) through at least December 31,
2008.
In 1995,
EDC entered into a product supply agreement with a third party whereby EDC is
required to make monthly facility fee and other payments which aggregate
$87,000. In return for this payment, EDC 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 EDC. The initial term of this agreement is
through August 2010. If the agreement is not terminated as of the end of the
initial term, the agreement automatically renews for a 5-year term and on a
year-by-year basis thereafter. EDC can currently terminate the agreement without
cause at a cost of approximately $1.4 million. Based on EDC’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 $1,078,000, $1,052,000 and $1,035,000
in 2007, 2006, and 2005, respectively.
At
December 31, 2007, our Climate Control Business had purchase commitments under
exchange-traded futures for 3,875,000 pounds of copper through December 2008 at
a weighted average cost of $3.02 per pound and a weighted average market value
of $3.04 per pound. At December 31, 2007, our Chemical Business had purchase
commitments under exchange-traded futures for 530,000 MMBtu of natural gas
through April 2008 at a weighted average cost of $7.98 per MMBtu and a weighted
average market value of $7.51 per MMBtu.
At
December 31, 2007, we also had standby letters of credit outstanding of $.8
million of which $.2 million related to our Climate Control
Business.
At
December 31, 2007, we had deposits from customers of $9.5 million for forward
sales commitments including $8.7 million relating to our Chemical Business and
$.6 million relating to our Climate Control Business.
In 2001,
EDC entered into a long-term cost-plus industrial grade ammonium nitrate supply
agreement (“Supply Agreement”) with a third party. Under the Supply Agreement,
as amended, EDC will supply from the El Dorado Facility approximately 210,000
tons of industrial grade ammonium nitrate per year, which is approximately 92%
of the plant’s manufacturing capacity for that product, for a term through
2010.
Employment and Severance Agreements -
We have employment and severance agreements with several of our officers.
The agreements provide for annual base salaries, bonuses and other benefits
commonly found in such agreements. In the event of termination of employment due
to a change in control (as defined in the agreements), the agreements provide
for payments aggregating $9.0 million at December 31, 2007.
13. Commitments
and Contingencies (continued)
Legal Matters - Following is a
summary of certain legal matters involving the Company.
A.
Environmental Matters
Our
operations are subject to numerous environmental laws (“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
certain performance obligations, substantial fines and criminal sanctions for
violations. There can be no assurance that material costs or liabilities will
not be incurred by us 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 our Chemical Business have in the
past resulted, and could in the future result, in compliance expenses, cleanup
costs, penalties or other liabilities relating to the handling, manufacture,
use, emission, discharge or disposal of effluents at or from our facilities or
the use or disposal of certain of its chemical products. Historically,
significant expenditures have been incurred by subsidiaries within our Chemical
Business in order to comply with the Environmental Laws and Health Laws and are
reasonably expected to be incurred in the future.
We are
required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably
estimated in accordance with FIN 47. We are obligated to monitor certain
discharge water outlets at our Chemical Business facilities should we
discontinue the operations of a facility. We also have certain facilities in our
Chemical Business that contain asbestos insulation around certain piping and
heated surfaces which we plan to maintain in an adequate condition to prevent
leakage through our standard repair and maintenance activities. Since we
currently have no plans to discontinue the use of these facilities and the
remaining life of the facilities is indeterminable, an asset retirement
liability has not been recognized. Currently, there is insufficient information
to estimate the fair value of the asset retirement obligations. However, we will
continue to review these obligations and record a liability when a reasonable
estimate of the fair value can be made.
1. Discharge
Water Matters
The El
Dorado Facility within our Chemical Business generates process wastewater. The
process water discharge and storm-water run off are governed by a state National
Pollutant Discharge Elimination System (“NPDES”) water discharge permit issued
by the Arkansas Department of Environmental Quality (“ADEQ”), which permit is to
be renewed every five years. The ADEQ issued to the El Dorado Facility a NPDES
water discharge permit in 2004, and the El Dorado Facility had until June 1,
2007 to meet the compliance deadline for the more restrictive limits under the
2004 NPDES permit. In order to meet the El Dorado Facility’s June 2007 limits,
the El Dorado Facility has significantly reduced the contaminant levels of its
wastewater.
13. Commitments
and Contingencies (continued)
The El
Dorado Facility has demonstrated its ability to comply with the more restrictive
permit limits, and the rules which support the more restrictive dissolved
minerals rules have been revised to authorize a permit modification to adopt
achievable dissolved minerals permit limits. The ADEQ has agreed to issue a
consent administrative order to authorize the El Dorado Facility to continue
operations without incurring permit violations pending the modification of the
permit to implement the revised rule and to dispose of the El Dorado Facility’s
wastewater into the creek adjacent to the El Dorado Facility. A draft of the
proposed consent administrative order has been prepared by the ADEQ and
submitted to the El Dorado Facility for review. We are currently reviewing the
proposed consent administrative order.
To meet
the June 2007 permit limits, the El Dorado Facility has conducted a study of the
creek adjacent to the El Dorado Facility to determine whether a permit
modification allowing for the discharge into the creek is appropriate. On
September 22, 2006, the Arkansas Pollution Control and Ecology Commission
approved the results of the study that showed that the proposed permit
modification is appropriate and the proposal to allow the El Dorado Facility to
dispose of its wastewater into the creek. A public hearing was
held on the matter on November 13, 2006 with minimal opposition. As a
result, the El Dorado Facility has been discharging its wastewater into the
creek.
In
addition, the El Dorado Facility has entered into a consent administrative order
(“CAO”) that recognizes the presence of nitrate contamination in the shallow
groundwater at the El Dorado Facility. A new CAO to address the shallow
groundwater contamination became effective on November 16, 2006 and requires the
evaluation of the current conditions and remediation based upon a risk
assessment. The CAO requires the El Dorado Facility to continue semi-annual
groundwater monitoring, to continue operation of a groundwater recovery system
and to submit a human health and ecological risk assessment to the ADEQ. The
final remedy for shallow groundwater contamination, should any remediation be
required, will be selected pursuant to the new CAO and based upon the risk
assessment. As an interim measure, the El Dorado Facility has installed two
recovery wells to recycle groundwater and to recover nitrates. The cost of any
additional remediation that may be required will be determined based on the
results of the investigation and risk assessment and cannot currently be
reasonably estimated. Therefore, no liability has been established at December
31, 2007.
2. Air
Matters
Under the
terms of a consent administrative order relating to air matters (“AirCAO”),
which became effective in February 2004, resolving certain air regulatory
alleged violations associated with the El Dorado Facility’s sulfuric acid plant
and certain other alleged air emission violations, the El Dorado Facility is
required to implement additional air emission controls at the El Dorado Facility
no later than February 2010. We currently estimate the remaining environmental
compliance related expenditures to be approximately $5.6 million, which has been
committed for 2008.
13. Commitments
and Contingencies (continued)
In
December 2006, the El Dorado Facility entered into a new CAO (“2006 CAO”) with
the ADEQ to resolve a problem with ammonia emissions from certain nitric acid
units. The catalyst suppliers had represented the volume of ammonia emissions
anticipated. The representation was the basis for the permitted emission limit,
but the representation of the catalyst suppliers was not accurate. Under the
2006 CAO, the ADEQ allowed the El Dorado Facility to re-evaluate the catalyst
performance and required the El Dorado Facility to submit a permit modification
with the appropriate ammonia limits. The permit modification was submitted to
ADEQ on June 11, 2007, and is currently under review. Until the permit is
modified, the 2006 CAO authorizes the El Dorado Facility to continue to operate
certain nitric acid units (even though the El Dorado Facility is in
non-compliance with the permitted emission limit for ammonia), provided that
during this period of time, the El Dorado Facility monitors and reports the
ammonia on a monthly basis.
3. Other
Environmental Matters
In April
2002, Slurry Explosive Corporation (“Slurry”), later renamed Chemex I Corp., a
subsidiary within our Chemical Business, entered into a Consent Administrative
Order (“Slurry Consent Order”) with the Kansas Department of Health and
Environment (“KDHE”), regarding Slurry’s Hallowell, Kansas manufacturing
facility (“Hallowell Facility”). The Slurry Consent Order addressed the release
of contaminants from the facility into the soils and groundwater and surface
water at the Hallowell Facility. There are no known users of the groundwater in
the area. The adjacent strip pit is used for fishing. Under the terms of the
Slurry Consent Order, Slurry is required to, among other things, submit an
environmental assessment work plan to the KDHE for review and approval, and
agree with the KDHE as to any required corrective actions to be performed at the
Hallowell Facility.
In
December 2002, Slurry and Universal Tech Corporation (“UTeC”), both subsidiaries
within our Chemical Business, sold substantially all of their operating assets
but retained ownership of the real property. At December 31, 2002, even though
we continued to own the real property, we did not assess our continuing
involvement with our former Hallowell facility to be significant and therefore
accounted for the sale as discontinued operations. In connection with this sale,
UTeC leased the real property to the buyer under a triple net long-term lease
agreement. However, Slurry retained the obligation to be responsible for, and
perform the activities under, the Slurry Consent Order. In addition, certain of
our subsidiaries agreed to indemnify the buyer of such assets for these
environmental matters. The successor (“Chevron”), the prior owner of the
Hallowell Facility has agreed, within certain limitations, to pay and has been
paying one-half of the costs incurred under the Slurry Consent Order subject to
reallocation.
As a
result of meetings with the KDHE, we recorded a provision of $644,000 for our
share of these additional estimated costs for 2005. In addition, during 2006,
additional costs were estimated due to requirements by the KDHE to further
investigate and delineate the site. As a result, for 2006, we recorded
provisions totaling $203,000 for our share of these estimated additional costs.
Based on additional modeling of the site, Slurry and Chevron are pursuing
a
13. Commitments
and Contingencies (continued)
course
with the KDHE of long-term surface and ground water monitoring to track the
natural decline in contamination, instead of the soil excavation proposed
previously. On September 12, 2007, the KDHE approved our proposal to perform two
years of surface and groundwater monitoring and to implement a Mitigation Work
Plan to acquire additional field data in order to more accurately characterize
the nature and extent of contaminant migration off-site. The two-year monitoring
program will terminate in February 2009. As a result of receiving approval from
the KDHE for our proposal, we recognized a reduction in our share of the
estimated costs associated with this remediation by $377,000 in 2007. This
reduction is included in the net income from discontinued operations of $348,000
for 2007 (in accordance with SFAS 144).
At
December 31, 2007, the total estimated liability (which is included in current
and noncurrent accrued and other liabilities) in connection with this
remediation matter is approximately $378,000 and Chevron’s share for these costs
(which is included in accounts receivable and other assets) is approximately
$194,000. These amounts are not discounted to their present value. It is
reasonably possible that a change in estimate of our liability and receivable
will occur in the near term.
B. Other
Pending, Threatened or Settled Litigation
1. Climate
Control Business
Wetherell v. Climate
Master, a proposed class action filed by Donna Wetherell, individually
and as a class action representative, Plaintiff, and Climate Master, Inc.,
Defendant, in the Circuit Court of the First Judicial Circuit, Johnson County,
Illinois on September 14, 2007 alleges that certain evaporator coils sold by one
of our subsidiaries in the Climate Control Business, Climate Master, Inc.
(“Climate Master”) in the state of Illinois from 1990 to approximately 2003 were
defective. The complaint requests certification as a class action for the State
of Illinois, which request has not yet been heard by the court. The
plaintiff asserts claims based upon negligence, strict liability, breach of
implied warranties, and the Illinois Consumer Fraud and Deceptive Business
Practices Act. Climate Master has timely filed its pleadings to remove
this action to federal court. Climate Master has also filed its answer denying
the plaintiff’s claims and asserting several affirmative defenses. Climate
Master’s insurers have been placed on notice of this matter. Currently the
Company is unable to determine the amount of damages or the likelihood of any
losses resulting from this claim. In addition, the Company intends to vigorously
defend Climate Master in connection with this matter. Therefore, no liability
has been established at December 31, 2007.
2. Chemical
Business
In 2005,
EDC sued the general partners of Dresser Rand Company, Ingersoll-Rand Company
and DR Holdings Corp., and an individual employee of Dresser Rand Company, in
connection with its faulty repair of a hot gas expander of one of EDC’s nitric
acid plants. As a result of defects in the repair, on October 8, 2004, the hot
gas expander failed, leading to a fire at the
13. Commitments
and Contingencies (continued)
nitric
acid plant. The lawsuit was styled El Dorado Chemical Company,
et al v. Ingersoll-Rand Company (NJ), et al. in the Union County Arkansas
Circuit Court. A trial was held in October 2006 resulting in a jury verdict
awarding EDC approximately $9.8 million in damages. The Defendants filed a
Notice to Appeal and filed a $10.7 million bond. EDC will pay
attorneys fees equal to approximately 32% of any recovery. We will recognize the
jury award if and when realized.
3. Other
Zeller
Pension Plan
In
February 2000, the Company’s board of directors authorized management to proceed
with the sale of the automotive products business, since the automotive products
business was no longer a “core business” of the Company. In May 2000, the
Company sold substantially all of its assets in its automotive products
business. After the authorization by the board, but prior to the sale, the
automotive products business purchased the assets and assumed certain
liabilities of Zeller Corporation (“Zeller”). The liabilities of Zeller assumed
by the automotive products business included Zeller’s pension plan, which is not
a multi-employer pension plan. In June 2003, the principal owner (“Owner”) of
the buyer of the automotive products business was contacted by a representative
of the Pension Benefit Guaranty Corporation (“PBGC”) regarding the plan. The
Owner was informed by the PBGC of a possible under-funding of the plan and a
possible takeover of the plan by the PBGC. The PBGC previously advised the
Company that the PBGC may consider the Company potentially liable for the
under-funding of the Zeller Plan in the event that the plan is taken over by the
PBGC and alleged that the under-funding is approximately $600,000. Our ERISA
counsel has advised us that, based on certain assumptions and representations
made by us to them, they believe that the possibility of an unfavorable
non-appealable verdict against us in a lawsuit if the PBGC attempts to hold us
liable for under-funding of the Zeller Plan is remote.
MEI
Drafts
Masinexportimport
Foreign Trade Company (“MEI”) has given notice to the Company and Summit Machine
Tool Manufacturing Corp. (“Summit”), a subsidiary of the Company, alleging that
it was owed $1,533,000 in connection with MEI’s attempted collection of ten
non-negotiable bank drafts payable to the order of MEI. The bank drafts were
issued by Aerobit Ltd. (“Aerobit”), a non-U.S. company, which at the time of
issuance of the bank drafts, was a subsidiary of the Company. Each of the bank
drafts has a face value of $153,300, for an aggregate principal face value of
$1,533,000. The bank drafts were issued in September 1992, and had a maturity
date of December 31, 2001. Each bank draft was endorsed by LSB Corp., which at
the time of endorsement, was a subsidiary of the Company.
On
October 22, 1990, a settlement agreement between the Company, Summit, and MEI
(the “Settlement Agreement”), was entered into, and in connection with the
Settlement Agreement, Summit issued to MEI obligations totaling $1,533,000. On
May 16, 1992, the Settlement
13. Commitments
and Contingencies (continued)
Agreement
was rescinded by the Company, Summit, and MEI at the request of MEI, and
replaced with an agreement purportedly substantially similar to the Settlement
Agreement between MEI and Aerobit, pursuant to which MEI agreed to replace the
original $1,533,000 of Summit’s obligations with Aerobit bank drafts totaling
$1,533,000, endorsed by LSB Corp. Aerobit previously advised us that MEI has not
fulfilled the requirements under the bank drafts for payment thereof. All of the
Company’s ownership interest in LSB Corp. was sold to an unrelated third party
in September 2002. Further, all of the Company’s interest in Aerobit was sold to
a separate unrelated third party, in a transaction completed on or before
November 2002. Accordingly, neither Aerobit, which was the issuer of the bank
drafts, nor LSB Corp., which was the endorser of the bank drafts, are currently
subsidiaries of the Company.
During
2007, Cromus, alleged to be a Romanian company and an assignee of MEI, filed a
lawsuit against us and two of our subsidiaries, Summit Machine Tool
Manufacturing Corp. (“Summit”) and Hercules Energy Mfg. Corp., Jack Golsen, our
CEO, Mike Tepper, an officer of our company, Bank of America Corporation and
others in the New York Supreme Court, in the case styled Cromus, as the assignee of
MEI vs. Summit, Index No. 114890107 (NY Sup. Ct., NY Co. The
complaint seeks $1,533,000 plus interest from 1990, $1,000,000 for failure to
purchase certain equipment and $1,000,000 in punitive damages. We
intend to contest this matter vigorously. As of December 31, 2007, no
liability has been established relating to these alleged damages.
The
Jayhawk Group
As
discussed in Note 15 - Non-Redeemable Preferred Stock, during July 2007, we
mailed to all holders of record of our Series 2 Preferred a notice of redemption
of all of the outstanding shares of Series 2 Preferred. The redemption of our
Series 2 Preferred was completed on August 27, 2007, the redemption date. The
terms of the Series 2 Preferred required that for each share of Series 2
Preferred so redeemed, we would pay, in cash, a redemption price equal to $50.00
plus $26.25 representing dividends in arrears thereon pro-rata to the date of
redemption. There were 193,295 shares of Series 2 Preferred outstanding, net of
treasury stock, as of the date the notice of redemption was
mailed. Pursuant to the terms of the Series 2 Preferred, the holders
of the Series 2 Preferred could convert each share into 4.329 shares of our
common stock, which right to convert terminated 10 days prior to the redemption
date. If a holder of the Series 2 Preferred elected to convert his, her or its
shares into our common stock pursuant to its terms, the Certificate of
Designations for the Series 2 Preferred provided, and it is our position, that
the holder that so converts would not be entitled to receive payment of any
dividends in arrears on the shares so converted. The Jayhawk Group, a former
affiliate of ours, converted 155,012 shares of Series 2 Preferred into 671,046
shares of common stock. The Jayhawk Group has advised us that it may bring legal
action against us for all dividends in arrears (approximately $4 million) on the
shares of Series 2 Preferred that it converted after receipt of the notice of
redemption. The Company believes the likelihood that the Jayhawk Group may
recover the dividends in arrears is not probable. Therefore, no liability has
been established at December 31, 2007. See discussion under Note 22 – Subsequent
Events.
13. Commitments
and Contingencies (continued)
We
received a letter dated May 23, 2007 from a law firm representing a stockholder
of ours demanding that we investigate potential short-swing profit liability
under Section 16(b) of the Exchange Act of the Jayhawk Group. The stockholder
alleges that the surrender by the Jayhawk Group of 180,450 shares of our Series
2 Preferred in our issuer exchange tender offer in March 2007 was a sale which
was subject to Section 16 and matchable against prior purchases of Series 2
Preferred by the Jayhawk Group. The Jayhawk Group advised us that they do not
believe that they are liable for short-swing profits under Section 16(b). The
provisions of Section 16(b) provide that if we do not file a lawsuit against the
Jayhawk Group in connection with these Section 16(b) allegations within 60 days
from the date of the stockholder’s notice to us, then the stockholder may pursue
a Section 16(b) short-swing profit claim on our behalf. We engaged our outside
corporate/securities counsel to investigate this matter. After completion of
this investigation, we attempted to settle the matter with the Jayhawk Group but
were unable to reach a resolution satisfactory to all parties. On October 9,
2007, the law firm representing the stockholder initiated a lawsuit against the
Jayhawk Group pursuing a Section 16(b) short-swing profit claim on our behalf up
to approximately $819,000. See Note 22 - Subsequent Events.
Securities
and Exchange Commission Inquiry
The SEC
made an informal inquiry to the Company by letter dated August 15, 2006. The
inquiry relates to the restatement of the Company’s consolidated financial
statements for the year ended December 31, 2004 and accounting matters relating
to the change in inventory accounting from LIFO to FIFO. The Company has
responded to the inquiry. At the present time, the informal inquiry is not a
pending proceeding nor does it rise to the level of a government investigation.
Until further communication and clarification with the SEC, if any, the Company
is unable to determine:
|
|
·
|
if
the inquiry will ever rise to the level of an investigation or proceeding,
or
|
|
|
·
|
the
materiality to the Company’s financial position with respect to
enforcement actions, if any, the SEC may have available to
it.
|
Other
Claims and Legal Actions
We are
also involved in various other claims and legal actions which in the opinion of
management, after consultation with legal counsel, if determined adversely to
us, would not have a material effect on our business, financial condition or
results of operations.
14. Stockholders’
Equity
Qualified Stock Option Plans -
At December 31, 2007, we have a 1993 Stock Option and Incentive Plan
(“1993 Plan”) and a 1998 Stock Option Plan (“1998 Plan”). The 1993 Plan has
expired, and accordingly, no additional options may be granted from this plan.
Options granted prior to the expiration of this plan continue to remain valid
thereafter in accordance with their terms. Under the 1998 Plan, we are
authorized to grant options to purchase up to 1,000,000
14. Stockholders’
Equity (continued)
shares of
our common stock to our key employees. Effective December 31, 2005, our board of
directors approved the acceleration of the vesting schedule of 61,500 shares of
qualified stock options which would have been fully vested on November 17, 2009.
Based on FIN 44, since the modification to the vesting schedule did not renew or
increase the life of these stock options, a remeasurement of the stock options
was not required and no stock-based compensation was recognized in 2005. At
December 31, 2007, there are 8,000 options available to be granted. At December
31, 2007, there were 26,500 options outstanding related to the 1993 Plan and
429,904 options outstanding relating to the 1998 Plan all of which were
exercisable. The exercise price of options granted under these plans was equal
to the market value of our common stock at the date of grant. For participants
who own 10% or more of our common stock at the date of grant, the exercise price
is 110% of the market value at the date of grant and the options lapse after
five years from the date of grant.
The
following information relates to our qualified stock option plans:
|
Shares |
Weighted
Average
Exercise Price |
||||||
|
Outstanding
at beginning of year
|
525,304
|
$
|
1.97
|
||||
|
Granted
|
-
|
$
|
-
|
||||
|
Exercised
|
(68,900
|
)
|
$
|
3.54
|
|||
|
Cancelled,
forfeited or expired
|
-
|
$
|
-
|
||||
|
Outstanding
at end of year
|
456,404
|
$
|
1.73
|
||||
|
Exercisable
at end of year
|
456,404
|
$
|
1.73
|
||||
|
2007
|
2006
|
2005
|
|||||||||
|
Weighted-average
fair value of options granted during year
|
N/A
|
N/A
|
$
|
3.78
|
|||||||
|
Total
intrinsic value of options exercised during the year
|
$
|
1,108,000
|
$
|
1,886,000
|
$
|
333,000
|
|||||
|
Total
fair value of options vested during the year
|
$
|
-
|
$
|
-
|
$
|
362,000
|
|||||
14. Stockholders’
Equity (continued)
The
following table summarizes information about qualified stock options outstanding
and exercisable at December 31, 2007:
|
Stock
Options Outstanding and Exercisable
|
|
Exercise Prices |
Shares Outstanding and Exercisable |
Weighted Average Remaining Contractual Life in Years |
Weighted Average Exercise Price |
Intrinsic
Value
of
Shares
Outstanding and Exercisable |
|
$
|
1.25
|
342,304
|
1.58
|
$
|
1.25
|
$
|
9,232,000
|
|||||||
|
$
|
2.73
|
93,000
|
3.92
|
$
|
2.73
|
2,370,000
|
||||||||
|
$
|
5.10
|
21,100
|
7.92
|
$
|
5.10
|
488,000
|
||||||||
|
$
|
1.25
|
-
|
$
|
5.10
|
456,404
|
2.35
|
$
|
1.73
|
$
|
12,090,000
|
Non-Qualified Stock Option Plans -
Our board of directors approved the grants of non-qualified stock options
to our outside directors, our Chief Executive Officer, Chief Financial Officer
and certain key employees, included in the tables below. The option prices are
generally based on the market value of our common stock at the dates of grants.
On June 19, 2006, the Compensation and Stock Option Committee of our board of
directors granted 450,000 shares of non-qualified stock options (the “Options”)
to certain Climate Control Business employees which were subject to
shareholders’ approval. The option price of the Options is $8.01 per share which
is based on the market value of our common stock at the date the board of
directors granted the shares (June 19, 2006). The Options vest over a ten-year
period at a rate of 10% per year and expire on September 16, 2016 with certain
restrictions. Under SFAS 123(R), the fair value for the Options was estimated,
using an option pricing model, as of the date we received shareholders’ approval
which occurred during our 2007 annual shareholders’ meeting on June 14, 2007.
Under SFAS 123(R) for accounting purposes, the grant date and service inception
date is June 14, 2007.
The total
fair value for the Options was estimated to be $6,924,000, or $15.39 per share,
using a Black-Scholes-Merton option pricing model with the following
assumptions:
|
·
|
risk-free
interest rate of 5.16% based on an U.S. Treasury zero-coupon issue with a
term approximating the estimated expected life as of the grant
date;
|
|
·
|
a
dividend yield of 0 based on historical
data;
|
|
·
|
volatility
factors of the expected market price of our common stock of 24.7% based on
historical volatility of our common stock since it has been traded on the
American Stock Exchange, and;
|
|
·
|
a
weighted average expected life of the options of 5.76 years based on the
historical exercise behavior of these
employees.
|
14. Stockholders’
Equity (continued)
As of
June 14, 2007, we began amortizing the total estimated fair value of the Options
to SG&A, which will continue through June 18, 2016 (a weighted-average
vesting period of 8.46 years). As a result, we incurred stock-based
compensation expense of $421,000 for 2007. At December 31, 2007, the
total stock-based compensation expense not yet recognized is $6,503,000 relating
to the non-vested Options.
Effective
December 31, 2005, our board of directors approved the acceleration of the
vesting schedule of 30,000 shares of non-qualified stock options which would
have been fully vested on April 22, 2008 and 15,000 shares of non-qualified
stock options which would have been fully vested on November 7, 2006. Based on
FIN 44, since this modification to the vesting schedule did not renew or
increase the life of these stock options, a remeasurement of the stock options
was not required and no stock-based compensation was recognized in
2005.
We have
an Outside Directors Stock Option Plan (the “Outside Director Plan”). The
Outside Director Plan authorizes the grant of non-qualified stock options to
each member of our board of directors who is not an officer or employee of the
Company or its subsidiaries. The maximum number of options that may be issued
under the Outside Director Plan is 400,000 of which 295,000 are available to be
granted at December 31, 2007. At December 31, 2007, there are 54,000 options
outstanding related to the Outside Director Plan.
14. Stockholders’ Equity (continued)
The
following information relates to our non-qualified stock option
plans:
|
Shares |
Weighted
Average Exercise Price |
||||||
|
Outstanding
at beginning of year
|
980,600
|
$
|
1.98
|
||||
|
Granted
|
450,000
|
$
|
8.01
|
||||
|
Exercised
|
(513,100
|
)
|
$
|
2.52
|
|||
|
Surrendered,
forfeited, or expired
|
-
|
$
|
-
|
||||
|
Outstanding
at end of year
|
917,500
|
$
|
4.64
|
||||
|
Exercisable
at end of year
|
512,500
|
$
|
1.97
|
||||
|
2007
|
2006
|
2005
|
|||||||||
|
Weighted-average
fair value of options granted during year
|
$
|
15.39
|
N/A
|
N/A
|
|||||||
|
Total
intrinsic value of options exercised during the year
|
$
|
10,042,000
|
$
|
147,000
|
$
|
38,000
|
|||||
|
Total
fair value of options vested during the year
|
$
|
692,000
|
$
|
-
|
$
|
257,000
|
|||||
The
following tables summarize information about non-qualified stock options
outstanding and exercisable at December 31, 2007:
|
Stock
Options Outstanding
|
|
Exercise Prices |
Shares Outstanding |
Weighted
Average Remaining Contractual Life in Years |
Weighted Average Exercise Price |
Intrinsic Value
of
Shares
Outstanding |
|
$
|
1.25
|
-
|
$
|
1.38
|
399,000
|
1.58
|
$
|
1.27
|
$
|
10,754,000
|
||||
|
$
|
2.62
|
-
|
$
|
2.73
|
32,500
|
4.22
|
$
|
2.70
|
829,000
|
|||||
|
$
|
4.19
|
61,000
|
0.33
|
$
|
4.19
|
1,466,000
|
||||||||
|
$
|
8.01
|
425,000
|
8.75
|
$
|
8.01
|
8,589,000
|
||||||||
|
$
|
1.25
|
-
|
$
|
8.01
|
917,500
|
4.91
|
$
|
4.64
|
$
|
21,638,000
|
14. Stockholders’ Equity (continued)
|
Stock
Options Exercisable
|
|
Exercise Prices |
Shares Exercisable |
Weighted
Average Remaining Contractual Life in Years |
Weighted Average Exercise Price |
Intrinsic Value
of
Shares
Exercisable |
|
$
|
1.25
|
-
|
$
|
1.38
|
399,000
|
1.58
|
$
|
1.27
|
$
|
10,754,000
|
||||
|
$
|
2.62
|
-
|
$
|
2.73
|
32,500
|
4.22
|
$
|
2.70
|
829,000
|
|||||
|
$
|
4.19
|
61,000
|
0.33
|
$
|
4.19
|
1,466,000
|
||||||||
|
$
|
8.01
|
20,000
|
8.75
|
$
|
8.01
|
404,000
|
||||||||
|
$
|
1.25
|
-
|
$
|
8.01
|
512,500
|
1.88
|
$
|
1.97
|
$
|
13,453,000
|
Preferred Share Purchase
Rights - In 1999, we adopted a preferred share rights plan (the “Rights
Plan”). Under the Rights Plan, we declared a dividend distribution of one
Renewed Preferred Share Purchase Right (the “Renewed Preferred Right”) for each
outstanding share of our common stock outstanding as of February 27, 1999 and
all further issuances of our common stock would carry the rights. The Rights
Plan has a term of ten years from its effective date. The Renewed Preferred
Rights are designed to ensure that all of our stockholders receive fair and
equal treatment in the event of a proposed takeover or abusive tender
offer.
The
Renewed Preferred Rights are generally exercisable when a person or group (other
than Jack E. Golsen, our Chairman and Chief Executive Officer (“CEO”), and his
affiliates, our company or any of our subsidiaries, our employee savings plans
and certain other limited excluded persons or entities, as set forth in the
Rights Plan) acquire beneficial ownership of 20% or more of our common stock
(such a person or group will be referred to as the “Acquirer”). Each Renewed
Preferred Right (excluding Renewed Preferred Rights owned by the Acquirer)
entitles stockholders to buy one one-hundredth (1/100) of a share of a new
series of participating preferred stock at an exercise price of $20. Following
the acquisition by the Acquirer of beneficial ownership of 20% or more of our
common stock, and prior to the acquisition of 50% or more of our common stock by
the Acquirer, our board of directors may exchange all or a portion of the
Renewed Preferred Rights (other than Renewed Preferred Rights owned by the
Acquirer) for our common stock at the rate of one share of common stock per
Renewed Preferred Right. Following acquisition by the Acquirer of 20% or more of
our common stock, each Renewed Preferred Right (other than the Renewed Preferred
Rights owned by the Acquirer) will entitle its holder to purchase a number of
our common shares having a market value of two times the Renewed Preferred
Right’s exercise price in lieu of the new preferred stock. Thus, only as an
example, if our common shares at such time were trading at $10 per share and the
exercise price of the Renewed Preferred Right is $20, each Renewed Preferred
Right would thereafter be exercisable at $20 for four of our common
shares.
If after
the Renewed Preferred Share Rights are triggered, we are acquired, or we sell
50% or more of our assets or earning power, each Renewed Preferred Right (other
than the Renewed Preferred Rights owned by the Acquirer) will entitle its holder
to purchase a number of the
14. Stockholders’
Equity (continued)
acquiring
company’s common shares having a market value at the time of two times the
Renewed Preferred Right’s exercise price, except if the transaction is
consummated with a person or group who acquired our common shares pursuant to a
Permitted Offer, the price for all of our common shares paid to all of our
common shareholders is not less than the price per share of our common stock
pursuant to the Permitted Offer and the form of consideration offered in the
transaction is the same as the form of consideration paid pursuant to the
Permitted Offer. As defined in the Rights Plan, a “Permitted Offer” is an offer
for all of our common shares at a price and on terms that a majority of our
Board, who are not officers, or the person or group who could trigger the
exerciseability of the Renewed Preferred Rights, deems adequate and in our best
interest and that of our shareholders. Thus, only as an example, if our common
shares were trading at $10 per share and the exercise price of a Renewed
Preferred Right is $20, each Renewed Preferred Right would thereafter be
exercisable at $20 for four shares of the Acquirer.
Prior to
the acquisition by the Acquirer of beneficial ownership of 20% or more of our
stock, our board of directors may redeem the Renewed Preferred Rights for $.01
per Renewed Preferred Right.
Other – In November 2007, the
Jayhawk Group exercised a warrant to purchase 112,500 shares of our common stock
for $3.49 per share.
In March
2005, the holders exercised certain warrants, under a cashless exercise
provision, to purchase 586,140 shares of our common stock.
As of
December 31, 2007, we have reserved 4.5 million shares of common stock issuable
upon potential conversion of convertible debt, preferred stocks and stock
options pursuant to their respective terms.
15. Non-Redeemable
Preferred Stock
Series B Preferred -The 20,000
shares of Series B Preferred, $100 par value, are convertible, in whole or in
part, into 666,666 shares of our common stock (33.3333 shares of common stock
for each share of preferred stock) at any time at the option of the holder and
entitle the holder to one vote per share. The Series B Preferred provides for
annual cumulative dividends of 12% from date of issue, payable when and as
declared.
Series 2 Preferred -The Series
2 Preferred had no par value and had a liquidation preference of $50.00 per
share plus dividends in arrears and was convertible at the option of the holder
at any time, unless previously redeemed, into our common stock at an initial
conversion price of $11.55 per share (equivalent to a conversion rate of
approximately 4.329 shares of common stock for each share of Series 2
Preferred), subject to adjustment under certain conditions. Upon the mailing of
notice of certain corporate actions, holders had special conversion rights as
discussed below. The Series 2 Preferred was redeemable at our option, in whole
or in part, at $50.00 per share, plus dividends in arrears to the redemption
date. Dividends on the Series 2 Preferred were cumulative and payable quarterly
in arrears.
15. Non-Redeemable
Preferred Stock (continued)
Completion
of Tender Offer in 2007
On
January 26, 2007, our board of directors approved and on February 9, 2007, we
began a tender offer to exchange shares of our common stock for up to 309,807 of
the 499,102 outstanding shares of the Series 2 Preferred. The tender offer
expired on March 12, 2007 and our board of directors accepted the shares
tendered on March 13, 2007. The terms of the tender offer provided for the
issuance by the Company of 7.4 shares of common stock in exchange for each share
of Series 2 Preferred tendered in the tender offer and the waiver of all rights
to the dividends in arrears on the Series 2 Preferred tendered. As a result of
this tender offer, we issued 2,262,965 shares of our common stock for 305,807
shares of Series 2 Preferred that were tendered. As a result, we effectively
settled the dividends in arrears on the Series 2 Preferred tendered totaling
approximately $7.3 million ($23.975 per share).
Because
the exchanges under the tender offer were pursuant to terms other than the
original terms, the transactions were considered extinguishments of the
preferred stock. Also the transactions qualified as induced conversions under
SFAS 84. Accordingly, we recorded a charge (stock dividend) to accumulated
deficit of approximately $12.3 million which equaled the excess of the fair
value of the common stock issued over the fair value of the common stock
issuable pursuant to the original conversion terms. To measure fair value, we
used the closing price of our common stock on March 13, 2007.
Included
in the amounts discussed above and pursuant to the Jayhawk Agreement and the
terms of the tender offer, the Jayhawk Group and Jack E. Golsen (Chairman of the
Board and CEO of the Company), his wife, children (including Barry H. Golsen,
our President) and certain entities controlled by them (the “Golsen Group”)
tendered 180,450 and 26,467 shares, respectively, of Series 2 Preferred for
1,335,330 and 195,855 shares, respectively, of our common stock. As a result, we
effectively settled the dividends in arrears on these shares of Series 2
Preferred tendered totaling approximately $4.96 million with $4.33 million
relating to the Jayhawk Group and $0.63 million relating to the Golsen
Group.
No
fractional shares were issued so cash was paid in lieu of any additional shares
in an amount equal to the fraction of a share times the closing price per share
of our common stock on the last business day immediately preceding the
expiration date of the tender offer.
Completion
of Redemption in 2007
On July
11, 2007, our board of directors approved the redemption of all of our
outstanding Series 2 Preferred. We mailed a notice of redemption to all holders
of record of our Series 2 Preferred on July 12, 2007. The redemption date was
August 27, 2007, and each share of Series 2 Preferred that was redeemed received
a redemption price of $50.00 plus $26.25 per share in dividends in arrears
pro-rata to the date of redemption.
15. Non-Redeemable
Preferred Stock (continued)
The
holders of shares of Series 2 Preferred had the right to convert each share into
4.329 shares of our common stock, which right to convert terminated 10 days
prior to the redemption date. If a holder converted its shares of Series 2
Preferred, the holder was not entitled to any dividends in arrears as to the
shares of Series 2 Preferred converted. As a result, 167,475
shares of Series 2 Preferred were converted (of which 155,012 shares were
converted by the Jayhawk Group) into 724,993 shares of our common stock (of
which 671,046 shares were issued to the Jayhawk Group).
As a
result of the conversions, only 25,820 shares of Series 2 Preferred were
redeemed (of which 23,083 shares were held by the Golsen Group) for a total
redemption price of $1,291,000 (of which approximately $1,154,000 was paid to
the Golsen Group). In addition, we paid approximately $678,000 in dividends in
arrears (of which approximately $606,000 was paid to the Golsen
Group). The shares of the Series 2 Preferred were redeemed using a
portion of the net proceeds of the 2007 Debentures.
No
fractional shares were issued so cash was paid in lieu of any additional shares
in an amount equal to the fraction of a share times the closing price per share
of our common stock on the day the respective shares were
converted.
Exchange
Agreements in 2006
During
October 2006, we entered into Exchange Agreements with certain holders of our
Series 2 Preferred. Pursuant to the terms of the Exchange Agreements, we issued
773,655 shares of our common stock in exchange for 104,548 shares of Series 2
Preferred and the waiver by the holders of their rights to all unpaid dividends.
As a result, we effectively settled the dividends in arrears on the Series 2
Preferred exchanged totaling approximately $2.4 million ($23.2625 per share).
Because the exchanges were pursuant to terms other the original terms, the
transactions were considered extinguishments of the preferred
stock. In addition, the transactions qualified as induced conversions
under SFAS 84. Accordingly, we recorded a charge (stock dividend) to accumulated
deficit of approximately $2.9 million which equaled the excess of the fair value
of the common stock issued over the fair value of the common stock issuable
pursuant to the original conversion terms. To measure fair value, we used the
closing price of our common stock on the day the parties entered into an
Exchange Agreement.
Jayhawk
Agreement in 2006
During
November 2006, the Company entered into an agreement (“Jayhawk Agreement”) with
the Jayhawk Group. Under the Jayhawk Agreement, the Jayhawk Group agreed to
tender (discussed above) 180,450 shares of the 346,662 shares of the Series 2
Preferred, if the Company made an exchange or tender offer for the Series 2
Preferred. In addition, as a condition to the Jayhawk Group’s
obligation to tender such shares of Series 2 Preferred in an exchange/tender
offer, the Jayhawk Agreement further provided that the Golsen Group would
exchange only 26,467 of the 49,550 shares of Series 2 Preferred beneficially
owned by them. As a result, only 309,807 of the 499,102 shares of Series 2
Preferred outstanding would be eligible to participate
15. Non-Redeemable
Preferred Stock (continued)
in an
exchange/tender offer, with the remaining 189,295 being held by the Jayhawk
Group and the Golsen Group.
Other
Series 2 Preferred Transactions
During
2007, we cancelled 18,300 shares of Series 2 Preferred previously held as
treasury stock. As the result of the cancellation, no shares of Series 2
Preferred were issued and outstanding at December 31, 2007. During 2006, we
purchased 1,600 shares of Series 2 Preferred in the open market for $95,000
(average cost of $59.74 per share). These shares were cancelled by the Company.
During 2005, we purchased 13,300 shares of Series 2 Preferred in the open market
for $597,000 (average cost of $44.90 per share). These shares were being held as
treasury stock.
Series D Preferred -The Series
D Preferred have no par value and are convertible, in whole or in part, into
250,000 shares of our common stock (1 share of common stock for 4 shares of
preferred stock) at any time at the option of the holder. Dividends on the
Series D Preferred are cumulative and payable annually in arrears at the rate of
6% per annum of the liquidation preference of $1.00 per share but would be paid
only after dividends in arrears were paid on the Series 2 Preferred. Each holder
of the Series D Preferred shall be entitled to .875 votes per
share.
Cash Dividends Paid – In
addition to the settlement of the dividends in arrears relating to the tender
offer in 2007 and the exchange agreements in 2006 as discussed above, during
2007, we paid the following cash dividends on our non-redeemable preferred
stock:
|
·
|
$1,890,000
on the Series B Preferred ($94.52 per
share);
|
|
·
|
$678,000
on the Series 2 Preferred ($26.25 per share);
and
|
|
·
|
$360,000
on the Series D Preferred ($0.36 per
share).
|
During
2006, we paid the following cash dividends on our non-redeemable preferred
stock:
|
·
|
$30,000
on the Series B Preferred ($1.48 per share);
and
|
|
·
|
$231,000
on the Series 2 Preferred ($0.40 per
share).
|
At
December 31, 2007, there were no dividends in arrears.
Other - At December 31, 2007,
we are authorized to issue an additional 229,415 shares of $100 par value
preferred stock and an additional 4,000,000 shares of no par value preferred
stock. Upon issuance, our board of directors will determine the specific terms
and conditions of such preferred stock.
16. Executive
Benefit Agreements and Employee Savings Plans
In 1981,
we entered into individual death benefit agreements with certain key executives
(“1981 Agreements”). Under the 1981 Agreements, should the executive die while
employed, we are
16. Executive
Benefit Agreements and Employee Savings Plans (continued)
required
to pay the beneficiary named in the agreement in 120 equal monthly installments
aggregating to an amount specified in the agreement. At December 31, 2007, the
monthly installments specified in the 1981 Agreements total $34,000 and the
aggregate undiscounted death benefits are $4.1 million. The benefits under the
1981 Agreements are forfeited if the respective executive’s employment is
terminated for any reason prior to death. The 1981 Agreements may be terminated
by the Company at any time and for any reason prior to the death of the
employee.
In 1992,
we entered into individual benefit agreements with certain key executives (“1992
Agreements”) that provide for annual benefit payments for life (in addition to
salary) ranging from $16,000 to $18,000 payable in monthly installments when the
employee reaches age 65. As of December 31, 2007 and 2006, the liability
for benefits under the 1992 Agreements is $1,040,000 and $979,000, respectively,
which is included in current and noncurrent accrued and other liabilities in the
accompanying consolidated balance sheets. The liability reflects the present
value of the remaining estimated payments at discount rates of 5.70% and 6.01%
as of December 31, 2007 and 2006, respectively. Future estimated
undiscounted payments aggregate to $2.1 million as of December 31, 2007. For
2007, 2006 and 2005, charges to SG&A for these benefits were $106,000,
$75,000 and $110,000, respectively. As part of the 1992 Agreements, should the
executive die prior to attaining the age of 65, we will pay the beneficiary
named in the agreement in 120 equal monthly installments aggregating to an
amount specified in the agreement. This amount is in addition to any amount
payable under the 1981 Agreement should that executive have both a 1981 and 1992
agreement. At December 31, 2007, the aggregate undiscounted death benefit
payments specified in the 1992 Agreements are $456,000. The benefits under the
1992 Agreements are forfeited if the respective executive’s employment is
terminated prior to age 65 for any reason other than death. The 1992 Agreements
may be terminated by the Company at any time and for any reason prior to the
death of the employee.
In 2005,
we entered into a death benefit agreement (“2005 Agreement”) with our CEO. The
Death Benefit Agreement provides that, upon our CEO’s death, we will pay to our
CEO’s designated beneficiary, a lump-sum payment of $2.5 million to be funded
from the net proceeds received by us under certain life insurance policies on
our CEO’s life that are owned by us. We are obligated to keep in existence life
insurance policies with a total face amount of no less than $2.5 million of the
stated death benefit. As of December 31, 2007, the life insurance policies owned
by us on the life of our CEO have a total face amount of $7 million. The benefit
under the 2005 Agreement is not contingent upon continued employment and may be
amended at any time by written agreement executed by the CEO and the
Company.
As of
December 31, 2007, the liability for death benefits under the 1981, 1992 and
2005 Agreements is $2,051,000 ($1,446,000 at December 31, 2006) which is
included in current and noncurrent accrued and other liabilities. We accrue for
such liabilities when they become probable and discount the liabilities to their
present value.
16. Executive Benefit Agreements and Employee Savings Plans (continued)
To assist
us in funding the benefit agreements discussed above and for other business
reasons, we purchased life insurance contracts on various individuals in which
we are the beneficiary. As of December 31, 2007, the total face amount of these
policies is $21 million of which $2.5 million of the proceeds is required to be
paid under the 2005 Agreement as discussed above. Some of these life insurance
policies have cash surrender values that we have borrowed against. The cash
surrender values are included in other assets in the amounts of $1,151,000 and
$917,000, net of borrowings of $1,859,000 and $2,084,000 at December 31, 2007
and 2006, respectively. Increases in cash surrender values of $548,000, $432,000
and $574,000 are netted against the premiums paid for life insurance policies of
$836,000, $837,000 and $1,037,000 in 2007, 2006 and 2005 respectively, and are
included in SG&A.
We
sponsor a savings plan under Section 401(k) of the Internal Revenue Code under
which participation is available to substantially all full-time employees. We do
not presently contribute to this plan except for EDC and CNC’s union employees
and EDNC employees which amounts were not material for each of the three years
ended December 31, 2007.
17. Fair
Value of Financial Instruments
The
following discussion of fair values is not indicative of the overall fair value
of our assets and liabilities since the provisions of SFAS 107 do not apply to
all assets, including intangibles.
As of
December 31, 2007 and 2006, due to their short-term nature, the carrying values
of financial instruments classified as cash, restricted cash, accounts
receivable, accounts payable, short-term financing and drafts payable, and
accrued and other liabilities approximated their estimated fair values. Carrying
values for our interest rate cap contracts and exchange-traded futures contracts
approximate their fair value since they are accounted for on a mark-to-market
basis. Carrying values for variable rate borrowings are believed to approximate
their fair value. Fair values for fixed rate borrowings, other than the 2007 and
2006 Debentures, 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 while also taking into consideration
our current credit worthiness. The estimated fair value of the 2007 and 2006
Debentures are based on the conversion rate and market price of our common stock
at December 31, 2007 and 2006, respectively.
17. Fair
Value of Financial Instruments (continued)
|
December
31, 2007
|
December
31, 2006
|
|
Estimated
Fair Value |
Carrying
Value |
Estimated
Fair Value |
Carrying
Value
|
|
(In
Thousands)
|
|
Variable
Rate:
|
|||||||||||
|
Secured
Term Loan
|
$
|
50,000
|
$
|
50,000
|
$
|
-
|
$
|
-
|
|||
|
Working
Capital Revolver Loan
|
-
|
-
|
26,048
|
26,048
|
|||||||
|
Senior
Secured Loan (1)
|
-
|
-
|
53,774
|
50,000
|
|||||||
|
Other
bank debt and equipment financing
|
155
|
155
|
2,517
|
2,517
|
|||||||
|
Fixed
Rate:
|
|||||||||||
|
5.5%
Convertible Senior Subordinated Notes
|
61,632
|
60,000
|
-
|
-
|
|||||||
|
Other
bank debt and equipment financing
|
12,298
|
11,952
|
14,853
|
15,127
|
|||||||
|
7%
Convertible Senior Subordinated Notes
|
-
|
-
|
6,543
|
4,000
|
|||||||
|
$
|
124,085
|
$
|
122,107
|
$
|
103,735
|
$
|
97,692
|
|
|
(1)
The Senior Secured Loan had a variable interest rate not to exceed 11% or
11.5% depending on ThermaClime’s leverage
ratio.
|
18. Property
and Business Interruption Insurance Recoveries
El Dorado
Facility - Beginning in October 2004 and continuing into June 2005, the Chemical
Business’ results were adversely affected as a result of the loss of production
due to a mechanical failure which led to a fire at one of the four nitric acid
plants at the El Dorado Facility. The plant was restored to normal production in
June 2005. We filed insurance claims for recovery of business interruption and
property losses related to this incident. For 2006 and 2005, we realized
insurance recoveries of $882,000 and $1,929,000, respectively, relating to the
business interruption claim which is recorded as a reduction to cost of sales.
For 2005, we recognized insurance recoveries totaling $1,618,000, of which most
were under our replacement cost insurance policy relating to this property
damage claim which are recorded as other income.
Cherokee
Facility - As a result of damage caused by Hurricane Katrina, the natural gas
pipeline servicing the chemical production facility located in Cherokee, Alabama
(the “Cherokee Facility”) suffered damage and the owner of the pipeline declared
an event of Force Majeure. This event of Force Majeure caused curtailments and
interruption in the delivery of natural gas to the Cherokee Facility. CNC’s
insurer was promptly put on notice of a claim and during 2006, CNC filed a
business interruption claim relating to this incident. In 2007, we
realized insurance recoveries of $3,750,000 relating to this business
interruption claim which are recorded as a reduction to cost of
sales.
19. Other Expense, Other Income and Non-Operating Other Income, net
|
Year
ended December 31,
|
|
2007
|
2006
|
2005
|
|
(In
Thousands)
|
|
Other
expense:
|
|||||||||||
|
Losses
on sales and disposals of property and equipment
|
$
|
378
|
$
|
-
|
$
|
-
|
|||||
|
Impairments
of long-lived assets (1)
|
250
|
286
|
237
|
||||||||
|
Settlement
of litigation and potential litigation (2)
|
350
|
300
|
-
|
||||||||
|
Other
miscellaneous expense (3)
|
208
|
136
|
95
|
||||||||
|
Total
other expense
|
$
|
1,186
|
$
|
722
|
$
|
332
|
|
Other
income:
|
|||||||||||
|
Settlement
of litigation (4)
|
$
|
3,272
|
$
|
-
|
$
|
-
|
|||||
|
Rental
income
|
17
|
25
|
142
|
||||||||
|
Property
insurance recoveries in excess of losses incurred
|
-
|
-
|
1,618
|
||||||||
|
Arbitration
award
|
-
|
1,217
|
-
|
||||||||
|
Gains
on the sales of property and equipment, net
|
-
|
12
|
714
|
||||||||
|
Other
miscellaneous income (3)
|
206
|
305
|
208
|
||||||||
|
Total
other income
|
$
|
3,495
|
$
|
1,559
|
$
|
2,682
|
|
Year
ended December 31,
|
|
2007
|
2006
|
2005
|
|
(In
Thousands)
|
|
Non-operating
other income, net:
|
|||||||||||
|
Interest
income
|
$
|
1,291
|
$
|
523
|
$
|
174
|
|||||
|
Gains
on sale of certain current assets, primarily precious
metals
|
12
|
-
|
237
|
||||||||
|
Net
proceeds from certain key individual life insurance
policies (5)
|
-
|
-
|
1,162
|
||||||||
|
Miscellaneous
income (3)
|
61
|
199
|
137
|
||||||||
|
Miscellaneous
expense (3)
|
(100
|
)
|
(98
|
)
|
(149
|
)
|
|||||
|
Total
non-operating other income, net
|
$
|
1,264
|
$
|
624
|
$
|
1,561
|
|
(1)
|
Based
on estimates of the fair values obtained from external sources and
estimates made internally based on inquiry and other techniques, we
recognized the following
impairments:
|
19. Other
Expense, Other Income and Non-Operating Other Income, net
(continued)
|
Year
ended December 31,
|
|
2007
|
2006
|
2005
|
|
(In
Thousands)
|
|
Chemical
Business assets
|
$
|
250
|
$
|
286
|
$
|
117
|
|||||
|
Corporate
assets
|
-
|
-
|
120
|
||||||||
|
$
|
250
|
$
|
286
|
$
|
237
|
|
(2)
|
During
2007, a settlement was reached relating to alleged damages claimed by a
customer of our Climate Control Business. During 2006, a settlement was
reached relating to an asserted financing
fee.
|
|
(3)
|
Amounts
represent numerous unrelated transactions, none of which are individually
significant requiring separate
disclosure.
|
|
(4)
|
During
2007, our Chemical Business reached a settlement with Dynegy, Inc. and one
of its subsidiaries, relating to a previously reported lawsuit. This
settlement reflects the net proceeds of $2,692,000 received by the
Cherokee Facility and the retention by the Cherokee Facility of a disputed
$580,000 accounts payable.
|
|
(5)
|
Amount
relates to the recognition in net proceeds from life insurance policies
due to the unexpected death of one of our executives in January
2005.
|
20. Segment
Information
Factors
Used by Management to Identify the Enterprise’s Reportable Segments and
Measurement of Segment Income or Loss and Segment Assets
We have
two reportable segments: the Climate Control Business and the Chemical Business.
Our 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.
We
evaluate performance and allocate resources based on operating income 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
Climate Control – The Climate
Control Business segment manufactures and sells the following variety of
heating, ventilation, and air conditioning (“HVAC”) products:
|
·
|
geothermal
and water source heat pumps,
|
|
·
|
hydronic
fan coils, and
|
|
·
|
other
HVAC products including large custom air handlers, modular chiller systems
and other products and services.
|
These
HVAC products are primarily for use in commercial and residential new building
construction, renovation of existing buildings and replacement of existing
systems. Our various facilities located 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.
Chemical –The Chemical
Business segment manufactures and sells:
|
·
|
anhydrous
ammonia, ammonium nitrate, urea ammonium nitrate, and ammonium nitrate
ammonia solution for agricultural
applications,
|
|
·
|
concentrated,
blended and regular nitric acid, mixed nitrating acids, metallurgical and
commercial grade anhydrous ammonia, sulfuric acid, and high purity
ammonium nitrate for industrial applications,
and
|
|
·
|
industrial
grade ammonium nitrate and solutions for the mining
industry.
|
Our
primary manufacturing facilities are located in El Dorado, Arkansas, Baytown,
Texas and Cherokee, Alabama. Sales to customers of this segment primarily
include industrial users of acids throughout the United States and parts of
Canada; farmers, ranchers, fertilizer dealers and distributors located in the
Central and Southeastern United States; and explosive manufacturers in the
United States.
20. Segment Information (continued)
The
Chemical Business is subject to various federal, state and local environmental
regulations. Although we have 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 we will not sustain a significant
future operating loss related thereto.
As of
December 31, 2007, our Chemical Business employed 360 persons, with 138
represented by unions under currently unexecuted negotiated agreements, which
the parties expect to execute in the near future. Assuming the union agreements
are executed in their current form, the agreements will expire in July through
November of 2010.
Other - The business operation
classified as “Other” sells industrial machinery and related components to
machine tool dealers and end users located primarily in North
America.
20. Segment Information (continued)
Segment
Financial Information
Information
about our continuing operations in different industry segments for each of the
three years in the period ended December 31, is detailed below:
|
2007
|
2006
|
2005
|
|
(In
Thousands)
|
|
Net
sales:
|
|||||||||||
|
Climate
Control:
|
|||||||||||
|
Geothermal
and water source heat pumps
|
$
|
165,115
|
$
|
134,210
|
$
|
85,268
|
|||||
|
Hydronic
fan coils
|
85,815
|
59,497
|
53,564
|
||||||||
|
Other
HVAC products
|
35,435
|
27,454
|
18,027
|
||||||||
|
Total
Climate Control
|
286,365
|
221,161
|
156,859
|
||||||||
|
Chemical:
|
|||||||||||
|
Agricultural
products
|
117,158
|
89,735
|
80,638
|
||||||||
|
Industrial
acids and other chemical products
|
95,754
|
95,208
|
80,228
|
||||||||
|
Mining
products
|
75,928
|
75,708
|
72,581
|
||||||||
|
Total
Chemical
|
288,840
|
260,651
|
233,447
|
||||||||
|
Other
|
11,202
|
10,140
|
6,809
|
||||||||
|
$
|
586,407
|
$
|
491,952
|
$
|
397,115
|
||||||
|
Gross
profit:
|
|||||||||||
|
Climate
Control
|
$
|
83,638
|
$
|
65,496
|
$
|
48,122
|
|||||
|
Chemical
|
44,946
|
22,023
|
16,314
|
||||||||
|
Other
|
4,009
|
3,343
|
2,330
|
||||||||
|
$
|
132,593
|
$
|
90,862
|
$
|
66,766
|
||||||
|
Operating
income (loss):
|
|||||||||||
|
Climate
Control
|
$
|
34,194
|
$
|
25,428
|
$
|
14,097
|
|||||
|
Chemical
|
35,011
|
9,785
|
7,591
|
||||||||
|
General
corporate expenses and other business operations,
net (1)
|
(10,194
|
)
|
(8,074
|
)
|
(6,835
|
)
|
|||||
|
59,011
|
27,139
|
14,853
|
|||||||||
|
Interest
expense
|
(12,078
|
)
|
(11,915
|
)
|
(11,407
|
)
|
|||||
|
Non-operating
income, net:
|
|||||||||||
|
Climate
Control
|
2
|
1
|
-
|
||||||||
|
Chemical
|
109
|
311
|
362
|
||||||||
|
Corporate
and other business operations
|
1,153
|
312
|
1,199
|
||||||||
|
Provisions
for income taxes
|
(2,540 | ) | (901 | ) | (118 | ) | |||||
|
Equity
in earnings of affiliate - Climate Control
|
877
|
|
821
|
|
745
|
|
|||||
|
Income
from continuing operations
|
$
|
46,534
|
$
|
15,768
|
$
|
5,634
|
20. Segment
Information (continued)
(1)
General corporate expenses and other business operations, net consist of the
following:
|
2007
|
2006
|
2005
|
|
(In
Thousands)
|
|
Gross
profit-Other
|
$
|
4,009
|
$
|
3,343
|
$
|
2,330
|
|||||
|
Selling,
general and administrative:
|
|||||||||||
|
Personnel
costs
|
(6,879
|
)
|
(5,862
|
)
|
(5,258
|
)
|
|||||
|
Professional
fees
|
(4,299
|
)
|
(3,004
|
)
|
(2,398
|
)
|
|||||
|
Office
overhead
|
(646
|
)
|
(598
|
)
|
(598
|
)
|
|||||
|
Advertising
|
(244
|
)
|
(188
|
)
|
(118
|
)
|
|||||
|
Shareholders
relations
|
(154
|
)
|
(58
|
)
|
(34
|
)
|
|||||
|
Property,
franchise and other taxes
|
(314
|
)
|
(198
|
)
|
(250
|
)
|
|||||
|
All
other
|
(1,626
|
)
|
(1,221
|
)
|
(1,272
|
)
|
|||||
|
Total
selling, general and administrative
|
(14,162
|
)
|
(11,129
|
)
|
(9,928
|
)
|
|||||
|
Other
income
|
53
|
28
|
883
|
||||||||
|
Other
expense
|
(94
|
)
|
(316
|
)
|
(120
|
)
|
|||||
|
Total
general corporate expenses and other business operations,
net
|
$
|
(10,194
|
)
|
$
|
(8,074
|
)
|
$
|
(6,835
|
)
|
Information
about our property, plant and equipment and total assets by industry segment is
detailed below:
|
2007
|
2006
|
2005
|
|
(In
Thousands)
|
|
Depreciation
of property, plant and equipment:
|
|||||||||||
|
Climate
Control
|
$
|
3,195
|
$
|
2,591
|
$
|
2,223
|
|||||
|
Chemical
|
8,929
|
8,633
|
8,503
|
||||||||
|
Corporate
assets and other
|
147
|
157
|
149
|
||||||||
|
Total
depreciation of property, plant and equipment
|
$
|
12,271
|
$
|
11,381
|
$
|
10,875
|
|||||
|
Additions
to property, plant and equipment:
|
|||||||||||
|
Climate
Control
|
$
|
6,778
|
$
|
7,600
|
$
|
4,322
|
|||||
|
Chemical
|
9,151
|
6,482
|
11,617
|
||||||||
|
Corporate
assets and other
|
294
|
37
|
232
|
||||||||
|
Total
additions to property, plant and equipment
|
$
|
16,223
|
$
|
14,119
|
$
|
16,171
|
|||||
|
Total
assets at December 31:
|
|||||||||||
|
Climate
Control
|
$
|
102,737
|
$
|
97,166
|
$
|
60,970
|
|||||
|
Chemical
|
121,864
|
109,122
|
111,212
|
||||||||
|
Corporate
assets and other (A)
|
82,953
|
13,639
|
16,781
|
||||||||
|
Total
assets
|
$
|
307,554
|
$
|
219,927
|
$
|
188,963
|
(A) At
December 31, 2007, the amount includes cash and cash equivalents of $55.9
million, deferred
income taxes of $10.0 million and debt issuance and other debt-related costs,
net of $4.6 million.
20. Segment
Information (continued)
Net sales
by industry segment include net sales to unaffiliated customers as reported in
the consolidated financial statements. Net sales classified as “Other” consist
of sales of industrial machinery and related components. Intersegment net sales
are not significant.
Gross
profit by industry segment represents net sales less cost of sales. Gross profit
classified as “Other” relates to the sales of industrial machinery and related
components.
Our chief
operating decision makers use operating income (loss) by industry segment for
purposes of making decisions which include resource allocations and performance
evaluations. Operating income (loss) by industry segment represents gross profit
by industry segment less SG&A incurred by each industry segment plus other
income and other expense earned/incurred by each industry segment before general
corporate expenses and other business operations, net. General corporate
expenses and other business operations, net consist of unallocated portions of
gross profit, SG&A, other income and other expense.
Identifiable
assets by industry segment are those assets used in the operations of each
industry. Corporate assets and other are those principally owned by the parent
company or by subsidiaries not involved in the two identified
industries.
All net
sales and long-lived assets relate to domestic operations for the periods
presented.
Net sales
to unaffiliated customers include foreign export sales as follows:
|
Geographic
Area
|
2007
|
2006
|
2005
|
|
(In
Thousands)
|
|
Canada
|
$
|
14,206
|
$
|
14,869
|
$
|
12,077
|
||
|
Mexico,
Central and South America
|
2,053
|
3,240
|
581
|
|||||
|
Europe
|
3,069
|
1,732
|
1,148
|
|||||
|
South
and East Asia
|
2,218
|
1,271
|
1,502
|
|||||
|
Caribbean
|
1,119
|
968
|
282
|
|||||
|
Middle
East
|
9,523
|
688
|
2,647
|
|||||
|
Other
|
129
|
390
|
365
|
|||||
|
$
|
32,317
|
$
|
23,158
|
$
|
18,602
|
Major
Customer
Net sales
to one customer, Orica USA, Inc., of our Chemical Business segment represented
approximately 9%, 10% and 11% of our total net sales for 2007, 2006 and 2005,
respectively. Under the terms of the Supply Agreement, EDC will supply from the
El Dorado Facility industrial grade ammonium nitrate through 2010.
21. Related
Party Transactions
Jayhawk
Jayhawk
Capital Management, L.L.C., and certain of its affiliates (collectively, the
“Jayhawk Group”), a former significant shareholder and affiliate, were
participants to various investment transactions in certain issues of the
Company’s debt and equity securities during the past several years, which both
increased and decreased their ownership interest in the Company. During August
2007, the two directors appointed by the holders of our Series 2 Preferred were
no longer eligible to serve on our board and as of December 31, 2007, the
Jayhawk Group had decreased its ownership in our debt and equity securities to
the level whereby they are no longer considered a related party. However, the
Jayhawk Group was a participant in the following transactions related to our
debt and equity securities during the period it was considered a related
party:
During
2006, approximately $1,037,000 of the net proceeds from the 2006 Debentures were
used to purchase from a member of the Jayhawk Group $1,000,000 principal amount
of our subsidiary’s 10.75% Senior Unsecured Notes, plus accrued and unpaid
interest due thereon.
During
2006, a member of the Jayhawk Group purchased $1,000,000 principal amount of the
2006 Debentures. In April 2007, the Jayhawk Group converted all of such 2006
Debentures into 141,040 shares of our common stock, at the conversion rate of
141.04 shares per $1,000 principal amount of 2006 Debentures (representing a
conversion price of $7.09 per share pursuant to the Indenture covering the 2006
Debentures). During 2007, we paid the Jayhawk Group $70,000 of which $46,000
relates to interest earned on the 2006 Debentures and $24,000 relates to
additional consideration paid to convert the 2006 Debentures. In 2006, we paid
the Jayhawk Group $35,000 for interest earned on the 2006
Debentures.
On
March 25, 2003, the Jayhawk Group purchased from us in a private placement
pursuant to Rule 506 of Regulation D under the Securities Act, 450,000 shares of
common stock and a warrant for the purchase of up to 112,500 shares of common
stock at an exercise price of $3.49 per share. In connection with
such sale, we entered into a Registration Rights Agreement with the Jayhawk
Group, dated March 23, 2003. During 2007, the Jayhawk Group exercised the
warrant and purchased 112,500 shares of our common stock at the exercise price
of $3.49 per share.
During
November 2006, we entered into an agreement (the “Jayhawk Agreement”) with the
Jayhawk Group. Under the Jayhawk Agreement, the Jayhawk Group agreed, that if we
made an exchange or tender offer for the Series 2 Preferred, to tender 180,450
shares of the 346,662 shares of Series 2 Preferred owned by the Jayhawk Group
upon certain conditions being met. The Jayhawk Agreement further provided that
the Golsen Group would exchange or tender 26,467 shares of Series 2 Preferred
beneficially owned by them, as a condition to the Jayhawk Group’s tender of
180,450 of its shares of Series 2 Preferred. Pursuant to the Jayhawk Agreement
and the terms of our exchange tender offer, during March 2007, the Jayhawk Group
and members of the Golsen Group tendered 180,450 and 26,467 shares,
respectively, of Series 2 Preferred for 1,335,330 and 195,855 shares,
respectively, of our common stock in our tender
21. Related
Party Transactions (continued)
offer. As
a result, we effectively settled the dividends in arrears totaling approximately
$4.96 million, with $4.33 million relating to the Jayhawk Group and $0.63
million relating to the Golsen Group.
We
received a letter, dated May 23, 2007, from a law firm representing a
stockholder of ours demanding that we investigate potential short-swing profit
liability under Section 16(b) of the Exchange Act of the Jayhawk Group. The
stockholder alleges that the surrender by the Jayhawk Group of 180,450 shares of
our Series 2 Preferred in our issuer exchange tender offer in March 2007 was a
sale which was subject to Section 16 and matchable against prior purchases
of Series 2 Preferred by the Jayhawk Group. The Jayhawk Group advised us that
they do not believe that they are liable for short-swing profits under
Section 16(b). The provisions of Section 16(b) provide that if we do
not file a lawsuit against the Jayhawk Group in connection with these
Section 16(b) allegations within 60 days from the date of the stockholder’s
notice to us, then the stockholder may pursue a Section 16(b) short-swing
profit claim on our behalf. After completion of the investigation of this matter
by our outside corporate/securities counsel, we attempted to settle this matter
with the Jayhawk Group, but were unable to reach a resolution satisfactory to
all parties. On October 9, 2007, the law firm representing the stockholder
initiated a lawsuit against the Jayhawk Group pursing a Section 16(b)
short-swing profit claim on our behalf up to $819,000. See Note 22 - Subsequent
Events.
The
redemption of all of our outstanding Series 2 Preferred was completed on
August 27, 2007. The holders of shares of Series 2 Preferred had the right
to convert each share into 4.329 shares of our common stock, which right to
convert terminated 10 days prior to the redemption date. The Certificate of
Designations for the Series 2 Preferred provided, and it is our position, that
the holders of Series 2 Preferred that elected to convert shares of Series 2
Preferred into our common stock prior to the scheduled redemption date were not
entitled to receive payment of any dividends in arrears on the shares so
converted. As a result, holders that elected to convert shares of Series 2
Preferred were not entitled to any dividends in arrears as to the shares of
Series 2 Preferred converted. On or about August 16, 2007, the Jayhawk
Group elected to convert the 155,012 shares of Series 2 Preferred held by it,
and we issued to the Jayhawk Group 671,046 shares of our common stock as a
result of such conversion.
The
Company has been advised by the Jayhawk Group, in connection with the Jayhawk
Group’s conversion of its holdings of Series 2 Preferred, the Jayhawk Group may
bring legal proceedings against us for all dividends in arrears on the
Series 2 Preferred that the Jayhawk Group converted after receiving a
notice of redemption. The 155,012 shares of Series 2 Preferred converted by the
Jayhawk Group after we issued the notice of redemption for the Series 2
Preferred would have been entitled to receive approximately $4.0 million of
dividends in arrears on the August 27, 2007 redemption date, if such shares
were outstanding on the redemption date and had not been converted and into
common stock.
As a
holder of Series 2 Preferred, the Jayhawk Group participated in the nomination
and election of two individuals to serve on our board of directors in accordance
with the terms of the Series 2
21. Related Party
Transactions (continued)
Preferred.
As the result of the exchanges, conversions and redemption of the Series 2
Preferred during 2007, resulting in less than 140,000 shares of Series 2
Preferred being outstanding, the right of the holders of Series 2 Preferred to
nominate and elect two individuals to serve on our board of directors terminated
pursuant to the terms of the Series 2 Preferred. Therefore, the two independent
directors elected by the holders of our Series 2 Preferred no longer serve as
directors on our board of directors and the Jayhawk Group is no longer
considered an affiliate of ours.
Golsen
Group
In
connection with the completion of our March 2007 tender offer for our
outstanding shares of our Series 2 Preferred, members of the Golsen Group
tendered 26,467 shares of Series 2 Preferred in exchange for our issuance to
them of 195,855 shares of our common stock. As a result, we effectively settled
approximately $0.63 million in dividends in arrears on the shares of Series 2
Preferred tendered. The tender by the Golsen Group was a condition to Jayhawk’s
Agreement to tender shares of Series 2 Preferred in the tender offer. See
discussion above under “Jayhawk.”
After our
exchange tender offer of our Series 2 Preferred, the Golsen Group held 23,083
shares of Series 2 Preferred. Pursuant to our redemption of the remaining
outstanding Series 2 Preferred during August 2007, the Golsen Group redeemed
23,083 shares of Series 2 Preferred and received the cash redemption amount of
approximately $1.76 million pursuant to the terms of our redemption of all of
our outstanding Series 2 Preferred. The redemption price was $50.00 per share of
Series 2 Preferred, plus $26.25 per share in dividends in arrears pro-rata to
the date of redemption. The holders of shares of Series 2 Preferred had the
right to convert each share into 4.329 shares of our common stock, which right
to convert terminated 10 days prior to the redemption date. Holders that
converted shares of Series 2 Preferred were not entitled to any dividends in
arrears as to the shares of Series 2 Preferred converted.
Cash
Dividends
During
2006, we paid nominal cash dividends to holders of certain series of our
preferred stock. These dividend payments included $91,000 and $133,000 to the
Golsen Group and the Jayhawk Group, respectively.
As
discussed above, during 2007, we paid cash dividends to the Golsen Group of
approximately $606,000 related to 23,083 shares of Series 2 Preferred
redeemed.
In
September 2007, we paid the dividends in arrears on our outstanding
preferred stock utilizing a portion of the net proceeds of the sale of the 2007
Debentures and working capital, including approximately $2,250,000 of dividends
in arrears on our Series B Preferred and our Series D Preferred, all
of the outstanding shares of which are owned by the Golsen Group.
21. Related Party
Transactions (continued)
Quail
Creek Bank
Bernard
Ille, a member of our board of directors, is a director of Quail Creek Bank,
N.A. (the “Bank”). The Bank was a lender to one of our subsidiaries. During
2007, 2006 and 2005, the subsidiary made interest and principal payments on
outstanding debt owed to the Bank in the respective amount of $.1 million and
$3.3 million in 2007, $.3 million and $1.6 million in 2006, and $.3 million and
$1.0 million in 2005. At December 31, 2006, the subsidiary’s loan payable
to the Bank was approximately $3.3 million, (none at December 31, 2007)
with an annual interest rate of 8.25%. The loan was secured by certain of the
subsidiary’s property, plant and equipment. This loan was paid in full in June
2007 utilizing a portion of the net proceeds of our sale of the 2007
Debentures.
22. Subsequent
Events (Unaudited)
During
the first quarter of 2008, the University of Kansas Endowment Charitable Gift
Fund (“KU”) filed a lawsuit against us in the U.S. District Court, for the
District of Kansas at Kansas City, styled The KU Endownment Charitable
Gift Fund vs. LSB Industries, Inc., Case No. 08-CV-2066. KU
alleges that we improperly refused to accept 11,200 shares of Series 2
Preferred, which KU received as a gift from the controlling party of the Jayhawk
Group, in our issuer exchange tender offer. Under the issuer exchange
tender offer, we offered to exchange each outstanding share of Series 2
Preferred for 7.4 shares of our common stock and a waiver of all dividends in
arrears, except for certain shares of Series 2 Preferred owned by the Jayhawk
Group (including its controlling party, Kent McCarthy) and the Golsen Group
pursuant to an agreement entered into between us and the Jayhawk
Group. The gift to KU by the controlling party of the Jayhawk Group
was made after the announcement of the issuer exchange tender offer, and it is
our position, among other things, that the tender of the shares given as a gift
was made contrary to the agreement between us and the Jayhawk Group and contrary
to the terms of our issuer exchange tender offer. KU alleges, among
other things, that it suffered losses because it was required to convert the
11,200 shares of Series 2 Preferred pursuant to the conversion terms of the
Series 2 Preferred, which was 4.3 shares of our common stock for each share of
Series 2 Preferred, and that the conversion was less favorable than the terms of
issuer exchange tender offer. KU alleges that the refusal to accept
the 11,200 shares of Series 2 Preferred was in violation of §14(d) of the
Securities Exchange Act of 1934 (“34 Act”), a violation of §10b and Rule 10b-5
and §18 of the 34 Act, the Kansas Uniform Securities Act and common law
fraud. We intend to vigorously defend this matter. As of
December 31, 2007, no liability has been established relating to this
claim. We have placed the carrier under our Executive Organizational
Liability Insurance Policy Including Securities Liability on notice of this
claim and litigation. Our policy is subject to a $250,000 self
insured retention for securities actions.
As
discussed in Note 13 - Commitments and Contingencies, in October 2007, a law
firm representing a stockholder initiated a lawsuit against the Jayhawk Group
pursuing a Section 16(b) short-swing profit claim on our behalf up to
approximately $819,000. During the first quarter of 2008, the parties
have agreed to settle this claim by a payment to us by the Jayhawk Group of
$180,000, of which we will receive approximately $125,000 after attorneys’
fees. This settlement is subject to a definitive settlement
agreement.
F-72
LSB
Industries, Inc.
Supplementary
Financial Data
(In
Thousands, Except Per Share Amounts)
|
Three
months ended
|
|
March
31
|
June
30
|
September
30
|
December
31
|
|
2007
|
|||||||||||||||
|
Net
sales
|
$
|
147,385
|
$
|
156,756
|
$
|
147,613
|
$
|
134,653
|
|||||||
|
Gross
profit (1)
|
$
|
32,052
|
$
|
34,657
|
$
|
35,172
|
$
|
30,712
|
|||||||
|
Income
from continuing operations (1) (2)
|
$
|
10,847
|
$
|
13,221
|
$
|
17,919
|
$
|
4,547
|
|||||||
|
Net
income (loss) from discontinued operations
|
(29
|
)
|
-
|
377
|
-
|
||||||||||
|
Net
income
|
$
|
10,818
|
$
|
13,221
|
$
|
18,296
|
$
|
4,547
|
|||||||
|
Net
income applicable to common stock
|
$
|
5,631
|
$
|
13,003
|
$
|
18,093
|
$
|
4,547
|
|||||||
|
Income
per common share:
|
|||||||||||||||
|
Basic:
|
|||||||||||||||
|
Income
from continuing operations
|
$
|
.32
|
$
|
.66
|
$
|
.87
|
$
|
.22
|
|||||||
|
Income
(loss) from discontinued operations, net
|
-
|
-
|
.02
|
-
|
|||||||||||
|
Net
income
|
$
|
.32
|
$
|
.66
|
$
|
.89
|
$
|
.22
|
|||||||
|
Diluted:
|
|||||||||||||||
|
Income from
continuing operations
|
$
|
.28
|
$
|
.58
|
$
|
.75
|
$
|
.20
|
|||||||
|
Income
(loss) from discontinued operations, net
|
-
|
-
|
.02
|
-
|
|||||||||||
|
Net
income
|
$
|
.28
|
$
|
.58
|
$
|
.77
|
$
|
.20
|
|||||||
|
2006
|
|||||||||||||||
|
Net
sales
|
$
|
111,857
|
$
|
132,391
|
$
|
123,968
|
$
|
123,736
|
|||||||
|
Gross
profit (1)
|
$
|
20,179
|
$
|
24,795
|
$
|
24,063
|
$
|
21,825
|
|||||||
|
Income
from continuing operations (1) (2)
|
$
|
3,078
|
$
|
6,290
|
$
|
3,650
|
$
|
2,750
|
|||||||
|
Net
loss from discontinued operations
|
(100
|
)
|
(31
|
)
|
(113
|
)
|
(9
|
)
|
|||||||
|
Net
income
|
$
|
2,978
|
$
|
6,259
|
$
|
3,537
|
$
|
2,741
|
|||||||
|
Net
income applicable to common stock
|
$
|
2,426
|
$
|
5,707
|
$
|
2,986
|
$
|
1,766
|
|||||||
|
Income
per common share:
|
|||||||||||||||
|
Basic:
|
|||||||||||||||
|
Income
from continuing operations
|
$
|
.19
|
$
|
.41
|
$
|
.22
|
$
|
.11
|
|||||||
|
Loss
from discontinued operations, net
|
(.01
|
)
|
-
|
(.01
|
)
|
-
|
|||||||||
|
Net
income
|
$
|
.18
|
$
|
.41
|
$
|
.21
|
$
|
.11
|
|||||||
|
Diluted:
|
|||||||||||||||
|
Income from
continuing operations
|
$
|
.15
|
$
|
.32
|
$
|
.19
|
$
|
.10
|
|||||||
|
Loss
from discontinued operations, net
|
(.01
|
)
|
-
|
(.01
|
)
|
-
|
|||||||||
|
Net
income
|
$
|
.14
|
$
|
.32
|
$
|
.18
|
$
|
.10
|
F-73
LSB
Industries, Inc.
Supplementary
Financial Data
Quarterly
Financial Data (Unaudited) (continued)
(1) The
following items increased (decreased) gross profit and income from continuing
operations:
|
Three
months ended
|
|
March
31
|
June
30
|
September
30
|
December
31
|
|
(In
Thousands)
|
|
Business
interruption insurance recoveries:
|
|||||||||||||||
|
2007
|
$
|
-
|
$
|
-
|
$
|
1,500
|
$
|
2,250
|
|||||||
|
2006
|
$
|
554
|
$
|
41
|
$
|
287
|
$
|
-
|
|||||||
|
Turnaround
costs:
|
|||||||||||||||
|
2007
|
$
|
(163
|
)
|
$
|
(182
|
)
|
$
|
(534
|
)
|
$
|
(2,483
|
)
|
|||
|
2006
|
$
|
(159
|
)
|
$
|
(1,356
|
)
|
$
|
(262
|
)
|
$
|
(2,211
|
)
|
|||
|
Precious
metals, net of recoveries and gains:
|
|||||||||||||||
|
2007
|
$
|
(898
|
)
|
$
|
(494
|
)
|
$
|
(278
|
)
|
$
|
(888
|
)
|
|||
|
2006
|
$
|
(430
|
)
|
$
|
(1,114
|
)
|
$
|
(103
|
)
|
$
|
(1,094
|
)
|
|||
|
Changes
in inventory reserves:
|
|||||||||||||||
|
2007
|
$
|
317
|
$
|
28
|
$
|
15
|
$
|
24
|
|||||||
|
2006
|
$
|
836
|
$
|
(297
|
)
|
$
|
366
|
$
|
(194
|
)
|
(2) The
following items increased (decreased) income from continuing
operations:
|
Three
months ended
|
|
March
31
|
June
30
|
September
30
|
December
31
|
|
(In
Thousands)
|
|
Award
received related to Trison arbitration:
|
|||||||||||||||
|
2006
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
1,217
|
|||||||
|
Settlements
of litigation and potential litigation:
|
|||||||||||||||
|
2007
|
$
|
-
|
$
|
-
|
$
|
3,272
|
$
|
(350
|
)
|
||||||
|
2006
|
$
|
-
|
$
|
(300
|
)
|
$
|
-
|
$
|
-
|
||||||
|
Interest
expense:
|
|||||||||||||||
|
2007
|
$
|
(2,588
|
)
|
$
|
(1,992
|
)
|
$
|
(3,482
|
)
|
$
|
(4,016
|
)
|
|||
|
2006
|
$
|
(2,875
|
)
|
$
|
(2,886
|
)
|
$
|
(3,196
|
)
|
$
|
(2,958
|
)
|
|||
|
Benefit
(provision) for income taxes:
|
|||||||||||||||
|
2007
|
$
|
(344
|
)
|
$
|
(188
|
)
|
$
|
1,549
|
$
|
(3,557
|
)
|
||||
|
2006
|
$
|
(50
|
)
|
$
|
(150
|
)
|
$
|
(208
|
)
|
$
|
(493
|
)
|
Note: Effective
January 1, 2007, we adopted FIN 48. The effect of this change in accounting
principles decreased income from continuing operations and net income by
$511,000 for the three months ended December 31, 2007. In addition, this change
in accounting principles decreased basis and diluted net income per share by
$0.03 and $0.02, respectively, for 2007.
F-74
LSB
Industries, Inc.
Condensed
Balance Sheets
The
following condensed financial statements in this Schedule I are of the parent
company only, LSB Industries, Inc.
|
December
31,
|
|
2007
|
2006
|
|
(In
Thousands)
|
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
|
$
|
35,051
|
$
|
881
|
|||
|
Accounts
receivable, net
|
149
|
43
|
|||||
|
Supplies,
prepaid items and other
|
101
|
2,734
|
|||||
|
Investment
in senior unsecured notes of a subsidiary
|
-
|
6,950
|
|||||
|
Due
from subsidiaries
|
6,971
|
5,413
|
|||||
|
Notes
receivable from a subsidiary
|
29,886
|
-
|
|||||
|
Total
current assets
|
72,158
|
16,021
|
|||||
|
Property,
plant and equipment, net
|
156
|
192
|
|||||
|
Note
receivable from a subsidiary
|
6,400
|
6,400
|
|||||
|
Investments
in and due from subsidiaries
|
92,007
|
42,004
|
|||||
|
Other
assets, net
|
3,572
|
800
|
|||||
|
$
|
174,293
|
$
|
65,417
|
||||
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
401
|
$
|
142
|
|||
|
Accrued
and other liabilities
|
2,582
|
1,050
|
|||||
|
Redeemable,
noncumulative, convertible preferred stock
|
56
|
65
|
|||||
|
Current
portion of long-term debt
|
13
|
44
|
|||||
|
Total
current liabilities
|
3,052
|
1,301
|
|||||
|
Long-term
debt
|
60,002
|
4,038
|
|||||
|
Due
to subsidiaries
|
2,558
|
2,558
|
|||||
|
Noncurrent
accrued and other liabilities
|
3,146
|
2,344
|
|||||
|
Stockholders’
equity:
|
|||||||
|
Preferred
stock
|
3,000
|
28,870
|
|||||
|
Common
stock
|
2,447
|
2,022
|
|||||
|
Capital
in excess of par value
|
123,336
|
79,838
|
|||||
|
Accumulated
deficit
|
(16,437
|
)
|
(47,962
|
)
|
|||
|
112,346
|
62,768
|
||||||
|
Less
treasury stock
|
6,811
|
7,592
|
|||||
|
Total
stockholders’ equity
|
105,535
|
55,176
|
|||||
|
$
|
174,293
|
$
|
65,417
|
See
accompanying notes.
F-75
LSB
Industries, Inc.
Schedule
I - Condensed Financial Information of Registrant
Condensed
Statements of Income
|
Year
ended December 31,
|
|
2007
|
2006
|
2005
|
|
(In
Thousands)
|
|
Fees
under service, tax sharing and management agreements with
subsidiaries
|
$
|
2,801
|
$
|
2,801
|
$
|
1,001
|
|||||
|
Selling,
general and administrative expense
|
5,361
|
4,367
|
4,161
|
||||||||
|
Gain
on sale of precious metals
|
(4,259
|
)
|
-
|
-
|
|||||||
|
Other
income, net
|
(402
|
)
|
(308
|
)
|
(708
|
)
|
|||||
|
Operating
income (loss)
|
2,101
|
(1,258
|
)
|
(2,452
|
)
|
||||||
|
Interest
expense
|
5,142
|
4,452
|
2,553
|
||||||||
|
Net
proceeds from certain key individual life insurance
policies
|
-
|
-
|
(1,162
|
)
|
|||||||
|
Interest
and other non-operating income, net
|
(3,309
|
)
|
(1,355
|
)
|
(373
|
)
|
|||||
|
Income
(loss) from continuing operations
|
268
|
(4,355
|
)
|
(3,470
|
)
|
||||||
|
Equity
in earnings of subsidiaries
|
46,266
|
20,123
|
9,104
|
||||||||
|
Net
income (loss) from discontinued operations
|
348
|
(253
|
)
|
(644
|
)
|
||||||
|
Net
income
|
$
|
46,882
|
$
|
15,515
|
$
|
4,990
|
See
accompanying notes.
F-76
LSB
Industries, Inc.
Schedule
I - Condensed Financial Information of Registrant
Condensed
Statements of Cash Flows
|
Year
ended December 31,
|
|
2007
|
2006
|
2005
|
|
(In
Thousands)
|
|
Net
cash flows provided (used) by operating activities
|
$
|
5,953
|
$
|
(985
|
)
|
$
|
(2,484
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||||||
|
Capital
expenditures
|
(71
|
)
|
(30
|
)
|
(9
|
)
|
|||||
|
Proceeds
from sales of property and equipment
|
2
|
-
|
-
|
||||||||
|
Payment
(purchase) of senior unsecured notes of a subsidiary
|
6,950
|
(6,950
|
)
|
-
|
|||||||
|
Notes
receivable from a subsidiary
|
(29,886
|
)
|
(6,400
|
)
|
-
|
||||||
|
Other
assets
|
(147
|
)
|
(209
|
)
|
40
|
||||||
|
Net
cash provided (used) by investing activities
|
(23,152
|
)
|
(13,589
|
)
|
31
|
||||||
|
Cash
flows from financing activities:
|
|||||||||||
|
Proceeds
from 5.5% convertible debentures, net of fees
|
56,985
|
-
|
-
|
||||||||
|
Proceeds
from 7% convertible debentures, net of fees
|
-
|
16,876
|
-
|
||||||||
|
Payments
on other long-term debt
|
(4
|
)
|
(1,655
|
)
|
(4
|
)
|
|||||
|
Payments
of debt issuance costs
|
(209
|
)
|
(356
|
)
|
-
|
||||||
|
Net
change in due to/from subsidiaries
|
(4,832
|
)
|
(1,134
|
)
|
4,475
|
||||||
|
Proceeds
from exercise of stock options
|
1,522
|
298
|
248
|
||||||||
|
Proceeds
from exercise of warrant
|
393
|
-
|
-
|
||||||||
|
Excess
income tax benefit on stock options exercised
|
1,740
|
-
|
-
|
||||||||
|
Dividends
paid on preferred stock
|
(2,934
|
)
|
(262
|
)
|
-
|
||||||
|
Acquisition
of non-redeemable preferred stock
|
(1,292
|
)
|
(95
|
)
|
(597
|
)
|
|||||
|
Net
cash provided by financing activities
|
51,369
|
13,672
|
4,122
|
||||||||
|
Net
increase (decrease) in cash
|
34,170
|
(902
|
)
|
1,669
|
|||||||
|
Cash
at the beginning of year
|
881
|
1,783
|
114
|
||||||||
|
Cash
at the end of year
|
$
|
35,051
|
$
|
881
|
$
|
1,783
|
See
accompanying notes.
F-77
LSB
Industries, Inc.
Schedule
I - Condensed Financial Information of Registrant
Notes to
Condensed Financial Statements
1. Basis of Presentation -
The accompanying condensed financial statements of the parent company
include the accounts of LSB Industries, Inc. (the “Company”) only. The Company’s
investments in subsidiaries are stated at cost plus equity in undistributed
earnings (losses) of subsidiaries since date of acquisition. These condensed
financial statements should be read in conjunction with the Company’s
consolidated financial statements.
2. Debt Issuance Costs -
During 2007, we incurred debt issuance costs of $3,224,000 relating to
the 2007 Debentures. In addition, the remaining portion of the 2006
Debentures was converted into our common stock. As a result of the
conversions, approximately $266,000 of the remaining debt issuance costs, net of
amortization, associated with the 2006 Debentures were charged against capital
in excess of par value in 2007.
In 2006,
the Company incurred debt issuance costs of $1,480,000 relating to the 2006
Debentures. During 2006, a portion of the 2006 Debentures were converted into
our common stock. As a result of the conversions, approximately $998,000 of the
debt issuance costs, net of amortization, associated with the 2006 Debentures
was charged against capital in excess of par value.
3. Commitments and
Contingencies - The Company has guaranteed the payment of principal and
interest under the terms of various debt agreements of its subsidiaries.
Subsidiaries’ long-term debt outstanding at December 31, 2007, which is
guaranteed by the Company is as follows (in thousands):
|
Secured
Term Loan due 2012
|
$
|
50,000
|
|
|
Other,
most of which is collateralized by machinery, equipment and real
estate
|
11,358
|
||
|
$
|
61,358
|
In
addition, the Company has guaranteed approximately $6.3 million of our
subsidiaries performance bonds.
See Notes
11 and 13 of the notes to the Company’s consolidated financial statements for
discussion of the long-term debt and commitments and contingencies.
4. Preferred Stock and
Stockholders’ Equity - At December 31, 2007 and 2006, a subsidiary of the
Company owns 2,451,527 shares of the Company’s common stock which shares have
been considered as issued and outstanding in the accompanying Condensed Balance
Sheets included in this Schedule I - Condensed Financial Information of
Registrant. See Notes 2, 10, 14 and 15 of notes to the Company’s consolidated
financial statements for discussion of matters relating to the Company’s
preferred stock and other stockholders’ equity matters.
F-78
LSB
Industries, Inc.
Schedule
I - Condensed Financial Information of Registrant
Notes to
Condensed Financial Statements (continued)
5. Precious Metals - The
Company had owned a specified quantity of precious metals used in the production
process at one of its subsidiaries. Precious metals are carried at cost, with
cost being determined using a FIFO basis. During 2007, the
Company sold metals the subsidiary had accumulated in excess of their production
requirements. As a result, the Company recognized gains of $4,259,000 for 2007
(none in 2006 and 2005) from the sale of these precious metals. These
gains included an intercompany profit of $2,248,000, which are eliminated in
the accompanying
condensed statement of income through equity in earnings of subsidiaries.
The intercompany profit resulted from differences in the FIFO cost basis of
these metals in relation to the consolidated FIFO cost basis.
6. Interest Income - During
2006, the Company acquired an investment in senior unsecured notes due 2007 (the
“Notes”) of one of its subsidiaries, ThermaClime, of $6,950,000. During 2007,
ThermaClime repaid the Notes. During 2007 and 2006, the Company earned interest
of $685,000 and $565,000, respectively, relating to the Notes. In 2006, the
Company entered into a $6,400,000 term loan due 2009 with ThermaClime. During
2007 and 2006, the Company earned interest of $698,000 and $331,000,
respectively, relating to this term loan. During 2007, the Company
entered into two demand notes totaling $29,886,000 with ThermaClime. During
2007, the Company earned interest of $801,000 relating to these demand notes. In
addition, the Company has currently invested a portion of the net proceeds of
the 2007 Debentures in money market investments. During 2007, the Company earned
interest of $752,000 relating to these money market investments.
F-79
LSB
Industries, Inc.
Years
ended December 31, 2007, 2006 and 2005
(In
Thousands)
|
Description |
Balance at Beginning of Year |
Additions-
Charges to (Recoveries) Costs and Expenses |
Deductions- Write-offs/ Costs Incurred |
Balance at End of Year
|
|
Accounts
receivable - allowance for doubtful accounts (1):
|
|
2007
|
$
|
2,269
|
$
|
858
|
$
|
1,819
|
$
|
1,308
|
||||||||
|
2006
|
$
|
2,680
|
$
|
426
|
$
|
837
|
$
|
2,269
|
||||||||
|
2005
|
$
|
2,332
|
$
|
810
|
$
|
462
|
$
|
2,680
|
|
Inventory-reserve
for slow-moving items (1):
|
|
2007
|
$
|
829
|
$
|
29
|
$
|
398
|
$
|
460
|
||||||||
|
2006
|
$
|
1,028
|
$
|
258
|
$
|
457
|
$
|
829
|
||||||||
|
2005
|
$
|
908
|
$
|
121
|
$
|
1
|
$
|
1,028
|
|
Notes
receivable - allowance for doubtful accounts (1):
|
|
2007
|
$
|
970
|
$
|
-
|
$
|
-
|
$
|
970
|
||||||||
|
2006
|
$
|
970
|
$
|
-
|
$
|
-
|
$
|
970
|
||||||||
|
2005
|
$
|
1,020
|
$
|
-
|
$
|
50
|
$
|
970
|
|
Deferred
tax assets - valuation (1):
|
|
2007
|
$
|
18,932
|
$
|
(18,932 | ) |
$
|
-
|
$
|
-
|
|||||||
|
2006
|
$
|
25,598
|
$
|
-
|
$
|
6,666
|
$
|
18,932
|
||||||||
|
2005
|
$
|
27,336
|
$
|
-
|
$
|
1,738
|
$
|
25,598
|
(1) Deducted
in the consolidated balance sheet from the related assets to which the reserve
applies.
Other
valuation and qualifying accounts are detailed in our notes to consolidated
financial statements.
F-80
FIRST
AMENDMENT TO
AMENDED
AND RESTATED LEASE AGREEMENT
This First Amendment to Amended and
Restated Lease Agreement (the “First Amendment”) is entered into effective April
1, 2007 between Raptor Master, L.L.C., an Oklahoma limited liability company
(the “Landlord”) and Climate Master, Inc., a Delaware corporation (the
“Tenant”).
WITNESSTH:
WHEREAS, Tenant and Landlord entered
into that certain Amended and Restated Lease Agreement dated as of May 8, 2001
(the “Agreement”); and
WHEREAS, Tenant and Landlord desires to
amend the Agreement as provided in this First Amendment.
NOW THEREFORE, in consideration of the
mutual covenants and agreements set forth in this First Amendment, and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Landlord and Tenant agree as follows:
1. The
foregoing recitals are incorporated as a part of this First
Amendment. All terms defined in the Agreement shall have the same
meaning in this First Amendment as are set forth in the Agreement, unless
defined differently in this First Amendment.
2. The
provisions of Section 3.1 of the Agreement are deleted in their entirety and
replaced with the following language:
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“3.1 Base
Rent. The Tenant agrees to pay to the Landlord
throughout the primary term of this Agreement a Base Rent, payable in
equal monthly installments of Fifty-Two Thousand Five Hundred Eighty-Three
and 72/100 Dollars ($52,583.72) each, payable in advance and without
demand beginning on April 1, 2007 and continuing thereafter on the first
day of each month throughout the primary term. Landlord and
Tenant acknowledge and agree that all amounts due from Tenant to Landlord
under the Agreement through and including April 1, 2007 have been fully
and timely paid by Tenant.”
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3. The
provisions of Section 14.1 of the Agreement is amended by adding the following
language at the end of Section 14.1:
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“Landlord
will not take any action or fail to take any action that would have the
effect of increasing the amount of the First Fee Mortgage at any time, and
Landlord will continue to timely pay the debt service under the First Fee
Mortgage. Landlord represents and warrants that the total
monthly payment of principal and interest under the First Fee Mortgage is
$51,583.72.”
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1
4. The
provisions of Section 16.1 of the Agreement are deleted in their entirety and
replaced with the following language:
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“16.1 Purchase
Option. Provided that this Agreement is then in effect
and no Event of Default has occurred and is continuing, the Tenant is
hereby granted the continuing option to purchase the Premises on the terms
and conditions of the Option Agreement executed by Landlord and Tenant
dated as of May 8, 2001, as amended by the First Amendment to Option
Agreement executed by Landlord and Tenant dated as of April 1, 2007, the
terms of which are incorporated
herein.”
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5. The
provisions of Section 17.1.1 of the Agreement are deleted in their entirety and
replaced with the following language:
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“17.1.1 Base
Rent. Notwithstanding the terms of Section 3.1 of this
Agreement, and assuming the Tenant’s exercise of the foregoing options,
the Base Rent for the extension periods will be as
follows: (a) Beginning on the first day of the first
extension period and for each month during such term and any subsequent
extended term, monthly installments in the amount of Fifty-Two Thousand
Five Hundred Eighty-Three and 72/100 ($52,583.72) each, payable in advance
and without demand.”
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6. The
provisions of Section 19.1.4 of the Agreement are deleted in their entirety and
replaced with the following language:
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“19.1.4 Building. The
230,000 square feet of warehouse space, related office space and
facilities located on the Land.”
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7. The
provisions of Section 19.1.9 of the Agreement are deleted in their entirety and
replaced with the following language:
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“19.1.9 First Fee
Mortgage. The
Mortgage dated as of April 30, 2001 from Landlord to Gold Bank, as amended
by the First Amended and Restated Mortgage dated as of January 17, 2002
from Landlord to Gold Bank, covering the Land, the Building, and the
Improvements, as well as all increases, renewals, modifications,
consolidations, replacements and extensions thereof which may be consented
to in advance by Tenant in writing. Tenant hereby provides
written consent to the First Amended and Restated Mortgage dated as of
January 17, 2002 from Landlord to Gold Bank as if such consent were
provided contemporaneously with the execution of such
amendment.”
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8. Except as
modified in this First Amendment, the Agreement shall remain in full force and
effect.
2
IN WITNESS WHEREOF, this First
Amendments is executed to be effective the day and year first above
written.
RAPTOR
MASTER,
L.L.C. CLIMATE
MASTER, INC.
By: Raptor
Properties, L.L.C, Manager
By: JRB
Investments, Inc.,
Manager By:__________________________
Name:__________________________
Title:__________________________
By:
__________________________
Name: __________________________
Title: __________________________
3
DRAFT
AGREEMENT
between
EL DORADO
CHEMICAL COMPANY
and
UNITED
STEELWORKERS OF AMERICA INTERNATIONAL UNION AFL-CIO
AND ITS
LOCAL 13-434
Effective:
August 1, 2007
EL DORADO
CHEMICAL COMPANY
El
Dorado, Arkansas
TABLE OF CONTENTS
PREAMBLE 1
ARTICLE
I TERM
OF AGREEMENT 1
ARTICLE
II MANAGEMENT
RIGHTS CLAUSE 1
ARTICLE
III RIGHT
TO ARBITRATE 2
ARTICLE
IV GRIEVANCE
PROCEDURE AND ARBITRATION 2
Section
1 2
Section
2 4
Section
3 4
ARTICLE
V CLASSIFICATION
CHANGES 4
Section
1 4
Section
2 4
Section
3 5
Section
4 5
Section
5 6
ARTICLE
VI HOURS
OF WORK 6
Section
1 6
Section
2 7
Section
3 7
Section
4 7
Section
5 7
ARTICLE
VII CALL-OUT
OVERTIME AND LOCAL NOTIFICATION 7
Section
1 7
Section
2 8
Section
3 8
Section
4 9
ARTICLE
VIII SHIFT
MEN - DAY MEN 9
ARTICLE
IX HOLIDAY
PAY 9
ARTICLE
X VACATIONS
10
Section 1 10
Section 2 11
Section 3 11
Section 4 11
Section 5 12
Section 6 12
Section 7 12
ARTICLE
XI SENIORITY
12
Section
1 Eligibility for Seniority
13
Section
2 Seniority Credits
13
Section
3 Progression Chart
13
Section
4 Bargaining Unit and Area
Seniority 13
Section
5 Vacancies of More than Ninety (90)
Days 14
Section
6 Vacancy Posting and Bidding
Procedure 14
Section
7 Filling Vacancies of Ninety (90)
Days or Less 15
Section
8 Classifications and
Shifts 18
Section
9 Reduction in Forces
19
Section
10 Status of Employees Laid Off
21
Section
11 Seniority Lists 21
Section
12 Seniority - Outside Assignments
21
Section
13 Layoffs and Reemployment
21
Section
14 New Operations and Existing Operations
22
Section
15 Promotional Requirements
22
ARTICLE
XII PHYSICAL
EXAMINATIONS 22
Section
1 Periodical
Examinations 22
Section 2 22
Section 3 23
ARTICLE
XIII AUTHORIZED
DEDUCTIONS 23
Section
1 Union Dues
23
Section
2 Political Contributions
23
ARTICLE
XIV DISCHARGE
24
Section 1 24
Section 2 24
Section 3 24
ARTICLE
XV MILITARY
LEAVE 24
Section
1 Leave
of Absence 24
Section 2 24
ARTICLE
XVI BULLETIN
BOARDS 25
ARTICLE
XVII SAFETY
& HEALTH 25
Section 1 25
Section 2 25
Section 3 25
Section 4 26
Section 5 26
Section 6 26
Section 7 26
Section 8 26
Section 9 27
Section 10 27
ARTICLE
XVIII WORKMEN'S
COMMITTEE CONFERENCES 27
ARTICLE
XIX SEVERANCE
PAY 28
ARTICLE
XX CONTRACT
WORK 28
ARTICLE
XXI DISCRIMINATION
28
ARTICLE
XXII LEAVE
OF ABSENCE 28
Section
1 Personal
Business 28
Section
2 Union
Business 29
Section
3 Sickness
or Accident 30
ARTICLE
XXIII JURY
DUTY 30
ARTICLE
XXIV WAGE
RATES AND CLASSIFICATIONS 30
ARTICLE
XXV VALIDITY
31
ARTICLE
XXVI NOTICES
31
ARTICLE
XXVII FUNERAL
LEAVE 31
ARTICLE
XXVIII MEDICAL
INSURANCE BENEFITS 32
Group Insurance and Pension
32
ARTICLE
XXIX NO
LOCKOUT - NO STRIKE 34
EXHIBIT
"A" OPERATING
DEPARTMENT PROGRESSION CHART 36
EXHIBIT
"B" WAGE
RATES AND CLASSIFICATIONS 36
SHIFT DIFFERENTIAL
37
CLOTHING ALLOWANCE
37
EMERGENCY SQUAD PREMIUM
37
EXHIBIT
"C-2" 5-2
SHIFT SCHEDULE 38
EXHIBIT
"C-3"
UNIFORM SHIFT SCHEDULE 38
EXHIBIT
"D" CONSOLIDATION
POLICY 39
LETTER OF
UNDERSTANDING 42
EXTRA
CREW LETTER OF UNDERSTANDING 44
AMERICANS
WITH DISABILITIES ACT LETTER OF UNDERSTANDING 46
TWELVE
HOUR SHIFT LETTER OF UNDERSTANDING 47
LETTER OF
UNDERSTANDING 48
LETTER OF
UNDERSTANDING 50
(iv)
PREAMBLE
Articles of Agreement between EL DORADO
CHEMICAL COMPANY (hereinafter referred to as "Company") and UNITED STEELWORKERS
OF AMERICA INTERNATIONAL UNION AFL-CIO AND ITS LOCAL 13-434 (hereinafter
referred to as "Union"), whom the Company recognizes as the exclusive bargaining
agency for all production, chemical, and operating employees included in the
bargaining unit at its chemical plant located North of El Dorado, Arkansas, for
the purposes of pay, wages, and other conditions of employment. There
is excepted from the bargaining unit described all Maintenance employees not
otherwise described within the Preamble, guards, shipping attendants, janitors
and common laborers, office and clerical employees, non-working Foremen, and all
supervisory employees.
Our future success and security
requires that we foster a plant culture which underscores the importance of
teamwork and focuses on customer satisfaction, methods improvement, demands
mutual respect and promotes high morale. We must be prepared to meet
the needs of changing circumstances and seize opportunities
provided. The Company, the Union and all employees are committed to
doing so.
We appreciate qualities and values such
as pride in what we do, taking ownership of responsibility, dedication,
cooperation, efficiency and optimism. Everyone who depends upon EDC
recognizes the importance of creating and maintaining a safe and clean workplace
and wants a plant which promotes fair treatment, quality work, and productive,
profitable and efficient operations. We each accept and share the
responsibility to do our parts to make that happen.
ARTICLE
I
TERM
OF AGREEMENT
This Agreement shall remain in full
force and effect for a period beginning at 12:01 a.m., August 1, 2007, and
ending at 12:00 Midnight, July 31, 2010. At reasonable times after
June 1, 2010, the parties will meet for the purpose of negotiating a new
contract to be effective for the period commencing after 12:01 a.m., August 1,
2010.
ARTICLE
II
MANAGEMENT
RIGHTS CLAUSE
The Union expressly recognizes that the
Company has the exclusive responsibility for and authority over (whether or not
the same was exercised heretofore) the management, operation and maintenance of
its facilities and, in furtherance thereof, has, subject to the terms of this
Agreement, the right to determine policy affecting the selection, hiring, and
training of employees; to direct the work force and to schedule work; to
institute and enforce reasonable rules of conduct, to assure discipline, and
efficient operation; to determine what work is to be done, what is to be
produced and by what means; to determine the quality and quantity of
workmanship; to determine the size and composition of the work force; to
determine the allocation and assignment of work to employees; to determine the
location of business, including the establishment of new locations or
departments, divisions, or subdivisions thereof; to arrange for work to be done
by other companies or other divisions of the Company; to alter, combine, or
eliminate any classification, operation, service or department; to sell, merge,
or discontinue the business or any phase thereof; provided, however, in the
exercise of these prerogatives, none of the specific provisions of the Agreement
shall be abridged.
The Company will not use the vehicle of
subcontracting for the sole purpose of laying off employees or reducing the
number of hours available to them.
ARTICLE
III
RIGHT
TO ARBITRATE
All grievances and disputes as to
classifications, hours of work, and other working conditions, arising between
the Company and the employees shall be governed in manner of settlement by the
terms of this Agreement. Whenever any grievance or dispute arises
which cannot be otherwise adjusted, the parties hereto agree that the same shall
be decided in the manner provided for in Article IV. Only a matter
concerning the interpretation or application of a provision of this Agreement
shall be the subject of arbitration.
ARTICLE
IV
GRIEVANCE
PROCEDURE AND ARBITRATION
Section
1.
Grievances shall be limited to matters
concerning the provisions of the Agreement. A "grievance," as that
term is used in this contract, means a claim by an employee, or the Union, that
a term of this contract has been violated. All time limits in the
first, second, third, and fourth steps listed below shall be to "working days"
which shall be interpreted to include only Monday through Friday, but shall not
include holidays. Time limits specified herein may be extended by
mutual written agreement of the parties in unusual cases.
The Company agrees to investigate
situations which may warrant discipline promptly after it learns of the
situation. It also commits to administer any discipline warranted
within 10 working days after it completes its investigation and assesses
relevant facts. If its factual determination and decision whether/how to
discipline cannot be completed within 10 working days of the completion of its
investigation, the Union will be advised of the need for a reasonable extension
of time within which the Company expects to complete the process. The
Union’s agreement to extend this time will not be unreasonably
withheld.
First Step
The aggrieved employee, and/or his
Steward, shall verbally discuss the grievance with his foreman and/or
supervisor. If the foreman and/or supervisor's verbal reply is not
satisfactory, the employee and/or his Steward shall submit the grievance in
writing to his foreman or supervisor. No grievance shall be
considered unless it is filed within fifteen (15) days after the occurrence of
the event complained of. The supervisor to whom the grievance is
submitted in writing shall provide his written reply within fifteen (15) days
after receipt of the grievance.
Within five (5) days after the receipt
of the written decision of the supervisor, the Steward shall notify the
supervisor as to whether his decision is satisfactory.
Second
Step
If the written decision of the
supervisor is not satisfactory, the Chief Steward shall submit the grievance in
writing, within ten (10) days, to the head of the department in which the
grievance arose. He shall give his reply in writing within
fifteen (15) days after receipt of the grievance.
Within five (5) days after the receipt
of the written decision of the department head, the Chief Steward shall notify
the department head as to whether the decision is satisfactory.
Third
Step
If the decision of the appropriate
department head is not satisfactory, it shall be submitted in writing, within
ten (10) days, to the Plant Manager, who shall then have ten (10) days after
receipt of the grievance in which to render his decision.
Within ten (10) days after receipt of
the written decision of the Plant Manager, the Workmen's Committee shall notify
the Plant Manager, in writing, as to whether his decision is
satisfactory.
Fourth
Step
If the procedure is not adjusted
satisfactorily through the procedure hereinbefore mentioned, the matter may be
referred to an arbitrator. If the Union desires to submit such
grievance to an impartial arbitrator (providing the grievance is one which does
not involve matters on which arbitration is specifically prohibited under the
terms of this Agreement, and which the Company and the Union have mutually
agreed to submit to arbitration) it must notify the other party of that fact, in
writing, within thirty (30) days after the date the Plant Manager, or other duly
authorized representative, advised the Workmen's Committee of his
decision.
The Union and the Company shall make
written application to the Federal Mediation and Conciliation Service requesting
a seven-name arbitrator panel from which the parties shall select an
arbitrator. The parties shall alternately each strike three names,
one at a time. After striking, the remaining name shall act as
Arbitrator. It is understood that, starting with the first
arbitration case following the date of the execution of this Agreement, the
Union shall strike the first name. In the next case, the first name
stricken will be by the Company and, alternately, the Union and the Company
thereafter. Both the Company and the Union shall have the right to
reject two panels submitted by the Federal Mediation and Conciliation
Service.
When the Arbitrator has been selected,
he shall meet for the consideration of the grievance as soon thereafter as is
practical. Any such meeting of an Arbitrator shall be held in El
Dorado, Arkansas, unless the parties unanimously decide otherwise.
Any such Arbitrator shall decide only
the grievance submitted to him upon testimony presented to him by the Union and
the Company, and shall render his decision in writing.
Except as otherwise specifically
provided in this Agreement, the Arbitrator shall have no power to change the
wages, hours, or conditions of employment set forth in this Agreement; he shall
have no power to add to, subtract from, or modify any of the terms of this
Agreement; he shall deal only with the grievance which occasioned his
appointment. He will require that the Union has the burden of
establishing its position on behalf of the employee, except in a discipline
and/or discharge case when the burden will be on management.
The parties hereto shall comply fully
with the award or decision made by any such Arbitrator, and the decision of the
Arbitrator will be final and binding on both parties.
The expense of the Arbitrator shall be
paid equally by the Company and the Union.
Section
2.
No provision of this Article IV, or of
any other Article of this Agreement, shall deprive any employee covered by the
terms of this Agreement of any rights to which he may be entitled under Section
9(a) of the Labor Management Relations Act of 1947, or any other Statute of the
United States.
Section
3.
In the event a grievance arises over a
discharge or layoff, the first and second steps of the grievance procedure may
be bypassed.
ARTICLE
V
CLASSIFICATION
CHANGES
Section
1.
An employee who has been trained and is
functioning independently (without the need for regular contact with an
accessible, certified trainer on the shift) but has not yet been certified as
qualified for the position will be paid the rate for the position while he is
doing so. This provision will not apply when the trainee is assisted
by another employee assigned to that position for purposed of
training. The employee will be expected to complete the certification
process of the position for which he is training without undue
delay. The expected time frame for doing so will vary by such factors
as position and skill level required, employee ability, availability of other
employees and production load of the facility.
Section
2.
Subject to the provision of Article XI,
Section 10, when an employee is transferred to a classification paying a smaller
wage rate than the classification from which he was transferred, he shall
receive the rate of pay of the new classification at the end of ninety (90)
calendar days.
If an employee is shifted to any
classification paying a smaller wage rate than his regularly assigned
classification due to the temporary shutdown of equipment, no reduction in rate
shall be made during the first ninety (90) calendar days.
If an employee is transferred to a
lower classification due to the exercise of seniority provisions of this
Agreement, he shall receive the rate of his new classification on the date of
transfer.
Section
3.
An employee who is to be laid off, due
to reduction in the work force shall be given two (2) weeks' notice of the date
of the layoff. In the absence of such notice, the employee shall be
given two (2) weeks' pay at his rate at the time of his layoff. It is
provided, however, if an employee is temporarily laid off and is reemployed
within less than two (2) weeks of the date on which he was temporarily laid off,
he shall be paid only a sum equal to the number of hours he would have worked
during the period of the layoff on his regular schedule, multiplied by the
hourly wage rate which he was earning at the time he was laid off.
Neither notice nor pay in lieu of
notice referred to in this Section 3 shall be required with respect to a
temporary layoff which is due to a reduction in forces caused by fire, storm,
explosion, Act of God, production emergency due to manpower shortage, or by a
strike of any employees of the Company at the Chemical Plant (which employees
are in another bargaining unit), or by a strike of any employees of any other
employer.
Section
4.
All work peculiar to any classification
shall normally be done by employees regularly assigned to that classification
except in cases of emergency. An employee called out or assigned to
fill that vacancy will be considered regularly assigned to that
classification. However, operating personnel in operating areas may
perform any other duties and routine process control analyses related to the
operation of the Unit. No arbitrary changes in present
classifications or duties thereof will be made with the purpose or result of
reducing the pay of any classification. Any man who has available
time over and above his normal duties shall assist other employees in his
area.
When an employee's area duties are down
and there is to be no work for him at all on his shift, he may be assigned
to:
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1.
|
Fill
other operating vacancies within his
area.
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2.
|
Assist
in maintenance efforts anywhere in the
plant.
|
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3.
|
Perform
yard maintenance work anywhere in the
plant.
|
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4.
|
Perform
minor maintenance in his unit.
|
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5.
|
Perform
any other duties as directed by his supervisor so long as it does not
require the performance of an immoral or unsafe
act.
|
(Under this condition, an employee may
be notified to change shifts and, if so notified sixteen (16) hours or more in
advance of the beginning of his new shift, will not be entitled to pay in lieu
of short notice under Article VII of the current agreement.)
When an employee's assignment is down
only part of the shift, he may be assigned to:
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1.
|
Assist
in maintenance efforts in his unit.
|
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|
2.
|
Perform
yard maintenance work in his unit.
|
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|
3.
|
Perform
minor maintenance in his unit.
|
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4.
|
Perform
any other duties as directed by his supervisor so long as it does not
require the performance of an immoral or unsafe
act.
|
An Operating Department employee shall
perform minor maintenance functions while his unit is operating if he has time
available over and above his primary operating duties.
Section
5.
Except in cases of emergency and for
training purposes, no foreman, supervisor, or employee not covered by this
Agreement shall do any work peculiar to any classification covered by the
bargaining unit. However, Maintenance employees may from time to time
perform minor operating functions when accompanied by operating
personnel. The Company shall use technical employees from time to
time to make tests and inspections requiring engineering skill.
ARTICLE
VI
HOURS
OF WORK
Section
1.
The regular hours for work shall be
eight (8) hours per day and forty (40) hours per work week. One and
one-half (1-1/2) times the applicable hourly rate will be paid for all work in
excess of eight (8) hours in any one day, in excess of eight (8) hours in
succession, or forty (40) hours in any one week.
Section
2.
The work week shall begin at 11:00 p.m.
on Sunday and end at 11:00 p.m. the following Sunday. The work day
shall begin at 11:00 p.m. and end at 11:00 p.m.
Section
3.
The work schedule and shift schedules
which are presently in effect and which are made a part of this contract as
Exhibit "C" shall remain in full force and effect for the terms of this
Agreement. Regular hours of work for laboratory personnel shall be
8:00 a.m. to 4:30 p.m.
Hours of work may be changed to 7:00
a.m. to 3:00 p.m. as dictated by the needs of the production or production
accounting departments and will not be considered a change in
shift. Laboratory personnel may be assigned to work other shifts
periodically as necessary to meet the needs of the production
department.
Section
4.
The payment of additional compensation
for any hours worked in excess of eight (8) hours in any one day, or forty (40)
hours in any one work week, shall be in satisfaction of the obligation of the
Company under this Agreement. There shall be no duplicate payment for
daily overtime and weekly overtime. If daily overtime is greater in
any one work week, only daily overtime shall be paid, or if weekly overtime is
greater in any one work week, only weekly overtime shall be paid.
Section
5.
Notwithstanding any other provision of
this Agreement to the contrary, no employee, except in case of emergency, shall
be allowed or required to work more than sixteen (16) consecutive
hours.
ARTICLE
VII
CALL-OUT
OVERTIME AND LOCAL NOTIFICATION
Overtime shall initially be
distributed, as equitably as practicable, to employees regularly assigned within
the area where the overtime is required. The Company may then offer
such work to employees in other areas who are qualified.
Section
1.
Work that is required beyond the end of
the shift (or end of the day) that is expected to be four (4) hours or less in
duration will be performed by a holdover, whereby the overtime will be offered
to the employees on duty who are qualified for the work in the order that their
names appear on the respective area call-out list. If the work will
exceed four (4) hours, Company shall have the option of holding an employee over
four (4) hours and calling a qualified oncoming employee in four (4) hours early
to complete the overtime, or calling an employee out from the appropriate
call-out list.
An employee held over for as much as
one (1) hour in a case in which his relief is not late, shall be paid a minimum
of four (4) hours at straight time at his regular rate even though the full four
(4) hours may not be worked. However, in the case of a holdover due
to a Company meeting, individuals will be paid time and one-half (1-1/2) for
hours worked.
An employee called for work outside his
regular schedule shall be paid a minimum of four (4) hours at time and one-half
(1-1/2) his regular rate even though the full four (4) hours may not be worked
or he does not work at all.
An employee called out for work outside
his regular hours will not be deprived of completing his daily schedule of hours
on account of the extra hours worked on such call-out. An employee
called out for work who works continuously until the beginning of his regular
hours of work and continues to work the regular hours of his scheduled work
shall not be considered to have had a change in shift within the meaning of
Section 3 of this Article VII. Notwithstanding the fact that an
employee has been called out for work, such employee shall be required to
perform his regular work schedule during the remainder of the work week in which
such call-out occurs unless excused by the Company.
In the event overtime distribution
and/or call-out procedures do not provide the Company with sufficient qualified
personnel to perform the overtime work, the Company shall have the right to
assign qualified personnel, or at its option, assign the work to a salaried
employee.
Section
2.
If an employee reports to work on time
as scheduled, he shall be given the opportunity of working a full 8-hour
shift. If an employee reports to work late for a scheduled work day
and arrangements have been made to have an employee work overtime in his place,
the Company shall allow the employee who reported to work late to work the
remainder of his regular schedule, and the employee who is working overtime due
to such employee being late will be relieved of duty.
Section
3.
No employee shall lose any time from
his normally scheduled 40-hour week occasioned by any shift
change. However, any employee who is working extra to complete his
forty (40) hours per week may be used for filling vacancies in his area in
accordance with his seniority. The Company further agrees that each
employee shall receive twenty-four (24) hours' notice prior to any change in his
shift, or in lieu thereof, the employee shall receive time and one-half (1-1/2)
for the first shift worked; however, no such extra pay shall be paid when an
employee's shift is changed incident to his promotion to a higher vacancy or
when he is returned to his regular assignment from an
advancement. However, if an employee's assignment is temporarily shut
down and, as a result, there is no work for him on his regular assignment, he
may be so notified and reassigned to fill other operating vacancies on another
shift or to work with Maintenance on another shift. If the employee
is so notified sixteen (16) hours or more in advance of the beginning of his new
shift, he will not be entitled to pay in lieu of short notice for shift
change.
If an Operator Trainee (in order to
complete his forty (40) hours per week) must work outside the regularly
scheduled hours of a day employee, he will be assigned to work extra and may be
used as a relief man for filling vacancies in the operating area in which he
last worked in accordance with his seniority.
Section
4.
If an employee is instructed to work
and does work continuously for as much as two (2) hours before or beyond his
regular shift or schedule, he shall be paid a sum equivalent to thirty (30)
minutes at straight-time pay in lieu of meal time.
ARTICLE VIII
SHIFT MEN - DAY MEN
The term "shift employee" as used
herein shall be deemed to mean one who is employed for specific periods in the
course of continuous operations regularly carried on during two (2) or more
shifts per day, five (5) or more days a week; each other employee is a "day
employee."
ARTICLE
IX
HOLIDAY
PAY
Each of the following days is a
holiday:
New
Year's Day
Good
Friday
Memorial
Day
July
Fourth
Labor
Day
Columbus
Day
Thanksgiving
Day
Day after
Thanksgiving
Christmas
Eve
Christmas
Day
Each of the above-mentioned holidays
shall be deemed to begin at 11:00 p.m. on the day immediately preceding the
holiday and end at 11:00 p.m. on the holiday, except when the holiday falls on
Sunday, in which case those employees who are working a 6-day week will observe
the holiday on the following Monday.
An employee may elect to take a
personal holiday in lieu of Columbus Day. To do so, it must be
scheduled with supervisory approval not less than 14 days prior to the date
requested.
Employees who are regularly scheduled
to work 12 hour shifts will receive 12 hours’ pay at his straight time rate for
each recognized holiday. Other employees who work on a holiday will
be paid eight (8) hours' holiday pay at his straight time rate. In
addition, all employees will be paid one and one-half (1-1/2) times his straight
time rate for each hour worked on the holiday.
Each employee covered by this Agreement
who does not work on a particular holiday shall be paid, with respect to that
holiday, a sum equal to his regular straight time for either eight (8) or 12
hours worked, depending upon his regular work schedule, provided that no such
payment shall be made to an employee, with respect to a holiday, if such
employee (a) is scheduled to work on that holiday and, without permission of the
Company, fails to report for work; or (b) is on leave of absence; or (c) is on
layoff; or (d) is on sick leave and has not worked or does not work at any time
during the 2-week pay period in which the holiday occurs.
Holiday Pay -- Employee will be off on
a holiday if so notified that his services are not needed. Employees
who fail to receive proper notification will receive time and one-half (1-1/2)
for the first shift worked after the said holiday. Proper
notification will be twenty-four (24) hours. Such notification shall
not be required in the event of unit or equipment mechanical failure, fire,
storm, explosion, or Act of God.
Employees will have the option, by
seniority, to elect to work or leave if less than all can be
excused.
Day Employees -- assigned to the
Operating areas -- who normally work Monday through Friday, shall observe a
holiday falling on Saturday the preceding Friday, and a holiday falling on
Sunday the following Monday, and not report for work unless
notified. However, the Christmas Eve holiday shall be observed on the
last scheduled work day prior to Christmas Day holiday.
ARTICLE
X
VACATIONS
Section
1.
Normal vacation accruals will be
computed in accordance with the following provisions:
|
|
(a)
|
Two
weeks (80 hours) after having accrued one (1) year's Company
seniority.
|
|
|
(b)
|
Three
weeks (120 hours) during the calendar year after having accrued six (6) or
more years' Company seniority.
|
In computing length of service for
vacations, time spent working at the El Dorado Plant will be used.
Section
2.
Those employees who had previously
accrued or who will accrue, during the term of this Agreement, twelve (12) years
or more Company seniority shall be entitled to a vacation accrual of four weeks
(160 hours). Thereafter, and for all other employees, the maximum
vacation accrual shall be as provided in Section 1.
Section
3.
Each employee must take his vacation
during the calendar year in which it falls due. However, when an
employee is absent from work due to authorized occupational injury or illness or
personal sick leave and has not returned to work by December 31, he may, at the
Company's option, be permitted to take his vacation or receive vacation pay
between January 1 and April 1 of the following year. An employee may
elect to split his vacation in 40-hour periods, or he may take all his vacation
in one period. However, an employee that works the Uniform shift
schedule (Exhibit "C-3") may elect to schedule his vacation in either 40-hour
periods or 56-hour periods, or a combination of the two. Any
remaining vacation of less than forty (40) hours must be scheduled in a single
period.
Section
4.
Vacation schedules must be prepared and
submitted to the department head by March 1, if
possible. Scheduling of vacations will begin immediately after
November 1 each year and no employee shall be allowed more than forty-eight (48)
hours after being contacted by his Foreman or supervisor in which to select his
vacation date. Vacation preferences will be determined within an area
by bargaining unit seniority. Employees who have not indicated their
preference of vacation dates at the end of this 48-hour period will be assigned
vacation dates by their supervisors. No employee may change his
vacation dates after the schedule has been prepared except with his supervisor's
permission. Vacations taken before March 1 will be on a first come
basis.
An employee will not be eligible for
overtime or call-out after 11:00 p.m. of his last scheduled work day prior to
the start of his vacation and until his first scheduled shift to return to work
following completion of his vacation.
If any employee is not permitted to
take his vacation in the calendar year in which it is due because the Company
finds it not convenient to excuse him from work, such employee shall be paid a
sum equal to the sum to which he would have been entitled if he had taken his
vacation within the period of time immediately preceding the end of the year
which period is equal to his vacation period. No more than five (5)
employees from the Operating Department and one (1) in the Laboratory may be on
vacation at one time.
Section
5.
If an employee so requests at least
five (5) days prior to the beginning vacation, the Company shall, prior to his
beginning vacation, pay him in advance for all vacation being taken, in 5-day
increments only.
Section
6.
An employee who (a) resigns, (b)
retires, (c) is laid off as part of a reduction in forces, (d) is discharged for
cause, or (e) is granted a military leave under the provisions of Article XV, at
a time when he has earned vacation to that date but has not taken or previously
received pay in lieu of, shall be paid in lieu of any vacation he has earned to
that date but has not taken nor previously received pay in lieu of.
Computation of vacation under this
section will be earned at the rate of one-twelfth (1/12th) for each month from
employee's anniversary date. Sixteen (16) or more calendar days of
employment in any calendar month will be considered a full month in computing
vacation accruals.
Section
7.
Vacation pay shall be based upon the
straight time rate of an employee's regular classification at the beginning of
the vacation and will be taken in accordance with his established work
schedule. If a holiday, as defined in Article IX, occurs during an
employee's vacation period, the employee will receive pay for said holiday as
defined in Article IX.
In the event of the death of an
employee who (as of the last day on which that employee worked) had earned but
not taken a vacation, a sum of money, in lieu of such vacation, computed on the
basis herein stated, shall be paid to the executor or administrator, to the
surviving spouse of that employee or, if there is no such representative or
surviving spouse, to the next of kin of such employee.
ARTICLE
XI
SENIORITY
Subject to Article XI, Section 15,
seniority shall be adhered to in vacancies within an area, shifts, and layoffs
as outlined below in this Article XI, other than discharge for
cause. It is understood the Company shall have the right to retain
sufficient numbers of qualified personnel in such event and may assign personnel
to particular shifts when required temporarily for training.
Section
1. Eligibility for Seniority.
An employee shall be first entitled to
seniority when he has been continuously employed for 180 days within the
bargaining unit, his seniority dating from the date of the beginning of such
employment.
The Company shall have the right to
layoff or discharge, without cause, any employee who has not worked in the
bargaining unit a sufficient length of time to be entitled to seniority, and
such action on the part of the Company shall not be the subject of a grievance
on the part of the Union or the employee involved under any provision of this
Agreement.
Section 2. Seniority
Credits.
In applying the seniority provisions of
this Agreement, each employee shall be credited with the seniority, if any, to
which he is entitled as shown on the records of the Company at the time of
execution of this Agreement.
Section
3. Progression Chart.
Attached hereto as Exhibit "A" and made
a part hereof is a Progression Chart showing all classifications in the various
areas of the Operating Department. Only those employees covered by
the terms of this Agreement and included in the bargaining unit shall be
entitled to exercise their seniority in their respective areas.
Section
4. Bargaining Unit and Area Seniority.
(a) Subject
to the provisions of Section 1 of this Article XI, bargaining unit seniority
shall be cumulative and shall be continuous from the date on which the employee
enters the bargaining unit as shown on Exhibit "A" attached hereto.
(b) Subject
to the provisions of Section 1 of this Article, area seniority shall be
cumulative and shall be continuous from the date on which the employee enters
any particular area by bidding or by assignment to a vacancy of more than ninety
(90) days. In the event that two (2) or more employees have the same
area seniority date, area seniority will be determined by bargaining unit
seniority.
(c) In
the event an employee is permanently assigned to an area by reasons of (i)
shutdown, (ii) reduction in force in an area, (iii) the return of an employee to
that area after an absence in excess of ninety (90) days, or (iv) the
application of Section 9 of this Article, he shall continue to be considered a
part of the area from which he was so transferred until he has failed to accept
a vacancy in the area from which he was so transferred.
The last employee to enter an area
shall be the first employee reduced from an area upon the termination of an
authorized leave in the area. All other reductions from the area will
be made by area seniority.
(d) If
an employee in any area elects to bid to another area of the Operating
Department and is the successful bidder, upon his transfer, he shall then lose
his accrued seniority in the area from which he bid. Should he fail
to qualify in the area to which he transferred, he will be transferred to
Operator Trainee position and will lose any seniority he has accrued in the area
where he failed to qualify.
Section
5. Vacancies of More Than Ninety (90) Days.
(1) Pursuant
to Section 15 of this Article, when a vacancy of more than ninety (90) days
occurs in any area, the vacancy will be filled by the bidding
procedure.
(2) Pursuant
to Section 7(1)(a) of this Article, if there are employees not in the area who
have retained seniority in the area in which the vacancy occurs, the employee
with the most retained seniority shall be assigned without bidding, to the
vacancy or forfeit his seniority in the area.
(3) Area
seniority shall be adhered to in all shift vacancies of more than ninety (90)
days within an area.
Section
6. Vacancy Posting and Bidding Procedure.
(a) The
Company shall post promptly and keep posted on the appropriate bulletin board
for ten (10) days the notice of any vacancy. It shall be the duty of
any employee who feels himself entitled to such vacancy, based on his seniority,
to file his signed bid in the manner hereinafter stated.
(b) In
order to be considered valid, a bid must be signed, dated, and the original must
be deposited in a locked box marked " USWBids for Company," and the duplicate
must be deposited in a locked box marked "USW Workmen's
Committee." Each of said boxes will be provided at or near the main
entrance gate.
(c) Immediately
upon expiration of the posting period of ten (10) days, the names of all bidders
will be posted on the bulletin board for a period of five (5)
days. Within this 5-day period, each bidder who still wants the
vacancy must sign an acceptance notice to this effect and deposit in the box
marked "USW Bids for Company" and place a copy of the notice in the " USW
Workmen's Committee" box at the clock house. However, if an employee
is going to be off from work for the duration of this 5-day period, he may leave
his acceptance notice with the personnel department.
(d) At
the end of this 5-day period, the employee with the most bargaining unit
seniority who has turned in an acceptance notice will be assigned the vacancy,
and he will be transferred to the new vacancy as soon as
possible. The successful bidder's seniority in the area to which he
is transferred will start on the sixteenth (16th) day after the vacancy was
originally posted. An employee accepting a promotion by either the
area realignment or the bidding procedure to a vacancy with a higher rate of pay
will not receive the higher rate of pay until qualified for the
vacancy.
In cases where more than one (1)
vacancy is posted, a bidder must indicate his order of preference on all
vacancies he is willing to accept when he turns in his acceptance
notice.
(e) In
the event no one wishes to accept the posted vacancy, Company may elect to
employ a qualified operator or to assign an Operator Trainee to the
vacancy.
(f) Notwithstanding
any other provisions of this Section 6, it is agreed that the Company shall have
the right at any time during said 10-day posting mentioned above, to withdraw
that posting in the event the Company decides that such vacancy need not be
filled. The provisions of this paragraph will not apply to filling
normal vacancies.
Section
7. Filling Vacancies of Ninety (90) Days or Less.
(1) Pursuant
to Section 15 of Article XI, when a vacancy exists for a period up to and
including ninety (90) days, it shall be filled by promoting the senior employee
of the next lower classification who is working the same shift in the area in
which the vacancy occurs. If no Operator Trainee, with retained area
seniority, is available, this lowest vacancy will be filled on an assignment
basis by an Operator Trainee assigned to that area with the most bargaining unit
seniority who is available and qualified to perform the work.
In the event the vacancy(ies) cannot be
filled by this procedure, the vacancy(ies) will be filled by overtime procedures
and will normally be the vacancy which existed in the area before any
reassignment.
(a) However,
if an employee is removed from the active payroll, the vacancy caused by this
action will be filled according to Section 5 of this Article on the first (1st)
day after this action.
(2) In
the event an Operator Trainee is not available and overtime is required, the
following procedure will be used:
(a)(i) When overtime is
required other than holdover or early call-in overtime, set forth in Section 1
of Article VII, call-outs will be made from the appropriate call-out
list. Overtime call-outs may start up to forty-eight (48) hours in
advance of the actual time required. Call-out lists will be
maintained for Operator Trainees, Area II, Area III, Area IV, Emergency Squad,
and a Master List. Call-outs will be made starting at the top of the
list for the area where the overtime is required and proceeding to the bottom,
calling those individuals possessing the necessary qualifications for the
work.
In the event there will be a vacancy as
the result of vacation or other scheduled absence, Company may assign qualified
employees to cover such absences up to seven (7) days in advance of such
need. Company may also utilize hold-over and call-in, or fill such
vacancy by regular call-out procedures.
Upon acceptance or rejection of a
call-out, the individual's name will be placed at the bottom of the
list. If the call-out is canceled, the employee shall be offered
makeup overtime without his name moving on the call-out list. Makeup
overtime is defined as: Work of the nature encountered in normal operations but
not normally done on overtime. At the time the makeup overtime is
offered, the employee must accept or reject the makeup
overtime. Makeup overtime will be offered for a full 8-hour
shift.
Employees are ineligible for call-outs
that interfere with previously arranged call-outs or their normal
schedule.
The master call-out list will consist
of a list of names of regularly assigned employees on Area II, Area III, and
Area IV call-out lists who desire to work overtime. Employees called
on this list will rotate on this list, but will not rotate on the area list
their name appears on for any overtime worked on a master
call-out. Master list call-outs will terminate when the work is
completed.
(a)(ii) Each call-out will
terminate at the end of the shift during which the work on that call-out
began. An employee working a call-out, except for filling shift
vacancies, will be expected to do the work for which that person was called and
other operational work, excluding housekeeping work, in the area that may arise
after the individual reports to work, for which that person is
qualified. A call-out will end when the work for which the person was
called, plus the additional operational work, is completed.
(a)(iii) Individuals' names
will not be moved on the call-out lists for any overtime associated with Safety
and Housekeeping Inspection Teams, or Accident Investigation Teams, or Safety
Meetings, or Emergency Squad Training, or for overtime set forth in Section 1 of
Article VII.
(a)(iv) Employees who work
the Uniform Shift Schedule will have their names moved to the bottom of their
respective call-out lists at the beginning of the 7-3 shift of the day which is
their sixth (6th) work day in the same work week.
(a)(v) Operator Trainees may
have their names appear on the list in the area where they possess
qualifications. For employees with retained area seniority, the
call-out list to which their names will be assigned will be the area where they
have retained seniority. Upon acceptance or rejection of a call-out,
an individual's name will be moved to the bottom of each list where his name
appears. An Operator Trainee's name will be moved from one area
call-out list to another, at the beginning of the day of transfer of that
individual to another area in which the Operator Trainee holds
qualifications.
(a)(vi) Any time an
employee's name is entered on an area call-out list, his name will be entered at
the bottom of that list.
(a)(vii) An employee may,
for personal reasons, have his name removed from the call-out
list(s). At such time as he desires, he may return his name to the
bottom of the appropriate call-out list(s). An employee who is off
for vacation, sick leave, or leave of absence will not be available for
overtime. His name shall be turned over on the call-out
list(s). Upon return, he will be available as though he had no
opportunity during his absence.
(a)(viii) The call-out lists
will be maintained under the direction of the area supervisors or Foremen, and
it will be their responsibility to keep such records as are necessary to
administer the call-out procedure and to present the proper information to the
shipping attendants for execution. Copies of the daily call-out
sheets will be furnished to the Union representatives.
(a)(ix) Any employee who
accepts an assignment outside the bargaining unit will have his name placed at
the bottom of the appropriate list(s) for the duration of the
assignment.
(a)(x) An employee must have
a telephone in his residence or be available at the plant in order to be
eligible for a call-out. Only one (1) telephone may be listed for
each employee.
(a)(xi) Employees will not
be eligible for overtime in an operating area until they have qualified on a
vacancy in that respective area. Upon qualifying on a vacancy in an
area, a new employee's name will be placed on the bottom of that area call-out
list and the master call-out list.
If, at the time of each bi-monthly
meeting, it is brought to the attention of the Company that an inequity exists
between areas in the distribution of overtime, an attempt will be made to
equalize overtime.
When an employee is held over due to
negligence in providing relief and proper notice has been given, the employee
held over will be paid a minimum of two (2) hours at his straight-time
rate.
The above procedure may be modified by
mutual agreement between the Union and the Plant Manager or his designated
representative.
(b)(i) Any employee who has
been off duty due to illness, injury, or an unauthorized leave will be required
to give his supervisor eight (8) hours' notice of his intention to return to
work or secure permission of the Company to return to work earlier.
(b)(ii) When an employee's
shift is changed for any reason so that he will have only eight (8) hours off
between shifts, he will not be eligible to double over from the first shift, and
he will not be eligible for call-out during the 8-hour interval between
shifts.
(b)(iii) When an employee
who is temporarily working in a higher classification, other than his regular
classification, accepts the opportunity to work over, his classification will
revert to his regular classification. At the end of his regular
shift, said employee who has stayed over onto a shift may exercise his seniority
to receive any temporary upgrading that occurs on that shift.
(b)(iv) When a unit or piece
of equipment is temporarily shut down and as a result there is no work for an
employee on his regular assignment, such employee may be required
to: (a) perform the duties of other assignments within his area, (b)
assist in maintenance efforts anywhere in the plant, or (c) perform minor
maintenance in his area. If such employee is absent from work during
such temporary shutdown, the Company shall not be required to fill his
position.
(b)(v) Notwithstanding any
other provisions of this Section, if notice of an employee's absence is not
reported, the employee not receiving relief will be required to work over if
relief is not available; however, if said employee does not desire to work over,
he may waive this work provided there are other employees on the same shift who
desire to work over. The employees in the same classification will be
given the opportunity to work over in order of their seniority. If no
employee in that classification accepts the opportunity to stay over, the
overtime will be offered to the other employees on that shift in accordance with
their seniority. In case a relief man is not found within thirty (30)
minutes, he may not be used to fill such vacancy. If an Operator
Trainee does not report on schedule, this paragraph is not
applicable.
An employee not eligible to work over
in accordance with (b)(iii) of this Section will be required to work over only
until relief can be obtained.
The same procedure will be applicable
to all employees if proper notice is given that an employee will be less than
three (3) hours late. Such employee will be relieved when his relief
reports.
Section
8. Classifications and Shifts
(a) Each
employee returning to the service of the Company or an area from an authorized
leave without pay or from sick leave, or temporary shutdown of equipment of
sixty (60) days or less, shall resume his duties uninterrupted service in the
area from which he left on the same lettered shift, or any shift that has become
vacant during his absence, and has been filled by a man younger in area
seniority. Notwithstanding any other provisions of this contract upon
(1) the termination of an authorized leave, or (2) the temporary shutdown of
equipment of sixty (60) days or less, each employee who was promoted or changed
shifts shall revert to the same classification (area), and the same lettered
shift from which he moved, or any shift within his area that has become vacant
during the leave or shutdown of equipment and is filled by a younger man in area
seniority.
(b) Any
time a new vacancy is established within an area, the employee with the most
area seniority shall have the right to this vacancy if he so
desires.
(c) Any
new operating facility for products not now being manufactured will be filled by
the bidding procedure before being transferred to any area.
(d) When
employees return to an area because equipment is started up after a shutdown of
more than sixty (60) days, all shifts within a classification will be chosen by
area seniority.
(e) Any
time that it becomes necessary for an employee to be demoted to a lower
classification, other than a demotion caused by the termination of an authorized
leave, he shall be given an opportunity to pick his shift within the
classification in accordance with his seniority.
(f) Subject
to the provisions of Subsection (e) of this Section 8 of this Article XI, an
employee displaced from his shift has been discontinued, shall have the right to
displace any other employee in that area in accordance with his area
seniority.
(g) Any
shift changes made in accordance with this Section shall be made on Monday
following the determination of employees' choices provided that the
determinations are made by noon on the preceding Friday and will be made without
involving any overtime pay. Determination of employees' choices of
shifts must be made within one (1) week after the shift is declared vacant,
except as specified above.
Section
9. Reduction in Forces.
1. Effective
August 1, 1986, employees who are permanently assigned in areas of the Operating
Department who may be transferred from their regularly assigned classifications
and thereby assigned, in accordance with the seniority provisions of the
Agreement, to a vacancy with a lower rate of pay, shall continue to receive the
higher rate of pay until they have had an opportunity to bid on and are the
successful bidder to another vacancy calling for the same or higher rate of
pay.
When there is more than one (1) bidder
receiving the frozen rate of pay, all except the youngest employee in seniority
shall have the right to refuse the vacancy. An employee who accepts a
vacancy in order to protect a frozen rate or his retained seniority shall have
the right to return to the vacancy from which he vacated if the vacancy he takes
does not last for more than ninety (90) days.
Any question arising pertaining to
safety due to reduced personnel in any area will be subject to Article XVII,
Section 2.
2. Reduction
in personnel and reduction in rate can, however, result from the fact that the
operation of all or part of the equipment being operated in area is shut down
either permanently or temporarily.
Any layoff will be in accordance with
Article XI, Section 13. No employee will be reduced in pay for ninety
(90) calendar days because of temporary shutdown.
3. Bumping
Procedure - Employees permanently assigned to an area who are transferred to the
Operator Trainee classification due to the shutdown of equipment will be allowed
to replace other employees as follows:
(a) An
equivalent number of vacancies permanently filled by employees with least
bargaining unit seniority in any classification with less bargaining unit
seniority, than employees reduced back to the Operator Trainee classification,
will be declared vacant. The declaring of vacancies will be made
within ninety (90) days after area shutdown and the assignments will be made on
the ninety-first (91st) day.
(b) The
vacancies declared vacant by the application of Item (1) above will be filled in
accordance with bargaining unit seniority by those employees reduced to the
Operator Trainee classification, or by the employees whose assignments were
declared vacant.
(c) Employees
reduced to the Operator Trainee classification who bid on and are the successful
bidders before vacancies are declared as provided in Item (a) above will
not be included in the number of assignments to be declared vacant.
4. Any
employee who has replaced another employee under the provisions of subsection
9(2) above must return to the area from which he was originally reduced when he
has an opportunity to do so on a vacancy of more than ninety (90) days or
forfeit his seniority in the area to which he was transferred under subsection
9(2) above and go to the Operator Trainee classification.
5. The
Bumping Procedure, as set forth in this Section, will not apply as a result of
consolidation of assignments, automation, or change in shift
schedules.
Section
10. Status of Employees Laid Off.
The accrued seniority, both bargaining
unit and area, of an employee who has been laid off through no fault of his own
shall continue to exist as of the date of the layoff for the following
periods:
|
|
Length of
Service
|
Period Seniority to
Exist
|
|
Less
than 180 days
|
0
|
|
180
Days to 2 Years
|
Length
of Previous Service
|
|
|
2
Years or More
|
2
Years
|
Section
11. Seniority Lists.
Seniority lists shall be complied and
be kept at all times available to the Workmen's Committee, and the Workmen's
Committee shall also have access to daily time reports to verify disputed
seniority lists and service records.
Section
12. Seniority - Outside Assignments.
Any employee, after having established
seniority under the provisions of this Agreement, who is temporarily assigned to
another classification by the Company, outside of the bargaining unit, shall
continue for not more than ninety (90) working days per calendar year on a
cumulative basis to accrue seniority on his regular classification during such
period of temporary assignment. If such employee works more than
ninety (90) days per calendar year on a cumulative basis, he shall forfeit one
(1) day of bargaining unit seniority for each day in excess of ninety (90) days
worked outside of the bargaining unit during that calendar year. This
paragraph is not applicable to employees who transfer to the Maintenance
Department. Such employees forfeit both area seniority and bargaining
unit seniority on the date which they transfer to Maintenance.
Section
13. Layoffs and Reemployment.
The last employee hired shall be the
first employee to be laid off on the basis of bargaining unit
seniority. The last employee laid off shall, if he still has
seniority, be the first employee rehired (notwithstanding any provisions of
Section 9 of this Article).
An employee who has worked in the
bargaining unit sufficiently long to be entitled to seniority in that
department, and who was laid off through no fault of his own, has kept his
current address on file with the Company and continues to be entitled to
seniority under the terms of this contract, shall, subject to the provisions of
this Section, be given first opportunity for reemployment.
If reemployment is available for any
such person, the Company shall so notify him by letter (with copy of such letter
to the Chairman of Workmen's Committee), addressed to him at his address then on
file with the Company. He shall be allowed ten (10) days from the
date upon which said letter was mailed, or until he no longer retains his
accrued seniority as provided in Section 10 of this Article XI (whichever is the
shorter period), in which to notify the Company in writing of his desire to
return to work. In the event he delivers such notice, he shall be
allowed ten (10) days from the date of delivery thereof to report for work;
provided, however, if the employee involved is, on the date which he would
otherwise be required to report for work, totally disabled to work, he shall, on
or before that date, deliver to said Company a statement in writing from a
licensed physician stating that he is so disabled, in which event the period
within which he shall be permitted to return to work shall be extended ninety
(90) days.
Section
14. New Operations and Existing Operations.
The classification to be established in
any new operations and the area in which new operations will be incorporated
shall be discussed with the Workmen's Committee not less than thirty (30) days
prior to the posting of new vacancies in that area.
Section
15. Promotional Requirements.
The minimum qualifications required in
order for an employee to be eligible to bid on a classification posted as a
vacancy will be the ability to write and to read and comprehend written and
verbal operating instructions.
ARTICLE
XII
PHYSICAL
EXAMINATIONS
Section
1. Periodical Examinations.
The Company may, from time to time,
require all employees to have periodical physical examinations by a doctor
selected by the Company. However, as long as an employee is
physically fit, such examination shall not be used as a cause for
termination. Each employee shall receive his regular rate of pay for
all time required for him to be examined at the request of the
Company.
Section
2.
In the case of an employee being absent
from work due to illness or physical impairment, he may be required to present a
certificate of physical fitness, signed by a licensed physician, before being
readmitted to work. This rule, however, shall not limit the right of
the Company to require physical examination by a physician in the Company's
service in exceptional cases of constantly recurring absence from
duty.
Section
3.
Notwithstanding any of the provisions
of Article II or Article IV of this Agreement, in case a dispute arises over the
physical fitness of an employee to return to work or continue to work, a board
of three (3) physicians shall be selected, one by the Company, one by the
employee, and one selected by the two so named. The decision of the
majority of this board shall be final and binding.
ARTICLE
XIII
AUTHORIZED
DEDUCTIONS
1. Union
Dues.
Upon receipt of a signed authorization
by an employee in the form provided herein, requesting deductions from his or
her wages of his or her monthly Union dues, the Company agrees to honor such
authorization according to its terms during the life of this
Agreement. The form of such individual authorization shall be as
follows:
|
|
"Until
further notice you are hereby requested and authorized to deduct from
wages due me and payable on the first regular pay day of each month, the
sum equal to my monthly dues as set by , UNITED STEELWORKERS OF AMERICA
INTERNATIONAL UNION AFL-CIO AND ITS LOCAL 13-434 , for my account on or
before the 15th day of the month following the calendar month for which
said deductions are made."
|
The Financial Secretary of Local
Union 13-434and an International Representative of the Union shall,
from time to time, notify the Company in writing the amount of the monthly
deduction to be made, from time to time, under this authorization.
The
Company shall remit to the Union the amount so deducted on or before the 15th
day of the calendar month following that for which deductions are
made.
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2.
|
Political
Contributions
|
The Company hereby agrees to honor
contribution deduction authorizations from its employees who are Union members
in the following form:
|
|
"I
hereby authorize the Company to deduct from my pay a yearly specified sum
and forward that amount to the UNITED STEELWORKERS OF AMERICA
INTERNATIONAL UNION AFL-CIO AND ITS LOCAL 13-434 Political
Committee. This deduction should be made and remitted to the
Union on the first regular pay day of February each year. This
authorization is voluntarily made on the specific understanding that the
signing of this authorization and the making of payments to the UNITED
STEELWORKERS OF AMERICA INTERNATIONAL UNION AFL-CIO Political Committee
are not conditions of membership in the Union or the employment with the
Company and that the UNITED STEELWORKERS OF AMERICA INTERNATIONAL UNION
AFL-CIO Political Committee will use the money it receives to make
political contributions and expenditures in connection with federal,
state, and local elections."
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The Union agrees to indemnify the
Company for any loss the Company may suffer as the result of this deduction
taken by the Company from an employee's pay to be remitted to the
Union.
ARTICLE
XIV
DISCHARGE
Section
1.
An employee shall not be discharged if
physically and mentally capable of continuing his duties on account of any
accident unless the accident was caused by negligence, carelessness, or
malicious intent of the employee.
Section
2.
The company shall expect all of its
employees to adhere to its rules and regulations.
Section
3.
The question as to whether a person who
is discharged was rightfully discharged shall be a proper subject of
arbitration.
The Company and the Union will share in
the expenses of arbitration equally.
ARTICLE
XV
MILITARY
LEAVE
Section
1. Leave of Absence.
The rights of employees of the Company
who enter military service during the term of this Agreement will be governed in
all respects by the Military Selective Service Act including
amendments.
Section
2.
An employee, upon return to work from
Military Leave, will be allowed to claim any assignment that became vacant
during his term of Military Leave to which his area seniority would have
entitled him had he not been on Military Leave.
ARTICLE
XVI
BULLETIN
BOARDS
The Company shall maintain a bulletin
board to be placed on the property where it may be seen by employees entering
and leaving their place of employment.
Such bulletin board may be used by the
Workmen's Committee of the Union for any matters pertaining to its membership
provided the material posted shall contain nothing of a political or
controversial nature nor reflect upon the Company or any of its employees or
products.
Any notices other than notices of Union
meetings, results of elections, sample ballots of Union elections, social events
shall be approved in writing by Plant Manager or his representative before
posting.
This bulletin board will be locked with
keys, released to the Chairman of the Workmen's Committee, the Chief Steward,
and the Chairman of El Dorado Chemical Company Group of Local 14-434of the Union
and to the Company.
ARTICLE
XVII
SAFETY
& HEALTH
Section
1.
The Company shall institute and
maintain all reasonable precautions for safeguarding the health and safety of
its employees, and all employees are expected to cooperate in the implementation
thereof. Both the Company and the Workmen's Committee recognize their
mutual interest to assist in the prevention, correction, and elimination of all
unhealthy and unsafe working conditions and practices.
Section
2.
No employee shall be required to
perform services that seriously endanger his physical safety, and his refusal to
do such work shall not warrant or justify discharge. In all such
cases, an immediate conference between the Company and Union shall be held to
settle the issue in question.
Section
3.
The Company recognizes the Workmen's
Committee to be a Union Health and Safety Committee that will discharge this
responsibility at a scheduled session as held under Article
XVIII. Discussion of Safety and Health topics will be included in
minutes issued from that session. The Health and Safety Committee
will have the responsibility of making constructive recommendations for changes
to eliminate unhealthy and unsafe conditions and
practices. Recommendations of the Health and Safety Committee will
not be subject to the Grievance Procedure under Article IV.
Section
4.
The Company will provide and maintain
adequate health and safety equipment, monitoring devices, and personnel
protective equipment. Additionally, the Company will provide employee
training to ensure that employees are knowledgeable in use and maintenance of
health and safety equipment and personnel protective equipment.
Section
5.
The Company will provide appropriate
routine medical examinations at its discretion. A report of the
medical findings will be made to the affected employee.
Section
6.
Inspection of all equipment throughout
the plant or place of employment shall be continued by the Plant Manager or
other persons designated by the Company from time to time. An
inspection of any equipment may be secured upon the recommendation of the
Workmen's Committee or the workmen employed on such equipment. The
Union Workmen's Committee may make written suggestions to the Plant Manager or
his representatives as to the elimination of hazards in order to prevent
accidents.
Section
7.
A Safety and Housekeeping Inspection
Team will be maintained for purposes of making periodic inspections of the plant
premises and recommendations to improve Safety and Housekeeping. This
team will consist of not more than two (2) members of this Workmen's Committee,
or two (2) other members of the bargaining unit, and other persons outside the
bargaining unit as designated by the Company. Those members of the
bargaining unit who serve on the team will be excused from work, with pay, on
the day of the inspection, and the vacancy created will be filled in accordance
with Article XI, Section 8.
Section
8.
Two (2) "at-large" employees will be
selected by the Company to participate in the Manufacturing Department Safety
Planning Committee. The term of service will normally be one (1) year
for these employees. The Company will maintain a list of those
employees agreeing to serve.
Section
9.
One (1) "at-large" employee from the
area in which the accident occurred, selected by the Company, will be asked to
serve on formal Accident Investigation Teams as formed. The Company
will maintain a list of those employees agreeing to serve.
Section
10.
The Company may, at its discretion,
maintain a plant Emergency Squad for preserving the well-being of both employees
and the physical facilities within the plant. The Company may assign
employees to the Emergency Squad by classification and classification
qualification.
The Emergency Squad shall be trained in
first aid, personal rescue, fire fighting and other emergency training under the
overall direction of the plant Safety Supervisor. Other selected
personnel will be expected to attend training sessions to complement the makeup
of the Emergency Squad, emergency equipment, and substitute as Emergency Squad
Leader.
The Emergency Squad will be called in
the event of an emergency, consistent with the Plant Emergency Plan, and shall
be considered the primary crew to perform the duties and direct the operation
during the emergency. However, should the need arise, other available
employees, including salaried employees, may assist the Emergency
Squad. If a need arises during an emergency, the Emergency Squad
Leader may, at his discretion, call out additional Emergency Squad
members.
The Company will maintain relationships
with local emergency service groups so that, if available and if required, these
groups may assist the Plant Emergency Squad.
ARTICLE
XVIII
WORKMEN'S
COMMITTEE CONFERENCES
Workmen's Committee, composed of five
(5) members from the employee work force, and management representatives, shall
hold regular meetings on a bi-monthly basis. It shall be the
responsibility of both parties to submit a written agenda of each subject it
wishes to discuss no less than forty-eight (48) hours before the day of any such
meeting. In the event the aforementioned day occurs on a holiday, the
day preceding the holiday shall be the day of the meeting. This date
may be changed by mutual agreement.
The members of the Workmen's Committee,
when scheduled to work the graveyard shift on the day after any such regular
meeting, will be excused from work on that graveyard shift with
pay.
ARTICLE
XIX
SEVERANCE
PAY
Any employee covered by the terms of
this Agreement whose services are terminated through no fault of his own shall
be granted severance pay after one (1) year of continuous service of one (1)
week's pay, equivalent to forty (40) hours' straight-time pay at his regular
rate; after two (2) years' service, two (2) weeks' pay equivalent to eighty (80)
hours straight-time pay at his regular hourly rate.
If the services of an employee who has
been continuously employed by the Company for one (1) year or longer is
terminated through no fault of his own, and he has not been notified by the
Company (by notice given at least two (2) weeks prior to the date upon which his
services are terminated) that his services will be terminated on that date, he
shall be paid, in addition to the amount to which he is entitled under the
provisions of the first paragraph of this Article, two (2) weeks' pay equivalent
to eighty (80) hours straight-time pay at his regular hourly rate.
ARTICLE
XX
CONTRACT
WORK
It is agreed that any work or operation
as covered by this Agreement will not be contracted out if the Company has men
and equipment available for such work.
ARTICLE
XXI
DISCRIMINATION
There shall be no discrimination by the
Company against any employee on account of his membership in this labor union or
on account of any activity undertaken in good faith in his capacity as a
representative of other employees. The Union shall not discriminate
against any employee who is not a member of the Union.
Where the male gender is used in this
contract, it is intended to refer to both male and female. It is a
continuing policy of the Company and the Union that the provisions of this
Agreement shall be applied to all employees without regard to race, color,
religion, sex, physical disability, national origin, or age.
ARTICLE
XXII
LEAVE
OF ABSENCE
Section
1. Personal Business.
If an employee desires to be off on
personal business (not emergencies), he may do so with written consent of the
Company, signed by the Plant Manager or his representative, so long as he does
not desire to be off work over two (2) work weeks and provided that he gives the
Company forty-eight (48) hours' notice of his desire to be absent and the length
of time he desires to be off. Upon completion of such leave, he will
resume employment on the basis of uninterrupted service. The
provisions of this Section 1 shall not be extended to more than two (2)
employees in each area at any one time.
Section
2. Union Business.
(a) The
Company shall grant a leave of absence, without pay, extending not longer than
thirty (30) days to employees in order to engage in any work pertaining to the
business of the Union, local or otherwise, upon sufficient notice so that the
employee's absence will not cause overtime employment. Upon
completion of such leave that employee will resume employment with previous
seniority retained. This privilege will not be extended to more than
four (4) employees at any one time. This privilege will not be
extended to any one (1) employee for more than an aggregate of sixty (60) days
in any one (1) calendar year. This does not apply to
negotiations.
(b) Notwithstanding
the provisions of the foregoing subdivision (a), the Company agrees that upon
written request of the President of the Union (addressed to El Dorado Chemical
Company, P. O. Box 231, El Dorado, Arkansas, Attention: Plant
Manager) one (1) employee will be given a leave of absence not to exceed one (1)
year, without pay, to work as an employee of the Union, or any of its
affiliates, with the provision, however, that such leave of absence shall, upon
the written request of the President of the Union (addressed in like manner) be
extended for a period of time not to exceed one (1) additional
year.
It is provided, however, that not more
than one (1) employee at a time may be on leave of the character mentioned in
the paragraph immediately preceding.
No employee shall be granted a leave of
absence pursuant to this subsection who has not, immediately preceding the date
upon which such leave of absence is to begin, worked for a period of one (1)
year continuously.
Upon completion of the leave of absence
mentioned within this subsection, or upon completion of the extended term of
such leave of absence, if the term thereof is extended pursuant to this
subsection, the employee involved will resume employment with previous seniority
retained, provided such employee reports to the Company for work within one (1)
day following the expiration of said leave of absence or within one (1) day
following the extended term of such leave of absence if the term thereof is
extended pursuant to this subsection.
An employee who fails to report for
work within one (1) day following the end of such leave of absence shall thereby
forfeit all of his seniority and his services with the Company shall be
terminated; provided, however, if the employee involved is (on the date which he
would otherwise be required to report to work) totally disabled to work, he
shall, on or before that date, deliver to the Company a statement in writing
from a licensed physician stating that he is so disabled, in which event the
period within which he shall be permitted to return to work shall be extended
thirty (30) days.
Company shall have the right to require
such employee to be examined by a physician of its choice before extending such
leave.
Section
3. Sickness or Accident.
If an employee who has established
seniority is out of service due to occupational injury or occupational disease
suffered or contracted while he is in the employ of the Company, he shall retain
his seniority accrued at the date of his disability and continue to accrue
seniority for a period of twenty-four (24) months or length of previously
accrued seniority, whichever is less, during the period of his disability as a
result thereof, notwithstanding any provisions of Article XI. If an
employee who has established seniority is out of service due to nonoccupational
injury or disease suffered while he was in the employ of the Company, he shall
retain his accrued seniority for a period of twenty-four (24) months and will
accrue seniority in the department in which he was last regularly employed for a
period of one (1) year.
Under either of the above conditions,
if an employee should accept an equal or better assignment elsewhere, his
seniority shall be canceled.
When an employee is out of work for the
reasons set forth in this section, FMLA and relevant insurance coverage will be
applied for the initial 12 weeks of the leave. After the initial 12
weeks, the employee will be entitled to continue health insurance coverage and
at costs pursuant to his COBRA rights which will begin upon completion of the
initial FMLA coverage.
ARTICLE
XXIII
JURY
DUTY
Each employee of the Company who is
called to serve upon any grand jury, petit jury, coroner jury, or jury
commission shall, after furnishing to his Foreman, a certificate in evidence of
his jury service, be paid by the Company for each day which he serves upon said
jury a sum equal to the difference between the amount which he would have earned
if he had been required to work for the Company on that day for the number of
hours of his regular work schedule and the jury pay received, with the provision
that no such payment shall be made to an employee for jury service on any day
during which, in accordance with his regular work schedule, he would not have
worked for the Company.
ARTICLE
XXIV
WAGE
RATES AND CLASSIFICATIONS
Each employee who works during the
period beginning 12:01 a.m., August 1, 2007, and ending 12:00 midnight, July 31,
2010, in one of the classifications shown on Exhibit "B" attached hereto,
shall be paid for his work in that classification in accordance with the
applicable wage rate, shift differential, and clothing allowance in accordance
with Exhibit "B".
Notwithstanding any other provision of
this Agreement to the contrary, the question of wages to be paid shall not be
construed to include any allowance which results in an increase in the
compensation of an employee or of employees.
ARTICLE
XXV
VALIDITY
If any court shall hold any part of
this Agreement invalid, such decision shall not invalidate the entire
Agreement.
ARTICLE
XXVI
NOTICES
Any notice required to be given an
employee under Article V, Section 3, or under Article XIX, may be given by
posting a notice on the bulletin board of the Union, with a copy of said notice
to the Chairman of the Workmen's Committee. If any employee named in
such notice is on vacation or on leave of absence, a copy of said notice will be
mailed in a sealed envelope, registered, and addressed to him at his address as
shown on the records of the Company. Each employee named in any such
notice shall be deemed to have received the notice at the time said notice is
posted on the bulletin board or mailed to him at his home address.
Any notice to the Company provided
herein may be given by depositing same in the U.S. Mail in a sealed envelope,
registered, postage prepaid, and addressed to El Dorado Chemical Company, P. O.
Box 231, El Dorado, Arkansas 71731, Attention: Plant Manager.
Any notice to be given to the Union may
be given by depositing the same in the U.S. Mail in a sealed envelope,
registered, postage prepaid, and addressed to the UNITED STEELWORKERS
OF AMERICA INTERNATIONAL UNION AFL-CIO AND ITS LOCAL 13-434, El Dorado, Arkansas
71731, with a copy of the notice to the Secretary, Local 13-434, of the Union,
El Dorado, Arkansas 71731.
ARTICLE
XXVII
FUNERAL
LEAVE
Any employee in the bargaining unit
shall be allowed to be absent from work to arrange for or to attend the funeral
or any of the relatives of the employee hereinafter mentioned for the time
hereinafter stated:
(a) If
the deceased relative was the husband, wife, child, father, mother, brother,
sister, grandfather, grandmother, or grandchild of the employee, the employee
shall be permitted to be absent from work for a period not to exceed two (2)
days. One of these days shall be the day of the
funeral. If either or both of these days are scheduled working days,
he shall be allowed pay for day(s) off during his regular working
schedule.
(b) If
the deceased relative was the father-in-law, mother-in-law, brother-in-law,
sister-in-law, son-in-law, or daughter-in-law, grandmother-in-law or
grandfather-in-law of the employee, the employee shall be permitted to be absent
from work with pay for the purpose stated for one (1) scheduled working day if
the funeral is held on a scheduled working day. Brother-in-law and
sister-in-law will be interpreted as (i) the spouse of an employee's brother or
sister; (ii) the brother or sister of an employee's spouse; or (iii) the spouse
of an employee's spouse's brother or sister.
(c) If,
to attend the funeral for a deceased relative, the employee travels to a point
more than 100 miles from El Dorado, Arkansas, he shall be allowed such leave for
an additional day with pay.
The pay for each day's leave which the
employee receives under the provisions of this Article shall be a sum equal to
straight-time for his regular schedule of work on the day
involved. There shall be no duplication of payment under provisions
of this Article for any other employee benefits such as: vacation
pay, holiday pay, or sickness benefits payments.
ARTICLE
XXVIII
MEDICAL
INSURANCE BENEFITS
Group
Insurance and Pension.
The Company and employees will share
the entire cost of group insurance benefits for employees and employee
dependents on the following basis, in the following employee enrollment
categories, payable bi-weekly:
a. Employee
b. Employee
and Children
c. Employee
and Spouse
d. Family
Medical claims utilization and fixed
costs will determine the cost shareassigned to each enrolled employee by
enrollment category.
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(1)
|
Effective
January 1, 2008, the employee’s cost share of 22%, per pay period, will be
based on the total claims utilization and fixed costs commencing November
1, 2006, through October 31, 2007.
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The
specific cost share amounts to be effective January 1, 2008, will be constant
throughout that year.
|
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(2)
|
Effective
January 1, 2009, the employee cost share of 23%, per pay period, will be
based on the total claims utilization and fixed costs during the period,
commencing November 1, 2007, through October 31,
2008.
|
|
|
The
specific cost share amounts, per pay period, to become effective January
1, 2009, will be constant throughout that
year.
|
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(3)
|
Effective
January 1, 2010, the employee cost share of 23%, per pay period, will be
based on the total claims utilization and fixed costs, during the period
commencing November 1, 2008, through October 31,
2009.
|
The
specific cost share amounts, per pay period, to be effective January 1, 2010,
will be constant throughout that year.
Effective
January 1, 2008, 2009, and 2010, of each year, the maximum employee cost share
amounts, per pay period, are as follows:
2008 22%
2009 23%
2010 23%
If the total claims percentage cost
share, per pay period, exceeds the capped rates shown below, the capped rates
will apply.
2008 2009 2010
22%
23%
23%
Capped Rates:
Employee $28.00 $33.60 $40.32
Employee &
Children $52.00 $62.40 $74.88
Employee &
Spouse $86.00 $103.20 $123.84
Family $110.00 $132.00 $158.40
Employees should refer to Summary Plan
Descriptions for details of EDC Health Plan co-payments, deductibles,
co-insurance coverage and periodic amendments as may be made from to time to
time.
Effective with the date of this
Agreement, the Company agrees to pay the cost of employee long-term disability
insurance and basic life insurance (twice an employee's annual
income).
Dental insurance coverage will be made
available as an option. The employee may elect to purchase the
insurance by paying the premium each month, or by increasing the deductible
amounts of the current group medical plan.
The Savings Incentive Plan for
Employees, adopted effective December 1, 1985, shall be continued during the
term of this Agreement.
ARTICLE
XXIX
NO
LOCKOUT -- NO STRIKE
The Company agrees that there shall be
no lockout and the Union agrees there shall be no strike, sympathy strike, or
interruption of production during the term of this Agreement.
IN WITNESS WHEREOF, this instrument is
executed on the 1st
day of August, 2004, to be effective as of 12:01 a.m. on the 1st day of August,
2004.
EL DORADO
CHEMICAL COMPANY
BY:
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George
Hogg
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Plant Manager
PAPER,
ALLIED-INDUSTRIAL, CHEMICAL & ENERGY WORKERS
INTERNATIONAL
UNION AFL-CIO AND ITS LOCAL 5-434
BY:
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Barry
L. Strange, Representative
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APPROVED:
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BY:
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Kenneth Booker
BY:
Danny Eakin
BY:
Duane Yerina
BY:
Ed Tuma
BY:
James Turberville
EXHIBIT
"A"
OPERATING
DEPARTMENT
PROGRESSION
CHART
AREA
II AREA
III AREA
IV
"A"
Operator "A"
Operator "A"
Analyst
"B"
Operator "B"
Operator "B"
Analyst
"C"
Operator "C"
Operator "C"
Analyst
*"D"
Operator "D"
Operator "D"
Analyst
* (First 180 Days)
EXHIBIT
"B"
WAGE
RATES AND CLASSIFICATIONS
08/01/07 08/01/08 08/01/09
"A"
Operator/"A"
Analyst $19.88 $20.38 $20.89
"B"
Operator/"B"
Analyst $18.51 $18.97 $19.44
"C"
Operator/"C"
Analyst $17.57 $18.00 $18.45
*"D"
Operator/"D"
Analyst $14.58 $14.58 $14.58
* (First
180 Days)
Rates for
Control Board Operator, Boiler House Board Operator and certain A Lab
Analysts:
Supplemental
pay will increase from $0.50/hour to $2.50/hour when an operator is functioning
in that capacity. The increased premium will be paid to
eligible employees immediately upon the beginning of the new term of
agreement.
The
premium does not apply to Board Operators in training who have not been
certified as required and who are functioning with a certified Board Operator as
a resource on his shift who is receiving the supplemental pay on that
shift.
The
Company and the Union representatives will meet again as a committee not later
than August 30, 2007 to continue its focus on and efforts to resolve operational
and administrative issues related to this initiative. The group will
meet as needed to insure that all relevant information is collected and a plan
is completed as soon as possible.
Management shall have the right to use
casual labor for periods of employment not to exceed ninety (90) days per year
for a given individual.
SHIFT
DIFFERENTIAL
In addition to the foregoing hourly
rates, there shall be paid a shift differential of forty cents ($.40) for each
hour worked on the 3:00 p.m. to 11:00 p.m. shift and eighty cents ($.80) for
each hour worked on the 11:00 p.m. to 7:00 a.m. shift.
For payroll purposes, shift
differential pay will be averaged over all three (3) shifts (7:00 a.m. to 3:00
p.m., 3:00 p.m. to 11:00 p.m., and 11:00 p.m. to 7:00 a.m.) - forty cents ($.40)
per hour will be paid for each hour worked. Shift differential will
be paid to operating personnel assigned to rotating shifts.
CLOTHING
ALLOWANCE
In addition to the foregoing hourly
wage rates, there shall be paid a clothing allowance of nine cents)
($.16) per hour for each hour worked by an
employee. Effective August,1, 2007 through the term of this Agreement
the clothing allowance will be sixteen cents ($.16) per hour worked by an
employee. An alternate choice to the employee is to use the
contractor service to supply them with uniforms. For those who
use the uniform service will be assured of the current level of shirts,
pants, jackets and winter work jacket at the $0.16/hour cost to
employees with no cost to repair or cost increase for the term
of Agreement unless the employee terminates use of
uniforms and returns damaged goods. The company will move the
location for uniform pick up and drop off to the old guard house
entrance. The new location will be implemented not later than
September 1, 2007.
EMERGENCY
SQUAD PREMIUM
In addition to the foregoing rates,
there shall be paid a rate of ten cents ($.10) per hour for each hour worked to
employees working classifications designated for inclusion on the Plant
Emergency Squad.
EXHIBIT
"C-2"
5-2
SHIFT SCHEDULE
M T W T F S
S M T W T F S
S M T W T F S S
_______________________________________________________________________
SHIFT
7-3 X
X X X
X Y
Y Y Y
Y Z
Z Z Z Z
_______________________________________________________________________
SHIFT
3-11 Y
Y Y Y
Y Z
Z Z Z
Z X
X X X X
_______________________________________________________________________
SHIFT
11-7 Z
Z Z Z
Z X
X X X
X Y
Y Y Y Y
_______________________________________________________________________
DAYS
OFF X
X X
X X
X
Y
Y Y
Y Y
Y
Z
Z Z
Z Z
Z
EXHIBIT
"C-3"
UNIFORM
SHIFT SCHEDULE
M T W T F S
S M
T W T F S S M T W T F S S M T W T
F S S
_______________________________________________________________________
SHIFT
11-7 A
A A A A D
D D
D D D D C C C C C C C B
B B
B B B B A A
_______________________________________________________________________
SHIFT
7-3 D
D D C C C
C C
C C B B B
B B
B B A A A AA A A D D D D
_______________________________________________________________________
SHIFT
3-11 C
C B B B B
B B
B A A A A
A A
A D D D D DD D C C C C C
_______________________________________________________________________
OFF B
B C D D A
A A
A B C C D
D D
D A B B C CC C D A A B B
EXHIBIT
"D"
CONSOLIDATION
POLICY
During their negotiations, the Company
and the Union discussed the procedures to be followed by the Company in its job
consolidation program and agreed as follows:
The Company will accomplish
consolidation of jobs in each operating department whereby each employee will be
trained through the training program announced by the Company.
As soon as an employee has demonstrated
the technical knowledge and qualifications to properly perform all duties of
each job within an assigned area (II), (III), then such employee will be
promoted to the classification of "A" Operator at the appropriate increase in
pay.
(a) The
length of training will be determined by the individual's ability to learn and
perform the skills required by consolidation. To become qualified and
entitled to "A" Operator pay and classification, an employee must have the
skills and knowledge to perform any job duty within his/her work
area.
(b) Areas
and shifts will not be changed as a result of consolidation.
(c) Company
shall have the right to determine the frequency of rotation, (not more often
than weekly) in order to accomplish job consolidation. Such rotation
shall normally be on a regular basis with exceptions made only because of
justifiable business needs such as unplanned personnel absence, Acts of God, and
production equipment failure.
(d) The
parties have discussed the possible impact of consolidation on a limited number
of employees who are not yet "A" Operators because:
1. They
do not possess the necessary ability to learn, retain, and satisfactorily
complete the requirements of job knowledge and demonstrated skills required for
promotion to "A" Operator. (This does not mean physical fitness which
is provided for in Article XII.)
2. A
very limited number of employees who allege they currently have medical
conditions which limit their assignment to perform all the duties of the "A"
Operator classification.
3. Those
who allege they do not possess the necessary ability to learn, retain, and
satisfactorily complete the requirements of job knowledge and demonstrated
skills required for promotion to "A" Operator and with whom the Company
disagrees.
4. Those
who have neither alleged nor requested disqualification, but who are nominated
by the Company. Following negotiations, a joint committee shall meet
for the purpose of discussing the above individuals subject to the
following:
(a) Each
employee in categories 1-3 must, no later than September 30, 1989, submit a
signed, dated request to the Manager of Manufacturing, requesting consideration
for one of the above reasons. This procedure is offered on a one-time
basis during such period.
(b) In
the event the joint committee agrees that such an employee is disqualified for
the reason alleged, such person shall then be "red-circled" at the rate of the
employee's present classification as provided by Exhibit "B". The
Company may utilize such individual in any job he/she is qualified to perform in
his/her area.
(c) An
employee who has submitted a request to be disqualified, due to physical
reasons, for assignment to perform all duties of the "A" Operator classification
may be required to submit to a physical examination by the Company's physician
pursuant to the provisions of Article XII. In case of a disagreement
over such employee's physical fitness for such work assignment, the procedures
of Section 3 of Article XII may be resorted to by the employee within three (3)
working days or the decision of the Company's physician shall be final and
binding.
(d) In
the case of an employee who has alleged that he/she does not possess the ability
to learn, retain and satisfactorily complete the requirements of job knowledge
and demonstrated skills required for promotion to "A" Operator and the joint
committee cannot reach a mutual agreement, the Company shall have the right to
require such employee to proceed with its job consolidation and training program
until the employee either qualifies or the Company agrees that such individual
does, in fact, lack such ability. Such individual shall then be
"red-circled" at the rate of the employee's present classification as provided
by Exhibit "B" and assigned any duties qualified to perform within his/her
area.
(e) In
the event the joint committee does not agree that a person nominated by the
Company under paragraph 4 is not qualified for training for promotion to "A"
Operator, the individual may grieve the Company's decision.
(f) The
above procedure is available only on a one-time basis, limited to those
individuals who have submitted written request for consideration under the
provisions of paragraphs 1, 2, or 3, or who were nominated by the Company during
the 60-day period commencing August 1, 1989.
It is understood that there may be a
situation where, because of training needs, it is necessary to train someone
other than the senior operator and shift. In this case, as soon as
such individual has been promoted to "A" Operator, the most senior operator will
be placed in training for advancement to "A" Operator or paid at the rate of "A"
Operator.
DATED this first day of August,
2004.
PAPER,
ALLIED-INDUSTRIAL, CHEMICAL & ENERGY WORKERS
INTERNATIONAL
UNION AFL-CIO AND ITS LOCAL 5-434
BY:
|
|
Barry
L. Strange, Representative
|
EL DORADO
CHEMICAL COMPANY
BY:
|
|
George
Hogg, Plant Manager
|
APPROVED:
|
BY:
|
Kenneth Booker
BY:
Danny Eakin
BY:
Duane Yerina
BY:
Ed Tuma
BY:
James Turberville
LETTER
OF UNDERSTANDING
The parties have agreed that not
withstanding any other clause or provision of the agreement the following
procedures shall apply during the life of the Agreement, effective August 4,
2001:
|
(a)
|
Commencing
August 1, 1990, each employee shall be limited to one bid during each
12-month period commencing with the date the successful bidder is informed
of the bid award. A successful bidder will be transferred as
soon as a qualified replacement is available to fill his
vacancy.
|
|
(b)
|
Skills
balancing, by shift within each area. Company shall have the
right to balance assignment skills in each area on each shift in order to
maintain production efficiency and to accomplish training
needs.
|
|
|
A
shift is considered not balanced until each operating assignment has
available a minimum of two qualified
operators.
|
|
|
The
Company has the right to balance skills on each shift in each
area. Whenever three (3) or more employees are qualified on any
one assignment within a shift and another shift has only one person
qualified for that assignment, the Company may transfer one person to the
shift having only one trained person in that assignment in the following
manner:
|
|
|
Company
will offer the transfers first by area seniority to such qualified
personnel and in the event the senior qualified employees decline, there
by assignment of the qualified employee(s) with the least area seniority
necessary to achieve shift skill
balancing.
|
|
|
When
more than one shift exceeds minimum skill balancing personnel numbers, the
initial offer of transfer opportunity or assignment, will be by area
seniority and qualifications from all shifts in the
area.
|
It is understood that the same
individual may not be involuntarily transferred for the purpose of skills
balancing more frequently than once each twelve (12) months.
Skills balancing between shifts takes
precedence over bidding procedures.
In the event the transfer of an
employee from one shift to another creates a surplus on the receiving shift, the
surplus employee shall then be assigned to the shift from which the transferred
employee came. If an employee is not surplus the bidding procedure
will be followed.
When there is a conflict between terms
of the Agreement and this Letter of Understanding, this document shall
control.
DATED this first day of August,
2004.
EL DORADO
CHEMICAL COMPANY
BY:
|
|
George
Hogg, Plant Manager
|
PAPER,
ALLIED-INDUSTRIAL, CHEMICAL & ENERGY WORKERS
INTERNATIONAL
UNION AFL-CIO AND ITS LOCAL 5-434
BY:
|
|
Barry
L. Strange, Representative
|
APPROVED:
|
BY:
|
Kenneth Booker
BY:
Danny Eakin
BY:
Duane Yerina
BY:
Ed Tuma
BY:
James Turberville
EXTRA
CREW
LETTER
OF UNDERSTANDING
During their negotiations, the parties
discussed the Company's objective of facilitating its commitment to job
consolidation training, recognizing the need for extra personnel who could be
used for purposes of relief, training, or replacement of employees who are
absent or for overtime assignment.
The parties have agreed that the
Company shall have the right to utilize certain lowest seniority individuals who
will be designated as "Extra Crew" and assigned as the Company may
elect. Such "Extra Crew" personnel will not be assigned to a shift or
area until there is a vacancy after the completion of the realignment and
bidding procedures, even though the employee has completed 180 days of
service.
Such "Extra Crew" members will be drawn
from the lowest senior employees in the plant or from "new hires." No
regular assignment will be deleted to provide employees for this "Extra
Crew."
The Company will utilize four (4)
current employees to establish the "Extra Crew," or new hires as attrition takes
place.
EL DORADO
CHEMICAL COMPANY
BY:
|
|
George
Hogg, Plant Manager
|
PAPER,
ALLIED-INDUSTRIAL, CHEMICAL & ENERGY WORKERS
INTERNATIONAL
UNION AFL-CIO AND ITS LOCAL 5-434
BY:
|
|
Barry
L. Strange, Representative
|
APPROVED:
|
BY:
|
Kenneth Booker
BY:
Danny Eakin
BY:
Duane Yerina
BY:
Ed Tuma
BY:
James Turberville
AMERICANS
WITH DISABILITIES ACT
LETTER
OF UNDERSTANDING
The Company and Union recognize the
provisions of the American's with Disabilities Act may impact the terms of this
Agreement, and thus agree to discuss each instance individually in order to
reach a mutual understanding.
EL DORADO
CHEMICAL COMPANY
BY:
|
|
George
Hogg, Plant Manager
|
PAPER,
ALLIED-INDUSTRIAL, CHEMICAL & ENERGY WORKERS
INTERNATIONAL
UNION AFL-CIO AND ITS LOCAL 5-434
BY:
|
|
Barry
L. Strange, Representative
|
APPROVED:
|
BY:
|
Kenneth Booker
BY:
Danny Eakin
BY:
Duane Yerina
BY:
Ed Tuma
BY:
James Turberville
TWELVE
HOUR SHIFT
LETTER
OF UNDERSTANDING
There is presently an operating
practice of a twelve hour shift schedule. All matters regarding the
twelve hour shift policy are governed by the policy which is contained in
Standard Operating Procedures Manual No. A002.
EL DORADO
CHEMICAL COMPANY
BY:
|
|
George
Hogg, Plant Manager
|
PAPER,
ALLIED-INDUSTRIAL, CHEMICAL & ENERGY WORKERS
INTERNATIONAL
UNION AFL-CIO AND ITS LOCAL 5-434
BY:
|
|
Barry
L. Strange, Representative
|
APPROVED:
|
BY:
|
Kenneth Booker
BY:
Danny Eakin
BY:
Duane Yerina
BY:
Ed Tuma
BY:
James Turberville
LETTER
OF UNDERSTANDING
During their negotiations in July and
August, 2001, the parties discussed a proposal which would permit a limited
exercise or bargaining unit seniority in the event of a reduction in force from
either Area II, Acid, or Area III, Nitrates. The parties recognize
the continuing right of the Company to rely on the provisions of Article XI,
Seniority, including the first paragraph of Article XI and agreed that Section
4, Bargaining Unit and Area Seniority, subparagraph (c) provides for reducing
the numbers of employees from an Area on the basis of area
seniority.
The Company agrees, that in the event
of a reduction in force from either Area II, or Area III, on the basis of Area
seniority, an effected employee must first seek to displace an employee who
holds a classification of "D" Operator, on the basis of bargaining unit
seniority, within the Area he is presently assigned.
In the event there is no "D" Operator
in the Area from which such employee was reduced, he may then request permission
to displace an employee who is classified as a "D" Operator from the production
area (II or III) he was not displaced from, on the basis of Bargaining Unit
Seniority.
The Company shall have the right to
give priority over Bargaining Unit Seniority to an employee who seeks to
displace a "D" Operator from Area II or III, which he was not displaced from, on
the basis of previous qualifications in such Area.
Employees may not displace an employee
from a classification wage rate higher than the employee who seeks to retain
employment on the basis of Bargaining Unit Seniority.
DATED this first day of August,
2004.
EL DORADO
CHEMICAL COMPANY
BY:
|
|
George
Hogg, Plant Manager
|
PAPER,
ALLIED-INDUSTRIAL, CHEMICAL & ENERGY WORKERS
INTERNATIONAL
UNION AFL-CIO AND ITS LOCAL 5-434
BY:
|
|
Barry
L. Strange, Representative
|
APPROVED:
|
BY:
|
Kenneth Booker
BY:
Danny Eakin
BY:
Duane Yerina
BY:
Ed Tuma
BY:
James Turberville
LETTER
OF UNDERSTANDING
The
parties have discussed the use of past disciplinary events of employees who
commit violations of Company policies, rules, work procedures, poor work
performance, negligence, errors, etc., which do not involve offenses for which
the penalty is immediate discharge, and agree, that a written disciplinary
record, issued to an employee who does not receive a subsequent written letter
or disciplinary notice, within twelve (12) months of the date of the first
written notice, then such notice will not be used as evidence in an arbitration
hearing in support of a disciplinary event occurring at a later
date.
If an
employee receives an additional disciplinary warning, at any point in time,
commencing with date of the first written warning, an additional twelve (12)
months, commencing with date of the most recent disciplinary incident, must
lapse with no disciplinary event, before the previous notices become unavailable
as evidence in future arbitration hearings.
DATED this first day of August,
2004.
EL DORADO
CHEMICAL COMPANY
BY:
|
|
George
Hogg, Plant Manager
|
PAPER,
ALLIED-INDUSTRIAL, CHEMICAL & ENERGY WORKERS
INTERNATIONAL
UNION AFL-CIO AND ITS LOCAL 5-434
BY:
|
|
Barry
L. Strange, Representative
|
APPROVED:
|
BY:
|
Kenneth Booker
BY:
Danny Eakin
BY:
Duane Yerina
BY:
Ed Tuma
BY:
James Turberville
DRAFT
AGREEMENT
between
EL DORADO
CHEMICAL COMPANY
and
INTERNATIONAL
ASSOCIATION OF
MACHINISTS AND AEROSPACE WORKERS,
AFL-CIO
LOCAL NO. 224
MACHINISTS AND AEROSPACE WORKERS,
AFL-CIO
LOCAL NO. 224
Effective:
October 17, 2007
EL DORADO
CHEMICAL COMPANY
El Dorado, Arkansas
El Dorado, Arkansas
TABLE
OF CONTENTS
PREAMBLE 1
ARTICLE
I APPLICATION
OF AGREEMENT 1
ARTICLE
II PERIOD
OF AGREEMENT 1
ARTICLE
III MANAGEMENT
RIGHTS CLAUSE 1
ARTICLE
IV CHECK-OFF
OF UNION DUES 2
ARTICLE
V SENIORITY 2
Section
1. Length
of Service 2
Section
2. Order
of Seniority 2
Section
3. Eligibility
for Seniority 3
Section
4. Filling
Vacancies 3
Section
5. Qualifications
for Job 4
Section
6. Seniority
List 5
Section
7. Seniority
Accrued 5
Section
8. Seniority
- - Outside Assignments
5
Section
9. Discharges
and Reemployment 5
Section
10. Status
of Employees Laid Off 6
Section
11. Loss
of Seniority 6
ARTICLE
VI HOURS
OF WORK AND OVERTIME 7
Section
1. Hours
of Work
7
Section
2. Overtime
and Call-Out Pay Rates 7
Section
3. Shift
Change Notice
8
Section
4. Meal
Time 8
Section
5. No
Reduction of Work Week as Result of Overtime 9
Section
6. Computation
of Overtime 9
Section
7. Distribution
of Overtime and Call-Out Time
9
Section
8. Call-Out
9
Section
8A. Advance
Scheduling of Overtime
10
Section
8B. Right
to Assign Qualified Personnel
10
Section
9. Holiday
Pay 10
Section
10. Reporting
for Work and Not Used 11
ARTICLE
VII WAGE
RATES AND CLASSIFICATIONS 11
Section
1. Wages
and Pay Period 11
Section
2. Changes
in Classification of Work
11
(i)
Section
3. Mechanic Classifications,
Opportunites and
Training 12
ARTICLE
VIII HANDLING
OF GRIEVANCES 13
Section
1. Routine
Submission 13
Section
2. Arbitration 13
ARTICLE
IX SHOP
COMMITTEE AND STEWARDS 14
Section
1. Shop
Committee 14
Section
2. Stewards 14
ARTICLE
X LEAVE
OF ABSENCE 15
Section
1. Personal
Business
15
Section
2. Union
Business 15
Section
3. Sickness
or Accident 15
Section
4. Notice
to the Company 16
Section
5. Military
Reserve Training 16
ARTICLE
XI VACATIONS
16
ARTICLE
XII MILITARY
LEAVE 18
Section
1. Military
Selective Service Act 18
Section
2. Pay
in Lieu of Vacation 18
ARTICLE
XIII PHYSICAL
EXAMINATIONS
19
Section
1. Periodical
Examinations 19
Section
2. Certificate
of Physical Fitness 19
Section
3. Dispute
Resolution 19
ARTICLE
XIV MISCELLANEOUS
AND GENERAL 19
Section
1. Tool
Check-In Time 19
Section
2. Bulletin
Board 19
Section
3. Discrimination 20
Section
4. Wage
Rate Changes 20
Section
5. Safety
Provisions 20
Section
6. Discharges 20
Section
7. Recess
Period (Smoking) 20
Section
8. Jury
Duty
21
Section
9. Termination
Pay 21
(ii)
Section
10. Contract
Work 21
Section
11. Technical
and Supervisory Employees 21
Section
12. Minor
Maintenance 21
Section
13. Minor
Operating Functions 22
Section
14. Uniforms 22
ARTICLE
XV VALIDITY
OF CONTRACT 22
ARTICLE
XVI NOTICE 22
ARTICLE
XVII FUNERAL
LEAVE 23
ARTICLE
XVIII GROUP
INSURANCE 23
ARTICLE
XIX NO
STRIKE OR LOCKOUT 25
ARTICLE
XX SERVICE
WITH COMPANY 25
ARTICLE
XXI RETIREMENT
AGE 26
ARTICLE
XXII CHANGE OR
MODIFICATION OF AGREEMENT 26
ARTICLE
XXIII TERMINATION
OF AGREEMENT 26
SIGNATURE
PAGE 27
EXHIBIT
"A" BASIC
HOURLY WAGE RATE 28
RATE CHANGES DURING TERM OF
AGREEMENT 28
CLOTHING ALLOWANCE 28
EXHIBIT
“B” RECOGNIZED
MAINTENANCE WORK GROUPS 29
(iii)
PREAMBLE
This Agreement is made and entered into
by and between EL DORADO CHEMICAL COMPANY (hereinafter referred to as the
“Company”), and the INTERNATIONAL ASSOCIATION OF MACHINISTS AND AEROSPACE
WORKERS, AFL-CIO, LOCAL NO. 224 (hereinafter referred to as the “Union”), which
the Company recognizes as the sole bargaining agent for the Maintenance
employees of the Company at its chemical plant located north of El Dorado,
Arkansas, who are eligible for membership in the Union in accordance with the
Labor Management Relations Act of 1947.
Our future success and security
requires that we foster a plant culture which underscores the importance of
teamwork and focuses on customer satisfaction, methods improvement, demands
mutual respect and promotes high morale. We must be prepared to meet
the needs of changing circumstances and seize opportunities
provided. The Company, the Union and all employees are committed to
doing so.
We appreciate qualities and values such
as pride in what we do, taking ownership of responsibility, dedication,
cooperation, efficiency and optimism. Everyone who depends upon EDC recognizes
the importance of creating and maintaining a safe and clean workplace and wants
a plant which promotes fair treatment, quality work, and productive, profitable
and efficient operations. We each accept and share the responsibility
to do our parts to make that happen.
ARTICLE I
APPLICATION OF AGREEMENT
APPLICATION OF AGREEMENT
The Company hereby recognizes the Union
as the exclusive bargaining agency for the employees of the Company at said
plant who work in the capacities hereinafter stated in this
Article I.
(a) All
Maintenance employees, as described in Exhibit "A", engaged in the installation,
maintenance and repair of machinery and equipment, but excluding all production,
chemical and operating employees, shipping attendants, office and clerical
employees, managers, supervisors and guards.
ARTICLE
II
PERIOD
OF AGREEMENT
This Agreement shall remain in full
force and effect for a three year contract term commencing October 17, 2007, at
12:01 a.m., and ending 12:00 midnight, October 16, 2010. At
reasonable times after August 1, 2010, the parties will meet to attempt to
negotiate a new contract to be effective for the period beginning after
midnight, October 16, 2010.
4
ARTICLE
III
MANAGEMENT
RIGHTS CLAUSE
The Union expressly recognizes that the
Company has the exclusive responsibility for and authority over (whether or not
the same was exercised heretofore) the management, operation and maintenance of
its facilities and, in furtherance thereof, has, subject to the terms of this
Agreement, the right to determine policy affecting the selection, hiring, and
training of employees; to direct the work force and to schedule work; to
institute and enforce reasonable rules of conduct; to assure discipline and
efficient operations; to determine what work is to be done, what is to be
produced and by what means; to determine the quality and quantity of
workmanship; to determine the size and composition of the work force; to
determine the allocation and assignment of work to employees; to determine the
location of the business, including the establishment of new locations or
departments, divisions, or subdivisions thereof; to arrange for work to be done
by other companies or other divisions of the Company; to alter, combine, or
eliminate any job, operation, service, or department; to sell, merge or
discontinue the business or any phase thereof; provided, however, in the
exercise of these prerogatives, none of the specific provisions of the Agreement
shall be abridged. The Company will not use the vehicle of
subcontracting for the sole purpose of laying off employees or reducing the
number of hours available to them.
ARTICLE
IV
CHECK-OFF OF UNION DUES and UNION MEMBERSHIP
CHECK-OFF OF UNION DUES and UNION MEMBERSHIP
Upon receipt of a signed authorization
by an employee requesting deductions from his wages for his monthly union dues,
the Company agrees to honor such authorization according to its terms during the
life of this Agreement. The form shall be furnished by the
Union.
The Financial Secretary of Local 224,
IAM-AW, shall, from time to time, notify the Company in writing of the amount of
the monthly deduction to be made, from time to time, under this
authorization. All money so deducted by the Company shall be paid to
the Union on or before the end of the month during which deductions are
made. Upon receipt of written request by current employees as of
October 17, 2007, the Company shall, after thirty (30) days’ notice, discontinue
dues deduction.
ARTICLE
V
SENIORITY
SENIORITY
Section 1. Length
of Service.
Length of service in the bargaining
unit and with the El Dorado Plant shall, in that order, govern the promotion,
demotion, and transfer of employees.
Section 2. Order
of Seniority.
An employee's seniority shall be
determined as follows:
5
Order of
Importance Seniority
1st
Bargaining Unit
2nd Plant
Section
3. Eligibility for Seniority.
An employee shall be first entitled to
seniority in the bargaining unit when he has been continuously employed in that
unit for 180 days; his seniority dating from the date of the beginning of such
employment.
However, an employee who has been
employed in the bargaining unit, who has been laid off prior to his having been
employed therein for 180 days continuously, and who is reemployed in the
bargaining unit within 180 days from the date upon which he is laid off, shall,
upon such reemployment, be entitled to have the number of days which he has
worked in the bargaining unit, during the period of his most recent previous
employment herein, included in any subsequent computation of his seniority in
the bargaining unit and shall be entitled to seniority when he has accrued 180
days on that basis.
The Company shall have the right to
layoff or discharge, without cause, any employee who has not worked in the
bargaining unit a sufficient length of time to gain seniority, and such action
on the part of the Company shall not be the subject of a grievance on the part
of the Union under any provision of this Agreement.
Section
4. Filling Vacancies.
(a) Temporary
and permanent vacancies will be filled only when the Company sees a need to fill
the vacancy. In the event the Company sees a need to fill a vacancy,
it will be filled by the employee having the most bargaining unit seniority, who
desires the job, and who possesses a skill of the group in which the vacancy
occurs. Any person so promoted must accept the duties and
responsibilities of the job.
(b) When
there is a permanent vacancy in a group and the Company sees a need to fill that
vacancy, the Company shall post promptly, and keep posted for fifteen (15) days,
notice on its bulletin board of the job vacancy. It shall be the duty
of an employee who feels himself entitled to such job on account of his
seniority to file his sealed bid for such job with the Plant Manager or his
representative, and send a copy thereof to the Chairman of the Shop Committee
within said 15-day period. In order to be considered valid, a bid
must be signed, dated, and deposited in a locked box marked "I.A. of M. and A.W.
Bids" located at the plant entrance gate.
Immediately upon expiration of the
posting period of fifteen (15) days, the names of all bidders will be posted on
the bulletin board, and the bidder having the most seniority and who desires the
job shall be assigned to the group and receive the "C" Mechanic rate of pay if
he possesses the necessary skill. In the event no qualified bidder
possessing the necessary skill bids on the vacancy, the Company may hire a
qualified employee from the outside.
6
If he does not possess the skill, he
will be reduced to the rate that compares to his previous experience beginning
not later than the beginning of the work week following the week in which the
successful bidder is determined, provided the successful bidder is available to
report for work on that day.
If the group vacancy is not filled by
the procedure set forth above and the Company sees the need to fill the vacancy,
a first-year "E" Mechanic job will be posted for filling outside the bargaining
unit.
Notwithstanding any other provisions of
this subsection (b), it is agreed that the Company shall have the right at any
time during said 15-day posting period to withdraw the posting of a new job in
the event the Company decides that such job need not be filled.
(c) Should
an employee within a group who is entitled to a promotion desire to waive his
opportunity for that promotion, he shall do so by signing a waiver.
(d) In
the event that it becomes necessary to establish a permanent rotating shift the
Company will notify the Shop Committee to discuss the procedure and shift to be
implemented at least thirty (30) calendar days before establishing such
shift.
(e) In
addition to the hourly rates, employees who are regularly assigned to a specific
shift shall be paid a shift differential of forty cents ($.40) for each hour
worked on the evening shift and eighty cents ($.80) for each hour worked on the
graveyard shift. For payroll purposes, employees who are regularly
assigned to a three shift rotating schedule shall receive shift pay averaged
over all three shifts (forty cents ($.40) per hour).
NOTE: Maintenance
personnel who are not regularly assigned on a rotating shift basis or to the
evening or graveyard shift will receive shift differential in accordance with
the August 3, 1989, Letter of Understanding (regarding turnarounds and major
maintenance projects).
Section
5. Qualifications for Job.
(a) It
is not the intention of the parties to this Agreement that any employee shall be
permitted to work on a job when he is not qualified to perform the work which
that job requires. However, if, in the opinion of the Company, an
employee is not qualified for a particular job to which he would otherwise be
entitled by virtue of his seniority, and the Company determines that an
employee's application for the job shall be denied on the basis of his lack of
qualifications, the Company shall notify the Chairman of the Shop Committee and
the employee involved of their decision, at least five (5) days prior to the
date upon which any other employee is permanently assigned to the
job.
7
Section
6. Seniority List.
Seniority lists will be compiled on
April 1 and October 1 and will be available to all employees. One
copy of each seniority list will be furnished to the Shop
Committee.
Section
7. Seniority Accrued.
Each employee shall retain the
seniority accrued to him based upon actual service at the El Dorado
Plant.
Section
8. Seniority - Outside Assignments.
Any employee, after having established
seniority under the provisions of this Agreement, who is temporarily assigned to
another job by the Company (outside the bargaining unit) shall continue, for not
more than ninety (90) days per calendar year, on a cumulative basis, to accrue
seniority on his regular classification during such period of temporary
assignment. If such employee works more than ninety (90) days per
calendar year on a cumulative basis, he shall forfeit one (1) day of bargaining
unit seniority for each day in excess of ninety (90) days worked outside of the
bargaining unit during that calendar year.
Section
9. Discharges and Reemployment.
When there is a reduction in the number
of employees in the bargaining unit, the employee last employed in the
bargaining unit shall be the first employee laid off. The employee
laid off through no fault of his own, who has the greatest bargaining unit
seniority, shall (subject to the following provisions of this Article) be the
person first reemployed in the event additional employees are employed, provided
that the person is qualified to perform the duties of the job to which he would
be assigned on reemployment.
A person who has worked in the
bargaining unit sufficiently long to be entitled to seniority in that unit, and
who is laid off through no fault of his own, who has kept his current address on
file with the Company, and who continues to be entitled to seniority under the
terms of this Agreement shall (subject to the following provisions of this
Article) be given first consideration for reemployment.
If reemployment is available for any
such person, the Company shall so notify him by letter (with a copy of such
letter to the Chairman of the Shop Committee), addressed to him at his address
then on file with the Company, and he shall be allowed fifteen (15) days from
the date upon which said letter was mailed, or until he no longer retains his
accrued seniority as provided in Section 10 of this Article V (whichever is the
shorter period), in which to notify the Company in writing of his desire to
return to work. In the event he delivers such notice, he shall be
allowed seven (7) days from the date of the delivery thereof to report for work;
provided, however, if the employee involved is, on the date which he would
otherwise be required to report for work totally disabled to work, he shall, on
or before that date, deliver to the Company a statement in writing from a
licensed
8
physician
stating that he is so disabled, in which event the period within which he shall
be permitted to return to work shall be extended ninety (90) days.
Section
10. Status of Employees Laid Off.
The accrued seniority of an employee
who has been laid off through no fault of his own shall continue to exist from
the date of his layoff for the following periods:
Years of
Service Period Seniority to
Exist
0-180
days -0-
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|
181
days to 2 years
|
Length
of previously accrued seniority
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|
|
2
years or more
|
2
years
|
Section 11. Loss
of Seniority.
Seniority shall be lost and employment
terminated for any of the following reasons:
(a) Quitting.
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|
(b)
|
Absence
from work for three (3) consecutive days without having notified the
Company, unless physically impossible to do
so.
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(c)
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Discharge
for just cause.
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(d)
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Failure
to return at the expiration of a leave of absence or
vacation.
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(e)
|
If
an employee misrepresents the reason for requesting a leave of
absence.
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(f)
|
If
an employee fails to file for reinstatement within ninety (90) days
following discharge from the U.S. Military
Service.
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(g)
|
Failure
to return to work from layoff within the time specified in Section 9 of
this Article.
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|
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(h)
|
At
the end of the period specified in Section 10 of this Article, or upon
earlier rejection after layoff of an offer of reemployment in a
classification equal to the classification from which laid
off.
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9
HOURS OF WORK AND OVERTIME
Section 1. Hours
of Work.
(a) Regular
base hours of work shall be eight (8) hours per day and forty (40) hours per
week.
(b) The
work week shall begin at 12:01 a.m. each Monday and end at 12:00 midnight the
following Sunday. The work day shall begin at 12:01 a.m. and end at
12:00 midnight.
(c) The
work week shall normally be five (5) consecutive 8-hour days, Monday through
Friday, and will normally begin work at 7:00 a.m. and end at 3:30 p.m. with a
30-minute lunch period from 12:00 noon to 12:30 p.m.
(d) No
employee shall be required to work more than twelve (12) hours during any normal
work day except in case of an emergency.
(e) All
employees shall be expected to report to work promptly at the scheduled
time. No employee shall be permitted to work if such employee reports
for work more than one and one-half (1-1/2) hours after his regular scheduled
reporting time, unless such delay has been previously excused by the
Company.
(f) No
employee shall be allowed to work more than sixteen (16) continuous hours nor
more than sixteen (16) hours in any one day except in the case of an
emergency. However, an employee will be allowed to complete his
regularly scheduled hours of work as provided in Sections 5, 8 and 10 of this
Article VI.
(g) Maintenance
overhauls may be staffed on 8-hour, 10-hour, or 12-hour shifts as may be
necessitated by the needs of the operation.
The Company will specify and select the
number and classifications of personnel on each shift by work group
classification for each particular overhaul on a shift
basis. Preference to shifts will be governed by the employee's
bargaining unit seniority. Shift change notice will be handled as
outlined in Article VI, Section 3. In the event there are
insufficient qualified personnel on each shift, the Company shall have the right
to assign qualified personnel as needed.
Section
2. Overtime and Call-Out Pay Rates.
(a) Overtime
and call-out rates shall be one and one-half (1-1/2) times the regular rate and
shall be paid for all work performed in excess of forty (40) hours per week,
continuous actual work in excess of eight (8) hours, and for all work performed
as a result of call-out and for hours worked outside an employee's regularly
scheduled hours.
10
(b) Any
employee who works over, beyond his regular scheduled work day, shall be paid a
minimum of three (3) hours at straight time. If the employee is
required to stay over beyond his regular scheduled work day to attend meetings
or to receive training, and no production work is involved, he will receive pay
for actual time spent at one and one-half (1-1/2) times his regular rate of pay,
providing he has received a minimum of twenty-four (24) hours' notice in
advance.
(c) No
employee shall work overtime without the approval of his Foreman.
Section 3. Shift
Change Notice.
(a) The
Company shall pay each employee one and one-half (1-1/2) times his regular rate
of pay for the first shift of a rearranged work schedule if the employee whose
shift is changed shall not have been notified of the change at least twenty-four
(24) hours prior to the beginning of said first shift. If notice of
employee's shift change shall be posted on his regular day off, notice of the
change shall be posted at least seventy-two (72) hours prior to the beginning of
said first shift. Any notice required to be given to an employee
under the provisions of this Section 3 may be given by written notice posted on
the general bulletin board of the Company and the bulletin board of the Union,
and each employee named in any notice shall be deemed to have received the
notice at the time copies of said notices are posted on said
boards.
(b) The
changing of an employee's shift, incident to the return of an employee from
sickness or accident, shall not be considered a change in shift within the
meaning of this Section 3, unless the absent employee has given the Company at
least seventy-two (72) hours' notice of his intention to return to work and the
time at which he will return to work by notifying his supervisor.
(c) The
changing of an employee's shift from 7:00-3:30 to 7:00-3:00, or from 7:00-3:00
to 7:00-3:30 will not constitute a shift change.
(d) A
change in shift at the request of an employee shall not be considered a change
in shift for the purpose of this Section 3.
(e) No
employee shall lose any time from his normally scheduled 40-hour week occasioned
by any shift change.
Section 4. Meal
Time.
(a) If
a "Day Man" is instructed to and continues to work overtime past 6:00 p.m., he
shall be allowed a 30-minute period beginning at 6:00 p.m. for supper on Company
time; and if said "Day Man" then continues to work additional overtime, he shall
be allowed a 30-minute lunch period on Company time; each such period to begin
at the end of four (4) hours of additional continuous overtime worked after 6:30
p.m.
(b) Any
employee called for work outside of his regular working hours, who is required
to work more than four (4) consecutive hours outside his regular hours,
shall be allowed a 30-minute period for a meal on Company time at the end of the
fourth consecutive hour and at the end
11
of each
consecutive 4-hour period thereafter that said employee continues to work
outside his regular hours.
Section 5. No
Reduction of Work Week as Result of Overtime.
No employee will be required to take
any time off from his regular work week because of overtime worked in that or
any other week. If an employee is required to work on his day off, he
shall not be forced to take another day off in lieu thereof.
Section
6. Computation of Overtime.
For the purpose of computing overtime
under this Article, the exact time worked, rounded to the nearest quarter hour,
shall be accounted for, which shall be paid for at the overtime
rate.
There shall be no duplicate payment for
daily overtime and weekly overtime. If daily overtime is greater in
any one work week, only daily overtime shall be paid, or if weekly overtime is
greater in any one work week, only weekly overtime shall be
paid. There shall be no pyramiding of overtime.
Section
7. Distribution of Overtime and Call-Out Time.
Overtime work opportunities shall
initially be distributed, as equitably as practicable, within each work group
where the overtime is required in accord with the Company's distribution
policy. The Company may then offer such work to employees in other
work groups who are qualified.
For the purpose of distributing
overtime, the Company will submit a list, biweekly, to the work group steward
showing the overtime worked, refused and overtime standing of each employee
covered within the group.
Each employee who is requested to
report for overtime duty shall report at the required time unless he shall first
obtain permission from his supervisor to be relieved of such duty.
Section
8. Call-Out.
An employee who is called out and
reports for work outside his regular working hours shall work until excused by
the person then supervising his work; provided that no one shall be required to
work longer than is provided in Section 1(d) of this Article. An
employee who is called out and reports for work shall be paid a minimum for four
(4) hours at time and one-half (1-1/2), even though the full four (4) hours may
not be worked because no work is available, or he does not work at all because
no work is available. An employee called for such work, who works
continuously until the beginning of his regular hours of work and continues to
work during the regular hours of his scheduled work, shall not be considered to
have had a change in shift within the meaning of Section 3 of this Article
VI.
12
A description of the work or jobs to be
done, or the problem necessitating the call-out, is provided as accurately as
possible by the supervisor in order that the person being called may judge: (a)
whether or not he has the ability to do the work, and (b) about how long he may
have to work. It is not intended to have a person come out on one
job, then surprise him with a list of additional jobs to be
done. However, due to emergencies, it cannot be guaranteed that he
will only be required to do what he was called for.
Notwithstanding the fact that an
employee has been called out for work, such employee shall perform his regular
work schedule during the remainder of the work week in which such call-out
occurs unless excused from such work.
If an employee is called out for work
and works until the beginning of his regular work schedule, the call-out will be
considered as ending at the beginning of his regular schedule.
Section
8A. Advance Scheduling of Overtime.
Overtime may be scheduled up to three
(3) weeks in advance of the actual time required. In the event the
scheduled overtime is cancelled, eight (8) hours' notice will be given or a
call-out will be paid.
Section 8B. Right
to Assign Qualified Personnel.
In the event overtime distribution and
call-out procedures do not provide the Company with sufficient,
qualified personnel to perform the overtime work, the Company shall have the
right to assign such work to qualified personnel. The performance of
such work is mandatory.
Section
9. Holiday Pay.
The following days shall be considered
holidays and normally no work will be performed on the designated holidays
except in cases of emergency, around-the-clock shift work, and in those crafts
where work is necessary for continued operations:
1. New
Year's Day
2. Good
Friday
3. Memorial
Day
4. July
Fourth
5. Labor
Day
6. Columbus
Day
7. Thanksgiving
Day
8. Day
after Thanksgiving
9. Last
work day before Christmas holiday
10. Christmas
Day
When any of these holidays fall on
Sunday, the following Monday will be observed as the holiday.
13
When any of these holidays fall on
Saturday, the preceding Friday will be observed as the holiday.
Each employee who is not required to
work and who does not work on a holiday shall be paid a bonus equivalent to
eight (8) hours at his regular rate at straight time pay, providing he has
worked his last scheduled work day immediately preceding the holiday and his
first scheduled work day following the holiday unless the failure to work these
days is because of confirmed illness or accident no more than five (5) work days
before or after the holiday, unless the employee was excused in advance by the
Company.
An employee who works on the holiday
will receive holiday pay equivalent to the actual hours worked on the holiday,
up to a maximum of twelve (12). The Company retains the right to
schedule employees to work and the amount of hours worked on
holidays.
Section
10. Reporting for Work and Not Used.
Except when no work is available due to
Act of God, such as fire, flood, explosion, or tornado, an employee who reports
for duty on his regular schedule shall be given the opportunity of working a
full 8-hour shift.
ARTICLE
VII
WAGE RATES AND CLASSIFICATIONS
WAGE RATES AND CLASSIFICATIONS
Section 1. Wages
and Pay Period.
The regular pay periods for employees
subject to this Agreement will cover every two (2) scheduled work weeks, and
checks will be available to the men on their regular shifts on the Friday
following completion of the 2-week period.
Each employee who works during the
period beginning 12:01 a.m., October 17, 2007, and ending 12:00 Midnight,
October 16, 2010, shall be paid for his work in that classification on the basis
of the basic hourly wage rate for that classification shown on Exhibit "A" to
this Agreement. Each employee will be paid the applicable clothing
allowances provided on Exhibit "A" to this Agreement.
Section
2. Changes in Classification of Work.
(a) Each
employee covered by any classification is expected to perform any duties to
which he may be assigned within his classification or lower
classification.
14
(b) It
is understood and agreed by the parties hereto that two (2) work groups shall be
recognized under this Agreement. A tabulation of the groups with
explanatory notes is made in Exhibit "B," Part 1, which is a part of this
Agreement.
(c) All
Maintenance personnel may be assigned to do any jobs that they have the ability
to perform subject to the provisions of Article V, Section 5, and Article XIV,
Section 5, of the current contract.
(d) The
Company reserves the right to increase or reduce, at any time and from time to
time, the number of individuals employed in any group mentioned in Exhibit "B",
Part 1, to that number of individuals which, in the opinion of the Company, are
required to perform work in that group for maintaining the plant. Any
such increase or reduction of force in any group shall be made on the basis of
bargaining unit seniority in that group. The Company shall advise the
employee(s) affected seventy-two (72) hours in advance of any permanent change
in the number of persons who shall work in any classification.
Section
3. Mechanic Classifications, Opportunities and
Training
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(a)
|
The
Company wants to provide growth and skills enhancement opportunities for
members of the bargaining unit. In that regard, it will create
new Mechanic classifications of Specialist I, Specialist II and Specialist
III. In addition, it will create a third classification of E
& I Specialist which will fall between current Specialists I and
II.
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|
(b)
|
The
rates paid employees in the Mechanic Specialist I and III classifications
will be the same as the hourly rates currently paid E & I Specialists
I and II. The rates for the Mechanic Specialist II and new E
& I Specialist position will be the midpoint between the existing two
rates.
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|
(c)
|
The
mutual benefit/objective of the new, higher paying classification is to
provide interested unit members with a chance to learn new skills or
enhance existing ones and provide them with opportunity for additional pay
for those in the classifications. The Company expects to
benefit by increased flexibility and efficiency, reduced reliance on
outside contractors, and be in a better position to recruit and retain
skilled personnel.
|
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(d)
|
The
Company and the Union committee will have a collaborative discussion to
determine the skill sets required for each new position. Input
from the Union will be solicited and carefully considered in an attempt to
reach consensus on the appropriate standards and expectations for the new
jobs. In addition, the parties will work to reach agreement on
the procedures which will be used for an interested individual to achieve
certification in the new
classifications.
|
|
(e)
|
The
parties recognize and agree that the training component is critical to the
success of this initiative and will meet to consider the best, fair
methods of testing for
|
15
|
|
competence
in relevant skill areas. Tests ultimately used will be relevant to the job
skills needed on site.
|
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(f)
|
The
Company will include the current Mechanic progression testing program as
another focus of the training committee to be
established.
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(g)
|
The
Company expects that the new positions, training and certification
programs above will be implemented not later than October 17,
2008. If not implemented by then, the parties agree to meet and
discuss reasons for the delay and attempt to complete the process as soon
as possible.
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ARTICLE
VIII
HANDLING OF GRIEVANCES
HANDLING OF GRIEVANCES
Section
1
Nothing in this section shall prohibit
the informal discussion and settlement of grievances between an individual
employee and his supervisor. If so requested by the employee, a
representative of the Union, who may be an officer or steward, may be present at
such informal discussions. The formal grievance procedure shall be as
follows: The grievance will be reduced to the writing (on a form
supplied by the Company) and shall state clearly, contract violations or
causes. The Company will respond in writing at all
steps.
Step
1
If the complaint is not settled
informally, it may be submitted to his Maintenance Supervisor or his designee by
the aggrieved employee and/or his Union Representative within 10 days excluding
Saturday, Sunday and Holidays, of the aggrieved act. The supervisor
will give his answer within five days excluding Saturday, Sunday and
Holidays. Grievances settled in step 1 shall be on a non-precedent
setting basis.
Step
2
If the grievance is not settled in Step
1, the grievance may be referred within ten days, (following receipt of the
Supervisor’s answer in Step 1) to the Maintenance Manager or his
designee. Maintenance Manager or his designee will meet with the shop
steward for the discussion of the grievance and after meeting with the shop
steward the Maintenance Manager or his designee will give his answer within
seven days, excluding Saturday, Sunday and Holidays.
Step
3
If the grievance is not settled in Step
2, the grievance may be referred within ten days, excluding Saturday, Sunday and
Holidays (following receipt of the Maintenance Manager or his designee’s answer
in Step 2) to the General Manager who will meet with the Union Officers and the
16
International
or District Lodge Representative after the meeting with the Union Officers/DBR
the Company will answer within ten days, excluding Saturday, Sunday and
Holidays.
a) If
the grievance is not settled in Step 3, the grievance may be referred within 30
days, excluding
Saturday, Sunday and Holidays, (following receipt of the Company’s answer in
Step 3)
to arbitration. If agreeable to both parties, mediation may be used
prior to arbitration to
resolve the grievance.
The party desiring arbitration will
make application to the Federal Mediation and Conciliation
Service for a panel of seven arbitrators. The Company and the Union
shall alternatively strike until one arbitrator is left. The notice
to the FMCS shall contain a requirement that the arbitrator be available to hear
the case in 90 days. Both the Company and the Union shall have the
right to reject two (2) panels submitted by the Federal Mediation and
Conciliation Service. The decision of the arbitrator shall be final
and binding upon all parties to this agreement. The arbitrator shall
have no power to add to or subtract from or modify any of the terms of this
agreement or any agreement made supplementary hereto, nor to establish or change
any rate, but shall interpret and adjust grievances in accordance, herewith, and
shall render his decision within 30 days from the close of the hearing or date
post hearing briefs may be filed. Such decisions are to be put into
effect within 30 days of receipt. The cost of the arbitrator shall be
borne equally by the parties.
b) Time
limits as provided herein may be extended by mutual agreement.
If the Union considers that an employee
has been discharged unjustly, the Committee shall file such claim within 15
days, excluding Saturday, Sunday and Holidays, with the Company at Step 3 in
this procedure.
ARTICLE
IX
SHOP COMMITTEE AND STEWARDS
SHOP COMMITTEE AND STEWARDS
Section 1. Shop
Committee.
The Shop Committee, composed of four
(4) members from the employee work force, and management representatives, shall
hold regular meetings on a bimonthly basis. It shall be the
responsibility of the Shop Committee to submit a written agenda of each
subject it wishes to discuss with the Company no less than forty-eight (48)
hours before the day of any such meeting. Only three (3) employees in
any one group at any one time shall be a member of the
Committee.
Section
2. Stewards.
(a) A
Steward and an assistant Steward may be elected in each work group by the
employees of that group, and the Union shall submit to the Company, in writing,
the names of each person so designated. The Company shall consider
the person so designated as Steward and assistant Steward of each work group
until notified, in writing, to the contrary.
17
(b) Duly-elected
Stewards or Committeemen shall be deemed to possess top ranking seniority for
purposes of layoff and recall rights within his respective work group or
classification while acting as such.
ARTICLE
X
LEAVE OF ABSENCE
LEAVE OF ABSENCE
Section
1. Personal Business.
If an employee desires to be off on
personal business (not emergencies), he may do so with the consent of the
Company so long as he does not desire to be off over two (2) work weeks and
provided that he gives the Company forty-eight (48) hours' notice of his desire
to be absent and the length of time he desires to be off. Upon
completion of such leave, he will resume employment on the basis of
uninterrupted service.
Section 2. Union
Business.
(a) The
Company shall, upon a minimum of thirty (30) days' prior written request from an
employee and the President of Local No. 224 of International Association of
Machinists and Aerospace Workers, grant a leave of absence, extending not longer
than fourteen (14) days, to the employee applying for such leave in order that
he may, during that leave, engage in work pertaining to the business of Local
No. 224 of International Association of Machinists and Aerospace
Workers.
Such a leave shall not be granted to
more than one (1) employee at any one time. Such employee shall not
be granted such a leave for more than an aggregate of thirty(30) days in any one
(1) calendar year.
(b) The
Company shall grant (upon a minimum of sixty (60) days advance prior written
request of an employee and the President or Vice President of International
Association of Machinists and Aerospace Workers) a leave of absence for a period
not to exceed one (1) year in order that the employee requesting such leave may,
during the period of such leave, work as any employee of International
Association of Machinists and Aerospace Workers. Not more than one
(1) employee shall be permitted to be absent from work at any one time on any
such leave.
Section
3. Sickness or Accident.
If an employee who has established
seniority is out of service due to occupational injury or occupational disease
suffered or contracted while he is in the employment of the Company, he shall
retain his seniority accrued at the date of his disability and continue to
accrue seniority for a period of twenty-four (24) months or length of
previously-accrued seniority, whichever is less, during the period of his
disability as a result thereof. If an employee who has established
seniority is out of service due to nonoccupational injury or disease suffered
while he was in the employment of the Company, he shall retain his accrued
seniority for a period of twenty-four (24) months and will accrue seniority in
the classification in which he was last regularly employed for a period of one
(1) year.
18
Under either of the above conditions,
if an employee should accept an equal or better job elsewhere, his seniority
shall be cancelled.
Section 4. Notice
to the Company.
When an employee becomes aware of the
fact that he is going to be absent from work due to sickness, accident, or other
emergency, he must notify his supervisor as far in advance of his scheduled
shift as he/she has knowledge of such intended absence, but no less than one (1)
hour before the time he is due to report to work. In the event the
employee cannot contact his Supervisor, it is permissible to contact any member
of Management.
Section
5. Military Reserve Training.
(a) Any
regular employee (not probationary) may be granted a special leave of absence
for a period not to exceed fourteen (14) days, plus a reasonable period to cover
travel time, when required for the purpose of engaging in a training program for
Enlisted Reserve, Reserve Officers, or National Guard Encampment,
provided:
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|
1.
|
He
furnishes the Company with a copy of orders from the military authorities
calling him for duty; and
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|
|
2.
|
He
gives advance notice to his immediate supervisor so that arrangements may
be made for his replacement during the period of his
leave.
|
(b) Only
one (1) leave of absence for Military Reserve Training shall be granted to any
employee during a calendar year.
When an employee is out of work for the
reasons set forth herein, FMLA and relevant insurance coverage will be applied
for the initial twelve (12) weeks of his leave. After the initial
twelve (12) weeks, the employee will be entitled to continue health insurance
coverage and at costs pursuant to his COBRA rights which will begin upon
completion of the initial FMLA coverage.
ARTICLE
XI
VACATIONS
VACATIONS
Section
1.
Normal vacation accruals will be
computed in accordance with the following provisions:
(a) Two
weeks (80 hours) - after having accrued one (1) year's Company
seniority;
(b) Three
weeks (120 hours) - during the calendar year in which an employee accrues six
(6) year's plant seniority;
19
In computing length of service for
vacations, time spent working at the El Dorado Plant will be used.
Section
2.
Those employees who had previously
accrued or who will accrue, during the term of this Agreement, twelve (12) years
or more Company seniority shall be entitled to a vacation accrual of four weeks
(160 hours). Thereafter, and for all other employees, the maximum
vacation accrual shall be as provided in Section 1.
Section
3.
(a) Normally,
all vacations will begin with the first work day of the work week
schedule.
(b) Vacation
pay shall be based upon the straight time rate of an employee's regular
classification at the beginning of the vacation and will be taken in accordance
with his established work schedule. If a holiday, as defined in
Article VI, occurs during an employee's vacation period, the employee will
receive pay for said holiday as defined in Article VI.
(c) Each
employee must take his vacation during the vacation year (January 1-December 31)
in which it falls due, subject to subsections (d) and (i) below.
(d) If
an employee is not permitted to take his vacation in any calendar year in which
it is due because the Company finds it not convenient to excuse him from work,
he shall be paid a sum equal to the sum to which he would have been entitled for
working at his regular job based on straight-time pay at normal working schedule
during the last part of that year equal to the number of weeks' vacation to
which he is entitled.
(e) Except
with special permission of the Company, no employee shall be permitted to begin
a vacation in any year within three (3) months of the date of the end of the
vacation taken by him during the preceding calendar year, and any employee who
has received pay in lieu of vacation for one (1) calendar year shall be entitled
to his next annual vacation before March 1 of the following year, if it is
practical for the Company to give him a vacation.
(f) An
employee who (a) resigns, (b) retires, (c) is laid off as part of a reduction in
forces, or (d) is granted a military leave under the provisions of Article XII,
at a time when he has earned vacation to that date but has not taken, nor
previously received pay in lieu of, shall be paid in lieu of any vacation he has
earned to that date but has not taken, nor previously received pay in lieu
of.
Computation of vacation under this
section will be earned at the rate of one-twelfth (1/12th) for each month from
employee's anniversary date. Sixteen (16) or more calendar days of
employment in any calendar month will be considered a full month in computing
vacation accruals.
20
(g) An
employee will not be eligible for overtime or call-out during the period
beginning with the first day of his vacation and until his first scheduled work
day following completion of his vacation.
(h) In
the event of the death of any employee who was then otherwise eligible for a
vacation but who had not taken it, a sum of money equal to pay in lieu of such
vacation shall be paid to the person(s) who shall be entitled to the personal
property of such decedent.
(i) No
employee shall receive pay in lieu of vacation except as provided in Article XI,
Section 2(d). However, when an employee is absent from work due to
authorized occupational injury or illness, or personal sick leave, and has not
returned to work by December 31, he may, at the Company's option, be permitted
to take his vacation or receive vacation pay between January 1, and April 1 of
the following year.
Section
4.
The vacation schedule will be initiated
January 2nd of each year for those eligible for vacation in that
year. Employees shall choose their vacation periods in order of their
bargaining unit seniority. The Company will, insofar as operations
permit, arrange by choice and by seniority the employee's request in the
vacation schedule. An employee not submitting his vacation preference
within a reasonable time after being contacted will have his vacation scheduled
during the year at a time convenient to the plant operations.
Normally, subject to operational
requirements, the Company will permit from each Maintenance Work Group, a
maximum of twenty (20%) percent of the active available employees to be on
vacation at the same time.
ARTICLE
XII
MILITARY LEAVE
MILITARY LEAVE
Section
1. Military Service
The rights of employees of the Company
who enter Military Service during the term of this Agreement will be governed in
all respects by applicable laws.
Section 2. Pay in
Lieu of Vacation.
Each such employee who is entitled to a
vacation under the vacation policy of the Company at the time he leaves to enter
the Armed Forces, who elects not to take the vacation but to receive pay in lieu
thereof, shall, upon furnishing to the Company a certificate from his commanding
officer establishing the fact that he had been inducted into the military
service, be paid the amount of money he would have received had he taken his
vacation just prior to the beginning of his military leave.
21
ARTICLE
XIII
PHYSICAL EXAMINATIONS
PHYSICAL EXAMINATIONS
Section
1. Periodical Examinations.
The Company may, from time to time,
require all employees to have periodical physical examinations by a doctor
selected by the Company. However, such examinations shall not be used
for the purpose of discriminating against an employee. Each employee
shall receive his regular rate of pay for all time required to be examined as
provided in this Section 1.
Section
2. Certificate of Physical Fitness.
In the case of an employee being absent
from work due to illness or physical impairment, he may be required to present a
certificate of physical fitness, signed by a licensed physician, before being
readmitted to work. This rule, however, shall not limit the right of
the Company to require physical examination by a physician in the Company's
service in exceptional cases of constantly recurring absence from
duty.
Section
3. Dispute Resolution.
Notwithstanding any of the provisions
of Article VIII of this Agreement, in case a dispute arises over the physical
fitness of an employee to return to work or continue to work, a board of three
(3) physicians shall be selected; one by the Company, one by the employee, and
one selected by the two so named. The decisions of the majority of
this board shall be final and binding.
ARTICLE
XIV
MISCELLANEOUS AND GENERAL
MISCELLANEOUS AND GENERAL
Section 1. Tool
Check-in Time.
Employees will be allowed fifteen (15)
minutes time to clean and check in their tools before quitting time, if such
action is required by them.
Section
2. Bulletin Board.
The Company shall maintain at the plant
entrance gate at the Chemical Plant a bulletin board which shall be designated
as "Local No. 224 Bulletin Board" and shall be for the use of the Union for
posting -- subject to the approval of the Company -- of any matters of interest
to or affecting the business of the Union. It is understood and
agreed that the posting of notices by the Union within the plant area will be on
this bulletin board only and will be posted by the Chairman of the Shop
Committee or his recognized representative. This bulletin board will
be locked with a key, released to the Chairman of the Shop Committee and to the
Company.
22
Section
3. Discrimination.
There shall be no discrimination by the
Company against any employee with respect to any conditions of employment on
account of his membership in this labor union, or on account of any activity
undertaken in good faith in his capacity as a representative of other
employees. The Union shall not discriminate against any employee who
is not a member of the Union.
Where the male gender is used in this
contract, it is intended to refer to both male and female. It is a
continuing policy of the Company and the Union that the provisions of this
Agreement shall be applied to all employees without regard to race, color,
religion, sex, physical disability, national origin, or age.
Section 4. Wage
Rate Changes.
There shall be no change in the basic
hourly wage rates set forth in Exhibit "A" to this Agreement, or in the clothing
allowance set forth in Exhibit "A" to this Agreement, during the term of this
Agreement.
Section 5. Safety
Provisions.
The Company shall continue to make
reasonable provisions for the safety and the health of its employees at the
plant during hours of their employment. Protective devices from
injury shall be provided by the Company. Employees, subject to this
Agreement, will abide by safe practice rules and regulations of the Company, and
failure to do so may be considered grounds for dismissal.
No employee shall be required to
perform services which, in the considered judgment of the Company and the Union,
seriously endanger his physical safety; his refusal to do such work shall not
warrant or justify discharge. If any employee refused to perform such
work, representatives of the Company and the Union shall immediately attempt to
decide the safety factor. Should they be unable to agree, the
decision of a representative of the Safety Department of the Company shall be
obtained. If the employee still feels an unsafe condition exists, he
will not be required to perform that given job, and the Company will have the
work done by any means it elects.
Section
6. Discharges.
It is agreed by and between the Company
and the Union that the Company may, without limitation upon its right to
discharge an employee for any other valid reason, discharge any employee,
subject to this Agreement, for the violation of any of the Company's rules or
regulations, which said rules and regulations heretofore have been approved by
both the Company and the Union.
Section 7. Recess
Period (Smoking).
Where men are required to work
continuously in restricted and confined areas where smoking is not permitted,
the Foreman is authorized to grant a recess of not longer than ten (10)
23
minutes
to employees upon request, providing in his judgment, work conditions permit;
however, no employee shall be granted more than two (2) such recesses in any one
(1) normal work day.
Section 8. Jury
Duty.
Each employee of the Company who is
called for service upon any grand jury, petit jury or coroner jury shall, after
furnishing to his Foreman, a certificate in evidence of his jury service, be
paid by the Company for each day which he serves upon said jury a sum equal to
the difference between the amount he would have earned if he had been required
to work for the Company on that day for the number of hours of his regular work
schedule and the jury pay he received, with the provision that no such payment
shall be made to an employee for jury service on any day during which, in
accordance with his regular work schedule, he would not have worked for the
Company.
Section
9. Termination Pay.
An hourly employee whose work comes
within the scope of the Fair Labor Standards Act, and who has been continuously
employed by the Company for one (1) year, shall, if discharged through no fault
of his own, receive a sum equivalent to forty (40) hours' straight time pay at
his regular rate, based upon his normal schedule of work, and twice that amount
if he has been employed by the Company for a period of five (5)
years. No employee shall receive such termination pay more than once
in any one (1) calendar year.
Section
10. Contract Work.
It is agreed that any classified work
covering maintenance and repair of equipment and machinery now being done by
employees of the Company shall not be contracted out as long as the Company has
the necessary equipment and as long as there are qualified men available to do
the work.
Section
11. Technical and Supervisory Employees.
The Company may use technical and
supervisory employees to install temporary test equipment to be used in
evaluating conditions and/or performance of plant facilities.
Section 12. Minor
Maintenance.
It is agreed that Operating Department
personnel will perform minor maintenance functions. Minor maintenance
functions shall be similar in scope but not limited to the following
examples:
|
|
1.
|
Tightening
loose mechanical connections.
|
|
|
2.
|
Tightening
leaking packing.
|
|
|
3.
|
Changing
instrument charts.
|
24
|
|
4.
|
Tightening
piping fittings to stop minor
leaks.
|
|
|
5.
|
Changing
light bulbs.
|
6. Hooking
up loading and unloading lines.
Section 13. Minor
Operating Functions.
Maintenance personnel may perform minor
operating functions when requested by production supervision, but only when
accompanied by a qualified member of the operations group. Typical
example: Assisting in closing or opening large block valves that are difficult
for one person to handle.
Section
14. Uniforms
Employees are encouraged to elect to
use the contractor service to supply them with uniforms. Those who
use the uniform service will be assured of the current level of shirts and pants
and the winter jacket at $0.16/hour cost to employees with no cost to repair for
the term of this Agreement, unless the employee terminates use of uniforms and
returns damaged goods.
ARTICLE
XV
VALIDITY OF CONTRACT
VALIDITY OF CONTRACT
In the event any of the provisions of
this agreement may conflict with State or Federal statutes now existing or
subsequently enacted or with legal executive orders or regulations or applicable
court decision, the requirements of law shall overrule such provisions of this
agreement, it being the intent thereof that neither the Company nor the Union
may insist upon the observance of any provision hereof where the other party to
the agreement is obligated by law to adopt a course in conflict with this
agreement. The remaining provisions of this agreement not affected
thereby will remain in full force and effect.
ARTICLE
XVI
NOTICE
NOTICE
Any notice to the Company provided
herein may be given by depositing same in the U.S. Mail in a sealed envelope,
registered, postage prepaid, and addressed to:
El Dorado Chemical Company
P.O. Box 231
El Dorado,
Arkansas 71731
Attention: Plant Manager
Any notice to be given to the Union may
be given by depositing same in the U.S. Mail in a seal envelope, registered,
postage prepaid, and addressed to:
25
Recording Secretary
International Association of
Machinists
and Aerospace Workers,
AFL-CIO,
Local No. 224
Box 1332
El Dorado, Arkansas
A copy of notices should be likewise
mailed to:
President, International Association
of
Machinists and Aerospace
Workers
AFL-CIO Machinists
Building
9000 Machinist Place
Upper Marlboro,
Maryland 20772-2687
ARTICLE
XVII
FUNERAL LEAVE
FUNERAL LEAVE
Any employee in the bargaining unit
shall be allowed to be absent from work to arrange for or attend the funeral of
any one of the relatives of the employee hereinafter stated:
(a) If
the deceased relative was the husband, wife, child, father, mother, brother,
sister, grandfather, grandmother, or grandchild of the employee or spouse, the
employee shall be permitted to be absent from work for a period not to exceed
two (2) continuous days.
(b) If,
to attend the funeral for the deceased relative, the employee travels to a point
more than 100 miles from El Dorado, Arkansas, he shall be allowed such leave for
an additional day with pay.
The pay for each day's leave which the
employee receives under the provisions of this Article shall be a sum equal to
straight time for his regular schedule of work on the day
involved. There shall be no duplication of payment under provisions
of this Article for any other employee benefits such as vacation pay, holiday
pay, or sickness benefits payments.
Any request for such time off with pay
based on false statements will subject the employee making the request to
immediate disciplinary action or discharge.
ARTICLE
XVIII
GROUP INSURANCE
GROUP INSURANCE
Group
Insurance and Pension.
The Company and employees will share
the entire cost of group insurance benefits for employees and employee
dependents on the following basis, in the following employee enrollment
categories, payable bi-weekly:
26
a. Employee
b. Employee
and Children
c. Employee
and Spouse
d. Family
Medical claims utilization and fixed
costs will determine the cost share assigned to each enrolled employee by
enrollment category.
|
|
(1)
|
Effective
January 1, 2008, the employee’s cost share of 22%, per pay period, will be
based on the total claims utilization and fixed costs commencing November
1, 2006, through October 31, 2007.
|
The
specific cost share amounts to be effective January 1, 2008, will be constant
throughout that year.
|
|
(2)
|
Effective
January 1, 2009, the employee cost share of 23%, per pay period, will be
based on the total claims utilization and fixed costs during the period,
commencing November 1, 2007, through October 31,
2008.
|
|
|
The
specific cost share amounts, per pay period, to become effective January
1, 2009, will be constant throughout that
year.
|
|
|
(3)
|
Effective
January 1, 2010, the employee cost share of 23%, per pay period, will be
based on the total claims utilization and fixed costs, during the period
commencing November 1, 2008, through October 31,
2009.
|
The
specific cost share amounts, per pay period, to be effective January 1, 2010,
will be constant throughout that year.
Effective January 1, 2008, 2009, and
2010, of each year, the maximum employee cost share amounts, per pay period, are
as follows:
2008 22%
2009 23%
2010 23%
27
If the total claims percentage cost
share, per pay period, exceeds the capped rates shown below, the capped rates
will apply.
|
2008
|
2009
|
2010
|
|
|
22%
|
23%
|
23%
|
|
|
Capped
Rates:
|
|||
|
Employee
|
$
28.00
|
$33.60
|
$
40.32
|
|
Employee
& Children
|
$
52.00
|
$
62.40
|
$
74.88
|
|
Employee
& Spouse
|
$
86.00
|
$103.20
|
$123.84
|
|
Family
|
$110.00
|
$132.00
|
$158.40
|
Employees should refer to Summary Plan
Descriptions for details of EDC Health Plan co-payments, deductibles,
co-insurance coverage and periodic amendments as may be made from to time to
time.
Effective with the date of this
Agreement, the Company agrees to pay the cost of employee long-term disability
insurance and basic life insurance (twice an employee's annual
income).
Dental insurance coverage will be made
available as an option. The employee may elect to purchase the
insurance by paying the premium each month, or by increasing the deductible
amounts of the current group medical plan.
The Savings Incentive Plan for
Employees, adopted effective December 1, 1985, shall be continued during the
term of this Agreement.
ARTICLE
XIX
NO STRIKE OR LOCKOUT
NO STRIKE OR LOCKOUT
There shall be no strike, sympathy
strike, or lockout during the term of this Agreement for any
reason.
ARTICLE
XX
SERVICE WITH COMPANY
SERVICE WITH COMPANY
The Company shall honor previous
service at the El Dorado Chemical Company for purposes of seniority and vacation
eligibility only. Previous service at the plant, or any predecessor
of the Company, shall not be credited for purposes of pension
benefits.
28
ARTICLE
XXI
RETIREMENT AGE
RETIREMENT AGE
The mandatory retirement age for
employees shall be in accord with federal law.
The seniority of each employee whose
services are terminated under the provisions of this Article shall cease as of
the date of such retirement.
ARTICLE
XXII
CHANGE
OR MODIFICATION OF AGREEMENT
Section
1
If either party shall desire to change
any provisions of the agreement; it shall give written notice of such desire to
the other party by certified mail at least 60 days in advance of its expiration
date.
Section
2
The giving of notice provided in
Section 1 shall constitute an obligation upon both parties to negotiate in good
faith all questions at issue, with the intent of reaching written agreement
prior to the expiration date.
Section
3
If the parties have not reached
agreement on or before the expiration date, all the provisions of the agreement
shall remain in effect unless specifically terminated in accordance with the
provisions of Article XXIII below.
ARTICLE
XXIII
TERMINATION OF AGREEMENT
TERMINATION OF AGREEMENT
Section
1
At any time after the expiration date,
if no agreement on the question at issue has been reached, either party may give
written notice to the other party of intent to terminate the Agreement in (not
less than) 10 days. All the provisions of the Agreement shall remain
in full force and effect until the specified time has elapsed. During
this period, attempts to reach an agreement shall be continued.
Section
2
In the event that parties fail to
resolve their differences within the specified time, all obligations under this
agreement are automatically canceled at the expiration
thereof. Provided,
29
however,
that nothing in the foregoing shall take away the right of the parties to
mutually agree to a written extension of this Agreement.
This Agreement may be opened for change
by specific areas by mutual agreement of the parties without affecting the
remainder of the contract. Any changes must be ratified by the Union
membership prior to implementation.
IN WITNESS HEREOF, this instrument is
executed on the 17th
October, 2007, to be effective as of October 17, 2007, at 12:01
a.m.
EL DORADO CHEMICAL
COMPANY
By: ____________________________
Greg
Withrow, General Manager
|
|
INTERNATIONAL
ASSOCIATION OF MACHINISTS AND AEROSPACE WORKERS AFL-CIO, LOCAL
NO. 224
|
By: ____________________________
Larry G.
Booth
Directing
Business Representative
MEMBERS OF THE SHOP
COMMITTEE:
____________________________
Jim McKnight
____________________________
Edward
Johnson
____________________________
Steve
Taylor
____________________________
Don
Fletcher
____________________________
Jeff
Robison
30
EXHIBIT
"A"
BASIC HOURLY WAGE RATE
BASIC HOURLY WAGE RATE
Classification 10/17/07 10/17/08 10/17/09
"A"
Mechanic $19.88 $20.38 $20.89
"B"
Mechanic $18.51 $18.97 $19.44
"C"
Mechanic $17.80 $18.25 $18.71
"D"
Mechanic $13.17 $13.50 $13.84
"E"
Mechanic-New
Hire ** ** **
(First
180 Days)
** Rate
of pay determined by Company on basis of employees qualifications.
The Company shall have the right to
select and appoint employee(s) as Lead. In addition to the regular
work of their classification, a Lead may be assigned to train, assist, assign
employees, carry out the instructions of supervision, and to perform any other
duties pertaining to the maintenance department, which may be assigned by
management. The selection of Lead personnel and the duration of their
appointment is within the sole discretion of management. While so
assigned, Lead(s) shall receive a premium of one dollar ($1.00) above their
regular hourly rate.
Specialist
I $21.94 $22.49 $22.94
Specialist
II $23.82 $24.42 $24.91
Specialist
III $25.69 $26.34 $26.87
31
RATE
CHANGES DURING TERM OF AGREEMENT
The parties agree that the Company
shall have the right to establish pay practices and rates which assure the
Company’s ability to attract and retain skilled/qualified bargaining unit
members. Before implementation, the Company will discuss the rates
and/or changes with the Union.
CLOTHING
ALLOWANCE
In addition to the hourly rates set
forth in Exhibit "A", there shall be paid a clothing allowance of each hour
worked, as indicated below:
Clothing
Allowance
Per
Hour
$.16
32
EXHIBIT
"B"
RECOGNIZED
MAINTENANCE WORK GROUPS
Group I -
Mechanical
Includes work ordinarily done by the
following work groups:
1
..Pipefitter, Plumber
2.
Welder, Lead Burner
3. Heavy
Duty Operator, Rigger
4.
Machinist
5.
General Mechanic
6. Tank
Car Repairman,
7.
Carpenter, Painter, Mason, Insulator, Concrete Finisher
8.
Rotating Machinery
Group II
- - Electrical/Instrumentation
Includes work ordinarily done
by:
1.
Electrician
2.
Instrument Repairman
33
DRAFT
AGREEMENT
between
United
Steel, Paper and Forestry, Rubber,
Manufacturing, Energy, Allied Industrial and
Service Workers
Manufacturing, Energy, Allied Industrial and
Service Workers
International
Union, AFL-CIO, CLC, on behalf of
Local
Union No. 00417
and
Cherokee
Nitrogen Company
November
12, 2007 to November 11, 2010
CONTENTS
P
age
No.
|
AGREEMENT (Preamble)
|
1
|
|
|
ARTICLE 1 – RECOGNITION
|
1
|
|
|
ARTICLE 2 – PURPOSE
|
1
|
|
|
ARTICLE 3 – MANAGEMENT RIGHTS
CLAUSE
|
2
|
|
|
ARTICLE 4 - WORK GROUPS
|
2
|
|
|
ARTICLE 5 - SENIORITY
|
4
|
|
|
ARTICLE 6 – POSTING AND FILLING JOB
BIDS
|
5
|
|
|
ARTICLE 7 – REDUCTION IN FORCE AND
RECALL
|
6
|
|
|
ARTICLE 8 – SCHEDULE CHANGE
|
8
|
|
|
ARTICLE 9 – HOURS OF WORK
|
8
|
|
|
ARTICLE 10 – OVERTIME
|
8
|
|
|
ARTICLE 11 – 12-HOUR SHIFT
AGREEMENT
|
12
|
|
|
ARTICLE 12 – ABSENCES
|
12
|
|
|
ARTICLE 13 - WAGES
|
13
|
|
|
ARTICLE 14 – SHIFT
DIFFERENTIAL
|
14
|
|
|
ARTICLE 15 - VACATIONS
|
14
|
|
|
ARTICLE 16 - HOLIDAYS
|
16
|
|
|
ARTICLE 17- FUNERAL LEAVE
PAY
|
17
|
|
|
ARTICLE 18 – JURY DUTY
|
17
|
|
|
ARTICLE 19 – PAYDAY
|
18
|
|
|
ARTICLE 20 – MEAL ALLOWANCE
PROVISIONS
|
18
|
|
|
ARTICLE 21 – WORKERS
COMMITTEE
|
19
|
|
|
ARTICLE 22 – GRIEVANCE
PROCEDURE
|
19
|
|
|
ARTICLE 23 – LEAVE OF
ABSENCE
|
21
|
|
|
ARTICLE 24 – MILITARY
SERVICE
|
22
|
|
|
ARTICLE 25 – SAFETY AND
HEALTH
|
22
|
|
|
ARTICLE 26 – DISCRIMINATION
|
23
|
|
i
|
ARTICLE 27 – BULLETIN
BOARDS
|
23
|
|
|
ARTICLE 28 – SICKNESS
BENEFITS
|
24
|
|
|
ARTICLE 29 – DISCIPLINE AND
DISCHARGE
|
25
|
|
|
ARTICLE 30 – GENERAL
|
25
|
|
|
ARTICLE 31 – AUTHORIZED
DEDUCTION
|
26
|
|
|
ARTICLE 32 – SAVINGS CLAUSE
|
26
|
|
|
ARTICLE 33 – STRIKES AND
LOCKOUTS
|
27
|
|
|
ARTICLE 34 –TERM
|
27
|
|
|
APPENDIX
"A" (Wage Rates)
|
29
|
|
|
APPENDIX
"B" (12-Hour Continuous Shift
Operations)
|
31
|
|
|
APPENDIX
"C" (401(k) Savings Plan)
|
36
|
|
|
APPENDIX
"D" (Alcohol and Drug Control
Policy)
|
37
|
|
|
APPENDIX “E” (USW Check-off
Authorization)
|
38
|
|
|
LETTER OF
UNDERSTANDING (Red Circle Personnel)
|
39
|
|
|
LETTER OF UNDERSTANDING
(Board Operator Premium)
|
40
|
|
ii
AGREEMENT
This
Agreement was made and entered into this twelfth day of November, 2007, by and
between Cherokee Nitrogen Company, Cherokee, Alabama, hereinafter called the
“Company” and The United Steel, Paper and Forestry, Rubber, Manufacturing,
Energy, Allied Industrial and Service Workers International Union
AFL-CIO, CLC (USW) on behalf of its Local Union No. 00417, hereinafter called
the "Union."
ARTICLE
1
RECOGNITION
Due to
the Company's hiring individuals, all of which were previously employed in the
Cherokee Nitrogen facility, where the Company currently operates, the Company
has recognized the "Union" for purposes of pay, wages, hours of work, and other
terms and conditions of employment for employees in the following unit: all
hourly-paid production and maintenance employees at the Company's Cherokee,
Alabama plant, but excluding journeyman electricians and instrument person,
their apprentices and/or electrician or instrument mechanics helpers, clerical
employees, professional, technical, managerial, and confidential employees,
guards, and supervisors as defined in the Act.
Whenever
reference is made to a particular gender in this Agreement, it is understood
that the reference applies equally to both male and female
employees.
ARTICLE
2
PURPOSE
A. The
parties hereto mutually agree that there is concern for the future of the
Company and its ability to compete in a the nitrogen fertilizer industry because
of factors over which neither the Union nor the Company have control, including
but not limited to foreign competition, excess domestic production capability,
natural gas prices, and the cyclical nature of product utilization by
consumers. Each agrees that our mutual goal is to provide the highest
quality product and service at a competitive price, and to assure the effective
flexibility in the utilization and skills of all employees.
B. It
is the intent and purpose of the parties hereto that this Agreement shall
promote and improve the industrial and economic relationship between the Company
and the Union, and shall set forth herein rates of pay, hours of work, and
working conditions of employment to be observed between the parties
hereto.
C.It is recognized by both
parties that they have a mutual interest and obligation in maintaining friendly
cooperation between the Company and the Union which will permit safe,
economical, and efficient operation of the plant.
D.All written Letters of
Agreement which are dated prior to the effective date of this contract are null
and void unless specifically added to this contract.
1
ARTICLE
3
MANAGEMENT RIGHTS
CLAUSE
The Union
expressly recognizes that the Company has the exclusive responsibility for and
authority over (whether or not the same was exercised heretofore) the
management, operation, and maintenance of its facilities and, in furtherance
thereof, has, subject to
the terms of this agreement, the right to determine policy affecting the
selection, hiring, and training of employees: to direct the work force and to
schedule work: to institute and enforce reasonable rules of conduct, to assure
discipline, and efficient operation: to determine what work is to be done, what
is to be produced and by what means; to determine the quality and quantity of
workmanship; to determine the size and composition of the work force; to
determine the allocation and assignment of work to employees; to determine the
location of business, divisions, and subdivisions thereof; to arrange for work
to be done by other companies or other divisions of the Company; to alter,
combine, or eliminate any classification, operation, service, or department; to
sell, merge, or discontinue the business or any phase thereof; provided,
however, in the exercise of these prerogatives, none of the specific provisions
of the Agreement shall be abridged.
The
Company will not use the vehicle of subcontracting for the sole purpose of
laying off employees or reducing the number of hours available to
them.
ARTICLE
4
WORK
GROUPS
A. Grandfathering
and red circle personnel are covered in a Letter of Understanding.
B. OPERATIONS PRODUCTION
DEPARTMENT SKILL ADVANCEMENT/ON-THE-JOB TRAINING.
1. In
the interest of maintaining and improving operating efficiencies, the following
is the standard for inception and advancement.
2. Levels
of advancement are as follows:
|
|
a.
|
Trainee - If a new hire
cannot complete the qualifications according to the following schedule,
they will be terminated. If an existing employee bids to the
job but despite his/her best efforts he/she cannot complete the
qualifications according to the schedule, the Company will consider
alternatives to termination including an extension of the training period
or reassignment to his/her prior position for which he/she is
qualified.
|
|
|
b.
|
Chemical Operator 1 -
Required to pass necessary requirements as determined by management, for
one (1) assignment which will include written and oral examinations and
demonstration of job proficiency. Must qualify within 240 hours
of training on day shift.
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|
|
c.
|
Chemical Operator 2 –
Required to qualify by passing the second assignment by written and oral
examinations, and demonstration of job proficiency. Must
qualify within one (1) year after passing Operator 1
qualifications.
|
|
|
d.
|
Chemical Operator 3 - Required to pass all area assignment written and oral examinations within an area, and by demonstrating job proficiency on all assignments. Must qualify within one (1) year after passing Operator 2 qualifications. |
2
|
|
e.
|
Chemical Operator 4 - Required to pass all area assignment written and oral examinations within an area, and by demonstrating job proficiency on all assignments. Must qualify within eighty (80) calendar days after passing Operator 3 qualifications and be certified as having completed Cherokee Nitrogen training programs. |
C. ROUTE OF ADVANCEMENT –
OPERATIONS PRODUCTION DEPARTMENT.
|
Switch
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|||||
|
Ammonia
|
Acid
|
Urea
|
Nitrate
|
Crews
|
|
|
Chemical
Operator 4
|
X
|
X
|
X
|
X
|
(1)*
|
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Chemical
Operator 3
|
X
|
X
|
X
|
X
|
(1)*
|
|
Chemical
Operator 2
|
X
|
X
|
X
|
X
|
X
|
|
Chemical
Operator 1
|
X
|
X
|
X
|
X
|
X
|
|
Trainee
New
Hire after 8/31/94
|
X
|
X
|
X
|
X
|
X
|
|
(1)*To
qualify for this level, the switching and rail crew members must qualify
for the shipping, bagging, and load-out of products in the Nitrate and
Urea areas.
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D. MAINTENANCE DEPARTMENT
WORK GROUPS.
1. In
the interest of maintaining and improving plant on-stream time, the following is
the standard for maintenance inception and advancement:
2. The
Company will provide on-the-job training necessary to acquire job skills at each
level. Levels of advancement are as follows:
a. Maintenance Trainee - A new
hire or bidder will be required to pass the skill levels established August 31,
1994 (document entitled "Training Program - General Mechanic") in order to
advance to Maintenance Level 1. A new hire who does not complete the
qualifications will be terminated. Must successfully complete and
pass written and practical factors tests, as determined by
Management. If an existing employee bids to the job but despite
his/her best efforts he/she cannot complete the qualifications according to the
schedule, the Company will consider alternatives to termination including
extension of the training period or reassignment to his/her prior position for
which he/she is qualified.
b. Maintenance Level 1 - Must be
qualified and proficient in one (1) major skill as determined by management, and
must pass written and practical factors tests, as determined by Management,
(i.e. General Mechanic, Certified Welder, Machinist, Auto Mechanic, Millwright,
etc.).
c. Maintenance Level 2 - Must be
qualified and proficient in two (2) major skills, and written and practical
factors tests, as determined by Management.
d. Maintenance Level 3 - Must be
qualified and proficient in three (3) major skills, and written and practical
factors tests, as determined by Management.
3
e. Maintenance Level 4 - Required
to be a Level 3 and certified by written and practical factors tests, as
determined by Management.
E. ROUTE OF ADVANCEMENT –
MAINTENANCE DEPARTMENT.
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Ø
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Maintenance
Level 4
|
|
Ø
|
Maintenance
Level 3
|
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Ø
|
Maintenance
Level 2
|
|
Ø
|
Maintenance
Level 1
|
|
Ø
|
Mechanic
3rd Year Trainee
|
|
Ø
|
Mechanic
2nd Year Trainee
|
|
Ø
|
Mechanic
1st Year Trainee
|
|
Ø
|
Maintenance
Trainee
|
Training
program guidelines to become a general mechanic shall be those as described in
4D 2(a) identified in the document, Training Program “General Mechanic”
established August 31, 1994, and updated August 15, 1999.
MAINTENANCE
DEPARTMENT AREAS
The
current operating practice is to assign employees to one of the following
areas:
Ammonia/Nitric
Acid/Utilities
Nitrate/Urea
Central
ARTICLE
5
SENIORITY
The
purpose of this Article is to define and describe the seniority provisions which
will govern the seniority status of employees within the bargaining
unit.
A. Employees
who were hired by Cherokee Nitrogen Company on November 1, 2000 shall have their
plant seniority date based on date of original employment at the
plant. Such seniority may be used for vacation eligibility and
seniority rights.
B. The
only type of seniority, which will be considered under this Agreement, is plant
seniority.
C. A
new employee screened and hired to become a regular full-time employee shall not
acquire seniority rights until he/she has been employed by the Company for a
period of sixty-five (65) continuous active work days within a period of six (6)
months. Until such time as an employee has acquired seniority rights,
he/she shall be considered a probationary employee and may be laid off or
terminated without recourse, and the Company shall be under no obligation to
rehire him/her. When
4
employees
have identical plant seniority, the order of seniority placement shall be
determined alphabetically.
D. The
seniority of an employee shall be considered broken, all rights forfeited, and
there shall be no obligation to rehire him/her for any one of the following
reasons:
1. If
the employee voluntarily quits.
2. If
the employee is discharged for just cause.
3. If the
employee is away from work for a period of 24 months or length of previously
accrued service, whichever is less, for any reason other than illness or
injury. In those cases the period of time will be a maximum of three
(3) years or length of previously accrued service, whichever is
less.
4. Subject
to paragraph 3 above, if an employee who has been laid off does not return to
work within (10) ten calendar days after the postmark date of a registered or
certified letter form the Company, addressed to his / her last known address as
shown on the Company’s records. It is the employee’s obligation to
keep the Company informed of his / her correct current address.
Employees
who are unable to report within this ten (10) calendar day period because of
sickness or accident will, subject to paragraph 3 above and in that event be
recalled to any vacancy during any subsequent recall action.
E. If
a member of the bargaining unit is promoted to a supervisory or salaried
position from an hourly-paid job, he/she shall lose all of his/her seniority in
the bargaining unit.
F. A
complete seniority list of all active employees shall be posted in each
department on the bulletin board within thirty (30) days after signing of this
Agreement, and revised quarterly.
ARTICLE
6
POSTING AND FILLING JOB
BIDS
When a
job vacancy occurs, it shall be posted on the Bulletin Board for six (6)
calendar days for bid, plant-wide. The job posting shall indicate the
primary job assignment and shift. The senior employees will be
awarded the job by plant seniority. The senior bidder will be awarded
the job as a trainee or based on Article 4, Section B.2 or D.2
qualifications. An employee will be allowed only one (1) successful
bid per six (6) month period unless the bid is to a new job which carries a
higher rate of pay at the time of the bid.
An
employee who is being laid off from his/her job at the time
that a posting is in effect can bump to the job which is posted without bidding
in accordance with Article 7, and he/she can keep the job if he/she is senior to
the bidder and he/she qualifies. An employee called in from layoff to
fill a job while it is posted for bidding must go to the open job when the
bidding is completed unless he/she bid for the job and is the senior
bidder. If there are no bidders for the job he/she will remain in the
job. When employees are being recalled from a layoff, which was
caused by a unit production cutback (or shutdown), all employees who have
adequate seniority to be recalled are eligible to bid for job
openings. If an employee took a voluntary layoff at the time of the
shutdown, but he/she has enough seniority to be on the recall list, he/she will
have bid rights just as others in the seniority group being recalled, provided
that the job for which he/she holds recall right is open. However, filling of a
job in either of the above manners will be regulated by the
following:
5
A. No
employee will be granted a trial period if he/she does not have a reasonable
expectancy of demonstrating the qualifications required by the
job. If within the preceding six (6) months an employee has refused
training on the job, or he/she has been disqualified on this job, he/she shall
not be permitted to bid.
B. The
successful bidder shall be given up to 240 hours of
training. Fulfillment of assignment requirements by the successful
bidder will be determined by the Company. If an employee has been
previously qualified in the job, he/she will be provided 84 hours of refresher
training. In determining whether an employee has become qualified,
the results of written and/or practical tests (which meet Federal guidelines)
will be among the factors given consideration. If an employee is
already qualified or becomes qualified in less than fifteen (15) work days,
he/she will be so informed by management.
C. During
the period of posting, the Company will fill the job on a temporary basis, not
to exceed 35 working days, unless prevented from doing so by extenuating
circumstances. If a successful bidder cannot be moved within 35 days
to the new job which would call for a higher rate, the employee will receive the
higher rate beginning with the 36th day
until he/she can be moved.
D. When
a temporary job is posted in operations, the employee who gets the job will
share overtime in that area. When the permanent employee returns, all
temporary employees will return to their regular (last permanent classification)
jobs.
When a
temporary job is posted and the regular employee does not return to the job, the
temporary
employee
shall become permanent in that classification.
E. When
a permanent vacancy exists in the maintenance department, it shall be filled by
plant seniority based on mechanical skills required.
ARTICLE
7
REDUCTION IN FORCE AND
RECALL
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A.
|
Should
it become necessary to lay off employees, the Company shall advise the
Union of such layoff at least seventy-two (72) hours in
advance. It is understood that this provision shall not apply
if the layoff is caused by emergencies or by conditions beyond the
Company's control.
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|
B.
|
It
is understood the Company shall have the right to retain sufficient
numbers of qualified personnel and in such event may assign personnel to
particular shifts where required, temporarily, for training, not to exceed
240 hours after assuming the job.
|
C. Reductions-in-force
and recalls shall be on the basis of plant seniority as outlined
below:
1. If
a layoff is for twenty-one (21) days or less, the employee can take a voluntary
layoff with recall rights or bump to any job for which he/she is qualified;
however, if no junior employee is available to bump, the employee cannot take a
voluntary layoff.
2. Employees
who took a voluntary layoff for recall or were laid off, and the reduction in
force exceeds twenty-one (21) days, the employee shall be recalled and exercise
his/her bump rights as outlined in paragraph (7) below.
3. Employees
who choose to take a layoff rather than bump to another job can only be recalled
to the job the employee was working at the time of the layoff. The
different classifications in production constitute usual jobs as referred to in
Article 7, Section C.5. Shift
6
assignments
are not recognized in considering usual job. In maintenance, the
classifications, as listed in Appendix "A" Maintenance, are
the basis for determining usual job, with no consideration given to area of
assignment.
4. When the
number of shifts in a particular job are being reduced, the junior employee(s)
will be given a bump notice and the remaining senior employee(s) will select
shift preference based on seniority.
5. The
employee's "usual job" is the only job for which the employee can be recalled
and only a job different from the employee's present "usual job," by the same
definition as is used for recall, can be used as a basis for refusing to
bump. For example, a control operator on "A" shift could not refuse
to bump a control operator on "C" shift. The same operator could not
refuse recall to any control operator job, regardless of
shift.
6. An
employee who has taken a voluntary layoff shall have the option to be recalled,
to an entry level vacancy, if the employee's usual job has not reopened within a
period of six (6) months from the date the layoff began. The employee
must be qualified for the work and pass a physical examination to be eligible to
return. If the employee's usual job has not reopened for a period of
twelve (12) months from the date that employee was placed on layoff, the
employee shall have option to bump the lowest seniority employee who is in a job
for which the employee on layoff was previously qualified, and assume that
employee's job. To be eligible to bump to this job, the employee must
pass a physical examination. If the employee elects not to return
after twelve (12) months, the seniority of this employee shall be considered
broken, all rights forfeited and there shall be no obligation to rehire the
employee, consistent with Article 5 of this agreement.
7. If a
layoff is for twenty-one (21) days or more, the employee can either take a
voluntary layoff with recall rights in accordance with (1) above, or bump to a
job for which he/she is qualified or he/she may bump a junior employee and
receive a twenty (20) -work-day qualification period or 84 hours if previously
qualified in the job. To receive the twenty (20)-day qualification
period the employee must demonstrate within the first three (3) work days the
ability to learn this job within the twenty (20)-day qualification
period. The employee will only be expected to qualify on the job that
he/she bumps to in the twenty (20) work day qualification
period. Such training will be provided on the day shift when
practical. If the employee does not demonstrate the ability within
three (3) work days or fails to qualify within twenty (20) days, he/she shall be
disqualified and laid off and the incumbent employee shall remain in the
job.
8. During
the qualification period, the bumping employee shall receive the rate for the
last job on which the employee was qualified.
9. It
is understood that in Maintenance, if the bumping employee is a Maintenance
Level 4, the bumping employee must have the mechanical skills of the employee
he/she bumped after the qualification period.
10. In
accordance with paragraph (7), in a given layoff, if a senior employee is laid
off without an opportunity to bump and a junior employee is left in the plant at
the end of the bump/qualification period, the senior employee will be recalled
with bump rights.
11. No
bumping between Departments shall be allowed. Employees are only
allowed to move from Department to Department under the terms of Article
6.
7
ARTICLE
8
SCHEDULE
CHANGE
The
Company shall give an employee thirty-six (36) hours notice of change in the
regular work schedule (this notice shall be posted by 2:00 p.m. on the first day
of the thirty-six (36) hours notice), and sixteen (16) hours' notice of return
to the employee's regular work schedule, except where rescheduling is required
due to lack of raw materials, labor difficulty, acts of God, or any other
occurrence beyond the Company's control. If the Company fails to give
such notice, except where excused in the preceding sentence, the Company shall
pay one and one- half (1-1/2) times the affected employee's regular
straight-time rate for hours worked on the first day after such change in
schedule. If there are any changes in present work schedules for
non-shift workers, assignments will be made on the basis of seniority, where
practical. The foregoing in no way precludes the Company from making
changes in the work schedules according to operational and maintenance
needs.
ARTICLE
9
HOURS OF
WORK
A. The
established workweek begins at 6:00 a.m. on Monday and ends at 6:00 a.m on the
following Monday. For the purpose of computing overtime, the normal
workweek shall be forty (40) hours and the normal workday shall be eight (8)
hours. This is not to be considered a guarantee of eight (8) hours a
day or forty (40) hours a week.
B. Under
the present operating requirements, the normal schedule for eight (8) hour shift
workers shall be organized into three (3) consecutive eight (8) hour shifts as
follows:
First shift 6:00 a.m. to 2:00
p.m.
Second shift 2:00 p.m. to 10:00
p.m.
Third shift 10:00 p.m. to 6:00
a.m.
Under
the present operating requirements the normal schedule for maintenance workers
shall be:
7:00 a.m. to 11:00 a.m.
11:30 a.m. to 3:30 p.m.
When an
employee is instructed or scheduled to report for work and so reports and
reports on time, the employee shall be guaranteed four (4) hours of work if
he/she is put to work, and if no work is available for them to perform, the
employee shall receive pay for four (4) hours' work at their regular hourly rate
of pay, except in case of fire, flood, power breakdown, or other conditions
beyond the control of Management. At the Company's discretion, an
employee instructed or scheduled to report for work may be assigned to any work
available which the employee is capable of performing in lieu of their being
released if there is no work for them to do in their usual
occupation.
ARTICLE
10
OVERTIME
A. The
basic work day shall be eight (8) hours. The basic work week shall be
forty (40) hours. Overtime shall be paid at the rate of one and
one-half (1-1/2) times the regular rate of pay for all hours worked in excess of
forty (40) hours per week, or in excess of eight (8) hours in a twenty-four
(24)-hour period beginning at the start of the employee's regular scheduled
shift, except that this provision shall not apply in the case of a regularly
scheduled shift change. Overtime payment shall be made on the basis
of either daily or weekly overtime, whichever results in the greater pay, but
there shall be no pyramiding or duplication of daily and weekly
overtime.
8
B Any
employee who is called out to perform work outside their scheduled working hours
shall be paid for all time worked pursuant to such call-out, at one and one-half
(1-1/2) times his regular rate of pay and will be guaranteed a minimum of four
(4) hours' work. An employee on call-out shall not be required to do
work other than the job or jobs they were called out to perform unless there is
additional emergency work that occurs. The employee will be paid time
and one- half (1-1/2) for the actual hours worked on this additional
work. To be eligible for call-out, an employee must have a telephone
in their residence and notify their foreman of any changes in their telephone
number. The Company has no obligation to call an employee at any
telephone number other than their residence telephone for call-outs, changing of
working schedule, or for any other reason.
C. When
an employee moves from one overtime group to another, the number of their
overtime hours will be adjusted up or down to equal the average of the new
group. Previously qualified employees will also retain eligibility
for overtime in previously qualified groups for one (1)
year. Employee will receive the higher rate of pay of the two jobs
when filling the overtime in another area.
D. Premium
pay provided for herein shall not be pyramided on premium pay payable under any
other article or section of this
Agreement.
E. All
overtime hours refused will be charged or added to an individual's overtime
hours on the basis of twice (2) the number of hours actually paid to the
employee who accepted the work. If charged overtime on a double-time
shift is worked, only the overtime paid will be charged.
F. It
is considered inappropriate in the scheduling of employees to hold over more
than eight (8) hours after any regular eight- hour shift, or to plan work where
employees must be scheduled more than twelve (12) hours per day, or holdover
more than 4 hours on a 12 hour shift. Every effort should be made to
anticipate relief requirements of employees in advance of the time
required.
G. If
an employee believes he or she has been bypassed for overtime, at the employee’s
or union’s request, the employee or union and his or her supervisor will examine
the overtime records and if they agree that a bypass occurred, preference for
overtime will be given to the employee, as soon as it is practical.
H. All
temporary vacancies will be offered to the qualified operator lowest in overtime
hours in that area. It is the Work Group’s responsibility to fill the
vacancies. Employees who are on duty who refuse to accept holdover
overtime assignments to vacancies shall be subject to disciplinary
action. Such assignments shall be deemed as mandatory. The
Company shall have the right to implement a pager policy or a disciplinary
policy to assure that it will have the services of its qualified employees to
perform the necessary work.
I. All
overtime will be reduced to zero at the end of each calendar year
period.
J. OVERTIME
COVERAGE PROCEDURE. Overtime hours shall be
shared equally by all employees in the Work Group, as far as practical for the
efficient operation of the plant, or on the following basis:
1. Maintenance
a. All
Maintenance overtime shall be posted by area and Work Group. This
time, hours paid for straight-time basis, and two (2) times hours paid but
turned down, will be posted by the Company. It shall be the
responsibility of the Company to keep this time accurate
daily. Overtime will be grouped by area Work Group.
9
b. Holdovers. The Work Group will
offer (holdover) overtime to employees who are already working on the job
according to the following procedure:
The
personnel already working on the job will be offered the work first, regardless
of their normal overtime group.
In the
event the assignment involves work in process, and continuity of the work is
required, Company may assign the employees already working the
job. If a group consists of both central and resident personnel, the
resident personnel on the job will be offered the work first. If additional
personnel are needed, the work will be offered to the central personnel on the
job prior to offering it to the resident personnel who are not working the job
at the time the overtime occurs.
If the
job has not been started, the first employee held over shall be the lowest
qualified mechanic from the group involved, and all succeeding personnel
required for the job shall be obtained by beginning with the lowest qualified
employee in the group (ML4, 3rd year mechanic, 2nd year mechanic, 1st year
mechanic, or utility person), until the job is manned. In the event
that additional help outside the group is needed, the Work Group will contact
the lowest qualified employee (ML4, 3rd year mechanic, 2nd year mechanic, 1st
year mechanic, and utility person) from the central maintenance group until the
job is filled. If for some reason the job still cannot be manned, the
Work Group shall call the other resident group in the same order
until all are called. All holdovers should be notified as early as
possible before quitting time.
In the
event sufficient volunteers are not obtained, employees may then be mandatory
assigned.
The Work
Group will start to fill hold-over requirements as well in advance of 2:00 p.m.
as practicable. If by 2:30 p.m. the required hold-over personnel have
not been obtained, the Company will notify the junior qualified employee that
they may be required to stay over. The Work Group will continue to
try to obtain the personnel requirements through the established overtime
procedure until 2:30 p.m. At this time, personnel requirements not
already fulfilled will be obtained by assigning the junior qualified employee in
the maintenance department to stay over.
c. Call-outs. On call-outs the Company
will first call the qualified ML4 who has worked to the lowest in number of
overtime hours worked from the group concerned. All succeeding
personnel required for the job shall be obtained as in the preceding
paragraphs.
d. Planned
Overtime. The group concerned will
be assigned to planned overtime first, beginning with the lowest qualified ML4
and continuing as above until all personnel in the group have been
assigned. When additional personnel are required, they will be
assigned from the Central Maintenance group by assigning the lowest qualified
employee first, and so on until the job is properly staffed.
When
out-of-classification work in the Automotive Shop must be offered to mechanics,
and it is known by 2:00 p.m. the day before the work is assigned, the Company
agrees to offer the work to the junior qualified employee(s) at the time the
work is offered. There may be some instances when special skills are
involved and would preclude following this procedure. Such cases will
be discussed with appropriate Union Officials. It is
10
understood
and agreed that this arrangement will not be extended to other jobs or work
assignments.
e. Scheduled
Shutdowns. Work performed on straight days, or on
around-the-clock shifts shall be handled as in the past, i.e., by the area
people involved, and whatever additional help is needed may be obtained from any
overtime group.
f. Prior
to major scheduled turn-around, the Company will advise the Union of work
arrangements.
g. When
Central Maintenance employees are scheduled to work during a shutdown or
start-up of at least four (4) working days duration, they shall share overtime
on an alternating basis with maintenance people in the area, with an employee
from the area scheduled first.
Example: 1st
Person - Area
2 People - Area,
Central
3 People - Area,
Central, Area
4 People - Area,
Central, Area, Central
h. When
work needs are great and cannot be met by personnel from the area concerned and
Central Maintenance, the other resident area is to be called starting with the
lowest qualified employee, and so on until the job is staffed.
2. Production
Department.
The
following overtime procedure is to be used by each area work group in the
Production Department:
|
|
a.
|
If
a section in a department is not in operation, then the operators from
that section may be moved, if qualified, to fill vacancies or to perform
other duties.
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|
|
b.
|
The
overtime in each production area will be grouped into the usual job
classification that the employee normally works. All temporary
vacancies will be filled by the usual job classification that the overtime
occurs. If the vacancies cannot be filled in this manner, they
will be offered to the qualified operator lowest in overtime hours in that
area. It is the work group on duty’s responsibility to fill the
vacancies. If the vacancies cannot be filled in this manner,
and the employees who are on duty refuse to accept holdover overtime
assignments, they shall be subject to disciplinary action. Such
assignments shall be deemed
mandatory.
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|
|
c.
|
If
an operator informs the plant at least three (3) hours before his
scheduled shift begins, any overtime worked as result of this absence will
be offered first to the qualified employee lowest in overtime in the
classification. In the event of an unscheduled absence before
shift change, the employee who is presently staffing the job (except when
employee is in training, regardless of their classification will be
required to continue working until properly relieved or may accept the
overtime opportunity. If an operator does not inform the plant
of their absence at least three (3) hours before their shift change, then
the employee who is presently staffing the job (except when the employee
is in training), regardless of their classification, will be given the
choice of the overtime.
|
11
d. If
the operator contacted desires the full eight (8) hours, he/she may work the
entire shift. If the operator wishes to work only one-half (1/2) of
the shift, he/she will be required to remain on duty until properly relieved by
another qualified operator who can be obtained. Operators who are
contacted may be mandatory assigned to perform the overtime work if other
volunteers cannot be reached. If any operator is contacted and
declines the overtime, then he will be charged twice (2) the number of hours
actually paid to the employee who accepted the work.
e. If
it appears that vacancy will be for an extended period, the operators in that
classification may be pre-scheduled to work the overtime.
f. When
a temporary job is posted in operation, the employee who gets the job will share
overtime in that area.
g. It is the
Work Group on Duty’s responsibility to post daily overtime hours on the overtime
board. This time, hours
paid on a straight-time basis, and two (2) times hours paid but turned
down will be posted daily in each area, unless there are unusual circumstances
which make a delay in posting necessary.
h. It is
realized that the Work Group is responsible for filling a shift. In
every case, operators are required to fill the job while the Work Group proceeds
to fill vacancies by means of this procedure.
i. It is
understood that employees may swap a shift or part of a shift by mutual consent;
however, it is further understood that shift swapping will not trigger an
obligation to pay any overtime premium pay.
In the
event, overtime distribution and/or call-out procedures do not provide the
Company with sufficient qualified personnel to perform the overtime work, the
Company shall have the right to assign qualified personnel. Failure
to work such mandatory overtime shall constitute just cause for disciplinary
action.
ARTICLE
11
12-HOUR SHIFT
AGREEMENT
Some
employment conditions which apply to employees who work on 12-hour continuous
shift operations may be different than those described in various Articles of
this Agreement. A special Letter of Agreement concerning 12-hour
shift employees is attached as APPENDIX "B" to this
Agreement.
ARTICLE
12
ABSENCES
A. Employees will give his/her foreman
or designee notice no less than twenty-four (24) hours in advance for all
absences from work for personal reasons except in cases of personal illness,
illness or death in the employee's immediate family, or other emergency making
such advance notice impossible. In case of such emergency, the employee will
provide the Company as much advance notice as possible.
B. An
employee absent for two (2) days or more shall not be permitted to return to
work unless they notify the Company at least four (4) hours prior to the start
of their shift that he/she is returning to work. This notification shall not
serve to excuse unexcused absences. The Company shall
have the right to require an employee to submit a medical certificate justifying
his absence.
12
C. When an employee is absent for thirty (30) or more consecutive calendar days for any reason, including layoff, the number of their overtime hours will be increased by the number of hours the average of their work group has increased during their absence.
D. When
an employee is absent from their assigned schedule for a definite period of time
(eight hours, one day, one week, etc.) their name will not be called for
overtime work to be performed during their time off.
E. When
an employee is absent from their assigned schedule for an indefinite time, their
name will be removed from the overtime list until the employee calls in to
report that they are available for work.
ARTICLE
13
WAGES
A. The
hourly wage rates shall be as shown in APPENDIX "A" attached hereto
and made a part of this Agreement.
B. The
Company shall advise the Union of the proposed basic hourly rate for any new
work established after the date of this Agreement. Upon request of
the Local Union representatives, the Company will negotiate with them concerning
such rate, provided that the Union so requests within thirty (30) days from the
establishment of such rate. If agreement is not reached on the new
rate, the matter will be appealed to the fourth (4th) step of the Grievance
Procedure.
C. When
an employee is temporarily assigned to a job paying a lower rate of pay, he/she
shall be paid his regular hourly rate.
D. When
an employee is temporarily assigned to a higher rated job for a purpose other
than that of training or instruction, he/she shall receive the rate for the job
to which he/she is so assigned for all hours worked on such higher rated
job.
E. An
employee who actually works for four (4) hours or more on seven (7) consecutive
days in the regularly established work week shall receive double (2) their
regular straight-time hourly rate for all hours worked on the seventh (7th)
consecutive day.
F. A
maximum of ten (10) employee members who have been trained and certified to
perform Hazardous Material Emergency Response shall receive twenty-five ($.25)
cents per hour, (maximum 40 hours per week) while so assigned.
G. An
employee required to work on his/her normal scheduled day or days of rest or on
hours outside of his/her normal work schedule will be paid at one and one-half
(1-1/2) times their regular hourly rate, provided that they shall not be
entitled to premium pay for such day or days in any week in which he/she has
been absent without a satisfactory excuse on one or more scheduled
workdays.
H. Premium
pay provided for, herein, shall not be pyramided on premium pay payable under
any other articles of this Agreement.
13
ARTICLE
14
SHIFT
DIFFERENTIAL
A. Employees
who are scheduled on multiple shift operations shall be paid a shift
differential of fifty cents ($0.50) per hour for all time worked during the
hours of 2:00 p.m. to 10:00 p.m. shift. Employees shall be paid a
shift differential of seventy cents ($0.70) per hour for all time worked during
the hours of 10:00 p.m. to 6:00 a.m. shift.
B. The
shift differential is not paid to employees scheduled on regular, single-day
shift operations who may work overtime into another shift; however, such
employees will be paid shift differential for scheduled hours worked during the
times listed in paragraph A above. All employees not scheduled on
regular, single-day shift operations are considered to be on scheduled
multiple-shift operations.
ARTICLE
15
VACATIONS
A. All
regular employees of the Company shall be granted a vacation of one (1) week
after one (1) year of continuous active service, two (2) weeks after three (3)
years of continuous active service, three (3) weeks after five years of
continuous service, and four (4) weeks after fifteen (15) years of continuous
active service. It is understood an employee shall receive his/her
next level of vacation effective January 1st of the
year his/her hire date for service is due. However, an employee who
is separated for any reason before his/her service anniversary date must repay
the Company for all vacation time taken/paid but not earned.
B. Employees
who have one (1) or more years of continuous service as of January 1st (except
for new employees provided for below) will be granted vacations during the
calendar year January 1st to December 31st, provided that they have worked a
minimum of one thousand (1,000) continuous active hours during the preceding
calendar year. The following hours will be counted in determining
whether or not employees have worked a minimum of one thousand (1,000)
continuous active hours during the preceding calendar year:
1. Hours
actually worked;
2. Holidays
paid for but not worked;
3. Forty
(40) hours for each week of paid vacation;
4. All hours lost due to
compensable, job-related injuries, maximum 800 consecutive hours lost in the
first calendar year of such injury; and
5. All
hours lost by Union officials for Local Union business pertaining to Cherokee
Nitrogen as approved by the Plant Manager.
C. A
new employee shall become eligible for his/her first vacation with pay upon
his/her first anniversary date, provided that he/she has worked a minimum of one
thousand (1,000) continuous active hours during his/her first anniversary year,
counting as hours worked those set forth in paragraph B above. An
employee will qualify for his/her second vacation to be taken not earlier than
January 1st following his/her first anniversary date, by fulfilling the
contractual requirements set forth in paragraph B above, provided that the
second vacation cannot be taken earlier than six (6) months after the employee's
completion of his/her first vacation.
14
D. Pay
for each week of vacation to which an employee is entitled shall be computed on
the basis of forty (40) hours at the particular employee's regular straight-time
rate of pay.
E. Vacations
will be granted only during the year in which they are due, and they may not be
carried over or taken advantage of during subsequent years.
F. Allocation
of the individual's time for taking the vacation during the vacation season from
January 1st to December 31st shall be subject to the approval of the Company in
order to ensure orderly efficient operation of the plant. Vacation
scheduling shall be from January 1st until March 1st.
G. In
the event of termination of service due to death, provided that at the time of
death of such employee he/she had become eligible to receive a vacation that had
not been granted, payment in the amount equal to that which would have been paid
to the employee for such vacation shall be made to the beneficiary of the group
insurance carried by the employee. Also, if the employee had worked
one thousand (1,000) hours in the present year, the same beneficiary will
receive payment for the vacation the deceased employee would have been eligible
for if he/she had been on the payroll during the following year. This
payment of the following year's vacation will be made during January of the
following year.
H. Vacation
pay for any employee entitled to a vacation, will, upon request to management,
be paid to the employee. Requests must be on time cards two weeks
prior to vacation.
I. Employees
entitled to a vacation will not be allowed to take money in lieu thereof except
that the Company may, with the employee's consent, pay him/her vacation pay in
lieu of time off for vacation for any weeks of vacation due him/her in excess of
one (1) week in any eligibility vacation period. It is understood
that the preceding in no way diminishes the Company's right to schedule a
vacation shutdown.
J. If
an employee takes his/her vacation during a week in which a holiday occurs, the
amount of his/her vacation pay shall be increased by the amount of eight (8)
hours' pay at his/her basic hourly rate, in order to compensate for the holiday
pay to which he/she would have been entitled had they not been on
vacation. If a holiday falls during an employee's vacation, it may be
mutually agreed to that he/she may receive an additional day off.
K. Employees
joining the Armed Forces of the United States shall receive their previously
earned vacation pay provided they have fulfilled all of the contractual
requirements for a vacation.
L. Vacations
will be granted only for continuous periods starting on Monday and ending on
Sunday, except by an employee's choice, he may take two (2) weeks one
(1) day at a time, or as he/she so desires, with approval from the Foreman or
designee and at least a twenty-four (24)-hour notice.
M. Employees
who have become eligible to receive a vacation under the provisions set forth in
this Agreement and who thereafter leave the service of the Company shall, upon
request, be entitled to receive vacation pay in lieu of the vacation they
otherwise would have been eligible to receive.
N. Deductions
from vacation pay will be consistent with the earning period. For
example, if an employee received two (2) or more weeks of vacation pay, one or
more checks may be issued but the deductions will be calculated as if a separate
check was issued for each week.
O. In
the calendar year in which an employee terminates due to retirement, the
employee will receive what would have been the Employee's subsequent year's
vacation on a pro-rata basis. For every full calendar month the
employee works on an active basis, the employee will receive 1/12 of the
following year's vacation.
15
ARTICLE
16
HOLIDAYS
A. The
following shall be considered as holidays:
1. New
Year's Day (January 1st)
2. Good
Friday (Last Friday Preceding Easter)
3. Memorial
Day (Last Monday in May)
4. Fourth
of July
5. Labor
Day (First Monday in September)
6. Thanksgiving
Day (Fourth Thursday in November)
7. Thanksgiving
Friday (Fourth Friday in November)
8. December
24th
9. Christmas
Day (December 25th)
B. The
term "holiday" is defined to mean the twenty-four (24)-hour period between 6:01
a.m. and 6:00 a.m. of the holiday. When a holiday falls on Saturday,
the preceding Friday shall be considered as the holiday, except when Friday is a
holiday also, then the preceding Thursday shall be considered as the
holiday. When a holiday falls on Sunday, the following Monday shall
be considered as the holiday, except when Monday is a holiday also, in which
case the following Tuesday shall be considered as the holiday. Shift
workers shall be paid for holidays on the day the holiday falls.
C. One
and one-half (1-1/2) times the regular hourly wage rate will be paid for all
work performed on the holidays listed in paragraph A above, in addition to such
holiday pay as the employee may be entitled to under the provisions of paragraph
D below.
D. All
regular full-time employees on the payroll shall receive holiday pay for eight
(8) hours at their basic hourly rate for each of the holidays set forth in
paragraph A above, provided that they report to work and work the hours as
scheduled on the last scheduled work day preceding and the first scheduled work
day following the holiday. In the event that a holiday occurs during
the initial calendar week in which an employee becomes laid off, or during the
calendar week in which an employee is recalled from layoff status, the employee
will be entitled to receive holiday pay if he/she is otherwise
eligible.
E. If
an employee fails to report or fails to work the hours as scheduled on the
holiday, or fails to work the hours as scheduled on the last scheduled work day
preceding and the first scheduled work day following the holiday, he/she will
not receive holiday pay as provided for herein.
F. If
a regular employee is excused from work for all or any part of his/her last
scheduled work day preceding, or for all or any part of his/her work day
following a holiday, or both, he/she shall be regarded as having worked on such
day or days (for the purpose of qualifying for holiday pay), and they shall be
eligible to receive holiday pay if they otherwise qualified for holiday pay
under the terms of this
16
Agreement,
provided that the Company shall excuse absences on such days on the same basis
and for the same reasons as would apply on any other day during the
year. Employees not excused under the foregoing circumstances will
not qualify for holiday pay. Employees reporting off will not
automatically constitute an excused absence. Employees on short-term
disability, or long-term disability, or workers compensation will qualify for
holiday pay not to exceed six months (6). Eligibility begins the
first full workday away from work.
G. There
shall be no pyramiding of daily, weekly and holiday overtime.
ARTICLE
17
FUNERAL LEAVE
PAY
A. In
the case of the death of a member of the immediate family of a regular employee,
the employer will, when requested in advance, grant a maximum of three (3) days
(twenty-four hours) paid leave of absence, and in no case will the paid leave of
absence extend beyond the day immediately following the day of the
funeral.
B. The
term "immediate family" as used herein is defined as consisting of the following
members of the employee's family only: mother, father, spouse, children,
brother, sister, mother-in-law, father-in-law, son-in-law, daughter-in law,
stepfather, stepmother, stepson, stepdaughter, grandparents, grandchildren,
brother-in-law, sister-in-law, and spouse’s grandparents.
C. When
a death occurs to any such member of an employee's family, the employee shall
notify his/her Foreman or designee for such paid leave. Such paid
leave will not be granted in instances when the employee otherwise eligible does
not attend the funeral. The employee absent on a paid funeral leave
shall not be eligible for any overtime which is scheduled during the period of
such employee's leave. If a holiday falls during the paid leave of
absence, the employee will not receive both holiday pay and paid leave of
absence.
D. The
employee will not be entitled to funeral leave pay for any day falling within
the three (3) day leave of absence which is not a scheduled work day for the
employee or when the employee is on vacation.
E. The
rate of pay shall be the regular hourly rate of the employee and for regular
scheduled work.
ARTICLE
18
JURY
DUTY
A. All
regular full-time employees (not including casual or part-time employees) who
have been in the continuous service of the Company for six (6) months or more,
shall be paid wages amounting to the difference between the amount paid to them
for jury service and the amount they would have earned at their basic hourly
rate had they worked on such days with their regular work group.
B. No
difference shall be paid if the employee received a greater amount for jury
service than he/she would have earned working in his/her work group at the basic
hourly rate.
C. Employees
who are absent due to layoff, vacation, sickness or injury, or other leaves of
absence shall not be entitled to receive difference payments under this article
during such periods of absence.
D. No
difference payments for jury service shall be paid in the case of an employee
who is absent on the last scheduled work day prior to starting jury
service.
17
E. No
difference payments for jury service shall be paid to employees who fail to
report to work and work the hours on any scheduled work day on which their
service was not required in court
F. In
order to receive difference payments as above provided, each such employee must
furnish to the Company a certificate of service duly signed by the Clerk of the
Court.
G. Employees
scheduled to work after 10 PM for eight (8) hours on days of required jury duty
will be excused from work for this time period and will receive the difference
between the amount paid to them for jury service and the amount they would have
earned at their basic hourly rate had they worked on such days.
H. Employees
that have received a subpoena or summons from a court of law shall be excused
without pay and he/she shall present a certificate to his/her Foreman or
designee with as much notice as possible.
ARTICLE
19
PAYDAY
The
parties agree to the present payday which is every other Thursday at 3:30 p.m.
to 5:45 p.m. and Friday at 6:00 a.m. Employees whose scheduled shift
ends at 2:00 PM will be permitted to get their checks at 2:00 PM.
ARTICLE
20
MEAL ALLOWANCE
PROVISIONS
A. Whenever an
employee is required to work overtime, six dollars ($6.00) meal money or a meal
will be provided at the end of two (2) hours' work and each four (4) hours
thereafter, provided that said employee has completed an eight (8)-hour shift
immediately preceding such overtime assignment.
B. The Company will not
furnish a lunch for an employee called in to work a regular eight (8)-hour shift
for anyone who is sick or absent provided that more than two (2) hours' notice
is given. If less than two hours' notice is given, the Company will
provide a meal.
C. If an employee is
called out on an emergency basis, he/she will be furnished a meal
after completing four (4) hours' work and each four (4) hours thereafter as long
as he/she is required to stay on the job.
D. Whenever
maintenance work is scheduled on a twelve (12)-hour relief basis, that is, one
crew relieving another each twelve hours, the Company will provide the second
meal and allow both meals to be eaten on Company time. It is mutually
understood that these meal periods will be held as short as possible in order to
keep the work going.
E. Whenever
maintenance work is scheduled on an extended day or holdover basis and one crew
does not relieve another, the first meal period will be for thirty (30) minutes
and shall be on the employee's own time. The Company will furnish additional
meals as required, and these will be on Company time.
F. A
non-shift worker required to work any part of his/her meal period shall receive
pay for his/her
entire
meal period unless he/she is given a full-length lunch period later in the shift
at the employee's option.
18
G. Production
employees working 8-hour shifts will eat their lunch on Company time at such
hours as their duties permit.
ARTICLE
21
WORKERS
COMMITTEE
A. There
shall be an employee Workers Committee comprised of the Local Union President,
Vice-President, Recording Secretary and not more than two (2) other Committee
persons. The Union shall certify to the Company from time to time the
names of the Workers Committee persons who shall be employees of the Company,
and the Company shall not recognize any committee person until his / her name
has been so certified. The Workers Committee as a committee, shall negotiate and
settle grievances in Steps 3 and 4 of the Grievance Procedure.
B. Time spent by
employees in the investigation and settlement of grievances shall be on the
employee’s own time.
C. During
contract negotiations the number of committee members may be increased to six
(6) active employees.
ARTICLE
22
GRIEVANCE
PROCEDURE
Should
any difference arise between the Company and the Union, or between the Company
and employees, or between employees of the Company, or should trouble of any
kind arise in the plant, there shall be no strike, stoppage, slowdown,
suspension of work or boycott on the part of the Union or its members or the
employees, or lockout on the part of the Company on account of such
dispute.
First
Step
The
employee shall first take his grievance up with his foreman, and, only if the
aggrieved employee requests, a committeeman shall be given an opportunity to be
present.
If the
grievance is not settled, it shall, within five (5) working days thereafter, be
reduced to writing on a form provided by the Union, signed by the employee, and
presented to the foreman, who shall, within five (5) working days after receipt
thereof, give his written answer to the grievance.
No
grievance will be considered unless it has been submitted to his foreman within
five (5) working days from the date the employee knew or should have known of
the occurrence giving rise to the dispute.
Second
Step
The
grievance shall be considered settled unless within five (5) working days after
receipt of the foreman's written answer, a Union committeeman notifies the Area
Superintendent that he desires additional processing of the
grievance. Management will arrange a meeting with the grievant and
one committeeman. Such meeting will be held no later than ten (10)
working days after receipt of the Union's appeal.
The Area
Superintendent or his designated representative shall provide a written answer
to the grievance within ten (10) working days after the close of the Second Step
meeting.
19
Third
Step
In the
event the Union is not satisfied with management's Second Step answer, an
officer of the Union, may, within five (5) working days after receiving the
Second Step answer, notify the Plant Manager and/or his designated
representative, in writing, that he wishes to submit the matter for further
consideration. At the same time, the Union shall provide a written
statement of the contractual reasons the Company's Second Step answer was not
accepted. The Plant Manager, and/or his designated representative
will discuss the matter with the Workers Committee and, if the Union requests,
an International Union Representative or the President of Local 417 G, at a time
to be mutually agreed upon. The Plant Manager and/or his designated
representative shall provide a written answer to the grievance within ten (10)
working days after the close of the discussions.
Fourth
Step
If the
answer of the Plant Manager, or his designated representative, does not settle
the grievance, the International Representative of the Union may request that
the grievance be submitted to an impartial arbitrator, providing the grievance
is one which does not involve matters in which arbitration is specifically
prohibited, under the terms of Article II of this Agreement. The
Union must then notify the Plant Manager of that fact, in writing, within thirty
(30) days after the date the Third Step answer was rendered.
The
International Union Representative and the Company shall make written
application to the Federal Mediation and Conciliation Service requesting a nine
(9) member panel from which the parties shall select an
arbitrator. The parties shall alternately strike eight (8) names, one
at a time. The remaining panelist shall serve as
arbitrator. It is understood that, starting with the first
arbitration case, following the date of execution of this Agreement, the Union
shall strike the first name. Thereafter the determination of which
party strikes first will be made by the toss of a coin. Both the
Company and the Union shall have the right to reject one entire panel submitted
by the Federal Mediation and Conciliation Service.
When the
arbitrator has been selected, he shall meet for the consideration of the
grievance as soon thereafter as is practical. Any such meeting of an
arbitrator shall be held in a location the parties unanimously decide
upon.
Any such
arbitrator shall decide only the grievance submitted to him, upon testimony
presented to him, by the Union and the Company, and shall render his decision in
writing.
The
jurisdiction of the arbitrator shall be limited to a grievance involving the
interpretation or application of the specific provisions of this
Agreement.
Except as
otherwise specifically provided in this Agreement, the arbitrator shall have no
power to change the wages, hours, or conditions of employment set forth in this
Agreement; he shall have no power to add to, subtract from, or modify any of the
terms of this Agreement; he shall deal only with the grievance which occasioned
his appointment. He will require that the Union has the burden of
establishing its position on behalf of the employee, except in discipline or
discharge cases, where the burden will be on management.
The
parties hereto shall fully comply with the award or decision made by any such
arbitrator, and the decision of the arbitrator will be final and binding on both
parties. The fee and expenses of the impartial arbitrator shall be
borne equally by both parties. The expense of witnesses for either
side shall be paid by the party requesting the witness. The total
cost of the stenographic record which may be made and all transcripts thereof
shall be paid for by the party ordering the same. If a stenographic
record is made by
20
either
party, the other party shall receive a copy thereof only if the other party
states at the outset of the hearing that he is requesting a copy of such
stenographic record and agrees to pay one-half (1/2) of the cost
thereof.
No
provision of Article VIII or any other Article of this Agreement shall deprive
any employee covered by the terms of this Agreement of any right to which it may
be entitled under Section 9(A) of the Labor Management Relations Act of 1947, or
any other statute of the United States.
In cases
involving verbal or written reprimands, a grievance may be filed and processed
through Step Three, but may not be submitted to arbitration. The
Union has authority to process, abandon, or settle grievances on behalf of
employees. The arbitrator may herein determine only one grievance at
a time without the express agreement of the Company and the Union.
The
grievance and arbitration provisions provided for herein, in addition to any
other right or obligation under the Agreement, are limited to grievances and
claims arising and actually filed in writing during the term of this
Agreement. The parties recognize the principle that the Company's
action governs until and unless modified by an arbitration award which is in
conformity with the provisions of this Agreement, and that the Union may not,
and will not, apply to any court for interim relief of any kind pending such an
arbitrator's award.
In any
case involving discharge or a disciplinary suspension, a grievance may be filed
in Step Three, but the grievance must be submitted no later than three (3)
working days following notice of the action, or the action becomes
final.
In cases
involving written discipline up to and including discharge, a copy of the action
notice will be given to the employee involved and a copy furnished to the
on-site committeeman.
The
parties agree to follow each of the foregoing steps in the processing of a
grievance and, if in any step the Union fails to proceed within the time limits
therein set forth, the grievance shall be considered settled, based on the
Company's answer in the last step through which it was processed. The
parties further agree that if in any step the Company's representative fails to
give his written answer within the time limit set forth, the Union may advance
the grievance to the next step at the expiration of the time
limits. All time limitations set forth herein shall be exclusive of
Saturdays, Sundays, and holidays. Time limits set forth in Step Four
may be extended in writing only by mutual agreement between the International
Representative and the Plant Manager.
ARTICLE
23
LEAVE OF
ABSENCE
A. The
Company will grant leave of absence, without pay, not to exceed one (1) year to
one (1) employee who is elected or appointed to a full-time position with the
Union, upon ten (10) days' written request. Upon ten (10) days'
notice of his /her desire to return to work for the Company, given not later
than one (1) week after he/she ceases to occupy such full-time position or after
the termination of this Agreement, whichever is earlier, he/she shall be
returned to the Company's employment in line with his/her original seniority
rights unimpaired. The Union shall notify the Company promptly when an employee
of the Company on leave of absence under this paragraph B ceases to occupy such
full-time position. A leave of absence granted under this paragraph B
shall become void and the employee's seniority rights shall be forfeited if such
employee accepts other employment or engages in other work.
B. The
Company may within its sole discretion grant a leave of absence, without pay,
not to exceed thirty (30) days in any one year, for personal reasons, without
loss of seniority.
21
C. Requests
for leaves of absence must be in writing no less than fourteen (14) working days
in advance of to the start of the absence. Leaves of absence will not
be granted for the purpose of allowing an employee to take another position
temporarily, try out new work, or venture into business for
himself.
D. A
medical leave provided due to workers’ compensation illness or injury will not
be considered leave time offset against the annual amount required by the Family
and Medical Leave Act (FMLA) as long as the injury or illness would otherwise be
covered by the FMLA.
ARTICLE
24
MILITARY
SERVICE
A. Except
as otherwise provided by law, an employee who is inducted into (or joins
voluntarily during a national emergency) the armed services of the United States
shall be granted a leave of absence during the period of such service, during
which period his/her seniority shall accumulate, provided, however, that if
he/she voluntarily re-enlists for an additional period, he/she shall not
accumulate seniority during such additional period of service and shall not be
entitled to the re- employment rights and privileges hereinafter set out. Upon
termination of his/her military service in the first instance, the employee
shall be offered re-employment in line with his/her seniority as may be
available, which he/she is capable of doing, at the current rate of pay for such
work, provided that he/she meets the following requirements:
1. He/she
has been honorably discharged.
2. He/she is physically
able to do the work.
3. He/she
reports for work within ninety (90) days after the date of his/her discharge, or
ninety (90) days after hospitalization continuing after discharge, for not more
than one (1) year.
B. A
regular employee having more than one (1) year of continuous service who is
granted a leave of absence to perform summer military training under the
National Armed Forces Reserves, including Army, Navy or Marine Corps Reserves or
State National Guard, shall be paid for the period of such leave, not to exceed
two (2) weeks in any calendar year, the difference between his/her pay while
performing such training and the compensation he/she would have received at
his/her regular hourly straight-time rate had he/she worked the
number of straight-time hours which his/her regular crew worked
during such two (2)-week Period.
C. This
provision does not apply to employees who perform such training duties during
periods of layoff, vacation, or during any other periods of recognized leave of
absence, nor does this provision apply unless the employee works on his/her last
scheduled work day prior to the leave granted and his/her first scheduled work
day thereafter.
ARTICLE
25
SAFETY AND
HEALTH
A. The
Company recognizes a Health and Safety Committee consisting of two (2) members
selected by the Union, and one representative from Management. The
Company will make reasonable provisions for the safety and health of the
employees during their hours of employment consistent with all governmental
regulations. Such protective devices and other safety equipment as
may be necessary to properly protect employees from injury shall be provided by
the Company without cost to the employee.
22
B. Adequate
ventilation, drinking coolers, showers, and safety equipment such as respirators
goggles, gloves, and any other safety devices as may be determined from
time-to-time shall be provided by the Company without cost to the
employees.
C. The
Union agrees that in order to protect the employees from injury and to protect
the facilities of the plant, it will cooperate to the fullest extent in seeing
that the safety rules and regulations are followed and that it will lend its
whole-hearted support to the safety program of the Company.
D. All
active employees will be reimbursed (up to $100) for one (1) pair of safety
boots annually. The Company will reimburse active employees regularly
assigned to the Nitrate/Urea area for the actual cost (up to $100 each) of two
(2) pairs of safety boots annually. Employees may purchase the boots
from any source and will be reimbursed by the Company upon providing the
receipt. However, if the employee’s boots are damaged and become
ineffective or unsafe due to conditions of the work environment, the employee
will be eligible to receive reimbursement (up to $100) for a second pair that
year upon demonstration to the Company.
The
Company recognizes a Health and Safety Committee consisting of two (2) members
selected from the by the Union, and one representative from
management. This committee will be maintained for purposes of making
monthly inspections of the plant facilities and making recommendations to
improve safety and housekeeping. Such members of the bargaining unit
who serve on the team will be excused from work, with pay, on the day of the
committee inspection. Recommendations of the Health and Safety
Committee will not be subject to the provisions of Article 22 - Grievance
Procedure.
ARTICLE
26
DISCRIMINATION
Neither
the Company nor the Union shall discriminate against any employee with regard to
the terms and conditions of employment on the basis of race, color, creed,
national origin, sex, age, handicap, religion, or because of membership or
non-membership in a Union.
ARTICLE
27
BULLETIN
BOARDS
A. The
Company will provide one bulletin board in each of the four (4) areas for the
purpose of posting official Union notices restricted to the
following:
1. Notices
of Union recreational and social affairs;
2. Notices
of Union elections;
3. Notices
of Union appointments and results of Union elections; and
4. Notices
of Union meetings.
B. The
bulletin boards shall not be used by either party for disseminating propaganda
of any kind, posting or distributing pamphlets or political matter, advertising,
or for notices adversely reflecting upon the Union or the Company.
23
ARTICLE
28
SICKNESS
BENEFITS
GROUP
INSURANCE
For
the plan year beginning January 1, 2008, employees will be offered the
opportunity to enroll in a program provided by High Mark Group insurance with
the terms and benefits agreed upon.
For
2008, the group insurance program will include three alternative coverage tier
options—employee only, employee plus one, and family. Dental and
vision coverage will be offered those who enroll in the health insurance in 2008
and may not be elected separately by anyone not enrolled.
The
employee share of the cost of the GROUP INSURANCE BENEFITS will be 25% of the
premium costs in each year of the Agreement. However, the Company is
not responsible for any part of the cost of dental and vision coverage, the
premium for which is fully paid by the employee.
For
plan years 2009 and 2010, the plan participants will elect whether coverage that
year will be under a plan provided by High Mark or a self-funded one with tiers,
benefits and premium costs determined exclusively by the Company. The
Union will authorize High Mark to provide the Company with complete and detailed
experience and cost information which will enable it to prepare terms for
potential coverage under a Cherokee, self-funded plan for the next
year. High Mark will also provide terms of alternative coverage its
plan would provide. All plan participants then will have an
opportunity to decide which program to adopt for the following plan
year. If the program changes to a Company self-funded one in 2009,
the Company will provide the necessary experience to High Mark in similar
fashion the next year so it can quote its alternative program for consideration
and election by 2009 participants in 2010. The information exchange
and decision shall be done as soon as practical each year.
It
is agreed that in the event some form of “universal” healthcare is initiated by
the government during the term of this Agreement, the then current group program
may no longer be appropriate and a conversion to an alternative system may be
necessary. The parties will meet to discuss the implications at such
time.
LONG TERM
DISABILITY
the
Company agrees to pay the cost of a basic employee long-term disability plan
with a maximum benefit of 50% of the monthly pay up to $1,000.00 per
month.
SHORT TERM
DISABILITY
Effective with the date of
this Agreement, the weekly benefit provided eligible employees under the
existing plan will increase to $250.
LIFE
INSURANCE
the
Company agrees to pay the cost of basic life insurance equal to one (1) times an
employee’s annual income, maximum of $50.000.00.
MEDICAL
EVIDENCE AND RETURN TO WORK. The employee's
disability and its continuation must be affirmed by acceptable medical evidence
showing the result of examinations made at appropriate
24
intervals
throughout the period of absence, such intervals to depend upon the nature of
the disability. The Company will provide a form on which such
statements may be submitted by the employee's doctor.
If a
disagreement arises between the Company's doctor and the employee's doctor as to
the employee's ability to return to work, the Company's doctor and the
employee's doctor shall agree upon a third doctor who shall make a determination
as to the employee's physical ability to work and the decision of such third
doctor shall be final and binding. Any fee or expenses of such third
doctor shall be divided equally between the Company and the employee
involved.
RETURN TO
WORK PROGRAM. For employees who have suffered work related
illnesses/injuries, the company will continue its practice, when possible, of
providing modified duties in an effort to help employees in the transition from
non-ability to work, to full capacity work. The company also reserves
the right to limit the number of employees in this program. In such
case, seniority and qualifications will prevail. When applicable, the
Company will use occupational function capacity evaluations, developed by
certified physicians and therapist, to determine an employee's ability to return
to full capacity work or modified work duty. A modified duty work
arrangement is intended to be a temporary accommodation and not to exceed four
(4) to eight (8) weeks; however, in the event that an employee cannot return to
full capacity work after said period, the Company will consider establishing a
second modified duty work arrangement, but not to exceed an additional four (4)
to eight (8) week duration. An employee returning to work on a
modified work duty program will be entitled to his/her normal wage rate as
recorded in Appendix "A" of this Agreement. In such event there is no
guarantee for overtime work; but any overtime assignments will be offered to the
employee only if he/she possesses the physical and endurance requirements of the
assignment.
The
Company agrees to administer the Return - To - Work program on a
non-discriminatory basis, and the employees at this work location agree not to
abuse the opportunities provided under this program. This Return - To
- - Work program is not intended to adversely affect any other bargaining unit
employee.
ARTICLE 29
DISCIPLINE AND
DISCHARGE
In the
event that an employee is discharged and the employee considers such discharge
to be without just cause, such action must be appealed to the fourth step of the
grievance procedure within forty-eight (48) hours of the time of such discharge,
excluding Saturdays, Sundays and holidays.
Any
disciplinary action administered and related documentation will remain as part
of the employee’s formal personnel file. However, the following will
not be used in determining the level of appropriate discipline to be
administered:
Verbal warning issued active employee
more than 12 months before;
Written warning issued active employee
more than 24 months before;
Suspension issued active employee more
than 36 months before.
ARTICLE
30
GENERAL
A. MANAGEMENT
EMPLOYEES WORKING. It is agreed that
supervisors are not to perform production or maintenance work to the extent that
it would deprive any worker of his/her regular job, or would result
in the layoff of a regular employee, or would prevent the hiring of additional
employees, if the amount of work warranted it. This, of course, does
not preclude a supervisor from helping out in emergencies or from giving
instructions to employees.
25
B. NOTIFICATION
OF CURRENT HOME ADDRESS. An employee must notify
his/her supervisor whenever he/she changes his/her home address.
C. CONTRACTORS. The
Company may contract out work at its discretion as long as bargaining unit
employees are not laid off as a result of contracting out bargaining unit
work.
D. MAINTENANCE
PERSONNEL ON 12 – HOUR SHIFTS. The Company may staff Maintenance on
12-hour shifts as it deems necessary. Maintenance employees with the
required skills will be assigned by canvassing the maintenance employees with
those skills, by seniority.
ARTICLE
31
AUTHORIZED
DEDUCTION
UNION
SECURITY
Membership
in the Union is not compulsory by state and federal law. Employees
have the right to join, not join, maintain, or drop their membership in the
Union as they see fit. Neither the Union, its agents, or any employee
shall exert any pressure on, or discriminate against an employee as regards to
such matters.
Union
Security and Check-off. (a) Upon receipt of written authorization of
any employee who is a member of the union, all in accordance with the
requirements of the Labor Management Relations Act of 1947, as amended, from
time to time, the Company agrees to deduct from the earnings of such employees
who are members of the Union, assessments and weekly membership
dues. It is agreed that the Company shall check off weekly dues and
assessments, each as designated by the International Secretary-Treasurer of the
Union.
Said
deductions shall be made from such respective employee’s pay in the calendar
month following the month in which the effective date of the employee’s
membership in said Union occurs. The authorization will be on forms
furnished by the Union and approved by the Company. A copy which
appears in the Appendix “E” of the agreement. All such initiation
fees, weekly dues and assessments, that are deducted in this manner, shall be
remitted by the Company to the International Secretary-Treasurer. Pittsburgh,
Pennsylvania, so long as the authorization is validly in effect and not revoked
by the employees.
A check
for deductions shall be to the International Secretary-Treasurer, Pittsburgh,
Pennsylvania each current month, together with an itemized list of all
collections.
(b)
The Union agrees to indemnify, hold, and save the Company harmless of, from and
against all claims, demands, suits, liabilities and expenses or other forms of
liability that may arise out of or by reason of action taken by the Company for
the purpose of complying with any of the provisions of this Article or in
reliance on any notice, authorization, or assignment furnished pursuant to said
provisions.
26
ARTICLE
32
SAVINGS
CLAUSE
If any
term or provision of this Agreement is, at any time during the life of this
Agreement, in conflict with any applicable valid federal or state law, such term
or provision shall continue in effect only to the extent permitted by such
law. If, at any time thereafter, such term or provision is no longer
in conflict with any federal or state law, such term or provision, as originally
embodied in this Agreement, shall be restored in full force and
effect. If any term or provision of this Agreement is or becomes
invalid or unenforceable, such invalidity or unenforceability shall not affect
or impair any other term or provision of this Agreement.
ARTICLE
33
STRIKES AND
LOCKOUTS
During
the term of this Agreement, neither the Union, its officers, agents, members,
nor any employee will authorize, instigate, aid, condone, participate in, or
engage in a strike, work stoppage, slow-down, boycott, sympathy strike, overtime
ban, or any other interruption or interference with work or any impeding of
production or business of the Company regardless of whether there is a claim by
the Union of a breach of this Agreement or of State or Federal law by the
Company. Any employee or employees who violate the provisions of this
Article may, at the sole discretion of the Company, be discharged or otherwise
disciplined. If an employee is disciplined or discharged for a
violation of this Article, the arbitrator’s jurisdiction is limited to a
determination of whether the employee engaged in activity prohibited by this
Article.
The
employer specifically has a right to proceed directly to court for an injunction
and any and all other legal relief for any breach of this Article.
The
Company agrees that there shall be no lockout during the term of this
Agreement.
ARTICLE
34
TERM
This
Agreement shall be effective as of the 12th day of November, 2007 and shall
remain in effect until and including 12:00 midnight on November 11, 2010 and
shall continue in full force and effect from year-to-year thereafter, unless
either party to this Agreement desires to change or modify the term or terms of
the Agreement. The party desiring the change or modification must notify the
other party to this Agreement, in writing, not less than sixty (60) days and not
more than seventy-five (75) days prior to the termination date or to any
subsequent anniversary date thereof.
27
EXECUTED
AT CHEROKEE, ALABAMA THIS TWELFTH DAY OF NOVEMBER, 2007:
|
CHEROKEE
NITROGEN COMPANY
Cherokee, Alabama Plant
|
UNION
|
|
| ________________________________________ | ________________________________________ | |
|
S/Don
Phillips
Plant
Manager
|
S/Leo
W. Gerard
International
President
|
|
|
________________________________________
|
_______________________________________
|
|
|
S/John
Nix
Plant
Controller
|
S/Jim
English
International
Secretary-Treasurer
|
|
|
________________________________________
|
||
|
S/Thomas
Conway
International
Vice-President (Administration)
|
||
|
________________________________________
|
||
|
S/Fred
Redman
International
Vice-President (Human Affairs)
|
||
|
________________________________________
|
||
|
S/Stan
Johnson
District
9 Director
|
||
|
________________________________________
|
||
|
S/Claude
Karr
Staff
Representative
|
||
|
________________________________________
|
||
|
S/Terry
Daniel
President
417-G
|
||
|
________________________________________
|
||
|
S/R.
Longmire, Vice President
|
||
|
________________________________________
|
||
|
S/B.
Black, Negotiating Committee
|
||
|
________________________________________
|
||
|
S/M.
Koger, Negotiating Committee
|
||
|
________________________________________
|
||
|
S/S.
O. Davis, Negotiating Committee
|
||
|
________________________________________
|
||
|
S/J.
D. Thomason, Negotiating Committee
|
||
|
|
||
28
APPENDIX
“A”
The
hourly rates at the Cherokee, Alabama plant of Cherokee Nitrogen shall be as
follows:
Maintenance
Table
|
Rates
Effective November 12, 2007
|
Rates
Effective November 12, 2008
|
Rates
Effective November 12, 2009
|
||||
|
Knowledge
/ Skill Level
|
Grandfathered
Rates |
Pay Rate
|
Grandfathered
Rates |
Pay Rate
|
Grandfathered
Rates
|
Pay Rate
|
|
Maintenance
Level
4
|
$17.94
|
$19.84
|
$18.48
|
$20.44
|
$19.03
|
$21.05
|
|
Maintenance
Level
3
|
$17.69
|
$18.22
|
$18.77
|
|||
|
Maintenance
Level
2
|
$17.45
|
$17.97
|
$18.51
|
|||
|
Maintenance
Level
1
|
$16.97
|
$17.48
|
$18.01
|
|||
|
1st
Yr. Mechanic
|
$15.56
|
$16.03
|
$16.51
|
|||
|
2nd
Yr. Mechanic
|
$15.83
|
$16.30
|
$16.79
|
|||
|
3rd
Yr. Mechanic
|
$16.12
|
$16.60
|
$17.10
|
|||
|
Utility
Person
|
$15.56
|
$16.03
|
$16.51
|
|||
|
Trainee
|
$11.66
|
$12.01
|
$12.37
|
|||
29
APPENDIX "A"
(continued)
Operations
Table
|
Rates
Effective November 12, 2007
|
Rates
Effective November 12, 2008
|
Rates
Effective November 12, 2009
|
||||
|
Knowledge
/
Skill
Level
|
Grandfathered"
Rates |
Pay Rate
|
Grandfathered
Rates |
Pay Rate
|
Grandfathered
Rates
|
Pay Rate
|
|
Chem.
Oper. 4
|
$17.94
|
$19.84
|
$18.48
|
$20.44
|
$19.03
|
$21.05
|
|
Chem.
Oper. 3
|
$17.69
|
$18.22
|
$18.77
|
|||
|
Chem.
Oper. 2
|
$17.45
|
$17.97
|
$18.51
|
|||
|
Chem.
Oper. 1
|
$16.97
|
$17.48
|
$18.01
|
|||
|
Trainee
(Probationary)
|
----
|
$11.66
|
----
|
$12.01
|
$12.37
|
|
If an
employee bids to a new area, he/she will receive Trainee rate of pay until
he/she qualifies as Operator 1.
Each
fully qualified regularly assigned Board Operator will receive an additional
fifty cents ($.50) per hour for such hours worked in recognition of additional
duties assigned.
30
APPENDIX
"B"
12-HOUR
CONTINUOUS SHIFT OPERATIONS
This
agreement establishes the terms and conditions which are applicable when
production employees are scheduled on 12-Hour Continuous Shift Operations at the
Cherokee, Alabama facility. Explained herein are the procedures which
apply to bargaining-unit employees who work a modified "4-3-4-3" rotating-shift
schedule over a twenty-eight (28)-day period, consisting of the
following:
--- Thirteen
(13) twelve-hour shifts; and
--- One
(1) four-hour shift.
Certain
criteria must be met in the preparation of this 12-Hour Shift
Agreement. It is desirable to conform as closely as possible to the
contractual pay provisions under the current Labor Agreement, and it is
essential that the Company's cost and the employees' wages be equitable for the
same amount of time worked under both a 21-turn shift schedule and the 12-hour
continuous shift operations schedule (hereinafter referred to as the "12-Hour
Shift Schedule).
Federal
Wage and Hour Law requires that an employee be paid time and one-half (1.5) for
hours worked in excess of forty (40) hours in a work week. No other
overtime/premium payments shall be applicable to this 12-Hour Shift
Schedule.
In order
to satisfy legal and contractual requirements and to provide employees with
equitable pay for the same amount of time worked under both a modified 21-turn
shift schedule and this 12-Hour Shift schedule, the Standard Hourly Wage Rates
listed in Appendix "A" of the current Labor Agreement will be adjusted for the
12-Hour Shift Schedule. These adjustments are based on the ratio of
equivalent straight-time hours paid on the modified 21-turn shift schedule to
those on the modified 12-Hour Shift Schedule. The Adjusted Hourly Rates, which
are determined by multiplying the current Standard Hourly Wage Rates by a
factor, are applicable only for the proposed schedule. All hours worked or paid
outside this 12-Hour Shift Schedule, such as holdover overtime or call-outs,
will continue to be paid on the basis of the Standard Hourly Wage Rates listed
in APPENDIX "A" of the current Labor Agreement.
I. CONDITIONS FOR SHIFT SCHEDULE.
The conditions under which the 12-Hour Shift Schedule will be implemented are as
follows:
A. Coverage
of shift vacancies will be mandatory in accordance with the existing requirement
that an employee may not leave his/her work area until properly
relieved.
B. The
Company requires the Union employees to hold over or be available for overtime
(by pager) to man the jobs when vacancies occur. If problems are
encountered in filling vacancies, the Company reserves the right to cancel the
12-Hour Shift Schedule operations at any time with ten (10) days'
notice.
C. Vacations
will be adjusted as defined herein for employees scheduled on 12-Hour Shift
Schedules.
31
II. PAY
PRACTICES
A. Regular
Scheduled Work Hours
1. Base Pay
a. In
order to equalize the cost to the Company and earnings of the employee, it is
necessary to apply a factor of .9756 to the Standard Hourly Wage Rate for each
job class and to develop an Adjusted Hourly Wage Rate for each job
class.
b. Overtime
worked as part of the regular 12-Hour Shift Schedule will be paid at the
Adjusted Hourly Wage Rate and referred to as Regularly Scheduled Overtime
(RSOT).
2. Shift
Differential. An employee who works on the 12-Hour Shift
Schedule during a four-week period will receive forty
($.40) cents per hour for all hours worked.
Example: An
employee whose Standard Hourly Wage Rate is $19.84 per hour would be paid as
follows:
|
Standard
Hourly Wage Rate
|
$19.84
|
|
Shift
Differential
|
+ .40
|
|
Subtotal.
|
$ 20.24
|
|
Factor
|
x .9756
|
|
Adjusted
Hourly Wage Rate
|
$19.75
|
|
Above
rate applicable to Day and Night
Shifts.
|
|
B. Overtime
1. Overtime
worked outside the regular 12-Hour Shift Schedule will be paid at the Standard
Hourly Wage Rates listed in APPENDIX "A" of the current Labor
Agreement.
2. The
computation of hours of days worked for the appropriate overtime premium will be
made under the terms of the current Labor Agreement except that during the week
of the 28-day cycle in which the employee is scheduled to work 48 hours, all of
these hours, except unexcused hours, shall be considered hours worked for the
purpose of computing overtime. The work week shall begin at 6:00 a.m.
on Monday and end at 6:00 a.m. on the following Monday. The work day
shall begin at 6:00 a.m. and end at 6:00 a.m. the following
morning.
3. Employees
assigned to 12-Hour Shifts will eat their lunches on Company time at such hours
as their duties permit. No overtime lunches will be provided to employees while
working scheduled 12-Hour Shifts.
C. Holiday
Pay
1. On
the 12-Hour Shift Schedule, a holiday will be paid as follows:
32
a. Each
of the two 12-Hour Shifts that work will be paid 1.5 times the Adjusted Hourly
Wage Rate for all hours worked on the holiday plus eight (8) hours of holiday
pay at the Standard Hourly Wage Rate.
b. Each
Off-Shift employee will receive eight (8) hours times the employee's
straight-time pay at his/her Standard Hourly Wage Rate.
2. An
employee who works on a holiday will be paid 1.5 times his/her Adjusted Hourly
Wage Rate only for all scheduled hours worked on the holiday plus eight (8)
hours of holiday pay at the employee's Standard Hourly Wage Rate.
3. An
employee who is scheduled off on a holiday will be paid eight (8) hours only at
his/her Standard Wage Rate.
4. For
purposes of the 12-Hour Shift Agreement, holidays will be the same as those
listed in Article 16 of the current Labor Agreement.
5. An
employee who is on a scheduled vacation on a holiday will be paid eight (8)
hours at the Standard Hourly Wage Rate, in addition to his/her vacation
pay.
III. VACATIONS
A. Employees
on the 12-Hour Shift Schedule will qualify for vacations in accordance with
Article 15 of the current Labor Agreement.
B. Vacation
pay for an employee on the 12-Hour Shift Schedule will be computed in accordance
with the number of hours the employee would have been scheduled to work had
he/she not been on vacation. The number of hours of vacation time is defined in
the contract with the maximum being one-hundred sixty (160) hours per year
depending on eligibility. Vacation time remaining of less than one
(1) week will be taken as per the contract.
C. One
(1) vacation week equals the hours determined in paragraph B above.
D. Vacations
will be adjusted for the full year.
E. A
week of vacation under the 12-Hour Shift Schedule shall be a work week as
defined in Article 15, Section L of the current Labor Agreement, provided that
suitable standby coverage is maintained. It is understood that
persons working the 12-Hour Shift Schedule may take five (5) twelve-hour days of
vacation one day-at-a-time with approval from the Company and at least a
twenty-four (24)-hour notice.
|
IV.
|
OVERTIME
PROCEDURES. In addition to paragraphs A and B of
Section I of this Agreement, the following shall
apply:
|
A. 12-Hour
Shift overtime coverage will be obtained from the replacement chart shown on the
12-Hour Shift Schedule except as otherwise specified below.
B. All
employees on the 12-Hour Shift Schedule must make available to the Company a
telephone number where they can be contacted.
33
C. The
Company may, when such action is necessary to fill a job, require an employee to
work past the time when his/her vacation is scheduled to begin. The
Company will, however, review any undue inconveniences which may result from
such action.
D. Overtime
provisions in the Labor Agreement will govern those areas not specifically
excluded herein under this Section IV.
|
V.
|
CALL-OUT AND SCHEDULE
CHANGES. Not withstanding any other provisions of this
Agreement, call-outs of 12-Hour Shift employees to vacancies on 12-Hour
Shifts will be paid at the Standard Hourly Wage Rate for those call-out
hours. If an employee is rescheduled to a 12-Hour Shift, the
employee will be paid according to the 12-Hour Shift
Agreement. An employee scheduled to work other than a 12-Hour
Shift, but who actually works a 12-Hour Shift, shall be paid at the
applicable Standard Hourly Wage
Rate.
|
VI. MISCELLANEOUS
BENEFITS.
A. Jury
Duty will be administered in accordance with the provisions of Article 18 of the
current Labor Agreement.
B. Funeral
Leave Pay will be paid only for two (2) workdays (24 hours) at twelve (12) hours
each at the Standard Hourly Wage Rate. If a 12 hour shift employee
needs a third day in conjunction with funeral leave, it will be granted, without
pay, upon request.
VII. SCOPE
OF AGREEMENT
A. It
is agreed that this 12-Hour Continuous Shift Operations Agreement supersedes the
current Labor Agreement in all areas where there may be a conflict.
B. All
areas not specifically covered by this Agreement shall be governed by the terms
and conditions of the current Labor Agreement.
C. In
the event of questions concerning the application of the 12-Hour Shift Schedule,
and/or unforeseen conflicts with the provisions of the current Labor Agreement,
such issues shall be referred to Human Resources for resolution.
D. Any
modifications and/or changes made to the existing terms and conditions of the
current Labor Agreement as a result of the Cherokee Nitrogen facility or any
portion thereof changing to this 12-Hour Shift Schedule shall be applicable only
during the term of this 12-Hour Continuous Shift Operations Agreement. In the
event that the 12-hour Shift Schedule is subsequently discontinued, the terms
and conditions of the current Labor Agreement will be given their normal
interpretation and application.
34
Schedules
and Factor Determination
One (1)
Four-Week Schedule
|
Week
No. 1
|
Week
No. 2
|
Week
No. 3
|
Week
No. 4
|
|||||||||||||||||||||||||
|
M
|
T
|
W
|
T
|
F
|
S
|
S
|
M
|
T
|
W
|
T
|
F
|
S
|
S
|
M
|
T
|
W
|
T
|
F
|
S
|
S
|
M
|
T
|
W
|
T
|
F
|
S
|
S
|
|
|
DAY
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|||||||||||||||||||||
|
NIGHT
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|||||||||||||||||||||
|
OFF
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
||||||||||||||
|
Factor:
|
Hours Worked
|
Hours Paid at Straight
Time
|
|
1st
Week
|
48
|
52
|
|
2nd
Week
|
36
|
36
|
|
3rd
Week
|
40
|
40
|
|
4th
Week
|
36
|
36
|
|
Hours
in 28-Day Cycle:
|
160
|
164
|
|
Thirteen
28-Day Cycles/Yr.
|
X 13
|
X 13
|
|
Number
Hours Per Year:
|
2080
|
2132
|
|
Factor
Determination: 2080 / 2132= .9756
|
35
APPENDIX
"C”
401(K)
PLAN
Effective
January, 2003, the company will contribute a sum based on 10% of a maximum of
$4,000.00 contribution by a plan participant. If a participant
employee contributes $4,000.00 during a plan year, the company’s contribution
would be $400.00, for that plan year.
36
APPENDIX
"D”
The
Cherokee Nitrogen Substance/Alcohol Abuse Policy and Procedure is made a part of
the Labor Agreement by reference.
37
APPENDIX
“E”
United Steelworkers (USW) Check-off Authorization Form
38
LETTER OF
UNDERSTANDING
February
22, 2002 and amended November 12, 2007
|
A.
|
During
their negotiations, the Parties discussed Article 4, Work Groups,
Operations Skill Advancement/On-The-Job Training, and agreed as
follows:
|
All
employees who were hired on or after December 1, 1994, must complete all levels
of advancement outlined in Article 4, B. 2. for operations personnel and in
Article 4, D. 2. for maintenance work groups.
Employees
hired before December 1, 1994, in either operations or maintenance will only be
required to complete the levels of advancement through Level 2.
B. The
parties also agreed, as follows:
|
1.
|
Red
Circle Personnel listed below will receive first consideration for
available Utility Positions within all areas of the
plant. Those individuals are: Charlie Pounders and
Clyde Wallace.
|
The
Parties agree that the positions they hold are not subject to the seniority
provisions of Article 10, Seniority, which relate to bidding and bumping
procedures.
In the
event of a reduction in force which includes Red Circled utility persons, plant
seniority shall control any such reduction in force.
It is
understood no employee will be laid off unless he/she has had the opportunity to
displace red-circled employees.
|
2.
|
Ron
Russell shall not be required to complete the Operations and/or
Maintenance Skills Advancement requirements of Article 4, Work Groups, for
Operations or Maintenance
personnel.
|
COMPANY UNION
______________________ ________________________
39
LETTER OF
UNDERSTANDING
(Board
Operator Premium)
November
12, 2004 and reaffirmed November 12, 2007
During
their negotiations, the parties discussed the Company’s agreement to provide a
premium of fifty cents ($.50) per hour to Board Operators in consideration for
their handling of administrative duties in addition to their regular duties such
as: filling out time cards for production personnel; calling employees for
overtime call-ins; maintaining area overtime board; posting of overtime hours,
refused and worked; maintain attendance records for shift personnel; handles
requests for vacation time off; functions as contact point and receives calls
from suppliers or vendors as needed.
COMPANY UNION
________________________________
______________________________
40
SUBJECT
INDEX
|
Subject
|
Article
|
Page
|
|
Adjustment
of Grievances
|
22
|
19
|
|
Agreement
|
1
|
|
|
Alcohol
Policy
|
Appendix
“D”
|
37
|
|
Arbitration
|
22
|
20
|
|
Board
Operator Premium
|
Letter
of Understanding
|
40
|
|
Bulletin
Boards
|
27
|
23
|
|
Change
of Home Address
|
30
|
25
|
|
Contracting
Out Work
|
3
|
2
|
|
Disability
Benefits – Short Term
|
28
|
24
|
|
Discharge
|
29
|
25
|
|
Drug
Policy
|
Appendix
“D”
|
37
|
|
EAP
– Employee Assistance Program
|
28
|
24
|
|
Effective
Date of Agreement
|
1
|
|
|
Employee/Management
Partnership
|
2
|
1
|
|
Funeral
Leave
|
17
|
17
|
|
General
|
30
|
25
|
|
Grandfathering
|
Letter
of Understanding
|
39
|
|
Grievance
Committee
|
21
|
19
|
|
Grievance
Procedures
|
22
|
19
|
|
Group
Life Insurance
|
28
|
24
|
|
Group
Medical Insurance
|
28
|
24
|
|
Health
Care Reimbursement Accounts (HCR)
|
28
|
24
|
|
Holidays
|
16
|
16
|
|
-
Loss of Pay
|
16
|
16
|
|
-
Observed Holidays
|
16
|
16
|
|
-
Pay for Holidays Worked
|
16
|
16
|
|
Hours
of Work
|
9
|
8
|
|
Incentive
Plan
|
Appendix
“C”
|
36
|
|
Jury
Duty
|
18
|
17
|
|
Layoffs
– Advance Notice
|
7
|
6
|
|
Leave
of Absence
|
23
|
21
|
|
-
Approval
|
23
|
21
|
|
-
Personal Reasons
|
23
|
21
|
|
-
Union Business
|
23
|
21
|
|
-
Medical Reasons
|
23
|
22
|
|
Life
and Medical Insurance
|
28
|
24
|
41
|
Subject (cont’d)
|
Article
|
Page
|
|
Maintenance
Department Work Groups
|
4
|
3
|
|
-
Titles
|
4
|
3
|
|
-
Qualifying
|
4
|
3
|
|
-
Training Progression
|
4
|
4
|
|
Maintenance
on 12-Hour Shifts
|
30
|
26
|
|
Management’s
Rights
|
3
|
1
|
|
Management
Employees Working
|
30
|
25
|
|
Meal
Allowance
|
20
|
18
|
|
-
Meal Period of Non Shift Workers
|
20
|
18
|
|
Military
Service
|
24
|
22
|
|
Military
Training
|
24
|
22
|
|
Operations
Work Groups
|
4
|
2
|
|
-
Titles
|
4
|
2
|
|
-
Qualifying
|
4
|
3
|
|
-
Training Progression
|
4
|
2
|
|
Overtime
Procedures
|
10
|
9
|
|
-
Call-outs
|
10
|
10
|
|
-
Overtime Coverage Procedure
|
10
|
9
|
|
-
Charged Overtime
|
10
|
9
|
|
-
Maintenance
|
10
|
9
|
|
-
Production
|
10
|
11
|
|
-
Transfers From One Group to Another
|
10
|
9
|
|
-
Reporting Pay – Guarantee
|
10
|
9
|
|
-
Production Overtime Procedures
|
10
|
11
|
|
Payday
|
19
|
18
|
|
Promotions
to Outside Bargaining Unit
|
5
|
5
|
|
Purpose
of Agreement
|
2
|
1
|
|
Protective
Equipment Safety Policy Procedure (SAF-17-Corp)
|
25
|
22
|
|
Recognition
of Union
|
1
|
1
|
|
Reduction
In Force
|
7
|
6
|
|
Return
to Work Program
|
28
|
25
|
|
Route
of Advancement
|
4
|
3
|
|
Safety
and Health
|
25
|
22
|
|
-
Safety and Health Committee
|
25
|
23
|
|
Savings
Clause
|
32
|
26
|
|
Savings
Plan – Section 401 (k)
|
Appendix
“C”
|
36
|
|
Seniority
|
5
|
4
|
|
-
Broken
|
5
|
5
|
|
-
Filling Vacancies
|
6
|
5
|
|
-
New Employees
|
5
|
5
|
|
-
Plant-Wide Seniority
|
5
|
5
|
|
-
Reductions in Workforce
|
7
|
6
|
|
-
Seniority List
|
5
|
5
|
|
Shift
Differential
|
14
|
14
|
|
Wages
|
13
|
13
|
|
-
Seven Consecutive Days Worked
|
13
|
13
|
42
|
Subject (cont’d)
|
Article
|
Page
|
|
Sick
Leave Agreement (Short Term Disability Benefits)
|
28
|
24
|
|
-
Return to Work
|
28
|
24
|
|
-
Return to Work Program
|
28
|
25
|
|
Term
of Agreement, Expiration Date
|
34
|
27
|
|
Twelve
Hour Shift Agreement
|
Appendix
“B”
|
31
|
|
-
Maintenance on 12 Hour Shifts
|
30
|
26
|
|
Union
Dues and Checkoff
|
31
|
26
|
|
Vacations
|
15
|
14
|
|
-
Amount Paid
|
15
|
14
|
|
-
During Holiday Week
|
15
|
15
|
|
-
Money in Lieu Of
|
15
|
15
|
|
-
New Employees – First Vacation
|
15
|
14
|
|
-
Pay Following Death
|
15
|
15
|
|
-
Qualifying Hours
|
15
|
14
|
|
-
Retirement During Year
|
15
|
15
|
|
-
Scheduling
|
15
|
15
|
|
-
Weeks Paid Per Year
|
15
|
14
|
|
-
When Paid
|
15
|
15
|
|
Wage
Rates
|
Appendix
“A”
|
29
|
|
-
Maintenance
|
Appendix
“A”
|
29
|
|
-
Operations
|
Appendix
“A”
|
30
|
|
-
Change in Work Schedules
|
8
|
8
|
|
-
Paydays
|
19
|
18
|
|
-
Premium Pay for Non-Scheduled Workday
|
13
|
13
|
|
-
Shift Differential
|
14
|
14
|
|
-
Wage Rates for New Jobs
|
13
|
13
|
|
Work
Groups
|
4
|
2
|
|
Workers
Committee
|
21
|
19
|
43
Exhibit
21.1
LSB
INDUSTRIES, INC.
SUBSIDIARY
LISTING
At
December 31, 2007
LSB INDUSTRIES, INC.
(Direct subsidiaries in bold italics)
Prime
Financial Corporation
Prime
Holdings Corporation (f/k/a Tower IV Corporation, f/k/a LSB Leasing
Corp.)
Northwest
Capital Corporation
ThermaClime,
Inc. (5% stock ownership)
LSB
Holdings, Inc.
LSB-Europa
Limited
Summit
Machine Tool Inc. Corp.
Cherokee
Nitrogen Holdings, Inc. (f/k/a Cherokee Nitrogen Company)
ClimateCraft
Technologies, Inc.
INDUSTRIAL PRODUCTS
BUSINESS
Summit
Machine Tool Manufacturing Corp.
Summit
Machinery Company
Pryor
Plant Chemical Company (f/k/a LSB Financial Corp.)
Hercules
Energy Mfg. Corporation
CLIMATE CONTROL/CHEMICAL
BUSINESS
ThermaClime,
Inc. (f/k/a
ClimaChem, Inc.) (95% stock ownership)
Northwest
Financial Corporation
LSB
Chemical Corp.
El Dorado
Chemical Company
Chemex I
Corp. (f/k/a Slurry Explosive Corporation)
DSN
Corporation
Chemex II
Corp. (f/k/a Universal Tech Corporation)
El Dorado
Nitric Company (f/k/a El Dorado Nitrogen Company, f/k/a
LSB
Nitrogen Corporation, f/k/a LSB Import Corp.)
El Dorado
Acid, L.L.C. (General Partner of El Dorado Nitrogen,
L.P.)
El Dorado
Nitrogen, L.P. (1% ownership)
El Dorado
Acid II, L.L.C. (Limited Partner of El Dorado Nitrogen,
L.P.)
El Dorado
Nitrogen, L.P. (99% ownership)
XpediAir,
Inc. (f/k/a The Environmental Group, Inc.)
International
Environmental Corporation
Climate
Master, Inc.
The
Climate Control Group, Inc. (f/k/a APR Corporation)
ClimateCraft,
Inc. (f/k/a Summit Machine Tool Systems, Inc.)
ThermaClime
Technologies, Inc. (f/k/a ACP International Limited, f/k/a ACP
Manufacturing Corp.)
CEPOLK
Holdings, Inc. (f/k/a ThermalClime, Inc.; f/k/a LSB South America Corporation)
ClimaCool
Corp. (f/k/a MultiClima Holdings, Inc., f/k/a LSB International Corp.)
TRISON
Construction, Inc.
Koax
Corp.
Cherokee
Nitrogen Company
Exhibit
23.1
Consent
of Independent Registered Public Accounting Firm
The Board
of Directors
LSB
Industries, Inc.
We
consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-58225) pertaining to the 1993 Stock Option and Incentive Plan, the
Registration Statements (Forms S-8 No. 333-62831, No. 333-62835, No. 333-62839,
No. 333-62843, and No. 333-62841) pertaining to the registration of an aggregate
of 225,000 shares of common stock pursuant to certain Non-Qualified Stock Option
Agreements for various employees, the Registration Statement (Form S-8 No.
333-98359) pertaining to the 1998 Stock Option and Incentive Plan and Outside
Directors Stock Purchase Plan, the Registration Statement (Form S-8 No.
333-110268) pertaining to the registration of an aggregate of 804,000 shares of
common stock pursuant to certain Non-Qualified Stock Option Agreements for
various employees, the Registration Statement (Form S-8 No. 333-145957)
pertaining to the registration of an aggregate of 450,000 of common stock
pursuant to certain Non-Qualified Stock Option Agreements for two employees, and
the Registration Statement (Form S-3 No. 33-69800) of LSB Industries, Inc. and
in the related Prospectuses of our reports dated March 13, 2008, with respect to
the consolidated financial statements and schedules of LSB Industries, Inc., and
the effectiveness of internal control over financial reporting of LSB
Industries, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 2007.
ERNST
& YOUNG LLP
Oklahoma
City, Oklahoma
March 13,
2008
Exhibit
31.1
CERTIFICATION
I, Jack
E. Golsen, Chairman of the Board and Chief Executive Officer, certify
that:
|
1.
|
I
have reviewed this annual report on Form 10-K of LSB Industries, Inc. (the
"registrant");
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant
and have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
|
|
|
|
|
|
b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
|
|
|
c)
|
Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
|
|
|
d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in this case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting.
|
|
|
|
|
5.
|
The
registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent
function):
|
|
a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
|
Date:
March 13,
2008 /s/ Jack E. Golsen
60;
Jack E. Golsen
Chairman of the Board and
Chief Executive
Officer
Exhibit
31.2
CERTIFICATION
I, Tony
M. Shelby, Executive Vice President of Finance and Chief Financial Officer,
certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K of LSB Industries, Inc. (the
"registrant");
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant
and have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
|
|
|
|
|
|
b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
|
|
|
c)
|
Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
|
|
|
d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in this case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting.
|
|
|
|
|
5.
|
The
registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent
function):
|
|
a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
|
Date:
March 13,
2008 /s/ Tony M. Shelby
Tony M. Shelby
Executive Vice President of
Finance
and Chief Financial
Officer
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18 U.S.C.
SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report of LSB Industries, Inc. (“LSB”) on Form 10-K
for the year ended December 31, 2007, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"). I, Jack E. Golsen,
Chairman of the Board and Chief Executive Officer of LSB, certify pursuant to 18
U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002,
that:
|
(1)
|
the
Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934;
and
|
|
(2)
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of
LSB.
|
/s/ Jack E. Golsen
Jack E.
Golsen
Chairman
of the Board and
Chief
Executive Officer
March 13,
2008
This
certification is furnished to the Securities and Exchange Commission solely for
purpose of 18 U.S.C. §1350 subject to the knowledge standard contained therein,
and not for any other purpose.
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18 U.S.C.
SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report of LSB Industries, Inc. (“LSB”), on Form 10-K
for the year ended December 31, 2007, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"). I, Tony M. Shelby,
Executive Vice President of Finance and Chief Financial Officer of LSB, certify
pursuant to 18 U.S.C. §1350, to §906 of the Sarbanes-Oxley Act of 2002,
that:
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(1)
|
the
Report fully complies with the requirements of section 13 (a) or 15 (d) of
the Securities Exchange Act of 1934;
and
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(2)
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the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
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/s/ Tony M. Shelby
Tony M.
Shelby
Executive
Vice President
and Chief
Financial Officer
March 13,
2008
This
certification is furnished to the Securities and Exchange Commission solely for
purpose of 18 U.S.C. §1350 subject to the knowledge standard contained therein
and not for any other purpose.