LSB
Industries, Inc.
Form 10-K
(12-31-2008)
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, 2008
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
Preferred Share Purchase Rights |
New
York Stock Exchange
New York Stock Exchange |
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, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer [ ] Accelerated filer [X]
Non-accelerated
filer [ ] Smaller reporting company [ ]
(Do not
check if a smaller reporting company)
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 30, 2008, was
approximately $338 million. As a result, the Registrant is an accelerated filer
as of December 31, 2008. For purposes of this computation, shares of the
Registrant’s common stock beneficially owned by each executive officer and
director of the Registrant were deemed to be owned by affiliates of the
Registrant as of June 30, 2008. Such determination should not be deemed an
admission that such executive officers and directors 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 6,
2009, the
Registrant had 21,109,812
shares of
common stock outstanding (excluding 3,848,518
shares of
common stock held as treasury stock).
2
FORM 10-K
OF LSB INDUSTRIES, INC.
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PART
I
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5
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17
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24
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24
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26
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29
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30
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PART
II
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32
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36
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37
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72
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76
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76
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76
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79
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PART
III
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84
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89
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3
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FORM
10-K OF LSB INDUSTRIES, INC.
TABLE
OF CONTENTS
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Page
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105
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111
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112
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PART
IV
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114
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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
certain 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 geothermal and water source heat
pumps and hydronic fan coils in the United States. Further, we believe that 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 as well as the retrofit and replacement markets.
Our
Chemical Business has three chemical production facilities located in El Dorado,
Arkansas (the “El Dorado Facility”), Cherokee, Alabama (the “Cherokee Facility”)
and Baytown, Texas (the “Baytown Facility”). Our
products include industrial and fertilizer grade ammonium nitrate (“AN”), urea
ammonium nitrate (“UAN”), nitric acid in various concentrations, nitrogen
solutions an
d various
other products.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
business.
Current
State of the Economy
The
current state of the economy creates significant uncertainty relative to the
industrial, construction and agricultural markets that we serve. We
based our 2009 business plan upon our
assumption
that during most of 2009, the economy will continue to contract due to
additional loss of jobs, declining consumer demand and limited credit
availability. However, our 2009 business plan is a moving target that will be
adjusted frequently as we measure customer demand during the first and second
quarters. We plan to adjust our controllable costs when and as market conditions
dictate. See further discussion relating to the economy under various risk
factors under Item 1A of this Part 1 and “Overview-Economic Conditions” of the
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) contained in this report.
Website Access to Company's
Reports
Our
internet website address is www.lsb-okc.com. Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to section
13(a) or 15(d) of the Exchange Act are available free of charge through our
website as soon as reasonably practicable after they are electronically filed
with, or furnished to, the Securities and Exchange Commission.
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 21 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 large custom air handlers and modular chiller systems. These products
are for use in commercial and residential HVAC systems. 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.
The
following table summarizes net sales information relating to our products of the
Climate Control Business:
|
2008
|
2007
|
2006
|
|
Percentage
of net sales of the Climate Control Business:
|
|||||||||
|
Geothermal
and water source heat pumps
|
61
|
%
|
58
|
%
|
61
|
%
|
|||
|
Hydronic
fan coils
|
27
|
%
|
30
|
%
|
27
|
%
|
|||
|
Other
HVAC products
|
12
|
%
|
12
|
%
|
12
|
%
|
|||
|
100
|
%
|
100
|
%
|
100
|
%
|
||||
|
Percentage
of our consolidated net sales:
|
|||||||||
|
Geothermal
and water source heat pumps
|
25
|
%
|
28
|
%
|
27
|
%
|
|||
|
Hydronic
fan coils
|
11
|
%
|
15
|
%
|
12
|
%
|
|||
|
Other
HVAC products
|
5
|
%
|
6
|
%
|
6
|
%
|
|||
|
41
|
%
|
49
|
%
|
45
|
%
|
Market Conditions for
Climate Control Business
We
discuss below certain details of our marketing, distribution, production,
backlog, competition and new products relative to our geothermal and water
source heat pumps, hydronic fan coils and other products produced by our Climate
Control Business. At this time, we are unable to assess the possible impact to
our Climate Control Business’ sales level as a result of the well documented
downturn in commercial and residential construction. For the short term, we do
expect to see lower demand for most of our products.
We
believe that tax credits and incentives, and certain planned direct spending by
the federal government contained in the recently enacted American Reinvestment
and Recovery Act of 2009, could stimulate sales of our geothermal heat pump
products, as well as other products that could be used to modernize federally
owned and operated buildings, military installations, public housing and
hospitals.
The
longer term outlook after 2009, to a significant extent, will depend on the
recovery of the credit and capital markets and the general economy.
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 using a
water pipe system, which is connected to a centralized cooling tower or heat
injector. Water source heat pumps enjoy a broad range of commercial
applications, particularly in medium to large sized buildings with many small,
individually controlled spaces. Despite the current economic downturn, we
believe the market share for commercial water source heat pumps relative to
other types of heating and air-conditioning systems will continue to grow due to
the relative efficiency and longevity of such systems, as well as due to
the emergence of the replacement market for those systems.
Our
Climate Control Business has also developed the use of geothermal 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 currently available in the market. We believe the
energy efficiency, longer life, and relatively short payback periods of
geothermal systems, as compared with air-to-air systems, will continue to
increase demand for our geothermal products. In addition, we believe the
recently enacted American Reinvestment and Recovery Act of 2009
contains significant incentives for the installation of our geothermal products.
We specifically target commercial and institutional new construction and
renovation and replacements as well as single-family new construction,
renovation and replacement.
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, 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. Hydronic fan coils
enjoy a broad range of commercial applications, particularly in medium to large
sized buildings with many small, individually controlled
spaces.
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 was approximately $700 million in 2008 based on December
2008 data supplied by the Air-Conditioning, Heating and Refrigeration Institute
(“AHRI”). Levels of repair, replacement, and new construction activity generally
drive demand in these markets. However, this market could be impacted by the
current economic conditions.
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
2008, we invested approximately $12.1 million primarily for property, production
equipment and other upgrades for additional capacity relating to our Climate
Control Business.
For 2009,
we currently have committed to spend an additional $3.5 million
primarily for production equipment and facilities upgrades. 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. Additional
investments will depend upon our long-term outlook for the economic conditions
that might affect our markets.
See
discussions under “Liquidity and Capital Resources-Capital Expenditures” of Item
7 of Part II of this report.
As of
December 31, 2008 and 2007, the backlog of confirmed orders for our Climate
Control Business was approximately $68.5 million and $54.5 million,
respectively. 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:
|
2008
|
2007
|
2006
|
|
Net
sales to OEMs as a percentage of:
|
||||||||
|
Net
sales of the Climate Control Business
|
20
|
%
|
19
|
%
|
17
|
%
|
||
|
Consolidated
net sales
|
9
|
%
|
9
|
%
|
8
|
%
|
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 and existing homes 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 copper, compressors, steel, aluminum, electric
motors, and valves. Periodically, our Climate Control Business enters into
futures contracts for copper. We do not anticipate any difficulties in obtaining
necessary materials for our Climate Control Business. However, changes in market
volatility, supply and demand could result in increased costs, lost production
and/or delayed shipments. Although we believe we will be able to pass to our
customers the majority of any cost increases in the form of higher prices, the
timing of these price increases could lag the increases in the cost of
materials. While we believe we will have sufficient sources for 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 plans to 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 products for three principal
markets:
|
·
|
concentrated,
blended and regular nitric acid, mixed nitrating acids, metallurgical
grade anhydrous ammonia, sulfuric acid, and high purity ammonium nitrate
(“AN”) for industrial applications,
|
|
·
|
anhydrous
ammonia, fertilizer grade AN, urea ammonium nitrate (“UAN”), and ammonium
nitrate ammonia solution (“ANA”) for the agricultural applications,
and
|
|
·
|
industrial
grade AN and solutions for the mining
industry.
|
The
following table summarizes net sales information relating to our products of the
Chemical Business:
|
2008
|
2007
|
2006
|
|
Percentage
of net sales of the Chemical Business:
|
|||||||||
|
Industrial
acids and other chemical products
|
38
|
%
|
33
|
%
|
37
|
%
|
|||
|
Agricultural
products
|
36
|
%
|
41
|
%
|
34
|
%
|
|||
|
Mining
products
|
26
|
%
|
26
|
%
|
29
|
%
|
|||
|
100
|
%
|
100
|
%
|
100
|
%
|
||||
|
Percentage
of our consolidated net sales:
|
|
||||||||
|
Industrial
acids and other chemical products
|
22
|
%
|
16
|
%
|
19
|
%
|
|||
|
Agricultural
products
|
20
|
%
|
20
|
%
|
18
|
%
|
|||
|
Mining
products
|
15
|
%
|
13
|
%
|
16
|
%
|
|||
|
57
|
%
|
49
|
%
|
53
|
%
|
Market Conditions for
Chemical Business
We
discuss below certain details of our industrial acids and other chemical
products, agricultural products, mining products, major customers, raw materials
and other sales and industry issues affecting our Chemical
Business.
As
discussed in more detail under “Overview-Economic Conditions” of the MD&A
contained in this report, we are unable to definitively assess the impact to our
Chemical Business sales level as a result of the current economic recession. At
this time, we believe that our sales volumes expressed in tons will be lower
than in 2008 and our sales dollars per unit will be less due to significantly
lower raw material costs and selling prices.
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.
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. The majority of the Baytown Facility’s production is sold pursuant to a
long-term contract. See discussion below under “Bayer Agreement” of this Item 1
concerning the future replacement of the Original Bayer Agreement with the Bayer
Agreement.
Agricultural
Products
Our
Chemical Business produces AN 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 AN. 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 AN 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.
Mining
Products
Our
Chemical Business manufactures industrial grade 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 AN per
year for a term through at least June 2011, with provisions for renewal
thereafter.
Major
Customers
The
following summarizes net sales to our major customers relating to our products
of the Chemical Business:
|
2008
|
2007
|
2006
|
|
Net
sales to Bayer as a percentage of:
|
||||||||
|
Net
sales of the Chemical Business
|
19
|
%
|
15
|
%
|
14
|
%
|
||
|
Consolidated
net sales
|
11
|
%
|
7
|
%
|
7
|
%
|
||
|
Net
sales to Orica as a percentage of:
|
||||||||
|
Net
sales of the Chemical Business
|
19
|
%
|
19
|
%
|
20
|
%
|
||
|
Consolidated
net sales
|
11
|
%
|
9
|
%
|
10
|
%
|
Raw
Materials
The
products our Chemical Business manufacture are derived from the following raw
material feedstocks: anhydrous ammonia, natural gas and sulfur. These
raw material feedstocks are commodities, subject to price
fluctuations.
The El
Dorado Facility purchases approximately 200,000 tons of anhydrous ammonia and
45,000 tons of sulfur annually and produces and sells approximately 470,000 tons
of nitrogen-based products and approximately 150,000 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. Prices for anhydrous ammonia were volatile during 2008, ranging
from $125 to $931 per metric ton. Historically, the sulfur
costs
have been
relatively stable; however, the recent world fertilizer market instability has
led to significant volatility in the cost of this raw material. During 2008, the
average prices for sulfur ranged from $150 to $617 per long ton.
The Cherokee Facility normally consumes
5 to 6 million MMBtu’s of natural gas annually and produces and sells
approximately 300,000 to 370,000 tons of nitrogen-based products per year.
Natural gas is a primary raw material for anhydrous ammonia. Natural gas prices
continue to exhibit volatility. In 2008, daily spot prices per MMBtu, excluding
transportation, ranged from $5.36 to $13.16.
The
Baytown Facility consumes more than 100,000 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. See discussion concerning
a new long-term contract below under “Bayer Agreement” of this Item
1.
Spot
anhydrous ammonia, natural gas and sulfur costs have fluctuated dramatically in
recent years. The following table shows, for the periods indicated, the high and
low published prices for:
|
·
|
ammonia
based upon the low Tampa metric price per ton as published by Fertecon and
FMB Ammonia reports,
|
|
·
|
natural
gas based upon the daily spot price at the Tennessee 500 pipeline pricing
point, and
|
|
·
|
sulfur
based upon the average quarterly Tampa price per long ton as published in
Green Markets.
|
|
Ammonia
Price
Per
Metric Ton
|
Daily
Spot Natural Gas
Prices
Per MMBtu
|
Sulfur
Price
Per
Long Ton
|
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
||||||
|
2008
|
$931
|
$125
|
$13.16
|
$5.36
|
$617
|
$150
|
|||||
|
2007
|
$460
|
$295
|
$10.59
|
$5.30
|
$112
|
$
56
|
|||||
|
2006
|
$395
|
$270
|
$9.90
|
$3.54
|
$
75
|
$
60
|
As of
March 6, 2009, the published price, as described above, for ammonia
was $275 per metric ton, natural gas was $4.15 per MMBtu. The price per long ton
for sulfur was minimal.
Effective
January 1, 2009, under an agreement with its principal supplier of anhydrous
ammonia, the El Dorado Facility will purchase the majority of all of its
anhydrous ammonia requirements using a market price-based formula plus
transportation to the El Dorado Facility through at least December 2010. 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 El Dorado and Cherokee Facilities
will hedge certain of their anhydrous ammonia and natural gas requirements with
futures/forward contracts as discussed below.
Sales
Strategy
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 raw material costs in order to
minimize the impact of the uncertainty of the sales prices of our products in
relation to the cost of anhydrous ammonia, natural gas and sulfur. These pricing
arrangements help mitigate the commodity risk inherent in the raw material
feedstocks of natural gas, anhydrous ammonia and sulfur. For 2008, approximately
62% of the Chemical Business’ sales were made pursuant to these types of
arrangements. The remaining sales are primarily into agricultural markets at the
price in effect at time of shipment. However, we enter into futures/forward
contracts to hedge the cost of natural gas and anhydrous ammonia for the purpose
of securing the profit margin on a significant portion of our sales commitments
with firm sales prices in our Chemical Business. 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 emphasizing our marketing efforts to customers that will accept the
commodity risk inherent with natural gas and anhydrous ammonia, while
maintaining a strong presence in the agricultural sector. We are also pursing
the opportunity to start an idle chemical process facility as discussed in the
MD&A contained in this report.
Bayer
Agreement
On
October 23, 2008, El Dorado Nitrogen, L.P. (“EDN”), and El Dorado Chemical
Company (“EDC”), both subsidiaries of the Company, entered into a new Nitric
Acid Supply Operating and Maintenance Agreement (the “Bayer Agreement”) with
Bayer MaterialScience, LLC (“Bayer”). The Bayer Agreement will
replace the current Baytown Nitric Acid Project and Supply Agreement, dated June
27, 1997 (the “Original Bayer Agreement”), as of June 24, 2009. The Bayer
Agreement is for a term of five years, with renewal options.
Under the
terms of the Bayer Agreement, Bayer will purchase from EDN all of Bayer’s
requirements for nitric acid for use in Bayer’s chemical manufacturing complex
located in Baytown, Texas. Bayer will also supply ammonia as required
for production of nitric acid at the Baytown Facility, in addition to certain
utilities, chemical additives and services that are required for such
production. Any surplus nitric acid manufactured at the Baytown
Facility that is not required by Bayer may be marketed to third parties by
EDN.
Pursuant
to the terms of the Original Bayer Agreement, Bayer has provided notice of
exercise of its option to purchase from a third party all of the assets
comprising the Baytown Facility, except certain assets that are owned by EDN for
use in the production process (the “EDN Assets”). EDN will continue
to be responsible for the maintenance and operation of the Baytown Facility in
accordance with the terms of the Bayer Agreement. In addition, EDC will continue
to guarantee the performance of EDN’s obligations under the Bayer
Agreement.
If there
is a change in control of EDN, Bayer will have the right to terminate the Bayer
Agreement upon payment of certain fees to EDN. See further discussion of the
Bayer Agreement under “Liquidity and Capital Resources - Bayer Agreement” of
Item 7 of Part II of this report.
Seasonality
We
believe that the only significant 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 AN 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.
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 various risk factors under Item 1A.
Competition
Our
Chemical Business competes with several chemical companies in our markets, such
as Agrium, CF Industries, Dyno Nobel North America and Terra Industries, many of
whom have greater financial and other resources than we do. 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, 2008, we employed 1,878 persons. As of that date, our Climate
Control Business employed 1,411 persons, none of whom was represented by a
union, and our Chemical Business employed 397 persons, with 129 represented by
unions under agreements that 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 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
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 or replace,
as needed, with non-asbestos insulation through our standard repair and
maintenance activities to prevent deterioration.
1. Discharge
Water Matters
The El
Dorado Facility generates process wastewater, which includes storm water. 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 EDC 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 believes it has demonstrated its ability to comply with the more
restrictive permit limits, and the rules that support the more restrictive
dissolved minerals rules have been revised to authorize a permit modification to
adopt achievable dissolved minerals permit limits. The ADEQ and EDC have entered
into a consent administration 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. We
believe the El Dorado Facility can comply with the revised permit; however, as
of December 31, 2008, the ADEQ has not issued the revised permit.
In
addition, EDC has entered into a consent administrative order (“CAO”) that
recognizes the presence of nitrate contamination in the shallow groundwater at
the El Dorado Facility. EDC is addressing the shallow groundwater contamination.
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. 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, 2008.
2.
Air Matters
An air
permit modification was issued to EDC by the ADEQ on August 26, 2008, which sets
new limits for ammonia emissions for the nitric acid units at the El Dorado
Facility. EDC recently completed required compliance testing but the results are
still pending. Based on a previous study, the nitric acid units can
meet these new limits.
3.
Other Environmental Matters
In
December 2002, two of our subsidiaries within our Chemical Business, sold
substantially all of their operating assets relating to a Kansas chemical
facility but retained ownership of the real property. In connection with this
sale, our subsidiary leased the real property to the buyer under a triple net
long-term lease agreement. However, our subsidiary retained the obligation to be
responsible for, and perform the activities under, a previously executed consent
order with the state of Kansas. In addition, certain of our subsidiaries agreed
to indemnify the buyer of such assets for these environmental matters. The
successor (“Chevron”) of a prior owner of the facility has agreed, within
certain limitations, to pay and has been paying one-half of the costs incurred
under the consent order subject to reallocation.
Based on
additional modeling of the site, our subsidiary and Chevron are pursuing a
course with the state of Kansas of long-term surface and ground water monitoring
to track the natural decline in contamination, instead of the soil excavation
proposed previously. The state of Kansas 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
requirement expired in February 2009. The data from the monitoring program has
not been evaluated by the state of Kansas and the potential costs of additional
monitoring or required remediation, if any, is unknown.
At
December 31, 2008, the total estimated liability (which is included in current
accrued and other liabilities) in connection with this remediation matter is
approximately $84,000 and Chevron’s share for these costs (which is included in
accounts receivable) is approximately $45,000. 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
futures/forward
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, natural gas and sulfur 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 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.
Our
Climate Control and Chemical Businesses and their customers are sensitive to
adverse 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 construction and renovation industries, which are
particularly sensitive to these factors. Due to the current recession, we expect
a decline in both commercial and residential construction. 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 us and our customers in the 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 and
could have a material adverse effect on our operating results, financial
condition and liquidity.
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. We expect that certain of our industrial and mining
customers will be affected by the current economic recession and could
substantially reduce their purchases. A substantial decline in the activity of
our Chemical Business has in the past, and could in the future, have a material
adverse effect on the results of our Chemical Business and on our liquidity and
capital resources.
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, 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.
Environmental
and regulatory matters entail significant risk for us.
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. Although we have established processes to monitor,
review and manage our businesses to comply with the numerous environmental laws
and regulations, our Chemical Business has in the past, and may in the future,
be subject to fines, penalties and sanctions for violations 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 current and
possible future government regulations, including the Homeland Security Act of
2002.
The
chemical industry in general, and producers and distributors of anhydrous
ammonia and AN specifically, are scrutinized by the government, industry and
public on security issues. Under current and proposed regulations,
including the Homeland Security Act of 2002, 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 anhydrous ammonia and AN, 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
2008, five customers of our Chemical Business accounted for 51% of its net sales
and 29% of our consolidated sales, and our Climate Control Business had one
customer that accounted for 18% of its net sales and 7% 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.
Potential
increase of imported ammonium nitrate from Russia
In 2000,
the United States and Russia entered into a suspension agreement limiting the
quantity of, and setting the minimum prices for, fertilizer grade AN sold from
Russia into the United States.
The
Russians have requested that the suspension agreement be changed to only require
that the prices of its imported AN reflect the Russian producers full production
costs, plus profit. The Russian producers of AN could benefit from
state set prices of natural gas, the principal raw material for AN, which could
be less than what U.S. producers are required to pay for their natural gas.
Other factors, however, such as transportation costs may partially offset
natural gas and production cost advantages. This change, if accepted by the
United States, could result in a substantial increase in the amount of AN
imported into the United States from Russia at prices that could be less than
the cost to produce AN by U.S. producers plus a profit. Russia is the
world’s largest producer of fertilizer grade AN, and we are led to believe that
it has substantial excess AN production capacity.
For 2008,
net sales of fertilizer grade AN accounted for 18% and 10% of our Chemical
Business net sales and consolidated net sales, respectively. If the suspension
agreement is changed, as discussed above, this change could result in Russia
substantially increasing the amount of AN sold in the United States at prices
less than the U.S. producers are required to charge in order to cover their cost
plus a profit, and could have an adverse effect on our revenues and operating
results.
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 28,
2009, an aggregate of 3,624,843 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 20.5% 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 208,500 shares of our common stock
within 60 days of February 28, 2009. 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.
Many
of our insurance policies are written by AIG, which has experienced and is
continuing to experience financial difficulties.
It has
been publicly reported that American International Group, Inc. (“AIG”) has
experienced significant financial difficulties and is continuing to experience
significant financial difficulties. AIG is a holding company for
several different subsidiary insurance companies. AIG’s insurance
subsidiary or subsidiaries provide many of our casualty, workers compensation
and other insurance policies, including, but not limited to, our general
liability policy, which includes certain pollution coverage, excess umbrella
policy, and officer and director liability policy covering us and our
officers and directors against certain securities’ law claims. We and
one of our executive officers are currently involved in certain legal proceeding
in which AIG or its subsidiaries has agreed to defend and to indemnify against
loss under a reservation of rights. In the event of a failure of AIG
and/or its subsidiaries, it is unknown whether AIG or the applicable subsidiary
that is the insurer under our policies or the applicable regulatory authorities
can comply with the insurer’s obligations under our
policies. Further, in the event of a failure by AIG and/or its
subsidiaries, we could be required to replace these policies. If it
becomes necessary to replace the policies written by subsidiaries of AIG, it may
difficult or impossible to replace these policies or, if we can replace these
policies, to replace them on substantially similar terms as our existing
insurance policies.
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 2009.
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
negatively impacted our operations and those of our customers. 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.
We
are the subject of an SEC enforcement action.
In August
2006, we were notified that the SEC was conducting an informal inquiry primarily
in connection with the change in inventory accounting from LIFO to FIFO of
approximately $500,000 by one of our subsidiaries that resulted in our
restatement of our 2004 audited financial statements and our interim financial
statements contained in our Form 10-Q’s for the quarters ended March 31, 2005
and June 30, 2005. We responded to that inquiry. During April 2008, the staff of
the SEC delivered a formal Wells Notice to us informing us that the staff has
preliminarily decided to recommend to the SEC that it institute a civil
enforcement action against us in connection with the above described matter. All
assertions against us involve alleged violations of Section 13 of the 1934 Act
and do not assert allegations of fraudulent conduct nor seek a monetary civil
fine against us. During May 2008, we made a written submission to the senior
staff of the SEC, and we have had discussions with the senior staff after such
submission. The staff has indicated that it is still their intention to
recommend to the SEC to bring a civil injunction action against us and seek
authority from the SEC to file such action. In addition, the SEC has also made
assertions against our former principal accounting officer based on Section 13
of the 1934 Act, and the SEC staff has also stated its intention to recommend
civil proceedings against him. The former principal accounting officer resigned
as principal accounting officer, effective August 15, 2008, but remains with the
Company as a senior vice president in charge of lending compliance and cash
management and will be involved in our banking relationships, acquisitions and
corporate planning. We are currently in discussions with the staff of the SEC
regarding the settlement of this matter. There are no assurances this matter
will be settled.
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 depends, in large part,
on the 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.
Our
net operating loss carryforwards are subject to certain limitations and
examination.
We had
generated significant net operating loss (“NOL”) carryforwards from certain
historical losses. As of December 31, 2008, we have utilized all of the
remaining federal NOL carryforwards and a portion of our state NOL
carryforwards. The utilization of these NOL carryforwards has reduced our
income tax liabilities. The federal tax returns for 1994 through 2004
remain subject to examination for the purpose of determining the amount of
remaining tax NOL and other carryforwards. With few exceptions, the 2005-2007
years remain open for all purposes of examination by the IRS and other major tax
jurisdictions.
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.
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) 53,890,188 shares of
common stock and 4,229,454 shares of preferred stock as of December 31, 2008.
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 protect us against
certain creeping acquisitions, open market purchases and certain mergers and
other combinations with acquiring companies.
The
foregoing provisions and agreements are designed to discourage a third party
tender offer, proxy contest, or other attempts to acquire 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;
|
·
|
prior
to such time the board of directors of the corporation approved the
business combination that results in the stockholder becoming an invested
stockholder;
|
|
·
|
the
acquirer owned at least 85% of the outstanding voting stock of such
company prior to commencement of the
transaction;
|
|
·
|
two-thirds
of the stockholders, other than the acquirer, vote to approve the business
combination after approval thereof by the board of directors;
or
|
|
·
|
the
stockholders of the corporation amends its articles of incorporation or
by-laws electing not to be governed by this
provision.
|
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 2008, approximately 78% 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 own a
46,000 square foot building subject to a mortgage, which is adjacent to our
existing heat pump manufacturing facility, primarily used for storage of raw
material inventory. Also we utilize approximately 110,000 square feet of an
existing facility for a distribution center, which facility is subject to a
mortgage.
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 2008, our fan coil
manufacturing operation was using 81% 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.
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 2008,
approximately 58% 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. However,
based on our long-term strategy, we are planning an expansion of our geothermal
and water source heat pump plant facility with a 78,000 square foot addition and
another 40,000 square foot addition to our air coil production
facility.
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 currently leased pursuant to a long-term lease
with an unrelated third party. See discussion above concerning the notice
provided by Bayer to exercise its option to purchase from this third party all
of the assets comprising the Baytown Facility, except the EDN assets, under
“Bayer Agreement” of Item 1. Certain real property and equipment located at the
El Dorado and Cherokee Facilities are being used to secure a $50 million term
loan. For 2008, the following facilities were utilized based on continuous
operation:
|
Percentage
of
Capacity |
|
El
Dorado Facility (1)
|
86
|
%
|
||
|
Cherokee
Facility (2)
|
89
|
%
|
||
|
Baytown
Facility
|
81
|
%
|
(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, AN and urea in excess of its ammonia capacity.
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
MEI
Drafts
Cromus,
as an assignee of Masinexportimport Foreign Trade Company (“MEI”), filed a
lawsuit against us, our subsidiary, Summit Machine Tool Manufacturing Corp.
(“Summit”), certain of our other subsidiaries, our chief executive officer and
another officer of our Company, Bank of America, and others, alleging that it
was owed $1,533,000, plus interest from 1990, in connection with Cromus’
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 one of our
subsidiaries. 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 also one of our
subsidiaries. The complaint also seeks $1,000,000 from us and Summit for failure
to purchase certain equipment and $1,000,000 in punitive damages. During May
2008, the court dismissed the complaint against us and our subsidiaries and our
officers (including our Chief Executive Officer). Cromus has appealed this
dismissal against our subsidiaries and our officers but did not appeal the
dismissal against us.
The
Jayhawk Group
In
November 2006, we entered into an agreement with Jayhawk Capital Management,
LLC, Jayhawk Investments, L.P., Jayhawk Institutional Partners, L.P. and Kent
McCarthy, the manager and sole member of Jayhawk Capital, (collectively, the
“Jayhawk Group”), in which the Jayhawk Group agreed, among other things, that if
we undertook, in our sole discretion, within one year from the date of agreement
a tender offer for our $3.25 Convertible Exchangeable Class C Preferred Stock,
Series 2 (“Series 2 Preferred”) or to issue our common stock for a portion of
our Series 2 Preferred pursuant to a private exchange, that it would tender or
exchange an aggregate of no more than 180,450 shares of the 340,900 shares of
the Series 2 Preferred beneficially owned by the Jayhawk Group, subject to,
among other things, the entities owned and controlled by Jack E. Golsen, our
Chairman and Chief Executive Officer (“Golsen”), and his immediate family, that
beneficially own Series 2 Preferred only being able to exchange or tender
approximately the same percentage of shares of Series 2 Preferred beneficially
owned by them as the Jayhawk Group is able to tender or exchange under the terms
of the agreement. In addition, under the agreement, the Jayhawk Group agreed to
vote its shares of our common stock and Series 2 Preferred “for” an amendment to
the Certificate of Designation covering the Series 2 Preferred to allow
us:
|
·
|
for
a period of five years from the completion of an exchange or tender to
repurchase, redeem or otherwise acquire shares of our common stock,
without approval of the outstanding Series 2 Preferred irrespective that
dividends are accrued and unpaid with respect to the Series 2 Preferred;
or
|
|
·
|
to
provide that holders of Series 2 Preferred may not elect two directors to
our Board of Directors when dividends are unpaid on the Series 2 Preferred
if less than 140,000 shares of Series 2 Preferred remain
outstanding.
|
During
2007, we made a tender offer for our outstanding Series 2 Preferred at the rate
of 7.4 shares of our common stock for each share of Series 2 Preferred so
tendered. In July 2007, we redeemed the balance of our outstanding shares of
Series 2 Preferred. Pursuant to its terms, the Series 2 Preferred was
convertible into 4.329 shares of our common stock for each share of Series 2
Preferred. As a result of the redemption, the Jayhawk Group converted the
balance of its Series 2 Preferred pursuant to the terms of the Series 2
Preferred in lieu of having its shares redeemed.
During
November 2008, the Jayhawk Group filed suit against us and Golsen in a lawsuit
styled Jayhawk Capital
Management, LLC, et al. v. LSB Industries, Inc., et al., in the United
States District Court for the District of Kansas at Kansas City. The complaint
alleges that the Jayhawk Group should have been able to tender all of its Series
2 Preferred pursuant to the tender offer, notwithstanding the above-described
agreement, based on the following claims against us and Golsen:
|
·
|
fraudulent
inducement and fraud,
|
|
·
|
violation
of 14(d) of the Securities and Exchange Act of 1934 and Rule
14d-10,
|
|
·
|
violation
of 10(b) of the Exchange Act and Rule
10b-5,
|
|
·
|
violation
of 18 of the Exchange Act,
|
|
·
|
violation
of 17-12A501 of the Kansas Uniform Securities Act,
and
|
|
·
|
breach
of fiduciary duty.
|
The
Jayhawk Group seeks damages in an unspecified amount based on the additional
number of common shares it allegedly would have received on conversion of all of
its Series 2 Preferred through the February 2007 tender offer, plus punitive
damages. In May 2008, the General Counsel for the Jayhawk Group offered to
settle its claims against us and Golsen in return for a payment of $100,000,
representing the approximate legal fees it had incurred investigating the claims
at that time. Through counsel, we verbally agreed to the settlement offer and
confirmed the agreement by e-mail. Afterward, the Jayhawk Group’s General
Counsel purported to withdraw the settlement offer, and asserted that Jayhawk is
not bound by any settlement agreement. We contend that the settlement agreement
is binding on the Jayhawk Group. We intend to contest the lawsuit vigorously,
and will assert that Jayhawk is bound by an agreement to settle the claims for
$100,000. Our insurer, a subsidiary of AIG, has agreed to defend this lawsuit on
our behalf and on behalf of Golsen and to indemnify under a reservation of
rights to deny liability under certain conditions. As of December 31, 2008, a
liability of $100,000 has been established for the Jayhawk claims.
Securities
and Exchange Commission
We have
previously disclosed that the SEC was conducting an informal inquiry of us
relating to the change in inventory accounting from LIFO to FIFO during 2004
involving approximately $500,000 by one of our subsidiaries, which change
resulted in the restatement of our financial statements for each of the three
years in the period ended December 31, 2004 and our March 31, 2005 and June 30,
2005 quarterly financial statements. During April 2008, the staff of the SEC
delivered a formal Wells Notice to us informing us that the staff has
preliminarily decided to recommend to the SEC that it institute a civil
enforcement action against us in connection with the above described matter. All
assertions against us involve alleged violations of Section 13 of the 1934 Act
and do not assert allegations of fraudulent conduct nor seek a monetary civil
fine against us. During May 2008, we made a written submission to the senior
staff of the SEC, and we have had discussions with the senior staff after such
submission. The staff has indicated that it is still their intention to
recommend to the SEC to bring a civil injunction action against us and seek
authority from the SEC to file such action. In addition, the SEC has also made
assertions against our former principal accounting officer based on Section 13
of the 1934 Act, and the SEC staff has also stated its intention to recommend
civil proceedings against him. The former principal accounting officer resigned
as principal accounting officer, effective August 15, 2008, but remains with the
Company as a senior vice president in charge of lending compliance and cash
management and will be involved in our banking relationships, acquisitions and
corporate planning. We are currently in discussions with the staff of the SEC
regarding the settlement of this matter. There are no assurances this matter
will be settled.
Other
Claims and Legal Actions
Wetherall v. Climate
Master is a proposed class action was filed in the Illinois
state district court in September 2007 alleging 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
plaintiffs asserted claims based upon negligence, strict liability, breach of
implied warranties, unjust enrichment and the Illinois Consumer Fraud and
Deceptive Business Practices Act. The plaintiffs have dismissed the first
three of these claims and the last two of these claims remain pending. Climate
Master has filed a motion for summary judgment as to the remaining claims, and
that motion is pending. Climate Master has removed this action to federal court.
Climate Master has also filed its answer denying the plaintiffs’ claims and
asserting several affirmative defenses. Climate Master’s insurers have been
placed on notice of this matter. One of these insurers has denied coverage, and
one is out of business and has been liquidated and one insurer advised that it
will monitor the litigation subject to a reservation of rights to decline
coverage. The policies associated with insurers that have not declined coverage
in this matter and remain in business have deductible amounts ranging from
$100,000 to $250,000. Climate Master intends to vigorously defend itself in
connection with this matter. Currently, the Company is unable to determine the
amount of damages or the likelihood of any losses resulting from this claim.
Therefore, no liability has been established at December 31, 2008.
Patent Litigation
Matter - On
December 7, 2007, Huntair Inc. filed a lawsuit against our subsidiary,
ClimateCraft, Inc., alleging patent infringement in the United States District
Court for the Northern District of Illinois, Eastern Division. In
January 2009, this lawsuit was settled and we paid an immaterial amount that was
accrued as of December 31, 2008.
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.
No
matters were submitted to a vote of our shareholders during the fourth quarter
of 2008.
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 80
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 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 58, 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 served 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 68, 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 67, first became a
director in 1971. His term will expire in 2011. 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.
|
|
Jim D.
Jones
|
Senior
Vice President and Treasurer. Mr. Jones, age 66, has been Senior Vice
President 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 49, 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.
|
|
Michael G.
Adams
|
Vice
President and Corporate Controller. Mr. Adams', age 59, was appointed to
this position effective October 16, 2008 and has served as an officer of
the Company since March 1990. Mr. Adams is a certified public accountant
and was with the accounting firm of Arthur Young & Co., a predecessor
to Ernst & Young LLP. Mr. Adams is a graduate of the University of
Oklahoma.
|
|
Harold
L. Rieker Jr.
|
Vice
President and Principal Accounting Officer. Mr. Rieker, age 48, was
appointed to this position effective October 16, 2008 and has served as an
officer of the Company since March 2006. Mr. Rieker is a certified public
accountant and was with the accounting firm of Grant Thornton LLP. Mr.
Rieker is a graduate of the University of Central
Oklahoma.
|
(1)
Barry H. Golsen is the son of Jack E. Golsen and David M. Shear is married to
the niece of Jack E. Golsen.
PART II
Market
Information
On
October 28, 2008, our common stock began trading on the New York Stock Exchange
under the symbol “LXU”. Prior to that date, our common stock traded on the
American Stock Exchange under the same symbol. The following table shows, for
the periods indicated, the high and low sales prices.
|
Year
Ended
|
|
|
December
31,
|
|
2008
|
2007
|
|
Quarter
|
High
|
Low
|
High
|
Low
|
|
First
|
$
|
28.80
|
$
|
13.80
|
$
|
15.71
|
$
|
11.41
|
|||||
|
Second
|
$
|
20.83
|
$
|
13.45
|
$
|
23.70
|
$
|
14.76
|
|||||
|
Third
|
$
|
24.59
|
$
|
13.11
|
$
|
25.25
|
$
|
17.00
|
|||||
|
Fourth
|
$
|
14.67
|
$
|
6.65
|
$
|
28.85
|
$
|
20.54
|
Stockholders
As of
March 6, 2009, we had 679 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
$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;
|
|
·
|
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.
|
In 2001,
we issued shares of Series D 6% cumulative, convertible Class C preferred stock
(“Series D Preferred”) and in 1985, we issued shares of Series B 12%
convertible, cumulative preferred stock ("Series B Preferred"). As of December
31, 2008, we have issued and outstanding 1,000,000 shares of Series D Preferred,
20,000 shares of Series B Preferred, and 547 shares of noncumulative redeemable
preferred stock (“Noncumulative 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;
|
|
·
|
Series
B Preferred at the rate of $12.00 a share payable January 1, which
dividend is cumulative; and
|
|
·
|
Noncumulative
Preferred at the rate of $10.00 a share payable April 1, which is
noncumulative.
|
On
February 9, 2009, our board of directors declared the following dividends to
holders of record on March 20, 2009:
|
·
|
$0.06
per share on our outstanding Series D Preferred for an aggregate dividend
of $60,000, payable on March 31,
2009;
|
|
·
|
$12.00
per share on our outstanding Series B Preferred for an aggregate dividend
of $240,000, payable on March 31,
2009; and
|
|
·
|
$10.00
per share on our outstanding Noncumulative Preferred for an aggregate
dividend of approximately $5,500, payable on April 1,
2009.
|
All
shares of Series D Preferred and Series B Preferred are owned by the Golsen
Group.
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 near future. However, our board of directors
has not made a definitive decision whether or not to pay such dividends in
2009.
Sale of Unregistered
Securities
During
the three months ended December 31, 2008, we issued the following
unregistered equity securities:
On
November 14, 2008, we issued 160 shares of common stock upon the holder’s
conversion of 4 shares of our Noncumulative Preferred. Pursuant
to the terms of the Noncumulative Preferred, the conversion rate was 40 shares
of common stock for each share of Noncumulative
Preferred.
The common stock was issued pursuant to the exemption from the registration
of securities afforded by Section 3(a)(9) of the Securities Act. No
commissions or other remuneration were paid for this
issuance. We did not receive any proceeds upon the
conversion of the Noncumulative Preferred.
Purchases of Equity
Securities by the Issuer and Affiliated Purchasers
During
the three months ended December 31, 2008, the Company and affiliated purchasers,
as defined, purchased treasury stock as shown in the following
table:
|
Period
|
(a)
Total
number of shares of common stock acquired (1) |
(b)
Average
price paid per share of
common
stock
(1)
|
(c)
Total number of
shares
of common
stock purchased as part
of publicly
announced
plans
or
programs (2)
|
(d)
Maximum number
(or
approximate
dollar
value) of
shares
of common
stock
that may yet
be
purchased under
the
plans or programs
|
|
October
1, 2008 -
October
31, 2008
|
-
|
$
|
-
|
-
|
||
|
November
1, 2008 -
November
30, 2008
|
260,000
|
$
|
7.07
|
200,000
|
||
|
December
1, 2008 -
December
31, 2008
|
90,000
|
$
|
7.02
|
-
|
||
|
Total
|
350,000
|
$
|
7.06
|
200,000
|
See
(2)
|
(1) During
the fourth quarter of 2008, we purchased 200,000 shares of common stock at
market prices from an unrelated third party and are being held as treasury
stock. In addition, the Golsen Group purchased 150,000 shares of our
common stock in the open market.
(2) As
previously reported, 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.
During
the three months ended December 31, 2008, the Company and affiliated purchasers,
as defined, purchased its 5.5% Convertible Senior Subordinated Notes due 2012
(“2007 Debentures”) as shown in the following table:
|
Period
|
(a)
Total
number
of
units
acquired
(A)
|
(b)
Average
price
paid
per
unit (A)
|
(c)
Total number of
units
purchased as
part
of publicly
announced
plans
or
programs
|
(d)
Maximum number
(or
approximate
dollar
value) of
units
that may yet
be
purchased under
the
plans or programs
|
|
October
1, 2008 -
October
31, 2008
|
-
|
$
|
-
|
-
|
||
|
November
1, 2008 -
November
30, 2008
|
20,000
|
$
|
694.25
|
15,000
|
||
|
December
1, 2008 -
December
31, 2008
|
4,500
|
$
|
649.17
|
4,500
|
||
|
Total
|
24,500
|
$
|
685.97
|
19,500
|
40,500
|
(A) One
unit represents a $1,000 principal amount of the debenture. During the fourth
quarter of 2008, we acquired $19.5 million aggregate principal amount of the
debentures. In addition, the Golsen Group acquired $5.0 million aggregate
principal amount of the debentures.
Preferred
Share Rights Plan
In
December 2008, we adopted a renewed shareholder rights plan which will impact a
potential acquirer unless the acquirer negotiates with our Board of Directors
and the Board of Directors approves the transaction. The rights plan became
effective on January 5, 2009, upon the expiration of our previous shareholder
rights plan. Pursuant to the renewed plan, one preferred share
purchase right (a “Right”) is attached to each currently outstanding or
subsequently issued share of our common stock. Prior to becoming exercisable,
the Rights trade together with our common stock. In general, the Rights will
become exercisable if a person or group (other than the acquirer) acquires or
announces a tender or exchange offer for 15% or more of our common
stock. Each Right entitles the holder to purchase from us one
one-hundredth of a share of Series 4 Junior Participating Preferred Stock, no
par value (the “Preferred Stock”), at an exercise price of $47.75 per one
one-hundredth of a share, subject to adjustment. If a person or group
acquires 15% or more of our common stock, each Right will entitle the holder
(other than the acquirer) to purchase shares of our common stock (or, in certain
circumstances, cash or other securities) having a market value of twice the
exercise price of a Right at such time. Under certain circumstances, each Right
will entitle the holder (other than the acquirer) to purchase the common stock
of the acquirer having a market value of twice the exercise price of a Right at
such time. In addition, under certain circumstances, our Board of Directors may
exchange each Right (other than those held by the acquirer) for one share of our
common stock, subject to adjustment. If the Rights become exercisable, holders
of our common stock (other than the acquirer), will receive the number of Rights
they would have received if their units had been redeemed and the purchase price
paid in our common stock. Our Board of Directors may redeem the Rights at a
price of $0.01 per Right generally at any time before 10 days after the Rights
become exercisable.
|
Years
ended December 31,
|
|||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||
|
(Dollars
In Thousands, Except Per Share
Data)
|
|
Selected
Statement of Income Data:
|
|||||||||||||||||||
|
Net
sales
|
$
|
748,967
|
$
|
586,407
|
$
|
491,952
|
$
|
397,115
|
$
|
363,984
|
|||||||||
|
Interest
expense (2)
|
$
|
11,381
|
$
|
12,078
|
$
|
11,915
|
$
|
11,407
|
$
|
7,393
|
|||||||||
|
Provisions
for income taxes (3)
|
$
|
18,776
|
$
|
2,540
|
$
|
901
|
$
|
118
|
$
|
-
|
|||||||||
|
Income
from continuing operations before cumulative effect of accounting
change (1) (4)
|
$
|
36,560
|
$
|
46,534
|
$
|
15,768
|
$
|
5,634
|
$
|
745
|
|||||||||
|
Cumulative
effect of accounting change
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(536
|
)
|
||||||||
|
Net
income
|
$
|
36,547
|
$
|
46,882
|
$
|
15,515
|
$
|
4,990
|
$
|
209
|
|||||||||
|
Net
income (loss) applicable to common stock
|
$
|
36,241
|
$
|
41,274
|
$
|
12,885
|
$
|
2,707
|
$
|
(2,113
|
)
|
||||||||
|
Income
(loss) per common share applicable to common
stock:
|
|||||||||||||||||||
|
Basic:
|
|||||||||||||||||||
|
Income
(loss) from continuing operations before cumulative effect of accounting
change
|
$
|
1.71
|
$
|
2.09
|
$
|
.92
|
$
|
.25
|
$
|
(.12
|
)
|
||||||||
|
Net
income (loss) from discontinued operations
|
$
|
-
|
$
|
.02
|
$
|
(.02
|
)
|
$
|
(.05
|
)
|
$
|
-
|
|||||||
|
Cumulative
effect of accounting change
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(.04
|
)
|
||||||||
|
Net
income (loss)
|
$
|
1.71
|
$
|
2.11
|
$
|
.90
|
$
|
.20
|
$
|
(.16
|
)
|
||||||||
|
Diluted:
|
|||||||||||||||||||
|
Income
(loss) from continuing operations before cumulative effect of accounting
change
|
$
|
1.58
|
$
|
1.82
|
$
|
.77
|
$
|
.22
|
$
|
(.12
|
)
|
||||||||
|
Net
income (loss) from discontinued operations
|
$
|
-
|
$
|
.02
|
$
|
(.01
|
)
|
$
|
(.04
|
)
|
$
|
-
|
|||||||
|
Cumulative
effect of accounting change
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(.04
|
)
|
||||||||
|
Net
income (loss)
|
$
|
1.58
|
$
|
1.84
|
$
|
.76
|
$
|
.18
|
$
|
(.16
|
)
|
|
Selected Balance Sheet
Data:
|
|||||||||||||||||||
|
Total
assets
|
$
|
335,767
|
$
|
307,554
|
$
|
219,927
|
|
$
|
188,963
|
|
$
|
167,568
|
|||||||
|
Redeemable
preferred stock
|
$ |
52
|
$ |
56
|
$ |
65
|
83
|
$
|
97
|
||||||||||
|
Long-term
debt, including current portion
|
$
|
105,160
|
$
|
122,107
|
$
|
97,692
|
$
|
112,124
|
$
|
106,507
|
|
||||||||
|
Stockholders'
equity
|
$
|
130,044
|
$
|
94,283
|
$
|
43,634
|
$
|
14,861
|
$
|
9,915
|
|
|
Selected
other data:
|
||||||||||||||||
|
Cash
dividends declared per common share
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|
(1)
|
See
discussions included in Item 7 of Part II of this
report.
|
|
(2)
|
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.
|
|
(3)
|
Beginning
in the fourth quarter of 2007, we began recognizing a provision for
regular federal income taxes as the result of reversing the valuation
allowance on federal NOL carryforwards and other timing differences and
the associated utilization of the federal NOL
carryforwards.
|
|
(4)
|
Income
from continuing operations before cumulative effect of accounting change
includes a gain on extinguishment of debt of $5.5 million and $4.4 million
for 2008 and 2004, respectively.
|
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, 2008
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, operating through our
subsidiaries. Our wholly-owned subsidiary, ThermaClime, through its
subsidiaries, owns substantially all of our core businesses consisting of
the:
|
|
·
|
Climate
Control Business engages 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 related products used in controlling
the environment in commercial and residential new building construction,
renovation of existing buildings and replacement of existing
systems. For 2008, approximately 41% of our consolidated net
sales relates to the Climate Control
Business.
|
|
|
·
|
Chemical
Business engages in the manufacturing and selling of
nitrogen based chemical products produced from three
plants located in Arkansas, Alabama and Texas for the industrial,
mining and agricultural markets. Our products include industrial and
fertilizer grade ammonium nitrate (“AN”), urea ammonium nitrate (“UAN”),
nitric acid in various concentrations, nitrogen solutions and various
other products. For 2008, approximately 57% of our consolidated net
sales relates to the Chemical Business.
|
Economic
Conditions
The
current state of the economy creates significant uncertainty relative to the
industrial, construction and agricultural markets that we serve. We
based our 2009 business plan upon our assumption that during most of 2009, the
economy will continue to contract due to additional loss of jobs, declining
consumer demand and limited credit availability. However, our 2009
business plan is a moving target that will be adjusted frequently as we measure
customer demand during the first and second quarters. We plan to adjust our
controllable costs when and as market conditions dictate.
Since we
serve several diverse markets, we have to consider market fundamentals for each
market individually as we plan our production levels.
In our
Climate Control Business, approximately 81% of our 2008 Climate Control sales
relate to commercial construction and the balance, or 19%, relates to
single-family residential geothermal heat pumps. Based on published
industry forecasts predicting significant declines in
commercial
and
residential construction, we expect to see lower volumes in Climate Control
sales during 2009, as compared to 2008 for most of our products.
At this
time, however, we are unable to assess the impact to our sales level. The longer
term outlook after 2009 will, in our opinion, depend upon the recovery of the
credit and capital markets and the general economy.
One
bright spot is the recently enacted American Reinvestment and Recovery Act of
2009. We believe that tax credits and incentives, and certain planned direct
spending by the federal government contained in the Act, could stimulate sales
of our geothermal heat pump products, as well as other products that could be
used to modernize federally owned and operated buildings, military
installations, public housing and hospitals.
Orders
received for all Climate Control products in the fourth quarter of 2008 were
$59.1 million compared to $53.9 million in the fourth quarter of 2007 and $82.3
million average for the first three quarters of 2008. Our backlog at the end of
2008 was $68.5 million, which provides solid support going into the first
quarter of 2009. Beyond the first quarter, the potential sales level
is uncertain. Our orders for January and
February of 2009 averaged $16 million per month compared to a monthly average of
$25 million for the same period of 2008.
In our
Chemical Business, approximately 64% of our 2008 Chemical Business sales
consisted of:
|
·
|
nitric
acid, sulfuric acid and anhydrous ammonia sold to industrial customers;
and
|
|
·
|
industrial
grade AN and nitrogen solutions sold to mining
customers.
|
Most of
these sales were pursuant to sales contracts and or pricing arrangements on
terms that include the cost of raw material feedstock as a pass through
component in the sales price.
Approximately
85% of our 2008 industrial and mining sales were to customers that have
contractual obligations to purchase a minimum annual quantity or allow us to
recover our costs plus a profit, irrespective of the volume of product
produced. We expect that many of these mining and industrial
customers will take significantly less product in 2009 than in 2008 due to the
downturn in housing, automotive and other sectors.
In 2008,
approximately 36% of our Chemical Business sales were nitrogen fertilizer sold
in the agricultural markets including:
|
·
|
AN
produced at our El Dorado Facility from purchased anhydrous ammonia
and,
|
|
·
|
UAN
produced at our Cherokee Facility from natural
gas.
|
The
agricultural product sales, unlike the majority of our industrial and mining
sales, are not sold at a formula price but instead at the market price in effect
at the time of sale or at a negotiated future price. Due to the
unpredictable volatility in the commodity markets, it is difficult at this point
to predict with any certainty the 2009 volume level and profit
margins.
We
believe that our 2009 sales volume expressed in tons will be lower than in 2008
and, due to the steep market price declines in most commodities in the latter
half of 2008, including anhydrous ammonia and natural gas, as well as our
selling prices per unit, our sales dollars per unit will also be
lower.
Further
beginning in June 2009 when the new Bayer Agreement takes effect, net sales will
decrease as a result of the reduction in the Baytown Facility’s lease expense
that was a pass through cost component in our sales price. This
reduction will be the result of Bayer exercising its option to purchase from a
third party all of the assets comprising the Baytown Facility, except certain
assets owned by EDN.
We expect
agricultural operating margins in dollars to be less based upon the current
spread between natural gas cost and UAN market prices and the current spread
between anhydrous ammonia cost and AN market prices. Due to unfavorable weather
during the fall and the deferral of nitrogen applications because of higher
fertilizer prices, the fall fertilizer application was below expectation. A
significant amount of nitrogen fertilizer remained in the distribution and
storage systems and at very high costs. During the period leading up to the
fourth quarter of 2008, the price of natural gas and anhydrous ammonia was very
high relative to the preceding 12 months. Significant amounts of nitrogen
fertilizer were put into storage and, due to the lower than normal application
of these fertilizers in the fall of 2008, the product did not move out of
storage. As a result, the distribution and storage systems in North America were
full, causing a number of producers to curtail production. Industry sources are
predicting that due to plant curtailments, fewer imports, the deferral of the
2008 fall nitrogen application, and low global grain inventories, a decreased
supply will be available to meet demand after the initial spring application
depletes the fertilizer in storage. However, we are unable to
predict if product prices and margins will respond favorably.
Irrespective
of our assumptions, the actual results for agricultural products will depend
upon the global and domestic supply of and the demand for nitrogen fertilizer
and agricultural products, including but not limited to, corn and
wheat.
Recent
figures from the Commerce Department reflect that gross domestic product
declined at a 6.2% annual rate in the fourth quarter of 2008, which is far worse
than previously thought. Economic indicators for the first two months of 2009
point to a deepening recession. These indications would imply that a rebound in
2009 is unlikely. As a result, we will make changes to our controllable cost
structure, as conditions dictate.
2008
Results
Our
consolidated net sales for 2008 were $749.0 million compared to $586.4 million
for 2007, our consolidated operating income was $59.2 million compared to $59.0
million in 2007, and our consolidated net income was $36.5 million, after an
income tax provision of $18.8 million, compared to net income of $46.9 million,
after an income taxes provision of $2.5 million, for 2007.
The sales
increase of $162.6 million includes an increase of $25.0 million in our Climate
Control Business and an increase of $135.3 million in our Chemical Business. Our
Chemical Business’ increase relates to significantly higher selling prices
primarily reflecting higher raw material costs. As a result of our ability to
pass through most raw material cost increases in the sales price on a
significant portion of the sales of our Chemical Business, our Chemical Business
was able to maintain a consistent level of gross profit, excluding the
significant items discussed below. However, since the increase in sales was
primarily a result of increases in raw material costs instead of volume
increases, the gross profit as a percent of sales declined significantly. In
addition, our Chemical Business recognized other significant items in 2008 that
negatively affected gross profit and operating income as discussed in the table
below.
With
respect to gross profit and operating income, there are a number of factors that
affect the comparability of 2008 to 2007. Our Chemical Business’
gross profit and operating income includes the following significant income
(loss) items:
|
2008
|
2007
|
Effect
|
|
(In
Millions)
|
||||||||||||
|
Unrealized
non-cash losses on commodities contracts
|
$
|
(5.3
|
)
|
$
|
(0.2
|
)
|
$
|
(5.1
|
)
|
|||
|
Unplanned
maintenance downtime of Cherokee Facility
|
(5.1
|
)
|
(1.1
|
)
|
(4.0
|
)
|
||||||
|
Insurance
recoveries of business interruption claims
|
-
|
3.8
|
(3.8
|
)
|
||||||||
|
LCM
provision on inventory
|
(3.6
|
)
|
-
|
(3.6
|
)
|
|||||||
|
Net
precious metals expense
|
(6.3
|
)
|
(2.6
|
)
|
(3.7
|
)
|
||||||
|
Expense
for Turnarounds
|
(6.0
|
)
|
(3.4
|
)
|
(2.6
|
)
|
||||||
|
Total
effect on gross profit
|
(26.3
|
)
|
(3.5
|
)
|
(22.8
|
)
|
||||||
|
Expenses
relating to the Pryor Facility
|
(2.4
|
)
|
(1.0
|
)
|
(1.4
|
)
|
||||||
|
Other
income from litigation judgment/settlement
|
7.6
|
3.3
|
4.3
|
|||||||||
|
Total
effect on operating income (1)
|
$
|
(21.1
|
)
|
$
|
(1.2
|
)
|
$
|
(19.9
|
)
|
|||
|
(1)
|
See
discussion of these items below under “Chemical
Business.”
|
In
addition, during 2008, we acquired $19.5 million aggregate principal amount of
the 2007 Debentures for $13.2 million and recognized a gain on extinguishment of
debt of $5.5 million, after expensing $0.8 million of the unamortized debt
issuance costs associated with the 2007 Debentures acquired.
Also
income taxes have a significant effect on the comparability of net income for
2008 compared to 2007. For 2008, we recognized a provision for income taxes of
$18.8 million compared to $2.5 million in 2007. During 2008, we recognized
current and deferred federal and state income taxes due, in part, to increased
taxable income, fewer NOL carryforwards available to offset taxable income and
higher effective tax rates. In addition during 2008, we performed a detailed
analysis of all our deferred tax assets and liabilities and determined that our
deferred tax assets were understated by approximately $1.8
million. As a part of our analysis, we reviewed the realizability of
these deferred tax assets and determined that a valuation allowance of
approximately $0.3 million was required. Accordingly, the addition of
the deferred tax assets
and the
associated valuation allowance resulted in an income tax benefit (a reduction to
our income tax provision) of approximately $1.6 million. This income
tax benefit is included in our net income tax provision of $18.8 million for
2008.
As
previously reported, the 2007 provision included a current provision for federal
income taxes of approximately $5.3 million for regular federal income tax and
alternative minimum income tax (“AMT”). The 2007 provision also
included a current provision of state income taxes of approximately $2.0
million, which included the provision for 2007 state income taxes, as well as,
approximately $1.0 million for uncertain state income tax positions recognized
in accordance with FIN 48. The 2007 provisions were partially offset
by a benefit for deferred income taxes of approximately $4.7 million resulting
from the reversal of valuation allowance on deferred tax assets, the benefit of
AMT credits, and other temporary differences as previously
reported.
|
|
Climate
Control Business
|
Our
Climate Control Business has consistently generated annual profits and positive
cash flows and continued to do so during 2008.
Climate
Control’s net sales were approximately $311.4 million compared to $286.4 million
for 2007, an increase of $25.0 million or 8.7%. The improvement in net sales
relates to a 15.7% increase in geothermal and water source heat pump products
and a 4.3% increase in other HVAC products, partially offset by a 2.7% decline
in sales of our fan coil products.
For 2008,
the order level was $305.9 million as compared to $241.6 million for 2007, an
increase of $64.3 million or 26.6%. Consistent with net sales, the increase in
orders was primarily for geothermal and water source heat pump
products. There was some softening in the order level for hydronic
fan coil products that was offset by orders for other HVAC
products.
Due to
the increase in net sales, Climate Control’s gross profit in 2008 increased to
$96.6 million, or 31.0% of net sales, as compared to $83.6 million, or 29.2% of
net sales, in 2007. For 2008, Climate Control’s operating income before
allocation of corporate overhead was $38.9 million compared to $34.2 million in
2007. For 2008, gross profit and operating income, as a percentage of net sales,
were positively impacted by an increase of $1.3 million in copper futures
contracts gains as compared to 2007.
We
continue to closely follow the contraction and volatility in the credit markets
and have attempted to assess the impact on the commercial construction sectors
that we serve, including but not limited to new construction and/or renovation
of facilities in the following sectors:
|
|
·
|
Multi-Family
|
|
|
·
|
Lodging
|
|
|
·
|
Education
|
|
|
·
|
Healthcare
|
|
|
·
|
Offices
|
|
|
·
|
Manufacturing
|
We expect
continued volatility in material costs, especially for copper, steel, aluminum
and components
that include those metals. Although we continue to monitor and take measures to
mitigate and control material cost fluctuations through hedging transactions,
contract purchases and volume agreements, there can be no assurance that our
selling prices will track raw material and component cost changes. During the
fourth quarter of 2008, commodity prices, including copper and aluminum, dropped
considerably.
The
majority of our Climate Control business is subject to the competitive bid
process and the opportunity to pass through cost increases for materials depends
on market conditions at the time we are bidding for a job. Once an order is
accepted and entered into our backlog, the price usually cannot be adjusted to
pass through any subsequent changes in our costs.
Our
Climate Control Business manufactures most of its products 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 reduces the
amount of inventory required to warehouse. At December 31, 2008, the backlog of
confirmed orders was approximately $68.5 million compared to $54.5 million at
December 31, 2007. We expect to ship substantially all the orders in the backlog
within the next twelve months and have the production capacity in place to do
so.
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. Our Climate Control Business' profitability over the
last few years has been affected by operating losses of certain 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 and 2008, the
results for these products reflected modest improvement. Although these products
have not yet achieved profitability, we continue to believe that these products
have good long-term prospects.
Management
focuses on the following objectives for Climate Control:
|
·
|
monitoring
and managing to the current economic
environment,
|
|
·
|
increasing
the sales and operating margins of all
products,
|
|
·
|
developing
and introducing new and energy efficient
products,
|
|
·
|
improving
production and product delivery performance,
and
|
|
·
|
expanding
the markets we serve, both domestic and
foreign.
|
|
|
Chemical
Business
|
Our
Chemical Business has three chemical production facilities: the El Dorado
Facility, the Cherokee Facility and the Baytown Facility. The El Dorado and
Baytown Facilities produce nitrogen products from anhydrous ammonia that is
delivered by pipeline and the El Dorado Facility also produces 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. In addition, we own idle ammonia and downstream
derivative chemical process facility in Pryor, Oklahoma (the “Pryor Facility”),
which we are in the process of activating, subject to the Pryor Facility
obtaining a sales or distribution agreement satisfactory to
us. When
and if activated, this facility will produce anhydrous ammonia and UAN from
natural gas. See additional discussion of the Pryor Facility below under
“Liquidity and Capital Resources - Pryor Facility.”
Our
Chemical Business reported net sales for 2008 of $424.1 million compared to
$288.8 million for 2007, an increase of $135.3 million. Operating income before
allocation of corporate overhead was $31.3 million compared to $35.0 million in
the same period of 2007.
The
increase in sales of $135.3 million is primarily attributable to significantly
higher selling prices for our products produced at our facilities.
As shown
in the table above and discussed below, our Chemical Business’ operating income
for 2008 decreased by a net $21.1 million for unrealized losses on outstanding
commodities contracts, costs relating to unplanned maintenance downtime of the
Cherokee Facility, a lower of cost or market provision on inventory, net
expenses for precious metals, expenses associated with Turnarounds, and expenses
associated with the possible start up of the Pryor Facility, partially offset by
other income from litigation judgment and settlement. For 2007, significant
items decreased operating income by a net $1.2 million. Excluding these
significant items for both periods, results for 2008 are favorable compared to
2007.
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. During 2008,
natural gas ranged in price from $5.36 to $13.16 per MMBtu and
averaged approximately $9.62 per MMBtu compared to an average price in 2007 of
$7.37 per
MMBtu. At March 6, 2009, the price for natural gas was $4.15 per MMBtu.
During 2008, anhydrous ammonia ranged in price based on the low Tampa metric
price per ton from $125 to $931 per metric ton and averaged approximately $587,
compared to an average price in 2007 of $333 per metric ton. At March 6, 2009,
the Tampa price for anhydrous ammonia was $275 per
metric ton. During 2008, sulfur ranged in price based on the quarterly Tampa
long ton price from $150 to $617 per long ton and averaged approximately
$368, compared to an average price in
2007 of $78 per long ton. At March 6, 2009, the Tampa price per long
ton for sulfur was minimal. Due to the volatility
of these commodity markets, we continue to focus our sales efforts on sales
agreements and/or pricing formulas that provide for the pass through of raw
material and other variable costs and certain fixed costs.
We have
entered into futures/forward contracts to hedge the cost of natural gas and
anhydrous ammonia for the purpose of securing the profit margin on a significant
portion of our sales commitments with firm sales prices in our Chemical
Business. Recent extreme volatility in natural gas and ammonia futures prices
has created wide swings in the market value of our natural gas and ammonia
hedges. Due to a steep decline in natural gas and ammonia futures
prices, the unrealized non-cash losses on our outstanding natural gas and
ammonia hedges totaled approximately $5.3 million at December 31, 2008, of which
approximately $2.5 million relate to contracts that will settle during the first
quarter of 2009. These hedges contractually secure a large portion of
the profit margin on significant orders for our Chemical Business by locking in
the cost of these raw material feedstocks as well as the ultimate sales price of
the end product. We believe the customers that have entered into these sales
commitments with us will
fulfill
their obligations to purchase the products at contracted prices. The
mark-to-market accounting adjustments produce volatility in our consolidated
financial statements. The unrealized gains or losses are non-cash items and
economically hedge the profit margin of these sales commitments.
During
the third quarter of 2008, the Cherokee Facility experienced repeated unplanned
maintenance downtime, which downtime reduced production and sales by our
Chemical Business. As a result, interim repairs were made at the Cherokee
Facility during this period. Due to this repeated downtime, the Cherokee
Facility lost approximately 20 days of operation reducing our Chemical Business’
gross profit and operating income by an estimated $5.1 million during the third
quarter of 2008. During 2007, the Cherokee Facility experienced unplanned
maintenance downtime, which reduced gross profit and operating income by an
estimated $1.1 million.
At
December 31, 2008, our Chemical Business recognized a lower of cost or market
(“LCM”) provision of $3.6 million due to declines in global nitrogen prices as
demand fell as the result of buyers’ concerns over volatile commodity prices and
the global economic crisis.
Our
Chemical Business uses precious metals as a catalyst in the manufacturing
process of nitric acid. The market prices of these precious metals were highly
volatile during 2008. During major maintenance and capital projects performed in
2008 and 2007, we performed procedures to recover precious metals (previously
expensed) which had accumulated over time within our manufacturing
equipment. Also during 2007, we sold a portion of our precious metals that
exceeded our production requirements. As the result, precious metals
expense, net of recoveries and gains, increased $3.7 million as compared to
2007. Current prices for precious metals are less than half the prices were a
year ago and are significantly lower than the peak levels reached in June
2008.
Our
Chemical Business expenses the costs of Turnarounds as they are incurred. During
2008, expenses for Turnarounds were approximately $6.0 million compared to $3.4
million during 2007. The increase in Turnaround costs relates primarily to
certain Turnarounds that are performed every 18-24 months compared to certain
Turnarounds that are performed annually. Based on our current plan for
Turnarounds to be performed during 2009, we currently estimate that we will
incur approximately $5.0 million of Turnaround costs. However, it is possible
that the actual costs could be significantly different than our
estimates.
As
discussed below under “Liquidity and Capital Resources - Pryor Facility”, we are
in the process of activating the Pryor Facility, subject to obtaining a sales or
distribution agreement. As a result, our expenses associated with the Pryor
Facility increased approximately $1.4 million in 2008 compared to
2007.
As
previously reported, in 2008, our Chemical Business recognized income from a
litigation judgment of approximately $7.6 million, net of attorneys’
fees. On June 6, 2008, we received proceeds of approximately $11.2
million for this litigation judgment, which includes interest of approximately
$1.4 million and from which we paid attorneys’ fees of approximately $3.6
million. During 2007, our Chemical Business reached a settlement with Dynegy,
Inc. and one of its subsidiaries, relating to a previously reported lawsuit.
This settlement of $3.3 million reflects
the net
proceeds of approximately $2.7 million received and the retention of a disputed
accounts payable amount of approximately $0.6 million.
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. A significant percentage of the costs
to operate process plants, other than costs for raw materials and
utilities, are fixed costs. Our long-term strategy includes optimizing
production efficiency of our facilities, thereby lowering the fixed cost of each
ton produced.
Repurchase
of Portion of 2007 Debentures
During
2008, we acquired $19.5 million aggregate principal amount of the 2007
Debentures for $13.2 million and recognized a gain on extinguishment of debt of
$5.5 million, after expensing $0.8 million of the unamortized debt issuance
costs associated with the 2007 Debentures acquired. The repurchase of these
debentures was funded by our working capital.
Liquidity and Capital
Resources
The
following is our cash and cash equivalents, total interest bearing debt and
stockholders’ equity:
|
December
31,
2008
|
December
31,
2007
|
|||
|
(In
Millions)
|
||||
|
Cash
and cash equivalents
|
$
|
46.2
|
$
|
58.2
|
||
|
Long-term
debt:
|
||||||
|
2007
Debentures due 2012
|
$
|
40.5
|
$
|
60.0
|
||
|
Secured
Term Loan due 2012
|
50.0
|
50.0
|
||||
|
Other
|
14.7
|
12.1
|
||||
|
Total
long-term debt
|
$
|
105.2
|
$
|
122.1
|
||
|
Total
stockholders’ equity
|
$
|
130.0
|
$
|
94.3
|
We
believe our capital structure and liquidity reflect a reasonably sound financial
position. At December 31, 2008, our cash and cash equivalents were $46.2 million
and our $50 million Working Capital Revolver Loan with Wells Fargo Foothill was
undrawn and available to fund operations, if needed, subject to the financial
viability of the lender. During 2008, we had no outstanding borrowings under the
Working Capital Revolver Loan. At December 31, 2008, the ratio between long-term
debt, before the use of cash on hand to pay down debt, and stockholders’ equity
was approximately 0.8 to 1 as compared to 1.3 to 1 at December 31,
2007.
For 2009,
we expect our primary cash needs will be for working capital and capital
expenditures. We and our subsidiaries plan to rely upon internally generated
cash flows, cash on hand, secured property and equipment financing, and the
borrowing availability under the Working Capital Revolver Loan to fund
operations and pay obligations. Due to the uncertainty relative to the
current
recession, we are evaluating the effect upon our internally generated cash flows
that could occur if we experience significant declines in our sales
volumes.
The 5.5%
Convertible Senior Subordinated Notes due 2012 (the “2007 Debentures”) bear
interest at the annual rate of 5.5% and mature on July 1, 2012. Interest is
payable in arrears on January 1 and July 1 of each year. As previously reported,
our board of directors has granted management the authority, commencing March
12, 2008, to repurchase all or a portion of the 2007 Debentures on favorable
terms if an opportunity is presented on terms satisfactory to management. Under
this authority, we acquired $19.5 million aggregate principal amount of these
debentures during the fourth quarter of 2008 as discussed above under
“Repurchase of Portion of 2007 Debentures.”
The
Secured Term Loan matures on November 2, 2012 and accrues interest at a defined
LIBOR rate plus 3%, which LIBOR rate is adjusted on a quarterly basis. The
interest rate at December 31, 2008 was approximately 6.19%. The Secured Term
Loan requires 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.
ThermaClime
and certain of its subsidiaries are subject to numerous covenants under the
Secured Term Loan 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.
ThermaClime’s
Working Capital Revolver Loan is available to fund its working capital
requirements, if necessary, through April 13, 2012. Under the Working Capital
Revolver Loan, ThermaClime and its subsidiaries (the “Borrowers”) may borrow on
a revolving basis up to $50.0 million based on specific percentages of eligible
accounts receivable and inventories. At December 31, 2008, we
had approximately $49.5 million of borrowing availability under the Working
Capital Revolver Loan based on eligible collateral and outstanding letters of
credit.
The
Working Capital Revolver Loan and the Secured Term Loan have financial covenants
that are discussed below under “Loan Agreements - Terms and Conditions”. The
Borrowers’ ability to maintain borrowing availability under the Working Capital
Revolver Loan depends on their ability to comply with the terms and conditions
of the loan agreements and their ability to generate cash flow from operations.
The Borrowers are restricted under their credit agreements as to the funds they
may transfer to the Company and their 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. Based upon our current projections, we believe that cash
and borrowing availability under our Working Capital Revolver Loan is adequate
to fund operations in 2009, subject to the financial viability of the
lender.
Income
Taxes
As
previously discussed, in 2007 and certain prior years, our effective tax rate
had been minimal due to the valuation allowances on federal NOL carryforwards
and other deferred tax assets. In the third quarter of 2007, due to our improved
operating results, it was determined that the
valuation
allowances were no longer necessary. At December 31, 2007, we had minimal
federal NOL carryforwards remaining, which were utilized during 2008. As a
result, in 2008, we recognized and paid federal income taxes at regular
corporate tax rates, which we expect to continue in 2009.
In
addition, the utilization of the NOL carryforwards has reduced our income tax
liabilities. The federal tax returns for 1994 through 2004 remain subject
to examination for the purpose of determining the amount of remaining tax NOL
and other carryforwards. With few exceptions, the 2005-2007 years remain open
for all purposes of examination by the IRS and other major tax
jurisdictions.
Capital
Expenditures
General
Cash used
for capital expenditures during 2008 was $32.6 million, including $8.7 million
primarily for property, production equipment, and other upgrades for additional
capacity in our Climate Control Business and $23.6 million for our Chemical
Business, primarily for process and reliability improvements of existing
facilities.
As discussed below, our current commitment for 2009 is
approximately $10.4 million. Other capital expenditures for 2009 are believed to
be discretionary. In addition, although not approved or committed, we are
considering numerous capital expenditures related to both our Chemical and
Climate Control Businesses that would utilize a significant amount of our
existing cash on hand, if not separately financed.
Current
Commitments
As of the
date of this report, we have committed capital expenditures of approximately
$10.4 million
for 2009. The expenditures include $6.9 million
for process and reliability improvement in our Chemical Business,
including $2.9 million
relating to the Pryor Facility (see
discussion below regarding our expected costs to activate the Pryor
Facility). In
addition, our current commitments include $3.5 million
primarily
for production
equipment and
facilities upgrades in
our Climate Control Business. We plan to fund these expenditures from working
capital, which may include utilizing our Working Capital Revolver Loan, and
financing arrangements. In addition to committed capital
expenditures and other than Pryor Facility’s capital expenditures, we have
planned capital expenditures in our Climate Control Business of approximately
$10 million and in our Chemical Business of approximately $12 million. These
planned expenditures are subject to economic conditions and approval. If these
capital expenditures are approved, most of the Climate Control’s expenditures
will likely be financed and the Chemical Business’ expenditures will likely be
funded from internal cash flows.
Certain
events relating to our Chemical Business
Pryor Facility - As previously
reported, we have been considering activating a portion of our idle Pryor
Facility subject to securing a sales agreement with a strategic customer to
purchase
and
distribute the majority of the UAN production. Based on our discussions with
several large strategic industry customers, we believe that in the near future
we will be able to reach an agreement to sell or distribute the UAN production
at the Pryor Facility.
We
received our permits to operate the Pryor Facility in February 2009. Based on
the status of discussions with potential customers and since we have received
the necessary permits, we are proceeding with the preparations to start the
facility. We have hired key personnel to operate the facility and have
positioned the additional necessary personnel to be hired at appropriate
intervals during the start-up phases.
Barring
unforeseen delays and subject to securing a sales or distribution agreement as
discussed above, we expect to start production at the Pryor Facility during the
third quarter of 2009. If the Pryor Facility becomes operational, we plan to
produce and sell approximately 325,000 tons of UAN and approximately 35,000 tons
of anhydrous ammonia annually. As previously disclosed, our initial cost
estimate to activate the Pryor Facility was $15 million to $20 million, with
approximately 50% being for capital expenditures and the remainder for
expenses. The estimated start up costs include those cost to bring
the plant up to full UAN production status. Our estimate of the total
remaining cost to activate the Pryor Facility, including $2.9 million
of current commitments discussed above, is approximately $13 million to $17
million. Approximately $6 million to $8 million will be for capital expenditures
and the remaining portion will be expensed as incurred. We plan to fund this
project from our available cash on hand and working capital. However, the actual
timeframe to begin production, the related amount of production and sales and
the total remaining cost to activate the facility could be significantly
different from our current estimates.
Bayer Agreement - On October
23, 2008, El Dorado Nitrogen, L.P. (“EDN”), and El Dorado Chemical Company
(“EDC”), both subsidiaries of the Company, entered into a new Nitric Acid Supply
Operating and Maintenance Agreement (the “Bayer Agreement”) with Bayer
MaterialScience, LLC (“Bayer”). The Bayer Agreement will replace the
current Baytown Nitric Acid Project and Supply Agreement, dated June 27, 1997
(the “Original Bayer Agreement”), as of June 24, 2009. The Bayer Agreement is
for a term of five years, with renewal options.
Under the
terms of the Bayer Agreement, Bayer will purchase from EDN all of Bayer’s
requirements for nitric acid for use in Bayer’s chemical manufacturing complex
located in Baytown, Texas at a price covering EDN’s costs plus a profit, with
certain performance obligations on EDN’s part. Bayer will also supply
ammonia as required for production of nitric acid at the Baytown Facility, in
addition to certain utilities, chemical additives and services that are required
for such production. Any surplus nitric acid manufactured at the
Baytown Facility that is not required by Bayer may be marketed to third parties
by EDN.
Pursuant
to the terms of the Original Bayer Agreement, Bayer has provided notice of
exercise of its option to purchase from a third party all of the assets
comprising the Baytown Facility, except certain assets that are owned by EDN for
use in the production process (the “EDN Assets”). EDN will continue to be
responsible for the maintenance and operation of the Baytown Facility in
accordance with the terms of the Bayer Agreement. In addition, EDC will continue
to guarantee the performance of EDN’s obligations under the Bayer
Agreement.
If there
is a change in control of EDN, Bayer will have the right to terminate the Bayer
Agreement upon payment to EDN a termination fee of approximately $6.3 million
plus 1.1 times the current net book value of the EDN Assets. For 2008, EDN, a
subsidiary of El Dorado Nitric Company (“EDNC”), had sales to
Bayer of approximately 19% and 11% of the Chemical Business’ and the Company’s
consolidated net sales, respectively.
Fire at Cherokee Facility - On
February 5, 2009, a small nitric acid plant located at the Cherokee Facility
suffered damage due to a fire. The fire was immediately extinguished and
there were no injuries. The cause of the fire is under investigation and
the extent of the damage to the nitric acid plant is not yet determined.
It is also not yet known when repair or replacement will be completed and the
nitric acid plant put back in operation. The nitric acid plant that
suffered the fire, with a current 182 ton per day capacity, is the smaller of
the two nitric acid plants at the Cherokee Facility. While the volume of
production of finished product at the Cherokee Facility will be impacted, the
Cherokee Facility continues production with the larger of the nitric acid
plants. Our insurance provides for business interruption coverage after a
30-day waiting period for lost profits and extra expense coverage and a $1
million property loss deductible.
Stock
Repurchase Authorization
As
previously reported, 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. During
2008, we repurchased 400,000 shares of our common stock using funds from our
working capital.
Stock
Options Granted in 2008
During
the second quarter of 2008, our board of directors adopted our 2008 Incentive
Stock Plan (the “2008 Plan”), which plan was approved by our shareholders at our
annual meeting of shareholders held on June 5, 2008. The number of
shares of our common stock available for issuance under the 2008 Plan is
1,000,000 shares, subject to adjustment. Under the 2008 Plan, awards
may be made to any employee, officer or director of the Company and its
affiliated companies. An award may also be granted to any consultant, agent,
advisor or independent contractor for bona fide services rendered to the Company
or any affiliate (as defined in the 2008 Plan), subject to certain
conditions. The
compensation and stock option committee of our board of directors will
administer the 2008 Plan.
During
the fourth quarter of 2008, the compensation and stock option committee of our
board of directors approved the grants of 372,000 shares of qualified stock
options to certain employees and our board of directors (with each recipient
abstaining as to himself) approved the grants of 45,000 shares of non-qualified
stock options to our outside directors under the 2008 Plan (the “2008
Options”). The exercise price of the 2008 Options was equal to the
market value of our common stock at the date of grant. The 2008
Options vest at the end of each one-year period at the rate of 16.5% per year
for the first five years and the remaining unvested options will vest at the end
of the sixth year. Pursuant to the terms of the non-qualified stock options, if
a termination event occurs, as defined, the non-vested stock options will become
fully vested and
exercisable
for a period of one year from the date of the termination event. Excluding
non-qualified stock options relating to a termination event, the 2008 Options
expire in 2018.
At
December 31, 2008, the total stock-based compensation expense not yet recognized
is $7.2 million relating to non-vested stock options, which is expected to be
amortized through 2016 (adjusted for forfeitures), based on the underlying
vesting terms of the non-vested stock options.
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 $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 not to exceed $2.0 million at any
time.
|
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 near future. However, our board of directors has not made a definitive
decision whether or not to pay such dividends in 2009.
During
2008, the 2008 dividend requirements were declared and paid on our preferred
stock using funds from our working capital. Therefore, there were no unpaid
dividends in arrears at December 31, 2008. 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;
|
|
·
|
Series
B Preferred at the rate of $12.00 a share payable January 1, which
dividend is cumulative; and
|
|
·
|
Noncumulative
Preferred at the rate of $10.00 a share payable April 1, which is
noncumulative.
|
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 2009 indicate that ThermaClime
will be able to meet all financial covenant requirements for 2009.
Loan Agreements - Terms and
Conditions
5.5% Convertible Senior Subordinated
Debentures - As previously reported, 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 $57.0 million, after discounts and
commissions. As discussed above under “Repurchase of Portion of 2007
Debentures”, we acquired $19.5 million aggregate principal amount of the 2007
Debentures during the fourth quarter of 2008. As a result, only $40.5 million
remains outstanding at December 31, 2008.
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, which began 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.
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, through April 13, 2012. 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. 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, 2008, there were no outstanding
borrowings. In addition, the net credit available for additional
borrowings under our Working Capital Revolver Loan was approximately $49.5
million. The Working Capital Revolver Loan requires that ThermaClime meet
certain financial covenants, including an EBITDA requirement of greater
than $25 million, a minimum fixed charge coverage ratio of not less than 1.10 to
1, and a maximum senior leverage coverage ratio of not greater than 4.50 to 1,
which requirements are measured quarterly on a trailing twelve-month basis and
as defined in the agreement. ThermaClime was in compliance with those covenants
for 2008.
Secured Term Loan - As previously reported,
in November 2007, ThermaClime and certain of its subsidiaries entered into the
$50.0 million Secured Term Loan with a certain lender. Proceeds from
the Secured Term Loan were used to repay the previous senior secured
loan. The Secured Term Loan matures on November 2, 2012. The
Secured Term Loan accrues interest at a defined LIBOR rate plus 3%, which LIBOR
rate is adjusted on a quarterly basis. The interest rate at December 31, 2008
was approximately 6.19%. 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 $61
million at December 31, 2008.
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, 2008, the
carrying value of the restricted net assets of ThermaClime and its subsidiaries
was approximately
$75 million. As
defined in the agreement, the
Secured Term Loan borrowers are also subject to a minimum fixed charge
coverage ratio of not less than 1.10 to 1 and a maximum leverage ratio of
not greater than 4.50 to 1, both measured quarterly on a trailing twelve-month
basis. The Secured Term Loan borrowers were in compliance with these financial
covenants for 2008. 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.
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.
Seasonality
We
believe that our only significant 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
Golsen
Group
During
the fourth quarter of 2008, the Golsen Group acquired from an unrelated third
party $5,000,000 of the 2007 Debentures. At December 31, 2008,
accrued interest of $137,500 relates to the portion of debentures held by the
Golsen Group.
In
March 2008, we paid the dividends totaling approximately $60,000 and
$240,000 on our Series D Preferred and Series B Preferred,
respectively, all of the outstanding shares of which are owned by the Golsen
Group.
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:
Accounts
Receivable 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 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 24% of our
total net receivables at December 31, 2008. 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, 2008 and 2007, our
allowance for doubtful accounts of $0.7 million and $1.3 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, 2008 and 2007, 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 $3,627,000 and $13,000, 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 $514,000 and $460,000 at December 31, 2008 and 2007,
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, 2008 and 2007, precious metals were $14.7 million and $10.9
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 2008, 2007 and 2006, the
amounts expensed for precious metals were approximately $7.8 million, $6.4
million and $4.8 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 2008, 2007 and 2006, we recognized recoveries of precious
metals at historical FIFO costs of approximately $1.5 million, $1.8 million and
$2.1 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 2008 or 2006) 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 values less costs to sell. At December 31, 2008, we had no long-lived
assets that met the criteria presented in SFAS 144 – Accounting for the
Impairment or Disposal of Long-Lived Assets (“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 $192,000
relating to Corporate assets during 2008 (none in 2007 and 2006) and $250,000
and $286,000 relating to certain capital spare parts and idle assets in our
Chemical Business during 2007 and 2006, respectively (none in 2008). 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, 2008 and
2007, our accrued insurance liabilities were $2,971,000 and $2,975,000,
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. We also recognize the additional warranty expense
and liability to cover atypical costs associated with a specific product,
or component thereof, or project installation, when such costs are probable and
reasonably estimable. It is possible that future warranty costs could exceed our
estimates. At December 31, 2008 and 2007, our accrued product warranty
obligations were $2.8 million and $1.9 million, respectively and are included in
current and noncurrent accrued and other liabilities in the consolidated balance
sheets.
Executive Benefit Agreements -
We have entered into benefit agreements with certain key executives.
Costs associated with these individual benefit agreements are accrued based on
the estimated remaining service period when such benefits become probable that
they will be paid. 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 approximately $1.1
million and $1.0 million as of December 31, 2008 and 2007, 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, 2008, the liability for death benefits is $2.7 million ($2.1
million at December 31, 2007) which is included in current and noncurrent
accrued and noncurrent liabilities in the consolidated balance
sheets.
Income Taxes - We account for
income taxes in accordance with SFAS 109 – Accounting for Income Taxes (“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 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 or
realizable and earned. 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.
Regulatory Compliance - The
Chemical Business is subject to specific federal and state regulatory compliance
laws and guidelines. We have developed policies and procedures related to
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, 2008, liabilities totaling $84,000 have been
accrued relating to a CAO covering our former Kansas facility. These liabilities
are included in 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.
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 or replace, as needed, with non-asbestos insulation
through our standard repair and maintenance activities to prevent deterioration.
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 in accordance with FIN 47 – Accounting
for Conditional Asset Retirement Obligations (“FIN 47”).
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.
Derivatives, Hedges and Financial
Instruments - We account for derivatives in accordance with SFAS 133 –
Accounting for Derivative Instruments and Hedging Activities (“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.
We have
three types of contracts that are accounted for on a fair value basis, which are
interest rate contracts, commodities futures/forward contracts and foreign
currency contracts. The valuation of these contracts was determined based on
quoted market prices or, in instances where market quotes are not available,
other valuation techniques or models used to estimate fair
values. The valuations of contracts classified as Level 1 are based
on quoted prices in active markets for identical contracts. The
valuations of contracts classified as Level 2 are based on quoted prices for
similar contracts and valuation inputs other than quoted prices that are
observable for these contracts. The valuations of contracts
classified as Level 3 are based on the average ask/bid prices obtained from a
broker relating to a low volume market. However at December 31, 2008,
the terms of contracts classified as Level 3 do not exceed three
months. At December 31, 2008, the fair value of Level 3 contracts
(unrealized loss) was approximately $1.4 million.
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.
Results of
Operations
The
following Results of Operations should be read in conjunction with our
Consolidated Financial Statements for the years ended December 31, 2008, 2007
and 2006 and accompanying notes and the discussions above under “Overview” And
“Liquidity and Capital Resources.”
The
following information about our results of operations is presented by our two
industry segments, Climate Control Business and Chemical Business. Gross profit
by industry segment represents net sales less cost of sales. In
addition, our chief operating decision makers use operating income by industry
segment for purposes of making decisions that include resource allocations and
performance evaluations. Operating income by industry segment represents gross
profit by industry segment less selling, general and administrative expense
(“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 continuing operations in
different industry segments for each of the three years ended December
31:
|
2008
|
2007
|
2006
|
|
(In
Thousands)
|
|
Net
sales:
|
|||||||||||
|
Climate
Control
|
$
|
311,380
|
$
|
286,365
|
$
|
221,161
|
|||||
|
Chemical
|
424,117
|
288,840
|
260,651
|
||||||||
|
Other
|
13,470
|
11,202
|
10,140
|
||||||||
|
$
|
748,967
|
$
|
586,407
|
$
|
491,952
|
||||||
|
Gross
profit:
|
|||||||||||
|
Climate
Control
|
$
|
96,633
|
$
|
83,638
|
$
|
65,496
|
|||||
|
Chemical
|
37,991
|
44,946
|
22,023
|
||||||||
|
Other
|
4,256
|
4,009
|
3,343
|
||||||||
|
$
|
138,880
|
$
|
132,593
|
$
|
90,862
|
||||||
|
Operating
income (loss):
|
|||||||||||
|
Climate
Control
|
$
|
38,944
|
$
|
34,194
|
$
|
25,428
|
|||||
|
Chemical
|
31,340
|
35,011
|
9,785
|
||||||||
|
General
corporate expense and other business operations, net
|
(11,129
|
)
|
(10,194
|
)
|
(8,074
|
)
|
|||||
|
59,155
|
59,011
|
27,139
|
|||||||||
|
Interest
expense
|
(11,381
|
)
|
(12,078
|
)
|
(11,915
|
)
|
|||||
|
Gain
on extinguishment of debt
|
5,529
|
-
|
-
|
||||||||
|
Non-operating
income, net:
|
|||||||||||
|
Climate
Control
|
1
|
2
|
1
|
||||||||
|
Chemical
|
27
|
109
|
311
|
||||||||
|
Corporate
and other business operations
|
1,068
|
1,153
|
312
|
||||||||
|
Provisions
for income taxes
|
(18,776
|
)
|
(2,540
|
)
|
(901
|
)
|
|||||
|
Equity
in earnings of affiliate - Climate Control
|
937
|
877
|
821
|
||||||||
|
Income
from continuing operations
|
$
|
36,560
|
$
|
46,534
|
$
|
15,768
|
Year Ended December 31, 2008
Compared to Year Ended December 31, 2007
Climate Control
Business
The
following table contains certain information about our net sales, gross profit
and operating income in our Climate Control segment for 2008 and
2007:
|
2008
|
2007
|
Change
|
Percentage
Change
|
|
(Dollars
In Thousands)
|
|
Net
sales:
|
||||||||||||||
|
Geothermal
and water source heat pumps
|
$
|
190,960
|
$
|
165,115
|
$
|
25,845
|
15.7
|
%
|
||||||
|
Hydronic
fan coils
|
83,472
|
85,815
|
(2,343
|
)
|
(2.7
|
)
%
|
||||||||
|
Other
HVAC products
|
36,948
|
35,435
|
1,513
|
4.3
|
%
|
|||||||||
|
Total
Climate Control
|
$
|
311,380
|
$
|
286,365
|
$
|
25,015
|
8.7
|
%
|
||||||
|
Gross
profit – Climate Control
|
$
|
96,633
|
$
|
83,638
|
$
|
12,995
|
15.5
|
%
|
||||||
|
Gross
profit percentage – Climate Control (1)
|
31.0
|
%
|
29.2
|
%
|
1.8
|
%
|
||||||||
|
Operating
income – Climate Control
|
$
|
38,944
|
$
|
34,194
|
$
|
4,750
|
13.9
|
%
|
(1) As a
percentage of net sales
Net
Sales – Climate Control
|
·
|
Net
sales of our geothermal and water source heat pump products increased
primarily as a result of a 19% increase in our average selling price per
unit due to a change in product mix, primarily more residential products
that have higher selling prices and more accessories, partially offset by
a 3% decrease in the number of units sold. The number of units sold in
2008 was down slightly due to lower export sales and a decrease in
domestic commercial orders as the result of the weaker construction
market. During 2008, we continued to maintain a market share leadership
position of approximately 40%, based on data supplied by the
Air-Conditioning, Heating and Refrigeration Institute
(“AHRI”);
|
|
·
|
Net
sales of our hydronic fan coils decreased slightly primarily due to a 7%
decrease in the number of units sold partially offset by a 4% increase in
our average selling price. During 2008, we continued to
maintain a market share leadership position, of approximately 37%, based
on data supplied by the AHRI;
|
|
·
|
Net
sales of our other HVAC products increased slightly primarily as the
result of an increase in sales of large custom air
handlers.
|
Gross
Profit – Climate Control
The
increase in gross profit in our Climate Control Business was primarily the
result of the increase in sales of our geothermal and water source heat pumps as
discussed above and the increase of $1.3 million in gains recognized on our
futures contracts for copper partially offset by the reduction in sales volumes
discussed above. In addition, the above changes were also the primary
reasons for the increase in our gross profit percentage.
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 $13.0 million as discussed above. This
increase in operating income was partially offset by an increase in variable
operating expenses associated with higher sales. Personnel costs increased by
$3.9 million as the result of an increase in the number of personnel and costs
associated with group insurance and other employee benefits, warranty expenses
increased by $2.2 million due to the increase in sales volume and actual costs
incurred, and professional fees increased by $1.1 million primarily relating to
legal expenses associated with patent defense costs relating to potential new
product development in the large air-handler product line.
Chemical
Business
The
following table contains certain information about our net sales, gross profit
and operating income in our Chemical segment for 2008 and 2007:
|
2008
|
2007
|
Change
|
Percentage
Change
|
|
(Dollars
In Thousands)
|
|
Net
sales:
|
||||||||||||||
|
Industrial
acids and other chemical products
|
$
|
162,941
|
$
|
95,754
|
$
|
67,187
|
70.2
|
%
|
||||||
|
Agricultural
products
|
152,802
|
117,158
|
35,644
|
30.4
|
%
|
|||||||||
|
Mining
products
|
108,374
|
75,928
|
32,446
|
42.7
|
%
|
|||||||||
|
Total
Chemical
|
$
|
424,117
|
$
|
288,840
|
$
|
135,277
|
46.8
|
%
|
||||||
|
Gross
profit - Chemical
|
$
|
37,991
|
$
|
44,946
|
$
|
(6,955
|
)
|
(15.5
|
)
%
|
|||||
|
Gross
profit percentage – Chemical (1)
|
9.0
|
%
|
15.6
|
%
|
(6.6
|
)
|
%
|
|||||||
|
Operating
income - Chemical
|
$
|
31,340
|
$
|
35,011
|
$
|
(3,671
|
)
|
(10.5
|
)
%
|
(1) As a
percentage of net sales
Net
Sales - Chemical
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. For 2008, overall sales prices for the Chemical Business increased 59%
while the volume of tons sold decreased 6%, compared with 2007.
|
·
|
Sales
prices at the El Dorado Facility increased 47% related, in part, to the
high cost of raw materials, anhydrous ammonia and sulfur, the majority of
which we were able to pass through to our customers and also to strong
global agricultural market demand relative to supply volumes during this
period. Volume at the El Dorado Facility decreased 13% or 86,000 tons. The
decrease in tons sold was primarily attributable to (i) 69,000 fewer tons
of agricultural AN and other bulk fertilizers sold primarily in the first
half of 2008 compared to
|
|
|
the
same period of 2007 due to poor weather conditions and lower demand for AN
in favor of urea, a competing product in El Dorado’s market area, as well
as reduced forage application due to poor conditions in the cattle market
and (ii) 11,000 fewer tons of sulfuric acid due primarily to the bi-annual
Turnaround of the sulfuric acid
plant.
|
|
·
|
Sales
prices and volumes at the Cherokee Facility increased 61% and 9%,
respectively, primarily related to the market-driven demand for UAN and
mining products. Sales prices also increased with the pass through of our
higher natural gas costs in 2008 compared to 2007, recoverable under
pricing arrangements with certain of our industrial customers. The
increase in volume was partially offset by the unplanned maintenance
downtime experienced during the third quarter of 2008 as discussed above
under “Overview – Chemical
Business”;
|
|
·
|
Sales
prices increased approximately 96% at the Baytown Facility due to higher
global ammonia pricing, which is recoverable under the Original Bayer
Agreement but had a minimum impact to gross profit and operating income.
Overall volumes decreased 11% as the result of a decline in customer
demand after Hurricane Ike and following the economic
downturn.
|
Gross
Profit - Chemical
As
discussed above under “Overview-Chemical Business,” the decrease in gross profit
of our Chemical Business relates to several significant items. We recognized
unrealized losses of $5.3 million on our natural gas and ammonia futures/forward
contracts outstanding at December 31, 2008. In addition, we have estimated that
the Cherokee Facility incurred costs of approximately $5.1 million as the result
of unplanned maintenance downtime during 2008 compared to $1.1 million in 2007.
Also at December 31, 2008, we recognized a lower of cost or market provision on
inventory of $3.6 million due to declines in global nitrogen prices as demand
fell as the result of buyers’ concerns over volatile commodity prices and the
global economic crisis. In addition during 2008, the amount expensed for
precious metals, net of recoveries and gains, was $6.3 million compared to $2.6
million during 2007. In general, other non-raw material manufacturing expenses,
including steam (produced from natural gas), maintenance and Turnarounds,
electricity and labor, increased during 2008 compared to 2007. Our Chemical
Business incurred expenses for Turnarounds of $6.0 million for 2008 compared to
$3.4 million for 2007. This decrease in gross profit was partially offset by the
increase in sales prices of products sold by the El Dorado and Cherokee
Facilities, as discussed above, in relation to raw material costs. During 2007,
we realized non-recurring insurance recoveries of $3.8 million relating to a
business interruption claim. These recoveries contributed to an increase in
gross profit in 2007. As a result of these changes discussed above, our overall
gross profit percentage declined for 2008 as compared to 2007.
Operating
Income - Chemical
The net
decrease of our Chemical Business’ operating income includes the net decrease in
gross profit of $7.0 million as discussed above. Also, we incurred an increase
in expenses associated with the Pryor Facility of $1.4 million due to the
process of activating this facility as discussed above under “Liquidity and
Capital Resources – Pryor Facility.” The decrease in operating income was
partially offset by other income recognized by our Chemical Business of $7.6
million from a litigation judgment during 2008, as previously reported. During
2007, we recognized income of $3.3 million relating to a litigation
settlement.
Other
The
business operation classified as “Other” primarily sells industrial machinery
and related components to machine tool dealers and end users. 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 net sales and gross profit classified as
“Other” and general corporate expenses and other business operations, net, for
2008 and 2007:
|
2008
|
2007
|
Change
|
Percentage
Change
|
|
(Dollars
In Thousands)
|
|
Net
sales - Other
|
$
|
13,470
|
$
|
11,202
|
$
|
2,268
|
20.2
|
%
|
||||||
|
Gross
profit - Other
|
$
|
4,256
|
$
|
4,009
|
$
|
247
|
6.2
|
%
|
||||||
|
Gross
profit percentage – Other (1)
|
31.6
|
%
|
35.8
|
%
|
(4.2
|
)
|
%
|
|||||||
|
General
corporate expense and other business operations, net
|
$
|
(11,129
|
)
|
$
|
(10,194
|
)
|
$
|
(935
|
)
|
9.2
|
%
|
(1) As a
percentage of net sales
Net
Sales - Other
The
increase in net sales classified as “Other” relates primarily to increased
customer demand for our machine tool products.
Gross
Profit - Other
The
increase in gross profit classified as “Other” is due primarily to the increase
in sales as discussed above. The decline in our gross profit percentage was
primarily due to additional costs incurred relating to a large customized
industrial machine tool, freight costs and the recognition of losses of $0.2
million on our foreign currency contracts.
General
Corporate Expense and Other Business Operations, Net
The net
increase in our general corporate expense and other business operations, net
relates primarily to increased personnel costs of $1.1 million resulting from
increased compensation and other employee benefits, professional fees of $0.5
million due, in part, for assistance in our evaluation of our internal controls
and procedures and related documentation for Sarbanes-Oxley requirements and to
legal fees on various litigation matters and other expense of $0.6 million
relating primarily to potential litigation settlements, an impairment of
long-lived assets and income tax related penalties, partially offset by an
increase in other income of $0.7 million due, in part, to litigation
settlements.
Interest
Expense
Interest
expense was $11.4 million for 2008 compared to $12.1 million for 2007, a
decrease of $0.7 million. This net decrease primarily relates to a decrease of
$3.4 million as the result of obtaining a lower interest rate associated with
the Secured Term Loan compared to the interest rate associated with the previous
senior secured loan and a decrease of $1.0 million due to the continual pay off
of the Working Capital Revolver Loan during 2008, partially offset by the
increase in realized and unrealized losses of $2.5 million relating to our
interest rate contracts and the increase of $1.7 million relating to the 2007
Debentures.
Gain on Extinguishment of
Debt
During
2008, we acquired $19.5 million aggregate principal amount of the 2007
Debentures for $13.2 million and recognized a gain on extinguishment of debt of
$5.5 million, after expensing $0.8 million of the unamortized debt issuance
costs associated with the 2007 Debentures acquired.
Provision
For Income Taxes
The
provision for income taxes for 2008 was $18.8 million compared to $2.5 million
for 2007. As discussed under “Overview - 2008 Results,” during 2008, we incurred
current and deferred federal and state income taxes due, in part, to increased
taxable income and higher effective tax rates partially offset by a net deferred
income tax benefit of $1.6 million as the result of a detailed analysis
performed on all our deferred tax assets and liabilities and the realizability
of those deferred tax assets. During 2007, we incurred federal and state income
taxes resulting from increased taxable income and additional prior year state
income taxes recorded under FIN 48. However, these provisions were partially
offset by the benefit of deferred taxes from the reversal of valuation
allowances.
Year Ended December 31, 2007
Compared to Year Ended December 31, 2006
Climate Control
Business
The
following table contains certain information about our net sales, gross profit
and operating income in our Climate Control segment for 2007 and
2006:
|
2007
|
2006
|
Change
|
Percentage
Change
|
|
(Dollars
In Thousands)
|
|
Net
sales:
|
||||||||||||||
|
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
|
%
|
||||||
|
Gross
profit – Climate Control
|
$
|
83,638
|
$
|
65,496
|
$
|
18,142
|
27.7
|
%
|
||||||
|
Gross
profit percentage – Climate Control (1)
|
29.2
|
%
|
29.6
|
%
|
(0.4
|
)
|
%
|
|||||||
|
Operating
income – Climate Control
|
$
|
34,194
|
$
|
25,428
|
$
|
8,766
|
34.5
|
%
|
|
(1)
|
As
a percentage of net sales
|
Net
Sales – Climate Control
|
·
|
Net
sales of our geothermal and water source heat pump products increased
primarily as a result of increases in 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.
|
Gross
Profit – Climate Control
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.
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.
Chemical
Business
The
following table contains certain information about our net sales, gross profit
and operating income in our Chemical segment for 2007 and 2006:
|
2007
|
2006
|
Change
|
Percentage
Change
|
|
(Dollars
In Thousands)
|
|
Net
sales:
|
||||||||||||||
|
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
|
%
|
||||||
|
Gross
profit - Chemical
|
$
|
44,946
|
$
|
22,023
|
$
|
22,923
|
104.1
|
%
|
||||||
|
Gross
profit percentage – Chemical (1)
|
15.6
|
%
|
8.4
|
%
|
7.2
|
%
|
||||||||
|
Operating
income - Chemical
|
$
|
35,011
|
$
|
9,785
|
$
|
25,226
|
257.8
|
%
|
|
(1)
|
As
a percentage of net sales
|
Net
Sales - Chemical
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.
|
Gross
Profit - Chemical
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.
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.
Other
The
business operation classified as “Other” sells industrial machinery and related
components to machine tool dealers and end users. 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 net sales and gross profit classified as “Other” and
general corporate expenses and other business operations, net, for 2007 and
2006:
|
2007
|
2006
|
Change
|
Percentage
Change
|
|
(Dollars
In Thousands)
|
|
Net
sales - Other
|
$
|
11,202
|
$
|
10,140
|
$
|
1,062
|
10.5
|
%
|
||||||
|
Gross
profit - Other
|
$
|
4,009
|
$
|
3,343
|
$
|
666
|
19.9
|
%
|
||||||
|
Gross
profit percentage – Other (1)
|
35.8
|
%
|
33.0
|
%
|
2.8
|
%
|
||||||||
|
General
corporate expense and other business operations, net
|
$
|
(10,194
|
)
|
$
|
(8,074
|
)
|
$
|
(2,120
|
)
|
26.3
|
%
|
|
(1)
|
As
a percentage of net sales
|
Net
Sales - Other
The
increase in net sales classified as “Other” relates primarily to increased
customer demand for our machine tool products.
Gross
Profit - Other
The
increase in gross profit classified as “Other” is due primarily to the increase
in sales as discussed above.
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.
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.
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 Kansas
Department of Health and Environment (“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.
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 2008,
net cash provided by continuing operating activities was $32.0 million,
including net income plus depreciation and amortization, deferred income taxes,
gain on extinguishment of debt, gain on litigation judgment associated with
PP&E, changes in fair value of commodities and interest rate contracts,
provision for losses on inventory and other adjustments offset by cash used by
the following changes in assets and liabilities:
Accounts
receivable increased a net $8.8 million including:
|
·
|
an
increase of $5.7 million relating to the Climate Control Business
primarily as the result of higher 2008 fourth quarter sales of our water
source heat pump products, and
|
|
·
|
a
net increase of $3.9 million relating to the Chemical Business due
primarily to the timing of two barge shipments of UAN in December 2008
partially offset by a decrease of $0.9 million relating to proceeds from a
business interruption claim. These increases were partially offset
by
|
|
·
|
a
decrease of $1.0 million relating to the reimbursement of group health
insurance claims paid in excess of our self-insured
limits.
|
Inventories
increased a net $7.8 million including:
|
·
|
a
net increase of $6.8 million relating to the Chemical Business primarily
relating to higher volumes on hand at our distribution centers and
increased raw material costs partially offset by the two barge shipments
of UAN in December 2008.
|
|
·
|
an
increase of $0.8 million relating to our industrial machinery to meet
customer demand, and
|
|
·
|
a
net increase of $0.2 million relating to the Climate Control Business but
included an increase of $1.1 million relating to water source heat pumps
associated with inventory required to support the higher backlog of
customers orders partially offset by a decrease of $0.8 million relating
to large custom air handlers as the result of lower shipment levels
expected for the first quarter of 2009 compared to the same period in
2008.
|
Other
supplies and prepaid items increased $4.1 million primarily due to an increase
of $3.8 million relating to higher volume on hand and costs of precious metals
used in the manufacturing process of our Chemical Business.
Accounts
payable increased $2.2 million primarily due to our Chemical Business primarily
as the result of improved credit terms with our supplier of natural
gas.
Customer
deposits decreased $6.3 million relating primarily to our Chemical Business as
the result of the shipment of product associated with these
deposits.
The
decrease in deferred rent expense of $2.9 million is due to the scheduled lease
payments in 2008 exceeding the rent expense recognized on a straight-line
basis.
The
increase in other current and noncurrent liabilities of $3.9 million
includes:
|
·
|
an
increase of $1.8 million of billings in excess of costs and estimated
earnings on uncompleted contracts due to invoices issued to customers
pursuant to the terms of the construction
contracts,
|
|
·
|
an
increase of $1.1 million of accrued payroll and benefits primarily as the
result of an increase in number of employees and in the number of days
accrued due to the timing of our payroll-related
payments,
|
|
·
|
an
increase of $0.9 million of accrued interest primarily as a result of the
timing of the semi-annual interest payment associated with the remaining
2007 Debentures,
|
|
·
|
an
increase of $0.9 million of accrued warranty costs primarily due to the
increase in sales volume,
|
|
·
|
a
net increase of $2.0 million due to other individually immaterial items,
partially offset by
|
|
·
|
a
decrease of $2.8 million of accrued income taxes due primarily to payments
made to the taxing authorities partially offset by the recognition of
income taxes for 2008.
|
Cash Flow from Continuing
Investing Activities
Net cash
used by continuing investing activities was $29.5 million for 2008, which
included $32.6 million for capital expenditures of which $8.7 million and $23.6
million are for the benefit of our Climate Control and Chemical Businesses,
respectively. As discussed above under “Overview – Chemical Business,” we
received proceeds from a litigation judgment, of which $4.1 million (net of
attorneys’ fees of $1.9 million) was associated with property, plant and
equipment.
Cash Flow from Continuing
Financing Activities
Net cash
used by continuing financing activities was $14.4 million, which primarily
consisted of:
|
·
|
$13.2
million used for the acquisition of $19.5 million aggregate principal
amount of the 2007 Debentures,
|
|
·
|
$4.8
million used for the acquisition of 400,000 shares of our common stock,
partially offset by,
|
|
·
|
$2.4
million provided from the excess income tax benefit on stock options
exercised and
|
|
·
|
$1.3
million provided from short-term financing, net of
payments.
|
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:
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, 2008, our investment was $3.6 million. For 2008, distributions received from
this Partnership were $0.7 million and our equity in earnings was $0.9 million.
As of December 31, 2008, the Partnership and general partner to the Partnership
is indebted to a term lender (“Lender”) of the Project for approximately $3.6
million 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.
Aggregate Contractual
Obligations
Our
aggregate contractual obligations as of December 31, 2008 are summarized in the
following table.
Payments
Due in the Year Ending December 31,
|
Contractual
Obligations
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
|
(In
Thousands)
|
||||||||||||||||||||||||||||
|
Long-term
debt:
|
||||||||||||||||||||||||||||
|
5.5%
Convertible Senior Subordinated Notes
|
$
|
40,500
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
40,500
|
$
|
-
|
$
|
-
|
||||||||||||||
|
Secured Term Loan due 2012
|
50,000
|
-
|
-
|
-
|
50,000
|
-
|
-
|
|||||||||||||||||||||
|
Capital
leases
|
716
|
235
|
253
|
165
|
63
|
-
|
-
|
|||||||||||||||||||||
|
Other
|
13,944
|
1,325
|
1,446
|
1,533
|
1,625
|
1,725
|
6,290
|
|||||||||||||||||||||
|
Total
long-term debt
|
105,160
|
1,560
|
1,699
|
1,698
|
92,188
|
1,725
|
6,290
|
|||||||||||||||||||||
|
Interest
payments on long-term debt (1)
|
24,460
|
6,266
|
6,153
|
6,039
|
4,360
|
492
|
1,150
|
|||||||||||||||||||||
|
Interest
rate contracts (2)
|
2,437
|
795
|
901
|
558
|
183
|
-
|
-
|
|||||||||||||||||||||
|
Capital
expenditures (3)
|
10,400
|
10,400
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||
|
Operating
leases:
|
||||||||||||||||||||||||||||
|
Baytown
Facility lease
|
4,881
|
4,881
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||
|
Other
operating leases
|
10,893
|
3,345
|
2,378
|
1,830
|
1,502
|
615
|
1,223
|
|||||||||||||||||||||
|
Futures/forward
contracts
|
17,259
|
17,259
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Accrued
contractual manufacturing obligations
|
2,230
|
2,230
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Purchase
obligations
|
1,740
|
1,044
|
696
|
-
|
-
|
-
|
||||||||||||||||||||||
|
Other
contractual obligations included in noncurrent accrued and other
liabilities
|
3,740
|
-
|
98
|
100
|
162
|
104
|
3,276
|
|||||||||||||||||||||
|
Total
|
$
|
183,200
|
$
|
47,780
|
$
|
11,925
|
$
|
10,225
|
$
|
98,395
|
$
|
2,936
|
$
|
11,939
|
||||||||||||||
|
(1
(2
|
)
)
|
The
estimated interest payments relating to variable interest rate debt are
based on the effective interest rates at December 31, 2008.
The
estimated future cash flows are based on the estimated fair value of these
contracts at December 31, 2008.
|
|
(3
|
)
|
Capital
expenditures include only non-discretionary amounts in our 2009 capital
expenditure budget.
|
Availability of Company's
Income Tax Loss Carry-Overs
For a
discussion on our income tax net operating loss carry-overs, see Note 13 of
Notes to Consolidated Financial Statements.
General
Our
results of operations and operating cash flows are impacted by changes in market
prices of copper, steel, anhydrous ammonia and natural gas, changes in market
currency exchange rates, and changes in market interest rates.
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, 2008, we had no embedded losses associated with sales commitments
with firm sales prices.
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.
As part of our raw material price risk management, periodically, our Climate
Control Business enters into futures contracts for copper and our Chemical
Business enters into futures/forward contracts for anhydrous ammonia and natural
gas, which contracts are generally accounted for on a mark-to-market basis in
accordance with SFAS 133. At December 31, 2008, our purchase commitments under
copper contracts were for 2 million pounds of copper through March 2009 at a
weighted-average cost of $1.72 per pound ($3.4 million) and a weighted-average
market value of $1.41 per pound ($2.8 million). In addition, our
Chemical Business had purchase commitments under anhydrous ammonia contracts for
9,000 metric tons of anhydrous ammonia through March 2009 at a weighted-average
cost of $320 per metric ton ($2.9 million) and a weighted-average market value
of $166 per metric ton ($1.5 million). Also our Chemical
Business had purchase commitments under natural gas contracts for approximately
970,000 MMBtu of natural gas through December 2009 at a weighted-average cost of
$10.08 per MMBtu ($9.8 million) and a weighted-average market value of $6.05 per
MMBtu ($5.9 million).
Foreign Currency
Risk
One of
our business operations purchases industrial machinery and related components
from vendors outside of the United States. As part of our foreign
currency risk management, we entered into several foreign currency contracts,
which set the U.S. Dollar/Euro exchange rates through March 2009. At
December 31, 2008, our commitments under these contracts were for the receipt of
approximately 861,000 Euros at a weighted-average contract exchange rate of 1.35
($1.16 million) and a weighted-average market exchange rate of 1.39 ($1.20
million).
Interest
Rate Risk
Our
interest rate risk exposure results from our debt portfolio which is impacted by
short-term rates, primarily variable-rate borrowings from commercial banks, and
long-term rates, primarily fixed-rate notes, some of which prohibit prepayment
or require a substantial premium payment with the prepayment.
As part
of our interest rate risk management, we periodically purchase and/or enter into
various interest rate contracts. At December 31, 2008, we have two
interest rate cap contracts, which set a maximum three-month LIBOR rate of 4.59%
on a total of $30 million and mature in March 2009. In addition, we have an
interest rate swap, which sets a fixed three-month LIBOR rate of 3.24% on $25
million and matures in April 2012. Also, we have an interest rate swap, which
sets a fixed three-month LIBOR rate of 3.595% on $25 million and matures in
April 2012. These contracts are free-standing derivatives and are accounted for
on a mark-to-market basis in accordance with SFAS 133. At December 31, 2008, the
fair value of these contracts (unrealized loss) was $2.4 million.
The
following table presents principal amounts and related weighted-average interest
rates by maturity date for our interest rate sensitive debt agreements and the
estimated future cash flows and related estimated weighted-average receive rate
for our interest rate sensitive interest rate swaps as of December 31,
2008.
|
Years
ending December 31,
|
|
(Dollars
In Thousands)
|
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
|
Expected
maturities of
long-term debt (1): |
|||||||||||||||||||||||||||
|
Variable
rate debt
|
$
|
8
|
$
|
-
|
$
|
-
|
$
|
50,000
|
$
|
-
|
$
|
-
|
$
|
50,008
|
|||||||||||||
|
Weighted-average
|
|||||||||||||||||||||||||||
|
interest
rate
|
6.19
|
%
|
6.19
|
%
|
6.19
|
%
|
6.19
|
%
|
-
|
%
|
-
|
%
|
6.19
|
%
|
|||||||||||||
|
Fixed
rate debt
|
$
|
1,552
|
$
|
1,699
|
$
|
1,698
|
$
|
42,188
|
$
|
1,725
|
$
|
6,290
|
$
|
55,152
|
|||||||||||||
|
Weighted-average
|
|||||||||||||||||||||||||||
|
interest
rate
|
5.81
|
%
|
5.77
|
%
|
5.74
|
%
|
5.86
|
%
|
6.70
|
%
|
6.72
|
%
|
5.98
|
%
|
|||||||||||||
|
Estimated
future cash flows of
interest
rate swaps (2):
|
|||||||||||||||||||||||||||
|
Variable
to Fixed
|
$
|
795
|
$
|
901
|
$
|
558
|
$
|
183
|
$
|
-
|
$
|
-
|
$
|
2,437
|
|||||||||||||
|
Weighted-average
|
|||||||||||||||||||||||||||
|
pay
rate
|
3.42
|
%
|
3.42
|
%
|
3.42
|
%
|
3.42
|
%
|
-
|
%
|
-
|
%
|
3.42
|
%
|
|||||||||||||
|
Weighted-average
|
|||||||||||||||||||||||||||
|
receive
rate
|
2.43
|
%
|
1.60
|
%
|
2.27
|
%
|
2.59
|
%
|
-
|
%
|
-
|
%
|
2.22
|
%
|
|
(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,
2008.
|
|
(2)
|
The estimated future cash flows
and related weighted-average receive rate are based on the estimated fair
value of these contracts as of December 31,
2008.
|
The
following table presents our purchase commitments under futures/forward
contracts and related weighted-average contract costs/exchange rate by contract
terms as of December 31, 2008.
|
Years
ending December 31,
|
|
(Dollars
In Thousands, Except For Per Pound, Metric Ton And MMBtu)
|
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
|
Futures/Forward
contracts:
|
|||||||||||||||||||||||||||
|
Copper:
|
|||||||||||||||||||||||||||
|
Total
cost of contracts
|
$
|
3,435
|
$
|
3,435
|
|||||||||||||||||||||||
|
Weighted-average
cost per pound
|
$
|
1.72
|
$
|
1.72
|
|||||||||||||||||||||||
|
Ammonia:
|
|||||||||||||||||||||||||||
|
Total
cost of contracts
|
$
|
2,880
|
$
|
2,880
|
|||||||||||||||||||||||
|
Weighted-average
cost per metric ton
|
$
|
320
|
$
|
320
|
|||||||||||||||||||||||
|
Natural
gas:
|
|||||||||||||||||||||||||||
|
Total
cost of contracts
|
$
|
9,780
|
$
|
9,780
|
|||||||||||||||||||||||
|
Weighted-average
cost per MMBtu
|
$
|
10.08
|
$
|
10.08
|
|||||||||||||||||||||||
|
Foreign
Currency (1):
|
|||||||||||||||||||||||||||
|
Total
cost of contracts
|
$
|
1,164
|
$
|
1,164
|
|||||||||||||||||||||||
|
Weighted-average
contract exchange rate
|
0.74
|
0.74
|
|
(1)
|
Our
commitments under these contracts are to pay in U.S Dollars and receive
approximately 861,000 Euros.
|
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 contracts,
commodities futures/forward contracts, and foreign currency contracts approximate
their fair value since they are accounted for on a mark-to-market basis.
At
December 31, 2008, the estimated fair value of the Secured Term Loan is based on
defined LIBOR rates plus 10% utilizing information obtained from the lender.
At December 31, 2007, carrying values for variable debt, including the
Secured Term Loan, was believed to approximate their fair value. Fair
values for fixed rate borrowings, other than the 5.5% Senior
Convertible Senior Subordinated Notes (“2007 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.
At December 31, 2008, the estimated fair value of the 2007 Debentures is based
on quoted prices obtained from a broker for these debentures. At December 31,
2007, the estimated fair value of the 2007 Debentures was based on the
conversion rate and market price of our common. The following table shows the
estimated fair value and carrying value of our borrowings at:
|
December
31, 2008
|
December
31, 2007
|
|
Estimated
Fair
Value
|
Carrying
Value
|
Estimated
Fair
Value
|
Carrying
Value
|
|
(In
Thousands)
|
|
Variable
Rate:
|
||||||||||||
|
Secured
Term Loan
|
$
|
20,939
|
$
|
50,000
|
$
|
50,000
|
$
|
50,000
|
||||
|
Working
Capital Revolver Loan
|
-
|
-
|
-
|
-
|
||||||||
|
Other
debt
|
8
|
8
|
155
|
155
|
||||||||
|
Fixed
Rate:
|
||||||||||||
|
5.5%
Convertible Senior Subordinated Notes
|
27,338
|
40,500
|
61,632
|
60,000
|
||||||||
|
Other
bank debt and equipment financing
|
14,949
|
14,652
|
12,298
|
11,952
|
||||||||
|
$
|
63,234
|
$
|
105,160
|
$
|
124,085
|
$
|
122,107
|
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.
As
previously reported, we had noted one significant
deficiency in
our disclosure controls and procedures, which
related to controls over electronic spreadsheets. At
December 31, 2008, we
have
remediated this deficiency.
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, 2008 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, 2008. 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, 2008, 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.
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, 2008 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, 2008, 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, 2008 and 2007, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2008 of LSB Industries,
Inc. and our report dated March 12, 2009 expressed an unqualified opinion
thereon.
ERNST
& YOUNG LLP
Oklahoma
City, Oklahoma
March 12,
2009
None.
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,
|
·
|
our
Climate Control Business has developed leadership positions in certain
niche markets by offering extensive product lines, customized products and
improved technologies,
|
|
·
|
we
have developed the most extensive line of geothermal and water source heat
pumps and hydronic fan coils in the United States,
|
|
·
|
we
were a pioneer in the use of geothermal technology in the climate control
industry,
|
|
·
|
we
have used geothermal technology in the climate control industry to create
the most energy efficient climate control systems commercially available
today,
|
|
·
|
the
tax credits and incentives and certain planned direct spending by the
federal government contained in the recently enacted American Reinvestment
and Recovery Act of 2009 could stimulate sales of our geothermal heat pump
products, as well as other products that could be used to modernize
federally owned and operated buildings, military installations, public
housing and hospitals,
|
|
·
|
we
are a leading provider of geothermal and water source heat pumps to the
commercial construction and renovation markets in the United
States,
|
|
·
|
the
market share for commercial water source heat pumps relative to
other types of heating and air-conditioning systems will continue to
grow due to the relative efficiency and longevity of such systems, as
well as due
to the emergence of the replacement market for those
systems,
|
|
·
|
the
energy efficiency, longer life, and relatively short payback periods of
geothermal systems, as compared with air-to-air systems, will continue to
increase demand for our geothermal products,
|
|
·
|
the
recently enacted American Reinvestment and Recover Act of 2009
contains significant incentives for the installation of our geothermal
products,
|
|
·
|
our
Climate Control Business is a leading provider of hydronic fan
coils,
|
|
·
|
the
amount of capital expenditures relating to the Climate Control Business
for 2009,
|
|
·
|
obtaining
raw materials for our Climate Control Business,
|
|
·
|
the
ability to pass to our customers the majority of any raw material cost
increases in the form of higher prices and that the timing of these price
increases could lag the increases in the cost of
materials,
|
|
·
|
our
Climate Control Business having sufficient sources for materials; however,
a shortage of raw materials could impact production of our Climate Control
products,
|
79
|
·
|
our
Climate Control Business having sufficient sources for materials; however,
a shortage of raw materials could impact production of our Climate Control
products,
|
|
·
|
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
|
|
·
|
lower
demand for most of our Climate Control products for the short
term,
|
|
·
|
a
decline in both commercial and residential construction due to the current
recession,
|
|
·
|
lower
volumes in Climate Control sales during 2009, as compared to 2008 for most
of our products,
|
|
·
|
continued
volatility in material costs, especially for copper, steel, aluminum and
components that include those metals,
|
|
·
|
our
longer term outlook after 2009 for the Climate Control Business, to a
significant extent, will depend on the recovery of the credit and capital
markets and the general economy,
|
|
·
|
our
investment in the Climate Control Business will continue if order intake
levels continue to warrant and the investment will increase our capacity
to produce and distribute our Climate Control products,
|
|
·
|
we
are competitive as to price, service, warranty and product performance in
our Climate Control Business,
|
|
·
|
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 a presence in new markets,
|
|
·
|
shipping
substantially all of our backlog at December 31, 2008 within the next
twelve months and have the production capacity in place to do
so,
|
|
·
|
monitoring
and managing to the current economic environment, increasing the sales and
operating margins of all products, developing and introducing new and
energy efficient products, improving production and product delivery
performance and expanding the markets we serve, both domestic and foreign,
in the Climate Control Business,
|
|
·
|
not
paying dividends on our common stock in the foreseeable
future,
|
|
·
|
the concentration relating to receivable accounts
of six customers at December 31, 2008 does not represent a
significant credit risk due to the financial stability of these
customers,
|
|
·
|
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
annual United States market for water source heat pumps and hydronic fan
coils to be approximately $700 million
in 2008 based on December 2008 data supplied by the
AHRI that
could be impacted by the current economic conditions,
|
|
·
|
the new products of our
Climate Control Business have good long-term
prospects,
|
|
·
|
our
Chemical Business has established leading regional market positions, which
is a key element in the success of this business,
|
|
·
|
our
Chemical Business sales volumes expressed in tons will be lower than in
2008 and our sales dollars per unit will be less due to significantly
lower raw material costs and selling prices,
|
|
·
|
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,
|
|
·
|
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,
|
|
·
|
the
El Dorado Facility’s ability to comply with the more restrictive permit
limits, and the rules that support the more restrictive dissolved minerals
rules have been revised to authorize a permit modification to adopt
achievable dissolved minerals permit limits,
|
|
·
|
Russia
is the world’s largest producer of fertilizer grade AN and we has
substantial excess AN production capacity,
|
|
·
|
the
El Dorado Facility produces a high performance AN fertilizer that, because
of its uniform size, is easier to apply than many competing nitrogen-based
fertilizer products,
|
|
·
|
the
customers that have entered into sales commitments with us will fulfill
their obligations to purchase the products at contracted
prices,
|
|
·
|
our
Chemical Business pursuing 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 raw
material costs in order to minimize the impact of the uncertainty of the
sales prices of our products in relation to the cost of anhydrous ammonia,
natural gas and sulfur,
|
|
·
|
certain
of our industrial and mining customers will be affected by the current
economic recession and could substantially reduce their
purchases,
|
|
·
|
many
of our mining and industrial customers will take significantly less
product in 2009 than in 2008 due to the downturn in housing, automotive
and other sectors,
|
|
·
|
our
agricultural operating margins in dollars will be less based upon the
current spread between natural gas cost and UAN market prices and the
current spread between anhydrous ammonia cost and AN market
prices,
|
|
·
|
starting
production at the Pryor Facility during the third quarter of
2009,
|
|
·
|
periodically,
the El Dorado and Cherokee Facilities will hedge certain of their
anhydrous ammonia and natural gas requirements with futures/forward
contracts,
|
|
·
|
our
primary efforts to improve the results of our Chemical Business include
emphasizing our marketing efforts to customers that will accept the
commodity risk inherent with natural gas and anhydrous ammonia, while
maintaining a strong presence in the agricultural
sector,
|
|
·
|
net
sales will decrease as a result of the reduction in the Baytown Facility’s
lease expense beginning in June 2009,
|
|
·
|
the
actual results for agricultural products will depend upon the global and
domestic supply of and the demand for nitrogen fertilizer and agricultural
products, including but not limited to, corn and wheat,
|
|
·
|
industry
sources predicting that due to plant curtailments, fewer imports, the
deferral of the 2008 fall nitrogen application, and low global grain
inventories, a decreased supply will be available to meet demand after the
initial spring application depletes the fertilizer in
storage,
|
|
·
|
making
changes to our controllable cost structure, as conditions
dictate,
|
|
·
|
the
products and amount of products to be produced from the Pryor
Facility,
|
|
·
|
the
costs to be incurred for Turnarounds in 2009,
|
|
·
|
continue
to focus our sales efforts on sales agreements and/or pricing formulas
that provide for the pass through of raw material and other variable costs
and certain fixed costs in the Chemical Business,
|
|
·
|
our
Chemical Business’ long-term strategy includes optimizing production
efficiency of our facilities, thereby lowering the fixed cost of each ton
produced,
|
|
·
|
other
capital expenditures for 2009 are discretionary and dependent upon an
adequate amount of liquidity and/or obtaining acceptable
funding,
|
|
·
|
the
agricultural products are the only significant seasonal
products,
|
|
·
|
we
are the largest domestic merchant marketer of concentrated and blended
nitric acids,
|
|
·
|
the
estimated costs to activate the Pryor Facility,
|
|
·
|
our
ability to reach an agreement to sell or distribute the UAN production at
the Pryor Facility in the near term,
|
|
·
|
obtaining
our requirements for raw materials in 2009,
|
|
·
|
the
amount of committed and discretionary capital expenditures for 2009 and
how it will be funded,
|
|
·
|
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 2010,
|
|
·
|
ability
to obtain anhydrous ammonia from other sources in the event of an
interruption of service under our existing purchase
agreement,
|
|
·
|
outcomes
of various contingencies adversely impacting our liquidity and capital
resources,
|
|
·
|
our
capital structure and liquidity reflect a reasonably sound financial
position,
|
|
·
|
our
performance is dependent upon the efforts of our principal executive
officers and our future success depends in large part on our continued
ability to attract and retain highly skilled and qualified
personnel,
|
|
·
|
our
cash and borrowing availability under our Working Capital Revolver Loan is
adequate to fund operations in 2009, subject to the financial viability of
the lender,
|
|
·
|
our
primary cash needs will be for working capital and capital expenditures in
2009,
|
|
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recognizing
and paying federal income taxes at regular corporate tax rates in
2009,
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the
total stock-based compensation expense not yet recognized to be amortized
through 2016 (adjusted for forfeitures),
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the
assumptions used for our 2009 business plan, including that the economy
will continue to contract due to additional loss of jobs, declining
consumer demand and limited credit availability during most of
2009,
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our
2009 business plan will be adjusted frequently as we measure customer
demand during the first and second quarters,
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meeting
all required covenant tests for all quarters and the year ending in 2009,
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
changes 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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material
changes in the cost of certain precious metals, anhydrous ammonia, natural
gas, copper and steel,
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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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changes
in the production efficiency of our facilities,
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adverse
results in any of our pending litigation,
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modifications
to or termination of the suspension agreement between the United States
and Russia,
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activating
operations at the Pryor Facility is subject to obtaining a customer to
purchase and distribute a majority of its production,
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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.
PART III
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 86.
Mr. Ackerman first became a director in 1993. His term will expire in 2011. 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 Honor in
1998. He served as the President of the Oklahoma City Chamber of
Commerce, the United Way, Allied Arts and six other Oklahoma City non-profit
organizations.
Robert C. Brown, M.D., age 77.
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 73. 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
56. 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
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
1978.
Barry H. Golsen, J.D., age 58.
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
served 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 80. 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 68. 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 82. Mr.
Ille first became a director in 1971. His term will expire in 2011. 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 is 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 76. Mr.
Munson first became a director in 1997. His term will expire in 2011. 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 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 59. Mr.
Perry first became a director in August 2007. His term will expire in
2011. Mr. Perry currently serves as President of Prime Time Travel,
which he founded in 1979. He also serves on the Alumni Board of Directors for
Leadership Oklahoma City. 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 81. 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 67. Mr.
Shelby first became a director in 1971. His term will expire in 2011. 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 58. 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.
Family
Relationships
Jack E.
Golsen is the father of Barry H. Golsen and the brother-in-law
of Robert C. Brown. Robert C. Brown is the uncle of Barry H. Golsen.
David M. Shear is the nephew by marriage to Jack E. Golsen and son-in-law of
Robert C. Brown. Although not executive officers or directors of the Company,
Steve J. Golsen, the son of Jack E. Golsen, brother of Barry H. Golsen, and the
nephew of Robert C. Brown, is the Chief Operating Officer of our Climate Control
Business, and Heidi Brown Shear, Vice President and Managing Counsel of the
Company, is the daughter of Robert C. Brown and spouse of David M.
Shear.
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 2008, or written
representations that no Form 5 was required to be filed, the Company believes
that during 2008 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
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Jack
Golsen, Barry Golsen, Steve Golsen, Sylvia Golsen, Linda Rappaport, SBL,
LLC, and Golsen Family, LLC each inadvertently filed one late Form 4 to
report three transactions;
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James
Murray inadvertently filed one late Form 4 to report one
transaction;
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Raymond
Ackerman inadvertently filed two late Forms 5 to report four
gifts;
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Paul
Rydlund and Linda Rappaport each filed a late Form 3 to report their
holdings of the Company’s
securities;
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Robert
Butkin inadvertently filed one late Form 4 and one late Form 5 to report
one transaction each; and
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Bernard
Ille, John Shelley, Raymond Ackerman, Charles Burtch, Donald Munson,
Robert Brown, Ron Perry and Horace Rhodes each inadvertently filed one
late Form 4 to report one
transaction.
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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 a Statement of Policy Concerning
Business Conduct applicable to our employees. Our Code of Ethics and Statement
of Policy Concerning Business Conduct are available on our website at www.lsb-okc.com or
by mail if requested. 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 NYSE Euronext (“NYSE”), on
our website.
Audit Committee
We have 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, Ray Ackerman and
John Shelley (added in November 2008). The Board has determined that each member
of the Audit Committee is independent, as defined in the listing standards of
the NYSE as of the Company’s fiscal year end. During 2008, the Audit Committee
had six 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 financially literate and able to read and
understand fundamental financial statements and at least one of its members is
“financially sophisticated” and has financial management expertise. 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.”
Nominating
and Corporate Governance Committee
We have a
separately-designated standing Nominating and Corporate Governance Committee
(the "Nominating Committee"). The members of the Nominating Committee are
Mssers. Ray Ackerman, Horace Rhodes, and John Shelley (Chairman). The Board has
determined that each member of the Nominating Committee is independent, in
accordance with Section 10A-3 of the Exchange Act and the listing standards of
the NYSE. During 2008, the Nominating Committee had one
meeting.
Compensation
and Stock Option Committee
The
Compensation and Stock Option Committee (the “Compensation Committee”) has three
members and met six times during 2008. The Committee is comprised of
Messrs. Horace Rhodes (Chairman), Charles Burtch and Bernard Ille, non-employee,
independent directors in accordance with the rules of the NYSE. 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:
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establish
the base salary, incentive compensation and any other compensation for the
Company’s executive officers;
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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
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perform
other functions or duties deemed appropriate by the
Board.
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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 2008, no outside consultants were engaged by the
Compensation Committee.
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 those of the Company. Based on the
foregoing, the Committee bases it executive compensation program on the
following criteria:
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Compensation
should be based on the level of job responsibility, executive performance,
and Company performance.
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Compensation
should enable us to attract and retain key
talent.
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Compensation
should be competitive with compensation offered by other companies that
compete with us for talented individuals in our geographic
area.
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Compensation
should reward performance.
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Compensation
should motivate executives to achieve our strategic and operational
goals.
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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 in light of the Compensation Committee’s philosophy
and objections 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 observations of the Chief
Executive Officer and the President during the applicable year.
2008
Executive Compensation Components
For the
fiscal year ended December 31, 2008, the principal components of
compensation for the named executive officers were:
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base
salary;
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cash
bonus;
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death
benefit and salary continuation programs;
and
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perquisites
and other personal benefits.
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The
Compensation Committee did not award equity based compensation, such as stock
options, to the named executive officers in 2008. As discussed below, the
Compensation Committee awarded salary increases and bonuses to the named
executive officers for 2008. Those awards were considered sufficient to provide
competitively based incentives to our executives to advance company performance,
without granting equity based compensation as well.
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 qualified retirement plan for our
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 observations of such senior executive officers and the Compensation
Committee’s assessment of such officers’ contribution to the Company’s
performance and other leadership achievements. Although the Compensation
Committee does not use specific profit targets to set base salaries or bonuses,
the Compensation Committee awarded salary increases in 2008 based on the above
criteria and with consideration of the profitable year.
Bonuses
The
Compensation Committee may award cash bonuses to the named executive officers to
reward outstanding performance. The Compensation Committee awarded bonuses to
the named executive officers in 2008 based upon the Committee’s review of the
performance and the recommendation of the Chief Executive Officer. 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 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, 2008, 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:
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encouraging
our named executive officers to render outstanding service;
and
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maintaining
competitive levels of total
compensation.
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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.
Amendments
to Salary Continuation Plans, Severance Agreements and Employment
Agreement
Effective
December 17, 2008, our Board of Directors, based on the recommendation and
approval of the Compensation Committee, approved the amendment of the following
benefit plans in order to address, before December 31, 2008, the documentation
requirements of Section 409A of the Internal Revenue Code (“Section
409A”):
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|
Non-Qualified
Benefit Plan Agreements, each dated January 1, 1992, between the Company
and each of Barry H. Golsen, David M. Shear, and Steven J. Golsen, Chief
Executive Officer of one of the Company’s subsidiaries and Chief Operating
Officer of the Company’s Climate Control
Business;
|
The
amendments primarily clarify and modify the dates on which certain types of
benefits are provided, in order to comply with Section 409A. Where applicable,
the amendments require that
|
·
|
Severance
Agreements, each dated January 17, 1989, between the Company and certain
of our officers, including each of Jack E. Golsen; Barry H. Golsen; Tony
M. Shelby; David R. Goss; and David M. Shear, (whose Severance Agreement
is dated September 25, 1991); and Steven J. Golsen, Chief Executive
Officer of one of the Company’s subsidiaries and Chief Operating Officer
of the Company’s Climate Control Business; and
|
|
·
|
Employment
Agreement, dated March 21, 1996, as amended April 29, 2003 and May 12,
2005, between the Company and Jack E.
Golsen.
|
The
amendments primarily clarify and modify the dates on which certain types of
benefits are provided, in order to comply with Section 409A. Where applicable,
the amendments require that
payments due to a “specified
employee” (as such term is defined under Section 409A) upon separation from
service must be delayed until the earlier of death or the expiration of a period
of six months, among other revisions made to comply with Section 409A. Except as
amended to address Section 409A, the agreements listed above are materially
consistent with the respective pre-amendment agreements.
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.
Tax
and Accounting Implications
Deductibility
of Executive Compensation - Section 162(m) of the Internal Revenue Code,
provides that the Company may not deduct compensation of more than $1,000,000 of
employee remuneration for named executive officers. However, the statute
exempts qualifying performance-based compensation from the deduction limit when
specified requirements are met. In the past, the Company has granted
non-qualifying stock options to the named executive officers that do not meet
the performance-based compensation criteria and are subject to the Section
162(m) limitation.
As a
result of the exercise of non-qualifying stock options, the Company’s reported
compensation, for tax purposes, to Jack E. Golsen, Barry H. Golsen, and David M.
Shear exceeded the Section 162(m) deductibility limits during 2008 and 2007 by
$350,000 and $3,418,000, respectively. For 2008, Barry H. Golsen’s
compensation exceeded the deductibility limit by $350,000, which represents a
cost to the company of $137,000 as a result of the lost tax deduction. For
2007 Jack E. Golsen’s compensation exceeded the deductibility limit by
$3,349,000, which represents a cost to the company of $1,306,000 as a result of
the lost tax deduction and David M. Shear’s compensation exceeded the
deductibility limit by $69,000 which represents a cost to the company of $27,000
as a result of the lost tax deductions.
Accounting
for Stock-Based Compensation – The Company accounts for stock-based payments,
including its incentive and nonqualified stock options, in accordance with the
requirements of SFAS 123(R).
Compensation
and Stock Option Committee Report
The
Compensation and Stock Option Committee of the Company has reviewed and
discussed the Compensation Discussion and Analysis with management and, based on
such review and discussions, the Compensation and Stock Option Committee
recommended to the Board that the Compensation Discussion and Analysis be
included herein.
Submitted
by the Compensation and Stock Option Committee of the Company’s Board of
Directors.
Horace G.
Rhodes, Chairman
Charles
A. Burtch
Bernard
G. Ille
The
following table summarizes the total compensation paid or earned by each of the
named executive officers for each of the three fiscal years in the period ended
December 31, 2008.
Summary
Compensation Table
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|
Name
and Principal Position
|
Year
|
Salary
($) |
Bonus
($) |
Stock
Awards ($)
|
Option
wards ($) |
Non-Equity Incentive
Plan Compensation
($)
|
Change
in
Pension
Value
and Nonqualified Deferred Compensation Earnings
($)
|
All
Other Compensation ($) (1)
|
Total
($)
|
|
|
|
|
-
|
-
|
-
|
-
|
|
|
|
| Jack E. Golsen, | |||||||||
|
Chairman
of the Board
|
2008
|
575,554
|
200,000
|
-
|
-
|
-
|
-
|
682,646
|
1,458,200
|
|
of
Directors and
|
2007
|
523,400
|
50,000
|
-
|
-
|
-
|
-
|
645,010
|
1,218,410
|
|
Chief
Executive Officer
|
2006
|
497,400
|
-
|
-
|
-
|
-
|
-
|
615,168
|
1,112,568
|
| Tony M. Shelby, |
|
||||||||
|
Executive
Vice President
|
2008
|
268,654
|
125,000
|
|
|
|
15,574
|
409,228
|
|
|
of
Finance and Chief
|
2007
|
255,000
|
90,000
|
-
|
-
|
-
|
-
|
22,773
|
367,773
|
|
Financial
Officer
|
2006
|
245,000
|
40,000
|
-
|
-
|
-
|
-
|
22,428
|
307,428
|
|
Barry
H. Golsen
|
|
|
|
|
|||||
|
Vice
Chairman of the Board of
|
|||||||||
|
Directors,
President, and
|
2008
|
479,446
|
175,000
|
27,546
|
681,992
|
||||
|
President
of the Climate Control
|
2007
|
433,100
|
100,000
|
-
|
-
|
-
|
-
|
22,191
|
555,291
|
|
Business
|
2006
|
413,600
|
40,000
|
-
|
-
|
-
|
-
|
9,515
|
463,115
|
|
David
R. Goss,
|
2008
|
259,923
|
85,000
|
14,440
|
359,363
|
||||
|
Executive
Vice President of
|
2007
|
240,500
|
55,000
|
-
|
-
|
-
|
-
|
12,361
|
307,861
|
|
Operations
|
2006
|
233,000
|
35,000
|
-
|
-
|
-
|
-
|
14,146
|
282,146
|
|
David
M. Shear,
|
2008
|
264,423
|
100,000
|
17,149
|
381,572
|
||||
|
Senior
Vice President and
|
2007
|
240,000
|
75,000
|
-
|
-
|
-
|
-
|
9,961
|
324,961
|
|
General
Counsel
|
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 (amended in 2008 to
comply with Section 409A) 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
pro rata portion of life insurance premium expense to fund the
undiscounted death benefit.
|
(1) As
discussed below under “1981 Agreements” and “2005 Agreement,” the Company
entered into individual death benefit agreements in 1981 (amended in 2008 to
comply with Section 409A) 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
pro rata 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.
|
As
discussed below under “1992 Agreements”, the Company entered into benefit
agreements in 1992 (and amended in 2008 to comply with Section 409A), which
include a death benefit until the employee reaches age 65 or benefits for life
commencing when the employee reaches age 65. Compensation reported for these
benefits is the greater of:
|
·
|
the
expense incurred associated with our accrued benefit liability
or
|
|
·
|
the
pro rata 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 2008, as follows:
|
1981
Agreements
|
1992
Agreements
|
2005
Agreement
|
Other (A)
|
Total
|
|
Jack
E. Golsen
|
$
|
204,856
|
$
|
-
|
$
|
466,533
|
$
|
11,257
|
$
|
682,646
|
||||
|
Tony
M. Shelby
|
$
|
7,250
|
$
|
-
|
$
|
-
|
$
|
8,324
|
$
|
15,574
|
||||
|
Barry
H. Golsen
|
$
|
2,593
|
$
|
18,960
|
$
|
-
|
$
|
5,993
|
$
|
27,546
|
||||
|
David
R. Goss
|
$
|
4,854
|
$
|
3,352
|
$
|
-
|
$
|
6,234
|
$
|
14,440
|
||||
|
David
M. Shear
|
$
|
-
|
$
|
10,782
|
$
|
-
|
$
|
6,367
|
$
|
17,149
|
(A)
Amount relates to the personal use of automobiles, cell phones and country club
dues.
The
Company did not grant equity-based awards to the named executive officers during
2008, 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 was amended in 2008 to comply with Section 409A. 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).
|
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 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
|
||
|
David
M. Shear
|
N/A
|
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”). The 1992 Agreements were amended in 2008 to comply with
Section 409A. 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, 2008.
|
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
|
$
|
33,490
|
||||
|
David
R. Goss
|
$
|
17,403
|
N/A
|
$
|
59,662
|
|||||
|
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. 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 2005 Agreement requires that the Company is obligated to keep in
existence no less than $2.5 million of the stated death benefit. The
life insurance policies in force provide an aggregate stated death benefit to
the Company, as beneficiary, of $7 million.
401(k)
Plan
We
maintain The LSB Industries, Inc. Savings Incentive Plan (the “401(k) Plan”) for
the employees (including the named executive officers) of the Company and its
subsidiaries, excluding employees covered under union agreements and certain
other employees. As relating to the named executive officers, the 401(k) Plan is
funded by the officer’s contributions. The Company and its subsidiaries make no
contributions to the 401(k) Plan for any of the named executive officers. The
amount that an officer may contribute to the 401(k) Plan equals a certain
percentage of the employee’s compensation, with the percentage based on the
officer’s income and certain other criteria as required under Section 401(k) of
the Internal Revenue Code. The Company or subsidiary deducts the amounts
contributed to the 401(k) Plan from the officer’s compensation each pay period,
in accordance with the officer’s instructions, and pays the amount into the
401(k) Plan pursuant to the officer’s election. The salary and bonus set forth
in the Summary Compensation Table above include any amounts contributed by the
named executive officers during the 2008, 2007 and 2006 fiscal years pursuant to
the 401(k) Plan.
Outstanding
Equity Awards At December 31, 2008
|
Options
Awards (1)
|
|||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
||||||
|
Name
|
Number
of Securities Underlying Unexercised Options
(#) (2)
Exercisable(2)
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
Option
Exercise Price
($)
|
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
|
11,250
|
-
|
-
|
2.73
|
11/29/2011
|
||||||
|
David
R. Goss
|
65,000
15,000
|
-
-
|
-
-
|
1.25
2.73
|
7/8/2009
11/29/2011
|
||||||
|
David
M. Shear
|
-
|
-
|
-
|
-
|
-
|
||||||
|
(1)
|
There
were no unvested stock awards at December 31,
2008.
|
|
(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
2008 (1)
|
Option
Awards
|
|||||
|
(a)
|
(b)
|
(c)
|
|||
|
Name
|
Number
of
Shares
Acquired
on Exercise
(#)
|
Value
Realized
on
Exercise(2)
($)
|
|||
|
Jack
E. Golsen
|
-
|
-
|
|||
|
Tony
M. Shelby
|
-
|
-
|
|||
|
Barry
H. Golsen
|
55,000
|
742,500
|
|||
|
David
R. Goss
|
35,000
|
338,800
|
|||
|
David
M. Shear
|
65,544
|
1,472,937
|
|||
|
(1)
|
There
were no stock awards that vested in
2008.
|
|
(2)
|
Value
realized was determined using the difference between the exercise price of
the options and the closing price of our common stock on the date of
exercise.
|
We have
entered into severance agreements with each of the named executive officers and
certain other officers, which were amended in 2008 to comply with Section 409A.
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;
|
|
·
|
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 date of retirement 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.
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 agreement if the respective
trigger event had occurred on December 31, 2008.
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
|
-
|
1,294,996
|
-
|
1,684,973
|
1,684,973
|
3,246,125
|
-
|
|||||||
|
Bonus
|
-
|
450,000
|
-
|
-
|
-
|
-
|
-
|
|||||||
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
4,250,000
|
|||||||
|
Other
|
-
|
59,182
|
-
|
-
|
-
|
-
|
59,182
|
|||||||
|
Tony
M. Shelby:
|
||||||||||||||
|
Salary
|
-
|
-
|
-
|
925,222
|
925,222
|
-
|
-
|
|||||||
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
350,000
|
|||||||
|
Other
|
240,794
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||
|
Barry
H. Golsen:
|
||||||||||||||
|
Salary
|
-
|
-
|
-
|
1,467,593
|
1,467,593
|
-
|
-
|
|||||||
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
415,962
|
|||||||
|
David
R. Goss:
|
||||||||||||||
|
Salary
|
-
|
-
|
-
|
864,770
|
864,770
|
-
|
-
|
|||||||
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
350,000
|
|||||||
|
Other
|
256,752
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||
|
David
M. Shear:
|
||||||||||||||
|
Salary
|
-
|
-
|
-
|
834,392
|
834,392
|
-
|
-
|
|||||||
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
79,567
|
(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, 2008.”
Compensation
of Directors
In 2008,
we compensated our non-employee directors for their services as directors on our
Board. Directors who are employees of the Company receive no compensation for
their services as directors.
The
following table summarizes the compensation paid by us to our non-employee
directors during the year ended December 31, 2008.
Director
Compensation Table
|
(a)
|
(b)
|
(d)
|
(h)
|
|
Name
|
Fees
Earned
or
Paid
in
Cash
($)
(1)
|
Option
Awards ($)(2)
|
Total
($)
|
|
Raymond
B. Ackerman
|
40,000
|
344
|
40,344
|
|
Robert
C. Brown, M.D.
|
40,000
|
344
|
40,344
|
|
Charles
A. Burtch
|
40,000
|
344
|
40,344
|
|
Robert
A. Butkin
|
39,500
|
344
|
39,844
|
|
Bernard
G. Ille
|
40,000
|
344
|
40,344
|
|
Donald
W. Munson
|
40,000
|
344
|
40,344
|
|
Ronald
V. Perry
|
40,000
|
344
|
40,344
|
|
Horace
G. Rhodes
|
40,000
|
344
|
40,344
|
|
John
A. Shelley
|
40,000
|
344
|
40,344
|
(1) This
amount includes as to each director, an annual fee of $13,000 for services as a
director and $500 for each Board meeting attended during 2008. This amount also
includes the following fees earned during 2008:
|
·
|
Mr.
Ackerman received $25,000 for his services on the Audit Committee,
Nominating and Corporate Governance Committee and Public Relations and
Marketing Committee.
|
|
·
|
Dr.
Brown received $25,000 for his services on the Benefits and Programs
Committee. This amount does not include amounts paid by the Company to Dr.
Brown for consulting services rendered by him or his affiliated medical
group, which amounts are described under “Item 13 - Certain Relationships
and Related Party Transactions, and Director Independence - Related Party
Transactions.”
|
|
·
|
Mr.
Burtch received $25,000 for his services on the Audit Committee and
Compensation and Stock Option
Committee.
|
|
·
|
Mr.
Butkin received $25,000 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, Nominating and Corporate
Governance Committee and Public Relations and Marketing
Committee.
|
|
·
|
Mr.
Munson received $25,000 for his services on the Business Development
Committee.
|
|
·
|
Mr.
Perry received $25,000 for his services on the Public Relations and
Marketing Committee.
|
|
·
|
Mr.
Rhodes received $25,000 for his services on the Audit Committee,
Compensation and Stock Option Committee and Nominating and Corporate
Governance Committee.
|
|
·
|
Mr.
Shelley received $25,000 for his services on the Audit Committee, Public
Relations and Marketing Committee and Nominating and Corporate Governance
Committee.
|
(2) During
the fourth quarter of 2008, our board of directors (with each recipient
abstaining as to himself) approved the grants of 45,000 shares of non-qualified
stock options to our non-employee directors under the 2008 Plan (the “2008
Non-Qualified Options”). The exercise price of the 2008 Non-Qualified
Options was equal to the market value of our common stock at the date of
grant. The 2008 Non-Qualified Options have a 10 year term and vest at
the end of each one-year period at the rate of 16.5% per year for the first five
years, with the remaining unvested options will vest at the end of the sixth
year. Pursuant to the terms of the 2008 Non-Qualified Options, if a
termination event occurs, as defined, the non-vested 2008 Non-Qualified Options
will become fully vested and exercisable for a period of one year from the date
of the termination event. The amount of director compensation
relating to option awards is the expense recognized in 2008 relating to the 2008
Non-Qualified Options in accordance with SFAS 123(R).
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 considers the
recommendations of the Chief Executive Officer when setting the compensation of
our officers. 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: Horace G. Rhodes (Chairman), Charles
A. Burtch, and Bernard G. Ille. Neither Mr. Burtch, Mr. Ille nor 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, 2008, 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)
|
1,145,100
|
$
|
6.81
|
863,000
|
|||
|
Equity
compensation plans not approved by stockholders (2)
|
142,500
|
$
|
1.48
|
-
|
|||
|
Total
|
1,287,600
|
$
|
6.22
|
863,300
|
1) Stock Incentive Plan
Receiving Stockholders' Approval in 2008 On May 5, 2008, our
Board of Directors adopted our 2008 Incentive Stock Plan (the “2008 Plan”),
which plan was approved by our shareholders at our annual meeting of
shareholders held on June 5, 2008. The number of shares of our common
stock available for issuance under the 2008 Plan is 1,000,000 shares, subject to
adjustment. Under the 2008 Plan, awards may be made to any employee,
officer or director of the Company and its affiliated companies. An
award may also be granted to any consultant, agent, advisor or independent
contractor for bona fide services rendered to the Company or any affiliate (as
defined in the 2008 Plan), subject to certain conditions. The 2008 Plan will be
administered by the Compensation and Stock Option Committee.
During
the fourth quarter of 2008, the Compensation and Stock Option Committee under
the 2008 Plan approved the grants of 372,000 shares of qualified stock options
to certain employees, and the Board of Directors (with each recipient abstaining
as to himself) approved the grants of 45,000 shares of non-qualified stock
options to our non-employee directors (the “2008 Options”). The exercise price
of the 2008 Options ranged from $7.86 to $9.97 per share, which is based on the
market value of our common stock on the date the 2008 Options were granted. The
2008 Options vest at the end of each one-year period at the rate of 16.5% per
year for the first five years and the remaining unvested options will vest at
the end of the sixth year. Pursuant to the terms of the non-qualified
stock options, if a termination event occurs, as defined, the non-vested stock
options will become fully vested and exercisable for a period of one year from
the date of the termination event. Excluding the non-qualified stock
options relating to a termination event, the 2008 Options expire during the
fourth quarter of 2018.
Under
SFAS 123(R), the fair value for the 2008 Options was estimated, using an option
pricing model. The total fair value for the 2008 Options was
estimated to be approximately $1,503,000, or an average of $3.60 per share,
using a Black-Scholes-Merton option pricing model. During the fourth
quarter of 2008, we began amortizing the total estimated fair value of the 2008
Options, primarily to SG&A, which will continue through the fourth quarter
of 2014 (adjusted for forfeitures). For 2008, we incurred stock-based
compensation expense of $811,000, of which $42,000 relates to the 2008
Options.
(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. The exercise 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, 2008.
The
equity compensation plans, which have not been approved by the stockholders, are
the following:
|
·
|
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, 2008, 22,500 shares remain
exercisable at an exercise price of $2.73 per
share.
|
|
·
|
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,
2008, 120,000 shares remain
exercisable.
|
Security
Ownership of Certain Beneficial Owners
The
following table sets forth certain information as of February 28, 2009,
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 28, 2009.
|
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
|
4,750,009
1,020,000
|
(3)
(4)
(5)
|
21.4%
99.9%
|
||
|
Winslow
Management Company LLC
|
Common
|
1,307,453
|
6.2%
|
+ 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 28, 2009 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.
(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 LLC (“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) 200,406 shares held in certain trusts for the benefit of
grandchildren and great grandchildren of J. Golsen and Sylvia H. Golsen over
which J. Golsen is the trustee; (b) 653,976 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) 296,639 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 11,250 shares that he has the right to acquire
within the next 60 days under the Company’s stock option plans; (d) 263,915
shares over which S. Golsen has the sole voting and dispositive power and 11,250
shares that he has the right to acquire within the next 60 days under the
Company’s stock option plans; (e) 30,000 shares over which L. Rappaport has the
sole voting and dispositive power and 36,400 shares that she has the right to
acquire upon conversion of $1 million principal amount of the 2007 Debentures;
(f) 1,632,099 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, 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 145,600 shares issuable shares upon the conversion of $4 million principal
amount of the Company’s 5.5% Convertible Senior Subordinated Debentures Due 2012
owned of record by SBL, and (g) 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, and (h) 36,400 shares issuable upon the conversion of $1 million
principal amount of the Company’s 5.5% Convertible Senior Subordinated
Debentures Due 2012 owned by L. Rappaport. See “Certain Relationships and
Related Transactions”.
(4) J.
Golsen and Sylvia H. Golsen disclaim beneficial ownership of the shares over
which B. Golsen, S. Golsen and L. Rappaport each have sole voting and investment
power. Sylvia H. Golsen, B. Golsen, S. Golsen and L. Rappaport
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,
S. Golsen and L. Rappaport disclaim beneficial ownership of the shares owned of
record by the LLC, except to the extent of their respective pecuniary interest
therein. S. Golsen and L. Rappaport 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. L. Rappaport
disclaims beneficial ownership of the shares over which her spouse has sole
voting and investment power over.
(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
executive officers as a group as to their beneficial ownership of our voting
common stock and voting preferred stock as of February 28, 2009.
|
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
|
59,516
|
(3)
|
*
|
||||
|
Charles
A. Burtch
|
Common
|
1,000
|
(4)
|
*
|
||||
|
Robert
A. Butkin
|
Common
|
1,000
|
(5)
|
*
|
||||
|
Barry
H. Golsen
|
Common
Voting
Preferred
|
3,940,718
1,020,000
|
(6)
(6)
|
17.8
99.9
|
%
%
|
|||
|
Jack
E. Golsen
|
Common
Voting
Preferred
|
4,100,022
1,020,000
|
(7)
(7)
|
18.5
99.9
|
%
%
|
|||
|
David
R. Goss
|
Common
|
251,594
|
(8)
|
1.2
|
%
|
|||
|
Bernard
G. Ille
|
Common
|
30,000
|
(9)
|
*
|
||||
|
Jim
D. Jones
|
Common
|
135,252
|
(10)
|
*
|
||||
|
Donald
W. Munson
|
Common
|
6,740
|
(11)
|
*
|
||||
|
Ronald
V. Perry
|
Common
|
-
|
-
|
|||||
|
Horace
G. Rhodes
|
Common
|
16,500
|
(12)
|
*
|
||||
|
David
M. Shear
|
Common
|
95,581
|
(13)
|
*
|
||||
|
Tony
M. Shelby
|
Common
|
220,810
|
(14)
|
1.0
|
%
|
|||
|
John
A. Shelley
|
Common
|
2,830
|
(15)
|
*
|
||||
|
Michael
G. Adams
|
Common
|
21,304
|
(16)
|
*
|
||||
|
Harold
L. Rieker, Jr.
|
Common
|
3,500
|
(17)
|
*
|
||||
|
Directors
and Executive Officers as a group number
(17
persons)
|
Common
Voting Preferred |
5,270,521
1,020,000
|
(19)
|
23.4
99.9
|
%
%
|
* Less
than 1%.
+ See
footnote “+” to the table under “Security Ownership of Certain Beneficial
Owners.”
|
(1)
|
We
based the information, with respect to beneficial ownership, on
information furnished by each director or officer, contained in filings
made with the SEC, or contained in our
records.
|
|
(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 are held in a trust owned by Mrs. Ackerman, of which Mrs. Ackerman
is trustee.
|
|
(3)
|
These
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. 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)
|
Mr.
Burtch has the sole voting and dispositive power over these
shares.
|
|
(5)
|
These
shares are held in certain trusts over which Mr. Butkin has voting
and dispositive power.
|
|
(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 80,000
shares that Mr. Goss may acquire pursuant to currently exercisable
stock options.
|
|
(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) 5,000 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 may acquire pursuant to
currently exercisable stock
options.
|
|
(11)
|
Mr. Munson
has the sole voting and dispositive power over these
shares.
|
|
(12)
|
The
amount includes (a) 16,000 shares of common stock over which
Mr. Rhodes has the sole voting and dispositive power including 15,000
shares held by a trust, and (b) 500 shares held by a revocable trust
over which Mr. Rhodes’ wife has voting and dispositive
power.
|
|
(13)
|
These
shares are held in a joint account owned by 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 8,988
shares, the beneficial ownership of which is disclaimed by her, that are held by
trusts of which she is the trustee.
|
(14)
|
Mr. Shelby
has the sole voting and dispositive power over these shares, which include
115,000 shares that Mr. Shelby may acquire pursuant to currently
exercisable stock options plans.
|
|
(15)
|
Mr. Shelley
has the sole voting and dispositive power over these
shares.
|
|
(16)
|
This
amount includes 11,304 shares held by Mr. Adams' trust over which
Mr. Adams possesses sole voting and dispositive power, and 10,000
shares that Mr. Adams may acquire pursuant to currently exercisable
stock options.
|
|
(17)
|
Mr. Rieker
has the sole voting and dispositive power over these shares, which include
3,100 shares that Mr. Rieker may acquire pursuant to currently exercisable
stock options.
|
|
(18)
|
The
shares of common stock include 349,350 shares of common stock that
executive officers and directors have the right to acquire within 60 days
under our stock option plans and 1,066,266 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.
|
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
Golsen
Group
During
the fourth quarter of 2008, the Golsen Group acquired from an unrelated third
party $5,000,000 of the 2007 Debentures. At December 31, 2008,
accrued interest of $137,500 relates to the portion of debentures held by the
Golsen Group.
During
2008, the Company remodeled their offices and incurred costs of $18,000 for the
replacement of carpet involving 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.
During
2008, the Golsen Group paid us approximately $9,400 for the use of office space
in our corporate offices, which is currently approximately 1,200 square
feet.
Steven J.
Golsen, Chief Operating Officer of our Climate Control Business, 2008
compensation was approximately $445,000, which included $160,000 bonus and
$6,000 automobile allowance. In addition, Steven J. Golsen realized
approximately $473,000 value in 2008 from the exercise of non-qualified stock
options. Heidi Brown Shear, Vice President and Managing Counsel to the Company,
2008 compensation was approximately $155,000, which included $35,000 bonus and
$3,900 automobile allowance. In addition, Heidi Brown Shear realized
approximately $295,000 value in 2008 from the exercise of qualified stock
options.
Cash
Dividends
In
March 2008, we paid the dividends totaling approximately $240,000 and
$60,000 on our Series B Preferred and our Series D Preferred,
respectively, 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. In addition, Dr.
Brown receives a fee of $2,000 per month to perform medical director consulting
services for the Company in connection with the Company’s self-insured health
plan and workmen’s compensation benefits.
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 NYSE.
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, 2008 and 2007, 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 $1,455,001 and $1,635,057, respectively.
Audit-Related
Fees
Ernst
& Young LLP billed the Company $25,000 and $95,000 during 2008 and 2007,
respectively, for audit-related services, which included benefit plan audit and
accounting consultations that included assistance with our internal control
documentation, the issuance of the 2007 Debentures, and the exchange tender
offer during 2007.
Tax
Fees
Ernst
& Young LLP billed $538,095 and $249,887 during 2008 and 2007, respectively,
for tax services to the Company, and included tax return review and preparation
and tax consultations and planning.
All Other
Fees
The
Company did not engage its accountants to provide any other services for the
fiscal years ended December 31, 2008 and 2007.
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, 2008 and 2007
is compatible with maintaining its independence.
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, 2008 and 2007
|
F-3
|
|
|
Consolidated
Statements of Income for each of the three years in the period ended
December 31, 2008
|
F-5
|
|
|
Consolidated
Statements of Stockholders' Equity for each of the three years in the
period ended December 31, 2008
|
F-6
|
|
|
Consolidated
Statements of Cash Flows for each of the three years in the period ended
December 31, 2008
|
F-9
|
|
|
Notes
to Consolidated Financial Statements
|
F-11
|
|
|
Quarterly
Financial Data (Unaudited)
|
F-
69
|
(a) (2) Financial Statement
Schedules
The
Company has included the following schedules in this report:
|
I -
Condensed Financial Information of Registrant
|
F-
72
|
|
II
- Valuation and Qualifying Accounts
|
F-
77
|
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.
(a)(3)
Exhibits
|
3(i).1
|
Restated
Certificate of Incorporation, as amended.
|
|
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 Noncumulative 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
|
Renewed
Rights Agreement, dated as of December 2, 2008, between the Company and
UMB Bank, n.a., which the Company hereby incorporates by reference from
Exhibit 4.1 to the Company’s Form 8-K, dated December 5,
2008.
|
|
4.7
|
First
Amendment to Renewed Rights Agreement, dated December 3, 2008, between LSB
Industries, Inc. and UMB Bank, n.a., which the Company hereby incorporates
by reference from Exhibit 4.3 to the Company’s Form 8-K, dated December 5,
2008.
|
|
4.8
|
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.
|
|
4.9
|
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.
|
|
4.10
|
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. |
|
4.11
|
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.
|
|
4.12
|
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.
|
|
4.13
|
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.
|
|
4.14
|
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.
|
|
4.15
|
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.
|
|
4.16
|
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.
|
|
4.17
|
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.
|
|
4.18
|
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
|
|
4.19
|
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.
|
|
4.20
|
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.
|
|
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
|
Amendment
to Non-Qualified Benefit Plan Agreement, dated December 17, 2008, between
Barry H. Golsen and the Company, which the Company hereby incorporates by
reference from Exhibit 99.3 to the Company’s Form 8-K, dated December 23,
2008. Each Amendment to Non-Qualified Benefit Plan Agreement
with David R. Goss and Steven J. Golsen is substantially the same as this
exhibit and will be provided to the Commission upon
request.
|
|
10.4
|
The
Company's 1993 Stock Option and Incentive Plan, 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.
|
|
10.5
|
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.
|
|
10.6
|
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.
|
|
10.7
|
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.
|
|
10.8
|
LSB
Industries, Inc. Outside Directors Stock Option Plan, which the Company
hereby incorporates by reference from Exhibit "C" to the Company’s Proxy
Statement, dated May 24, 1999 for its 1999 Annual Meeting of Stockholders.
See SEC file number 001-07677.
|
|
10.9
|
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.
|
|
10.10
|
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.
|
|
10.11
|
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.
|
|
10.12
|
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.
|
|
10.13
|
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.
|
|
10.14
|
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.
|
|
10.15
|
LSB
Industries, Inc. 2008 Incentive Stock Plan, effective June 5, 2008, which
the Company hereby incorporates by reference from Exhibit 99.1 to the
Company’s Form 8-K, dated June 6, 2008.
|
|
10.16
|
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.
|
|
10.17
|
Amendment
to Severance Agreement, dated December 17, 2008, between Barry H. Golsen
and the Company, which the Company hereby incorporates by reference from
Exhibit 99.2 to the Company’s Form 8-K, dated December 23,
2008. Each Amendment to Severance Agreement with Jack E.
Golsen, Tony M. Shelby, David R. Goss and David M. Shear is substantially
the same as this exhibit and will be provided to the Commission upon
request.
|
|
10.18
|
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.
|
|
10.19
|
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.
|
|
10.20
|
Third
Amendment to Employment Agreement, dated December 17, 2008, between the
Company and Jack E. Golsen, which the Company hereby incorporates by
reference from Exhibit 99.1 to the Company’s Form 8-K, dated December 23,
2008.
|
|
10.21
|
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.
|
|
10.22
|
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.
|
|
10.23
|
Nitric Acid Supply Operating and
Maintenance Agreement, dated October 23, 2008, between El Dorado Nitrogen,
L.P., El Dorado Chemical Company and Bayer MaterialScience, LLC, 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, 2008.
CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A
REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES
AND EXCHANGE COMMISSION FOR THE PURPOSES OF THIS
REQUEST
|
|
10.24
|
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.
|
|
10.25
|
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.
|
|
10.26
|
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.
|
|
10.27
|
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.
|
|
10.28
|
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.
|
|
10.29
|
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.
|
|
10.30
|
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.
|
|
10.31
|
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.
|
|
10.32
|
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.
|
|
10.33
|
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.
|
|
10.34
|
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.
|
|
10.35
|
First
Amendment to Amended and Restated Lease Agreement, dated April 1, 2007,
between Raptor Master, L.L.C. and Climate Master, Inc., which the Company
hereby incorporates by reference from Exhibit 10.30 to the Company’s Form
10-K for the fiscal year ended December 31, 2007.
|
|
10.36
|
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.
|
|
10.37
|
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.
|
|
10.38
|
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.
|
|
10.39
|
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.
|
|
10.40
|
Third
Amendment to AN Supply Agreement, dated effective December 9, 2008,
between El Dorado Chemical Company and Orica USA Inc., which the Company
hereby incorporates by reference from Exhibit 99.1 to the Company's Form
8-K, filed January 21, 2009.
|
|
10.41
|
Agreement,
dated August 1, 2007, between El Dorado Chemical Company and United
Steelworkers of America International Union AFL-CIO and its Local 13-434,
which the Company hereby incorporates by reference from Exhibit 99.1 to
the Company’s Form 8-K, dated July 29, 2008.
|
|
10.42
|
Agreement,
dated October 17, 2007, between El Dorado Chemical Company and
International Association of Machinists and Aerospace Workers, AFL-CIO
Local No. 224, which the Company hereby incorporates by reference from
Exhibit 99.1 to the Company’s Form 8-K, dated May 14,
2008.
|
|
10.43
|
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, which the Company hereby incorporates by reference from Exhibit
99.1 to the Company’s Form 8-K, dated March 27,
2008.
|
|
10.44
|
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.
|
|
10.45
|
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.
|
|
10.46
|
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.
|
|
10.47
|
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.
|
|
10.48
|
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.
|
|
10.49
|
Anhydrous Ammonia
Sales Agreement, dated effective January 1, 2009 between Koch Nitrogen
International Sarl and El Dorado Chemical Company. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A
REQUEST FOR CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES
AND EXCHANGE COMMISSION FOR THE PURPOSES OF THIS
REQUEST
|
|
10.50
|
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.
|
|
10.51
|
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.
|
|
10.52
|
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.
|
|
10.53
|
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.
|
|
10.54
|
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.
|
|
10.55
|
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.
|
|
10.56
|
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.
|
|
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 12, 2009 |
Jack
E. Golsen
Chairman
of the Board and
Chief
Executive Officer
(Principal
Executive Officer)
|
||||
|
Dated:
|
By:
|
/s/
Tony M. Shelby
|
|||
| March 12, 2009 | Tony
M. Shelby
Executive
Vice President of Finance
and
Chief Financial Officer
(Principal
Financial Officer)
|
||||
|
Dated:
|
By:
|
/s/
Harold L. Rieker Jr.
|
|||
| March 12, 2009 | Harold
L. Rieker Jr.
Vice
President and Principal Accounting Officer
|
||||
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
12, 2009
|
Jack
E. Golsen, Director
|
|
Dated:
|
By:
/s/ Tony M. Shelby
|
|
March
12, 2009
|
Tony
M. Shelby, Director
|
|
Dated:
|
By:
/s/ Barry H. Golsen
|
|
March
12, 2009
|
Barry
H. Golsen, Director
|
|
Dated:
|
By:
/s/ David R. Goss
|
|
March
12, 2009
|
David
R. Goss, Director
|
|
Dated:
|
By:
/s/ Raymond B. Ackerman
|
|
March
12, 2009
|
Raymond
B. Ackerman, Director
|
|
Dated:
|
By:
/s/ Robert C. Brown MD
|
|
March
12, 2009
|
Robert
C. Brown MD, Director
|
|
Dated:
|
By:
/s/ Charles A. Burtch
|
|
March
12, 2009
|
Charles
A. Burtch, Director
|
|
Dated:
|
By:
/s/ Robert A. Butkin
|
|
March
12, 2009
|
Robert
A. Butkin, Director
|
|
Dated:
|
By:
/s/ Bernard G. Ille
|
|
March
12, 2009
|
Bernard
G. Ille, Director
|
|
Dated:
|
By:
/s/ Donald W. Munson
|
|
March
12, 2009
|
Donald
W. Munson, Director
|
|
Dated:
|
By:
/s/ Ronald V. Perry
|
|
March
12, 2009
|
Ronald
V. Perry, Director
|
|
Dated:
|
By:
/s/ Horace G. Rhodes
|
|
March
12, 2009
|
Horace
G. Rhodes, Director
|
|
Dated:
|
By:
/s/ John A. Shelley
|
|
March
12, 2009
|
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, 2008
|
Page
|
|
| Financial Statements | |
|
F -
2
|
|
|
F -
3
|
|
|
F -
5
|
|
|
F -
6
|
|
|
F -
9
|
|
|
F -
11
|
|
|
F -
69
|
|
|
F -
72
|
|
|
F -
77
|
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, 2008 and 2007, and the related consolidated statements of
income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2008. 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, 2008 and 2007, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2008, 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, 2008, 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 12, 2009 expressed an unqualified
opinion thereon.
As
discussed in Note 13 to the
consolidated financial statements, 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 12, 2009
|
December
31,
|
|
2008
|
2007
|
|
(In
Thousands)
|
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 46,204 | $ | 58,224 | ||||
|
Restricted
cash
|
893 | 203 | ||||||
|
Accounts
receivable, net
|
78,846 | 70,577 | ||||||
|
Inventories
|
60,810 | 56,876 | ||||||
|
Supplies,
prepaid items and other:
|
||||||||
|
Prepaid
insurance
|
3,373 | 3,350 | ||||||
|
Precious
metals
|
14,691 | 10,935 | ||||||
|
Supplies
|
4,301 | 3,849 | ||||||
|
Other
|
1,378 | 1,464 | ||||||
|
Total
supplies, prepaid items and other
|
23,743 | 19,598 | ||||||
|
Deferred
income taxes
|
11,417 | 10,030 | ||||||
|
Total
current assets
|
221,913 | 215,508 | ||||||
|
Property,
plant and equipment, net
|
104,292 | 79,692 | ||||||
|
Other
assets:
|
||||||||
|
Debt
issuance costs, net
|
2,607 | 4,213 | ||||||
|
Investment
in affiliate
|
3,628 | 3,426 | ||||||
|
Goodwill
|
1,724 | 1,724 | ||||||
|
Other,
net
|
1,603 | 2,991 | ||||||
|
Total
other assets
|
9,562 | 12,354 | ||||||
| $ | 335,767 | $ | 307,554 | |||||
(Continued
on following page)
|
December
31,
|
|
2008
|
2007
|
|
(In
Thousands)
|
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
43,014
|
$
|
39,060
|
|||
|
Short-term
financing
|
2,228
|
919
|
|||||
|
Accrued
and other liabilities
|
39,236
|
38,942
|
|||||
|
Current
portion of long-term debt
|
1,560
|
1,043
|
|||||
|
Total
current liabilities
|
86,038
|
79,964
|
|||||
|
Long-term
debt
|
103,600
|
121,064
|
|||||
|
Noncurrent
accrued and other liabilities
|
9,631
|
6,913
|
|||||
|
Deferred
income taxes
|
6,454
|
5,330
|
|||||
|
Commitments
and contingencies (Note 14)
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Series
B 12% cumulative, convertible preferred stock, $100 par value; 20,000
shares issued and outstanding
|
2,000
|
2,000
|
|||||
|
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, 24,958,330 shares
issued (24,466,506 at December 31, 2007)
|
2,496
|
2,447
|
|||||
|
Capital
in excess of par value
|
127,337
|
123,336
|
|||||
|
Accumulated
other comprehensive loss
|
(120
|
)
|
(411
|
)
|
|||
|
Accumulated
retained earnings (deficit)
|
19,804
|
(16,437
|
)
|
||||
|
152,517
|
111,935
|
||||||
|
Less
treasury stock, at cost:
|
|||||||
|
Common
stock, 3,848,518 shares (3,448,518 at December 31, 2007)
|
22,473
|
17,652
|
|||||
|
Total
stockholders’ equity
|
130,044
|
94,283
|
|||||
|
$
|
335,767
|
$
|
307,554
|
See
accompanying notes.
|
Year
ended December 31,
|
|||||
|
2008
|
2007
|
2006
|
|||
|
(In
Thousands, Except Per Share
Amounts)
|
|||||
|
Net
sales
|
$
|
748,967
|
$
|
586,407
|
$
|
491,952
|
|||||
|
Cost
of sales
|
610,087
|
453,814
|
401,090
|
||||||||
|
Gross
profit
|
138,880
|
132,593
|
90,862
|
||||||||
|
Selling,
general and administrative expense
|
86,646
|
75,033
|
64,134
|
||||||||
|
Provisions
for losses on accounts receivable
|
371
|
858
|
426
|
||||||||
|
Other
expense
|
1,184
|
1,186
|
722
|
||||||||
|
Other
income
|
(8,476
|
)
|
(3,495
|
)
|
(1,559
|
)
|
|||||
|
Operating
income
|
59,155
|
59,011
|
27,139
|
||||||||
|
Interest
expense
|
11,381
|
12,078
|
11,915
|
||||||||
|
Gain
on extinguishment of debt
|
(5,529
|
)
|
-
|
-
|
|||||||
|
Non-operating
other income, net
|
(1,096
|
)
|
(1,264
|
)
|
(624
|
)
|
|||||
|
Income
from continuing operations before provisions for income taxes and equity
in earnings of affiliate
|
54,399
|
48,197
|
15,848
|
||||||||
|
Provisions
for income taxes
|
18,776
|
2,540
|
901
|
||||||||
|
Equity
in earnings of affiliate
|
(937
|
)
|
(877
|
)
|
(821
|
)
|
|||||
|
Income
from continuing operations
|
36,560
|
46,534
|
15,768
|
||||||||
|
Net
loss (income) from discontinued operations
|
13
|
(348
|
)
|
253
|
|||||||
|
Net
income
|
36,547
|
46,882
|
15,515
|
||||||||
|
Dividends,
dividend requirements and stock dividends on preferred
stock
|
306
|
5,608
|
2,630
|
||||||||
|
Net
income applicable to common stock
|
$
|
36,241
|
$
|
41,274
|
$
|
12,885
|
|||||
|
Income
(loss) per common share:
|
|||||||||||
|
Basic:
|
|||||||||||
|
Income
from continuing operations
|
$
|
1.71
|
$
|
2.09
|
$
|
.92
|
|||||
|
Net
income (loss) from discontinued operations
|
-
|
.02
|
(.02
|
)
|
|||||||
|
Net
income
|
$
|
1.71
|
$
|
2.11
|
$
|
.90
|
|||||
|
Diluted:
|
|||||||||||
|
Income
from continuing operations
|
$
|
1.58
|
$
|
1.82
|
$
|
.77
|
|||||
|
Net
income (loss) from discontinued operations
|
-
|
.02
|
(.01
|
)
|
|||||||
|
Net
income
|
$
|
1.58
|
$
|
1.84
|
$
|
.76
|
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
Retained
Earnings
(Deficit)
|
Treasury
Stock
-
Preferred
|
Treasury
Stock
-
Common
|
Total
|
|
(In
Thousands)
|
|
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)
|
Common
Stock
Shares
|
Non-
Redeemable
Preferred
Stock
|
Common
Stock
Par
Value
|
Capital
in
Excess
of
Par
Value
|
Accumulated
Other
Comprehensive
Loss
|
Accumulated
Retained
Earnings
(Deficit)
|
Treasury
Stock
-
Preferred
|
Treasury
Stock
-
Common
|
Total
|
|
(In
Thousands)
|
| 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 |
|
(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.
|
(Continued
on following page)
|
Common
Stock Shares |
Non-
Redeemable
Preferred
Stock
|
Common
Stock Par Value |
Capital
in
Excess of Par Value |
Accumulated
Other
Comprehensive
Loss
|
Accumulated
Retained
Earnings
(Deficit)
|
Treasury
Stock - Preferred |
Treasury
Stock - Common |
Total
|
|
(In
Thousands)
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,547
|
|
|
|
|
|
$
|
36,547
|
||||||||||||
|
Amortization
of cash flow hedge
|
291
|
291
|
||||||||||||||||||||||||||||||
|
Total
comprehensive income
|
36,838
|
|||||||||||||||||||||||||||||||
|
Dividends
paid on preferred stock
|
(306
|
)
|
(306
|
)
|
||||||||||||||||||||||||||||
|
Stock-based
compensation
|
811 |
811
|
||||||||||||||||||||||||||||||
|
Exercise
of stock options
|
490 |
49
|
797 |
|
846
|
|||||||||||||||||||||||||||
| Income tax
benefit from
exercise of stock options |
2,390
|
2,390
|
|
|||||||||||||||||||||||||||||
|
Acquisition of 400,000 shares
of common stock |
|
|
|
|
(4,821
|
)
|
(4,821
|
)
|
||||||||||||||||||||||||
|
Conversion
of 38 shares of redeemable preferred stock to common stock
|
1
|
|
3
|
3
|
||||||||||||||||||||||||||||
| Balance at December 31, 2008 |
24,958
|
$ |
3,000
|
$ |
2,496
|
$ |
127,337
|
$ | (120 | ) | $ | 19,804 | $ | - | $ |
(22,473
|
) | $ | 130,044 |
See
accompanying notes.
|
Year
ended December 31,
|
|||||
|
2008
|
2007
|
2006
|
|||
|
(In
Thousands)
|
|||||
|
Net
income
|
$
|
36,547
|
$
|
46,882
|
$
|
15,515
|
|||||
|
Adjustments
to reconcile net income to net cash provided by continuing operating
activities:
|
|||||||||||
|
Net
loss (income) from discontinued operations
|
13
|
(348
|
)
|
253
|
|||||||
|
Deferred
income taxes
|
(263
|
)
|
(4,700
|
)
|
-
|
||||||
|
Gain
on extinguishment of debt
|
(5,529
|
)
|
-
|
-
|
|||||||
|
Losses
(gain) on sales and disposals of property and equipment
|
158
|
378
|
(12
|
)
|
|||||||
|
Gain
on litigation judgment associated with property, plant and
equipment
|
(3,943
|
)
|
-
|
-
|
|||||||
|
Depreciation
of property, plant and equipment
|
13,830
|
12,271
|
11,381
|
||||||||
|
Amortization
|
1,186
|
2,082
|
1,168
|
||||||||
|
Stock-based
compensation
|
811
|
421
|
-
|
||||||||
|
Provisions
for losses on accounts receivable
|
371
|
858
|
426
|
||||||||
|
Provision
for (realization of) losses on inventory
|
3,824
|
(384
|
)
|
(711
|
)
|
||||||
|
Provisions
for impairment on long-lived assets
|
192
|
250
|
286
|
||||||||
|
Provision
for (realization of) losses on firm sales commitments
|
-
|
(328
|
)
|
328
|
|||||||
|
Equity
in earnings of affiliate
|
(937
|
)
|
(877
|
)
|
(821
|
)
|
|||||
|
Distributions
received from affiliate
|
735
|
765
|
875
|
||||||||
|
Changes
in fair value of commodities contracts
|
5,910
|
172
|
408
|
||||||||
|
Changes
in fair value of interest rate contracts
|
2,863
|
580
|
44
|
||||||||
|
Cash
provided (used) by changes in assets and liabilities (net
of effects of discontinued operations):
|
|||||||||||
|
Accounts
receivable
|
(8,776
|
)
|
(4,392
|
)
|
(18,066
|
)
|
|||||
|
Inventories
|
(7,758
|
)
|
(11,044
|
)
|
(7,287
|
)
|
|||||
|
Other
supplies and prepaid items
|
(4,145
|
)
|
(4,857
|
)
|
(1,871
|
)
|
|||||
|
Accounts
payable
|
2,214
|
(5,110
|
)
|
11,183
|
|||||||
|
Customer
deposits
|
(6,283
|
)
|
6,587
|
1,011
|
|||||||
|
Deferred
rent expense
|
(2,876
|
)
|
(931
|
)
|
122
|
||||||
|
Other
current and noncurrent liabilities
|
3,871
|
8,524
|
3,460
|
||||||||
|
Net
cash provided by continuing operating activities
|
32,015
|
46,799
|
17,692
|
||||||||
|
Cash
flows from continuing investing activities
|
|||||||||||
|
Capital
expenditures
|
(32,556
|
)
|
(14,808
|
)
|
(14,701
|
)
|
|||||
|
Proceeds
from litigation judgment associated with property, plant and
equipment
|
5,948
|
-
|
-
|
||||||||
|
Payment
of legal costs relating to litigation judgment associated with property,
plant and equipment
|
(1,884
|
)
|
-
|
-
|
|||||||
|
Proceeds
from sales of property and equipment
|
74
|
271
|
147
|
||||||||
|
Proceeds
from (deposits of) current and noncurrent restricted cash
|
(690
|
)
|
3,478
|
(3,504
|
)
|
||||||
|
Purchase
of interest rate cap contracts
|
-
|
(621
|
)
|
-
|
|||||||
|
Other
assets
|
(379
|
)
|
(168
|
)
|
(363
|
)
|
|||||
|
Net
cash used by continuing investing activities
|
(29,487
|
)
|
(11,848
|
)
|
(18,421
|
)
|
(Continued
on following page)
|
Year
ended December 31,
|
|
2008
|
2007
|
2006
|
|
(In
Thousands)
|
|
Cash
flows from continuing financing activities
|
|||||||||||
|
Proceeds
from revolving debt facilities
|
$
|
662,402
|
$
|
529,766
|
$
|
460,335
|
|||||
|
Payments
on revolving debt facilities
|
(662,402
|
)
|
(556,173
|
)
|
(466,445
|
)
|
|||||
|
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
|
||||||||
|
Payments
on Senior Secured Loan
|
-
|
(50,000
|
)
|
-
|
|||||||
|
Acquisition
of 5.5% convertible debentures
|
(13,207
|
)
|
-
|
-
|
|||||||
|
Acquisition
of 10.75% Senior Unsecured Notes
|
-
|
-
|
(13,300
|
)
|
|||||||
|
Payments
on other long-term debt
|
(599
|
)
|
(7,781
|
)
|
(6,853
|
)
|
|||||
|
Payments
of debt issuance costs
|
-
|
(1,403
|
)
|
(356
|
)
|
||||||
|
Proceeds
from short-term financing and drafts payable
|
3,178
|
1,456
|
3,984
|
||||||||
|
Payments
on short-term financing and drafts payable
|
(1,869
|
)
|
(3,523
|
)
|
(3,788
|
)
|
|||||
|
Proceeds
from exercise of stock options
|
846
|
1,522
|
298
|
||||||||
|
Proceeds
from exercise of warrant
|
-
|
393
|
-
|
||||||||
|
Purchase
of treasury stock
|
(4,821
|
)
|
-
|
-
|
|||||||
|
Excess
income tax benefit on stock options exercised
|
2,390
|
1,740
|
-
|
||||||||
|
Dividends
paid on preferred stock
|
(306
|
)
|
(2,934
|
)
|
(262
|
)
|
|||||
|
Acquisition
of non-redeemable preferred stock
|
-
|
(1,292
|
)
|
(95
|
)
|
||||||
|
Net
cash provided (used) by continuing financing activities
|
(14,388
|
)
|
21,180
|
(1,388
|
)
|
||||||
|
Cash
flows of discontinued operations:
|
|||||||||||
|
Operating
cash flows
|
(160
|
)
|
(162
|
)
|
(281
|
)
|
|||||
|
Net
increase (decrease) in cash and cash equivalents
|
(12,020
|
)
|
55,969
|
(2,398
|
)
|
||||||
|
Cash
and cash equivalents at beginning of year
|
58,224
|
2,255
|
4,653
|
||||||||
|
Cash
and cash equivalents at end of year
|
$
|
46,204
|
$
|
58,224
|
$
|
2,255
|
| Supplemental cash flow information: | |||||||||||
|
Cash
payments for:
|
|||||||||||
|
Interest
on long-term debt and other
|
$
|
6,562
|
$
|
9,162
|
$
|
11,084
|
|||||
|
Income
taxes, net of refunds
|
$
|
19,469
|
$
|
1,646
|
$
|
445
|
|||||
|
Noncash
investing and financing activities:
|
|||||||||||
|
Receivable
from sale of property and equipment
|
$
|
-
|
$
|
-
|
$
|
182
|
|||||
|
Debt
issuance costs
|
$
|
-
|
$
|
3,026
|
$
|
1,190
|
|||||
|
Other
assets, accounts payable and other liabilities and long-term debt
associated with additions of property, plant and equipment
|
$
|
6,675
|
$
|
1,937
|
$
|
149
|
|||||
|
Debt
issuance costs associated with the acquisition of the 5.5% convertible
debentures
|
$
|
764
|
$
|
-
|
$
|
-
|
|||||
|
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.
Certain
reclassifications have been made in our consolidated financial statements for
2007 and 2006 to conform to our consolidated financial statement presentation
for 2008.
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.
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.
Restricted Cash - Restricted
cash consists of cash balances that are legally restricted or designated by the
Company for specific purposes. At December 31, 2008 and 2007, we had restricted
cash of $893,000 and $203,000, respectively, primarily to fund certain
unrealized losses on 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, 2008 and 2007, we had inventory reserves for certain slow-moving
inventory items (primarily Climate Control
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
2. Summary
of Significant Accounting Policies (continued)
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. Recoveries of precious metals are recognized at historical FIFO
costs.
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 of the assets
or fair values less costs to sell. At December 31, 2008, we had no long-lived
assets that met the criteria presented in Statement of Financial Accounting
Standards (“SFAS”) 144 - Accounting for the Impairment or Disposal of Long-Lived
Assets (“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 Costs - Debt
issuance costs are amortized over the term of the associated debt
instrument.
Goodwill - Goodwill is
reviewed for impairment at least annually in accordance with SFAS 142 - Goodwill
and Other Intangible Assets (“SFAS 142”). As of December 31, 2008 and 2007,
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.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
2. Summary of
Significant Accounting Policies (continued)
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 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, 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. We
also recognize the additional warranty expense and liability to cover atypical
costs associated with a specific product, or component thereof, or project
installation, when such costs are probable and reasonably
estimable.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements (continued)
2. Summary
of Significant Accounting Policies (continued)
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)
|
|
2008
|
$
|
1,944
|
$
|
5,514
|
$
|
4,638
|
$
|
2,820
|
|||||
|
2007
|
$
|
1,251
|
$
|
3,325
|
$
|
2,632
|
$
|
1,944
|
|||||
|
2006
|
$
|
861
|
$
|
2,199
|
$
|
1,809
|
$
|
1,251
|
Plant Turnaround Costs - We
expense the costs relating to planned major maintenance activities
(“Turnarounds”) as they are incurred by 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 based on the estimated remaining service period when such benefits
become probable they will be paid. 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 – Accounting for Income Taxes (“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.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
2. Summary
of Significant Accounting Policies (continued)
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 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 or
realizable and earned. Our Chemical Business is subject to specific federal and
state regulatory compliance laws and guidelines. We have developed policies and
procedures related to 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 or replace, as needed, with non-asbestos insulation
through our standard repair and maintenance activities to prevent deterioration.
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 in accordance of FASB Interpretation
(“FIN”) 47 – Accounting for Conditional Asset Retirement Obligations (“FIN
47”).
Stock Options - Effective
January 1, 2006, we adopted SFAS 123(R)-Share-Based Payment “SFAS 123(R)”) using
the modified prospective method, which requires equity awards to be accounted
for under the fair value method. For equity awards with only service conditions
that have a graded vesting period, we recognize compensation cost on a
straight-line basis over the requisite service period for the entire award. In
addition, we issue new shares of common stock upon the exercise of stock
options.
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.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
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 or realizable and earned.
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. Also gains and losses (realized and unrealized)
from our commodities and foreign currency futures/forward contracts are included
in 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 2008, 2007 and 2006, shipping costs of
$16,333,000, $15,209,000 and $17,448,000, respectively, are included in net
sales as these costs relate to amounts billed to our customers. In addition, in
2008, 2007, and 2006, handling costs of $5,432,000, $5,249,000, and $4,950,000,
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 $11,047,000, $11,057,000 and $10,326,000 are included in
SG&A for 2008, 2007 and 2006, respectively.
Advertising Costs - Costs in
connection with advertising and promotion of our products are expensed
as incurred. Such costs amounted to $2,180,000 in 2008, $1,791,000 in 2007 and
$1,233,000 in 2006.
Derivatives, Hedges and Financial
Instruments - We account for derivatives in accordance with SFAS 133 –
Accounting for Derivative Instruments and Hedging Activities (“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.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
2. Summary
of Significant Accounting Policies (continued)
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.
Recently Issued Accounting
Pronouncements - In September 2006, 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 requirements of SFAS 157 became effective for the
Company on January 1, 2008. The provisions of SFAS 157 were applied
prospectively. See Note 15 - Derivatives, Hedges and Financial
Instruments.
In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (“FSP 157-2”),
which delayed the effective date of SFAS 157 for nonfinancial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. FSP 157-2 will become effective for the
Company beginning in the first quarter of 2009 and will be applied
prospectively. We currently do not expect a significant impact from adopting FSP
157-2.
In
March 2008, the FASB issued SFAS No. 161 - Disclosures about Derivative
Instruments and Hedging Activities; an Amendment of SFAS 133 (“SFAS 161”). SFAS
161 requires enhanced disclosures about an entity’s derivative and hedging
activities for the purpose of improving the transparency of financial reporting.
The new disclosure requirements of SFAS 161 will become effective for the
Company beginning in the first quarter of 2009 and we expect that the provisions
will be applied prospectively. We currently do not expect a significant impact
from adopting SFAS 161.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements (continued)
3. Income
Per Share
The
following is a summary of certain transactions which affected basic income per
share or diluted income per share, if dilutive:
During
2008,
|
·
|
we
purchased 400,000 shares of treasury
stock;
|
|
·
|
we
issued 490,304 shares of our common stock as the result of the exercise of
stock options;
|
|
·
|
we
granted 417,000 shares of stock
options;
|
|
·
|
we
paid cash dividends on our 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
$240,000, $60,000 and $6,000, respectively;
and
|
|
·
|
we
acquired $19.5 million aggregate principal amount of our 5.5% Convertible
Senior Subordinated Notes due 2012 (the “2007
Debentures”).
|
During
2007,
|
·
|
we
sold $60 million of 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 Preferred, Series D Preferred and
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.
|
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements (continued)
3. Income
Per Share (continued)
The
following table sets forth the computation of basic and diluted net income per
share:
|
2008
|
2007
|
2006
|
|
(Dollars
In Thousands, Except Per Share Amounts)
|
|||||||||||
|
Numerator:
|
|||||||||||
|
Net
income
|
$
|
36,547
|
$
|
46,882
|
$
|
15,515
|
|||||
|
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
|
)
|
||||||
|
Dividends
and dividend requirements on shares of Series 2 Preferred which were
redeemed in 2007
|
-
|
(59
|
)
|
(84
|
)
|
||||||
|
Dividend
requirements and stock dividend on shares of Series 2 Preferred pursuant
to tender offer in 2007 (1)
|
-
|
(4,971
|
)
|
(993
|
)
|
||||||
|
Dividend
requirements and stock dividend on shares of Series 2 Preferred pursuant
to exchange agreements in 2006 (2)
|
-
|
-
|
(705
|
)
|
|||||||
|
Dividends
and dividend requirements on Series D Preferred
|
(60
|
)
|
(60
|
)
|
(60
|
)
|
|||||
|
Dividends
on Noncumulative Preferred
|
(6
|
)
|
(6
|
)
|
(1
|
)
|
|||||
|
Total
dividends, dividend requirements and stock dividends on preferred
stock
|
(306
|
)
|
(5,608
|
)
|
(2,630
|
)
|
|||||
|
Numerator
for basic net income per share - net income applicable to common
stock
|
36,241
|
41,274
|
12,885
|
||||||||
|
Dividends
and dividend requirements on preferred stock assumed to be converted, if
dilutive
|
306
|
637
|
1,925
|
||||||||
|
Interest
expense including amortization of debt issuance costs, net of income
taxes, on convertible debt assumed to be converted, if
dilutive
|
1,624
|
1,276
|
1,083
|
||||||||
|
Numerator
for diluted net income per common share
|
$
|
38,171
|
$
|
43,187
|
$
|
15,893
|
|||||
|
Denominator:
|
|||||||||||
|
Denominator
for basic net income per common share - weighted-average
shares
|
21,170,418
|
19,579,664
|
14,331,963
|
||||||||
|
Effect
of dilutive securities:
|
|||||||||||
|
Convertible
preferred stock
|
939,126
|
1,478,012
|
3,112,483
|
||||||||
|
Convertible
notes payable
|
1,478,200
|
1,200,044
|
2,100,325
|
||||||||
|
Stock
options
|
544,994
|
1,160,100
|
1,261,661
|
||||||||
|
Warrants
|
-
|
77,824
|
65,227
|
||||||||
|
Dilutive
potential common shares
|
2,962,320
|
3,915,980
|
6,539,696
|
||||||||
|
Denominator
for dilutive net income per common share – adjusted weighted-average
shares and assumed conversions
|
24,132,738
|
23,495,644
|
20,871,659
|
||||||||
|
Basic
net income per common share
|
$
|
1.71
|
$
|
2.11
|
$
|
.90
|
|||||
|
Diluted
net income per common share
|
$
|
1.58
|
$
|
1.84
|
$
|
.76
|
|||||
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
3. Income
Per Share (continued)
(1) As
discussed in Note 17 - 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 – Induced Conversions of Convertible Debt
(“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 17 - 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.
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:
|
2008
|
2007
|
2006
|
|
Stock
options
|
506,142
|
240,068
|
-
|
||||||||
|
Series
2 Preferred pursuant to tender offer in 2007 (A)
|
-
|
261,090
|
-
|
||||||||
|
Series
2 Preferred pursuant to exchange agreements in 2006 (A)
|
-
|
-
|
348,366
|
||||||||
|
506,142
|
501,158
|
348,366
|
(A) 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.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
4. Accounts
Receivable
|
December
31,
|
|
2008
|
2007
|
|
(In
Thousands)
|
|
Trade
receivables
|
$
|
78,092
|
$
|
68,234
|
|||
|
Insurance
claims
|
252
|
2,469
|
|||||
|
Other
|
1,231
|
1,182
|
|||||
|
79,575
|
71,885
|
||||||
|
Allowance
for doubtful accounts
|
(729
|
)
|
(1,308
|
)
|
|||
|
$
|
78,846
|
$
|
70,577
|
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 24% of our
total net receivables at December 31, 2008.
5. Inventories
|
Finished
Goods
|
Work-in-
Process
|
Raw
Materials
|
Total
|
|
(In
Thousands)
|
|
December
31, 2008:
|
||||||||||||
|
Climate
Control products
|
$
|
7,550
|
$
|
2,954
|
$
|
21,521
|
$
|
32,025
|
||||
|
Chemical
products
|
18,638
|
-
|
5,656
|
24,294
|
||||||||
|
Industrial
machinery and components
|
4,491
|
-
|
-
|
4,491
|
||||||||
|
$
|
30,679
|
$
|
2,954
|
$
|
27,177
|
$
|
60,810
|
|||||
|
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
|
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements (continued)
5. Inventories
(continued)
At
December 31, 2008 and 2007, inventory reserves for certain slow-moving inventory
items (primarily Climate Control products) were $514,000 and $460,000,
respectively. In addition, inventory reserves for certain nitrogen-based
inventories provided by our Chemical Business were $3,627,000 and $13,000 at
December 31, 2008 and 2007, 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)
|
|
2008
|
$
|
473
|
$
|
3,824
|
$
|
156
|
$
|
4,141
|
||||||||
|
2007
|
$
|
1,255
|
$
|
(384
|
)
|
$
|
398
|
$
|
473
|
|||||||
|
2006
|
$
|
2,423
|
$
|
(711
|
)
|
$
|
457
|
$
|
1,255
|
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.
6. Precious
Metals
At
December 31, 2008 and 2007, precious metals were $14,691,000 and $10,935,000,
respectively, and are included in supplies, prepaid items and other in the
accompanying consolidated balance sheets.
Precious
metals are used as a catalyst in the Chemical Business manufacturing
process. 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 and/or capital projects, we may be able to perform
procedures to recover precious metals (previously expensed) which have
accumulated over time within our manufacturing equipment. When we
accumulate precious metals in excess of our production requirements, we may sell
a portion of the excess metals.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
6. Precious
Metals (continued)
Precious
metals expense, net, consists of the following:
|
2008
|
2007
|
2006
|
|
(In
Thousands)
|
|
Precious
metals expense
|
$
|
7,786
|
$
|
6,352
|
$
|
4,823
|
|||||
|
Recoveries
of precious metals
|
(1,458
|
)
|
(1,783
|
)
|
(2,082
|
)
|
|||||
|
Gains
on sales of precious metals
|
-
|
(2,011
|
)
|
-
|
|||||||
|
Precious
metals expense, net
|
$
|
6,328
|
$
|
2,558
|
$
|
2,741
|
Precious
metals expense is included in cost of sales (recoveries and gains on sales of
precious metals are reductions to cost of sales) in the accompanying
consolidated statements of income.
7. Property,
Plant and Equipment
|
Useful
lives
|
December
31,
|
|
in
years
|
2008
|
2007
|
|
(In
Thousands)
|
|
Machinery,
equipment and automotive
|
3-20
|
$
|
173,678
|
$
|
151,633
|
|||
|
Buildings
and improvements
|
8-30
|
28,457
|
27,510
|
|||||
|
Furniture,
fixtures and store equipment
|
3-5
|
6,716
|
7,458
|
|||||
|
Assets
under capital leases
|
10
|
1,076
|
1,907
|
|||||
|
Construction
in progress
|
N/A
|
8,514
|
6,648
|
|||||
|
Capital
spare parts
|
N/A
|
2,344
|
1,662
|
|||||
|
Land
|
N/A
|
4,082
|
2,194
|
|||||
|
224,867
|
199,012
|
|||||||
|
Less
accumulated depreciation
|
120,575
|
119,320
|
||||||
|
$
|
104,292
|
$
|
79,692
|
Machinery,
equipment and automotive primarily includes the categories of property and
equipment and estimated useful lives as follows: chemical processing plants and
plant infrastructure (15-20 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, 2008 and 2007, assets under capital leases consist of $1,076,000 and
$1,907,000 of machinery, equipment and automotive, respectively. Accumulated
depreciation for assets under capital leases were $193,000 and $244,000 at
December 31, 2008 and 2007, respectively.
8. Debt
Issuance Costs, net
Debt
issuance costs of $2,607,000 and $4,213,000 are net of accumulated amortization
of $2,980,000 and $2,368,000 as of December 31, 2008 and 2007,
respectively.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
8. Debt
Issuance Costs, net (continued)
During
2008, we acquired a portion of the 2007 Debentures. As a result, approximately
$764,000 of the unamortized debt issuance costs associated with the 2007
Debentures acquired was charged against the gain on extinguishment of debt in
2008.
During
2007, we incurred debt issuance costs of $4,429,000 which included $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 unamortized debt issuance costs
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 unamortized debt issuance and other
debt-related costs associated with the Senior Secured Loan was charged to
interest expense in 2007.
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.
9. 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, 2008 and 2007, our investment was $3,628,000 and
$3,426,000, respectively. As of December 31, 2008, the Partnership and general
partner to the Partnership is indebted to a term lender (“Lender”) of the
Project for approximately $3,578,000 with a term extending to December 2010. 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.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements (continued)
10. Current
and Noncurrent Accrued and Other Liabilities
|
December
31,
|
|
2008
|
2007
|
|
(In
Thousands)
|
|
Fair
value of derivatives
|
$
|
8,347
|
$
|
172
|
|
|
Accrued
payroll and benefits
|
6,422
|
5,362
|
|||
|
Deferred
revenue on extended warranty contracts
|
4,028
|
3,387
|
|||
|
Customer
deposits
|
3,242
|
9,525
|
|||
|
Accrued
insurance
|
2,971
|
2,975
|
|||
|
Accrued
warranty costs
|
2,820
|
1,944
|
|||
|
Accrued
death benefits
|
2,687
|
2,051
|
|||
|
Accrued
commissions
|
2,433
|
2,256
|
|||
|
Accrued
contractual manufacturing obligations
|
2,230
|
1,548
|
|||
|
Accrued
interest
|
2,003
|
1,056
|
|||
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
1,882
|
62
|
|||
|
Accrued
income taxes
|
1,704
|
4,540
|
|||
|
Deferred
rent expense
|
1,424
|
4,300
|
|||
|
Accrued
precious metals costs
|
1,298
|
1,359
|
|||
|
Accrued
executive benefits
|
1,111
|
1,040
|
|||
|
Other
|
4,265
|
4,278
|
|||
|
48,867
|
45,855
|
||||
|
Less
noncurrent portion
|
9,631
|
6,913
|
|||
|
Current
portion of accrued and other liabilities
|
$
|
39,236
|
$
|
38,942
|
11. Redeemable
Preferred Stock
At
December 31, 2008 and 2007, we had 547 shares and 585 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 2008, 2007 and 2006, our board of directors
declared and we paid dividends totaling $6,000 (10.00 per share), $6,000 ($10.00
per share) and $1,000 ($1.24 per share), respectively, on the then outstanding
Noncumulative Preferred. At December 31, 2008 and 2007, the Noncumulative
Preferred was $52,000 and $56,000, respectively, and is classified as accrued
and other liabilities in the accompanying consolidated balance
sheets.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements (continued)
12. Long-Term
Debt
|
December
31,
|
|
2008
|
2007
|
|
(In
Thousands)
|
|
Working
Capital Revolver Loan due 2012 (A)
|
$
|
-
|
-
|
||
|
5.5%
Convertible Senior Subordinated Notes due 2012 (B)
|
40,500
|
60,000
|
|||
|
Secured
Term Loan due 2012 (C)
|
50,000
|
50,000
|
|||
|
Other,
with a current weighted-average interest rate of 6.70%, most
of which is secured by machinery, equipment and real estate
(D)
|
14,660
|
12,107
|
|||
|
105,160
|
122,107
|
||||
|
Less
current portion of long-term debt (E)
|
1,560
|
1,043
|
|||
|
Long-term
debt due after one year (E)
|
$
|
103,600
|
$
|
121,064
|
(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. 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% and matures on April 13, 2012. The interest
rate at December 31, 2008 was 3.75%. Interest is paid monthly, if applicable.
The facility provides for up to $8.5 million of letters of credit. All letters
of credit outstanding reduce availability under the facility. As of December 31,
2008, amounts available for additional borrowing under the Working Capital
Revolver Loan were $49.5 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.
The
lender may, upon an event of default, as defined, terminate the Working Capital
Revolver Loan and make the balance outstanding, if any, due and payable in full.
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 El Dorado Chemical Company
(“EDC”). EDNC is neither a borrower nor guarantor of the Working Capital
Revolver Loan. The
carrying value of the pledged assets is approximately $204 million at December
31, 2008.
A
prepayment premium of $500,000 is due to the lender should the Borrowers elect
to prepay the facility prior to April 13, 2009. This premium 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, including an EBITDA requirement of greater than $25
million, a minimum fixed charge coverage ratio of not less than 1.10 to 1, and a
maximum senior leverage coverage
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
12. Long-Term
Debt (continued)
ratio of
not greater than 4.50 to 1, which requirements are measured quarterly on a
trailing twelve-month basis and as defined in the agreement. ThermaClime was in
compliance with those covenants during 2008. 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.
(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, which began 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.
During
2008, we acquired $19.5 million aggregate principal amount of the 2007
Debentures for $13.2 million and recognized a gain on extinguishment of debt of
$5.5 million, after writing off $0.8 million of the unamortized debt issuance
costs associated with the 2007 Debentures acquired. In addition, see discussion
concerning $5.0 million of the 2007 Debentures being held by the Golsen Group in
Note 22-Related Party Transactions.
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
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
12. Long-Term
Debt (continued)
$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 used a
portion of the net proceeds to redeem our remaining 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 to reduce the
outstanding borrowings under the Working Capital Revolver Loan. In addition, we
have currently invested a portion of the net proceeds in U.S. Treasury
obligations (cash equivalents).
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
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
12. Long-Term Debt
(continued)
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. However, pursuant to the terms of the 5.5% Registration Rights
Agreement, we are no longer obligated to maintain the effectiveness of the 5.5%
Registration Statement.
(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. The Secured Term Loan matures on November 2,
2012.
The
Secured Term Loan accrues interest at a defined LIBOR rate plus 3%, which LIBOR
rate is adjusted on a quarterly basis. The interest rate at December 31, 2008
was approximately 6.19%. 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 $61 million at December 31,
2008.
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, 2008, the
carrying value of the restricted net assets of ThermaClime and its subsidiaries
was approximately $75 million.
As defined in the agreement, the Secured Term Loan borrowers are also subject to a
minimum fixed charge coverage ratio of not less than 1.10
to 1 and a maximum leverage ratio of not greater than 4.50 to 1, 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, 2008.
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.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
12. Long-Term
Debt (continued)
The
Working Capital Revolver Loan agreement (discussed in (A) above) 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.
(D) Amounts include
capital lease obligations of $716,000 and $1,230,000 at December 31, 2008 and
2007, respectively.
(E) Maturities of
long-term debt for each of the five years after December 31, 2008 are as follows
(in thousands):
|
2009
|
$
|
1,560
|
|||
|
2010
|
1,699
|
||||
|
2011
|
1,698
|
||||
|
2012
|
92,188
|
||||
|
2013
|
1,725
|
||||
|
Thereafter
|
6,290
|
||||
|
$
|
105,160
|
13. Income
Taxes
Provisions
(benefits) for income taxes are as follows:
|
2008
|
2007
|
2006
|
|
(In
Thousands)
|
|
Current:
|
|||||||||||
|
Federal
|
$
|
17,388
|
$
|
5,260
|
$
|
312
|
|||||
|
State
|
1,651
|
1,980
|
589
|
||||||||
|
Total
Current
|
$
|
19,039
|
$
|
7,240
|
$
|
901
|
|
Deferred:
|
|||||||||||
|
Federal
|
$
|
595
|
$
|
(4,095
|
)
|
$
|
-
|
||||
|
State
|
(858
|
)
|
(605
|
)
|
-
|
||||||
|
Total
Deferred
|
$
|
(263
|
)
|
$
|
(4,700
|
)
|
$
|
-
|
|||
|
Provisions
for income taxes
|
$
|
18,776
|
$
|
2,540
|
$
|
901
|
For 2008,
the current provision for federal income taxes of approximately $17.4 million
includes regular federal income tax after the consideration of permanent and
temporary differences between income for GAAP and tax purposes. The
current provision for state income taxes of approximately $1.7 million in 2008
includes regular state income tax and provisions for uncertain state income tax
positions. (See discussion of FIN 48 below). At December 31, 2007, we
had federal and state NOL carryforwards and we utilized all of the federal NOL
carryforwards during 2008 and a significant portion of the state NOL
carryforwards.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
13. Income
Taxes (continued)
The 2008
deferred tax benefit of $0.3 million results from the recognition of changes in
our prior year deferred tax assets and liabilities, and the utilization of state
NOL carryforwards and other temporary differences. We reduce income tax expense
for investment tax credits in the year they are earned. The gross
amount of the investment tax credits available to offset state income taxes is
approximately $0.6 million and includes credits for the tax years
2004-2008. The investment tax credits do not expire and carryforward
indefinitely.
During
2008, we performed a detailed analysis of all our deferred tax assets and
liabilities and determined that our state net NOL carryforwards were understated
by approximately $34.2 million. The addition of the tax benefits of
these state NOL carryforwards increased our deferred tax assets and decreased
our deferred tax expense by approximately $1.1 million, net of the valuation
allowance discussed below. During 2008, we utilized the remaining federal NOL
carryforwards of approximately $0.7 million and approximately $32.8 million of
state NOL carryforwards to reduce tax expense. We have remaining state tax NOL
carryforwards of approximately $35 million that begin expiring in 2009 and no
federal NOL carryforwards remaining.
During
2008, we determined it was more-likely-than-not that approximately $6.7 million
of the state NOL carryforwards would not be able to be utilized before
expiration and a valuation allowance for the deferred tax assets associated with
these state NOL carryforwards, net of federal benefit, of approximately $0.3
million was established. We considered both positive and negative
evidence in our determination. The negative evidence considered
primarily included our history of losses by certain entities and jurisdictions,
both as to amount and trend and uncertainties surrounding our ability to
generate sufficient taxable income in the individual states to utilize these
state NOL carryforwards.
Our
overall effective tax rate in 2008 is reduced by permanent tax differences, the
effect of the change to prior year deferred items and the provision for
uncertain tax positions.
The
current provision for federal income taxes of $5.3 million for 2007 includes
regular federal income tax and alternative minimum income tax
(“AMT”). The current provision of state income taxes of $2.0 million
for 2007 includes the provision for 2007 state income taxes, as well as $1.0
million for uncertain state income tax positions recognized in accordance with
FIN 48 as discussed below.
The 2007
benefit for deferred taxes of $4.7 million 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
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
13. Income
Taxes (continued)
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 of 2007 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.
Due to
regular tax NOL carryforwards, the only current tax expense for 2006 was for
federal AMT and state income taxes as shown above.
When
non-qualified stock options (“NSOs”) are exercised, the grantor of the options
is permitted to deduct the spread between the fair market value of the stock
issued 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 2008
and 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
$2.4 million and $1.7 million, in 2008 and 2007, respectively, 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. At December 31,
2008 and 2007, we had approximately $0.6 million and $2.3 million, respectively,
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 the benefit at December 31, 2008 will be realized
in 2009 when our current tax liability is reduced by these items.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
13. Income
Taxes (continued)
Temporary
differences and carryforwards which gave rise to deferred tax assets and
liabilities at December 31, 2008 and 2007 include:
|
2008
|
2007
|
|
(In
Thousands)
|
|
Deferred
tax assets
|
|||||||
|
Amounts
not deductible for tax purposes:
|
|||||||
|
Allowance
for doubtful accounts
|
$
|
775
|
$
|
906
|
|||
|
Asset
impairment
|
683
|
902
|
|||||
|
Inventory
reserves
|
1,614
|
204
|
|||||
|
Deferred
compensation
|
3,445
|
2,700
|
|||||
|
Other
accrued liabilities
|
3,260
|
2,439
|
|||||
|
Uncertain
income tax positions
|
411
|
655
|
|||||
|
Hedging
|
3,610
|
-
|
|||||
|
Other
|
452
|
512
|
|||||
|
Capitalization
of certain costs as inventory for tax purposes
|
1,123
|
900
|
|||||
|
Net
operating loss carryforwards
|
865
|
779
|
|||||
|
Alternative
minimum tax credit carryforwards
|
-
|
3,911
|
|||||
|
State
tax credits
|
392
|
-
|
|||||
|
Total
deferred tax assets
|
16,630
|
13,908
|
|||||
|
Less
valuation allowance on deferred tax assets
|
(268
|
)
|
-
|
||||
|
Net
deferred tax assets
|
$
|
16,362
|
$
|
13,908
|
|||
|
Deferred
tax liabilities
|
|||||||
|
Accelerated
depreciation used for tax purposes
|
$
|
9,860
|
$
|
7,273
|
|||
|
Excess
of book gain over tax gain resulting from sale of assets
|
340
|
541
|
|||||
|
Investment
in unconsolidated affiliate
|
1,199
|
1,394
|
|||||
|
Total
deferred tax liabilities
|
$
|
11,399
|
$
|
9,208
|
|||
|
Net
deferred tax assets
|
$
|
4,963
|
$
|
4,700
|
|||
|
Consolidated
balance sheet classification:
|
|||||||
|
Net
current deferred tax assets
|
$
|
11,417
|
$
|
10,030
|
|||
|
Net
non-current deferred tax liabilities
|
(6,454
|
)
|
(5,330
|
)
|
|||
|
Net
deferred tax assets
|
$
|
4,963
|
$
|
4,700
|
|||
|
Net
deferred tax assets by tax jurisdiction:
|
|||||||
|
Federal
|
$
|
3,609
|
$
|
3,921
|
|||
|
State
|
1,354
|
779
|
|||||
|
Net
deferred tax assets
|
$
|
4,963
|
$
|
4,700
|
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
13. Income
Taxes (continued)
All of
our income before taxes relates to domestic operations. 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:
|
2008
|
2007
|
2006
|
|
(In
Thousands)
|
|
Provisions
for income taxes at federal statutory rate
|
$
|
19,363
|
$
|
17,176
|
$
|
5,834
|
|||||
|
Effect
of discontinued operations and other
|
(282
|
)
|
403
|
58
|
|||||||
|
Federal
alternative minimum tax
|
-
|
-
|
312
|
||||||||
|
State
current and deferred income taxes
|
2,213
|
1,939
|
383
|
||||||||
|
Provision
for uncertain tax positions
|
(74
|
)
|
1,047
|
-
|
|||||||
|
Other
permanent differences
|
327
|
451
|
264
|
||||||||
|
Domestic
production activities deduction
|
(820
|
)
|
-
|
-
|
|||||||
|
Effect
of change to prior year deferred items (A)
|
(1,827
|
)
|
-
|
-
|
|||||||
|
Changes
in the valuation allowance related to deferred ta assets
(A)
|
268
|
(18,476
|
)
|
(5,950
|
)
|
||||||
|
State
tax credits
|
(392
|
)
|
-
|
-
|
|||||||
|
Provisions
for income taxes
|
$
|
18,776
|
$
|
2,540
|
$
|
901
|
(A)
During 2008, we performed a detailed analysis of all our deferred tax assets and
liabilities and determined that our deferred tax assets were understated by
approximately $1,827,000. As a part of our analysis, we reviewed the
realizability of these deferred tax assets and determined that a valuation
allowance of approximately $268,000 was required. Accordingly, the
addition of the deferred tax assets and the associated valuation allowance
resulted in a tax benefit of $1,559,000 in our income tax provision for
2008.
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 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
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
13. Income Taxes
(continued)
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 to properly reflect this as an uncertain
tax position.
During
2008, we entered into multiple voluntary disclosure agreements with various
states and resolved many of our outstanding state tax liabilities for payments
of approximately $606,000. The settlement of many of these
liabilities was for less than the amounts previously estimated and accrued in
accordance with FIN 48. As a result, we reduced the FIN 48 liability
and state tax provision by $504,000. Additionally during 2008, we evaluated if
we and our subsidiaries had any new nexus creating activities in any state
taxing jurisdictions that had not previously been considered. As a
result, we recognized additional state income tax expense of $391,000 in
2008.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
|
2008
|
2007
|
|
(In
Thousands)
|
|||||||
|
Balance
at beginning of year
|
$
|
1,617
|
$
|
420
|
|||
|
Additions
based on tax positions related to the current year
|
-
|
192
|
|||||
|
Additions
based on tax positions of prior years
|
391
|
1,031
|
|||||
|
Reductions
for tax positions of prior years
|
(504
|
)
|
(26
|
)
|
|||
|
Settlements
|
(606
|
)
|
-
|
||||
|
Balance
at end of year
|
$
|
898
|
$
|
1,617
|
|||
If the
tax benefit of these uncertain tax positions were recognized in the financial
statements, the tax benefit would decrease the annual effective tax rate by
reducing the total state tax provision by approximately $300,000 and $700,000,
net of federal expense, in 2008 and 2007, respectively.
Interest
recognized relating to unrecognized tax benefits is included interest expense
and penalties are included in other expense. During 2008 and 2007, we recognized
$181,000 and $253,000, respectively, in interest and penalties associated with
unrecognized tax benefits (none in 2006). We had approximately $288,000 and
$315,000 accrued for interest and penalties at December 31, 2008 and 2007,
respectively.
We plan
to continue to negotiate voluntary disclosure agreements and file prior year tax
returns with various taxing authorities in 2009. Therefore, we anticipate that
the total amount of unrecognized tax benefits will decrease by approximately
$200,000 by December 31, 2009 as a
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
13. Income Taxes
(continued)
result of
state tax payments made as part of the voluntary disclosure agreement process or
other resolutions.
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 2004 remain subject to examination for the purpose of determining the
amount of remaining tax NOL and other carryforwards. With few exceptions, the
2005-2007 years remain open for all purposes of examination by the IRS and other
major tax jurisdictions.
14. 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-Accounting for Leases (“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, 2008, are as
follows:
|
Operating
Leases
|
|
Capital
Leases
|
Baytown
Lease
|
Others
|
Total
|
|
(In
Thousands)
|
||||||||||||||
|
2009
|
$
|
285
|
$
|
4,881
|
$
|
3,345
|
$
|
8,511
|
||||||
|
2010
|
282
|
-
|
2,378
|
2,660
|
||||||||||
|
2011
|
176
|
-
|
1,830
|
2,006
|
||||||||||
|
2012
|
64
|
-
|
1,502
|
1,566
|
||||||||||
|
2013
|
-
|
-
|
615
|
615
|
||||||||||
|
Thereafter
|
-
|
-
|
1,223
|
1,223
|
||||||||||
|
Total
minimum lease payments
|
807
|
$
|
4,881
|
$
|
10,893
|
$
|
16,581
|
|||||||
|
Less
amounts representing interest
|
91
|
|||||||||||||
|
Present
value of minimum lease payments
included in long-term debt
|
$
|
716
|
||||||||||||
Rent
expense under all operating lease agreements, including month-to-month leases,
was $13,801,000 in 2008, $13,793,000 in 2007 and $12,587,000 in 2006. 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 the Baytown Nitric Acid
Project and Supply Agreement, as amended, (the “Original Bayer Agreement”) with
Bayer Material Science, LLC (“Bayer”). See discussion below under “Bayer
Agreement” concerning a new long-term contract. Under the terms of the Original
Bayer Agreement, EDNC
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
14. Commitments and
Contingencies (continued)
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, which
expires in 2009. 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. As
discussed below under “Bayer Agreement”, pursuant to the terms of the Original
Bayer Agreement, Bayer has provided notice of exercise of its option to purchase
from a third party all of the assets comprising the Baytown Facility, except
certain assets that are owned by El Dorado Nitrogen, L.P. (“EDN”), a subsidiary
of EDNC, for use in the production process (the “EDN Assets”). EDNC’s ability to
perform on its lease commitments is contingent upon Bayer’s performance under
the Original Bayer Agreement. EDC has guaranteed the performance of EDNC’s
obligations under the Original Bayer Agreement.
Bayer Agreement - On October
23, 2008, EDN and EDC, both subsidiaries of the Company, entered into a new
Nitric Acid Supply Operating and Maintenance Agreement (the “Bayer Agreement”)
with Bayer. The Bayer Agreement will replace the Original Bayer Agreement, as of
June 24, 2009. The Bayer Agreement is for a term of five years, with renewal
options.
Under the
terms of the Bayer Agreement, Bayer will purchase from EDN all of Bayer’s
requirements for nitric acid for use in Bayer’s chemical manufacturing complex
located in Baytown, Texas. Bayer will also supply ammonia as required
for production of nitric acid at the Baytown Facility, in addition to certain
utilities, chemical additives and services that are required for such
production. Any surplus nitric acid manufactured at the Baytown
Facility that is not required by Bayer may be marketed to third parties by
EDN. The Bayer Agreement provides that Bayer will make certain net
monthly payments to EDN which will be sufficient for EDN to recover all of its
costs plus a profit, with certain performance obligations on EDN’s
part.
Pursuant
to the terms of the Original Bayer Agreement, Bayer has provided notice of
exercise of its option to purchase from a third party all of the assets
comprising the Baytown Facility, except the EDN Assets. EDN will
continue to be responsible for the maintenance and operation of the Baytown
Facility in accordance with the terms of the Bayer Agreement. In addition, EDC
will continue to guarantee the performance of EDN’s obligations under the Bayer
Agreement.
If there
is a change in control of EDN, Bayer will have the right to terminate the Bayer
Agreement upon payment of certain fees to EDN.
Purchase and Sales Commitments –
In addition to the purchase and sales commitments relating to the Baytown
Facility and the Bayer Agreement discussed above, we have the following
significant purchase and sales commitments.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
14. Commitments
and Contingencies (continued)
Effective
January 1, 2009, under an agreement with its principal supplier of anhydrous
ammonia, 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 2010.
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
$95,000 as of December 31, 2008. 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 October 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 terminate the agreement
without cause upon a 12-month notice given on or before October 8, 2009 at a
cost of approximately $573,000 as of December 31, 2008. After October
8, 2009, this agreement can be terminated upon a 12-month notice at no
additional cost. 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
$1,347,000, $1,078,000 and $1,052,000 in 2008, 2007, and 2006,
respectively.
At
December 31, 2008, our Climate Control Business had purchase commitments under
futures contracts for 2 million pounds of copper through March 2009 at a
weighted-average cost of $1.72 per pound. At December 31, 2008, our Chemical
Business had purchase commitments under futures/forward contracts for 9,000
metric tons of anhydrous ammonia through March 2009 at a weighted-average cost
of $320 per metric ton and for approximately 970,000 MMBtu of natural gas
through December 2009 at a weighted-average cost of $10.08 per
MMBtu.
At
December 31, 2008, we also had standby letters of credit outstanding of $0.7
million.
At
December 31, 2008, we had deposits from customers of $3.2 million for forward
sales commitments including $1.8 million relating to our Chemical Business and
$1.0 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 91%
of the plant’s manufacturing capacity for that product, for a term through June
2011.
Employment and Severance Agreements -
We have an employment agreement and severance agreements with several of
our officers. The agreements, as amended, 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 $10 million at
December 31, 2008.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements (continued)
14. 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 will
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 or replace, as needed, with non-asbestos insulation through our
standard repair and maintenance activities to prevent deterioration. 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 located in El Dorado, Arkansas within our Chemical Business
generates process wastewater, which includes storm water. The process water
discharge and storm-water runoff 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 EDC 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.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
14. Commitments
and Contingencies (continued)
The El
Dorado Facility has demonstrated its ability to comply with the more restrictive
permit limits, and the rules that support the more restrictive dissolved
minerals rules have been revised to authorize a permit modification to adopt
achievable dissolved minerals permit limits. The ADEQ and EDC have entered into
a consent administration 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. We believe the El
Dorado Facility can comply with revised permit; however, as of December 31,
2008, the ADEQ has not issued the revised permit.
In
addition, EDC has entered into a consent administrative order (“CAO”) that
recognizes the presence of nitrate contamination in the shallow groundwater at
the El Dorado Facility. EDC is addressing the shallow groundwater contamination.
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. 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, 2008.
2. Air
Matters
An air
permit modification was issued to EDC by the ADEQ on August 26, 2008, which sets
new limits for ammonia emissions for the nitric acid units at the El Dorado
Facility. EDC recently completed required compliance testing but the results are
still pending. Based on a previous study, the nitric acid units can meet these
new limits.
3. Other
Environmental Matters
In
December 2002, two of our subsidiaries within our Chemical Business, sold
substantially all of their operating assets relating to a Kansas chemical
facility (“Hallowell Facility”) 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, our subsidiary leased the real property to the buyer
under a triple net long-term lease agreement. However, our subsidiary retained
the obligation to be responsible for, and perform the activities under, a
previously executed consent order. In addition, certain of our subsidiaries
agreed to indemnify the buyer of such assets for these environmental matters.
The successor (“Chevron”) of a 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 consent order subject to reallocation.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
14. Commitments
and Contingencies (continued)
Based on
additional modeling of the site, our subsidiary and Chevron are pursuing a
course with the state of Kansas of long-term surface and ground water monitoring
to track the natural decline in contamination, instead of the soil excavation
proposed previously. The state of Kansas 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
requirement expired in February 2009. The data from the monitoring program has
not been evaluated by the state of Kansas and the potential costs of addition
monitoring or required remediation, if any, is unknown.
At
December 31, 2008, the total estimated liability (which is included in current
accrued and other liabilities) in connection with this remediation matter is
approximately $84,000 and Chevron’s share for these costs (which is included in
accounts receivable) is approximately $45,000. 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
A
proposed class action was filed in the Illinois state district court in
September 2007 alleging 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
plaintiffs asserted claims based upon negligence, strict liability, breach of
implied warranties, unjust enrichment and the Illinois Consumer Fraud and
Deceptive Business Practices Act. The plaintiffs have dismissed the first three
of these claims, and the last two of these claims remain pending. Climate Master
has filed a motion for summary judgment as to the remaining claims, and that
motion is pending. Climate Master has removed this action to federal
court. Climate Master has also filed its answer denying the plaintiffs’ claims
and asserting several affirmative defenses. Climate Master’s insurers have
been placed on notice of this matter. One of these insurers has denied coverage,
one is out of business and has been liquidated and one insurer advised that it
will monitor the litigation subject to a reservation of rights to decline
coverage. The policies associated with insurers that have not declined coverage
in this matter and remain in business have deductible amounts ranging from
$100,000 to $250,000. Climate Master intends to vigorously defend itself in
connection with this matter. Currently, the Company is unable to determine the
amount of damages or the likelihood of any losses resulting from this claim.
Therefore, no liability has been established at December 31,
2008.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements (continued)
14. Commitments
and Contingencies (continued)
2. Other
MEI
Drafts
Cromus,
as an assignee of Masinexportimport Foreign Trade Company (“MEI”), filed a
lawsuit against us, our subsidiary, Summit Machine Tool Manufacturing Corp.
(“Summit”), certain of our other subsidiaries, our chief executive officer and
another officer of our Company, Bank of America, and others, alleging that it
was owed $1,533,000, plus interest from 1990, in connection with Cromus’
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 one of our
subsidiaries. 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 also one of our
subsidiaries. The complaint also seeks $1,000,000 from us and Summit for failure
to purchase certain equipment and $1,000,000 in punitive damages. During May
2008, the court dismissed the complaint against us and our subsidiaries and our
officers (including our Chief Executive Officer). Cromus has appealed this
dismissal against our subsidiaries and our officers but did not appeal the
dismissal against us.
The
Jayhawk Group
In
November 2006, we entered into an agreement with Jayhawk Capital Management,
LLC, Jayhawk Investments, L.P., Jayhawk Institutional Partners, L.P. and Kent
McCarthy, the manager and sole member of Jayhawk Capital, (collectively, the
“Jayhawk Group”), in which the Jayhawk Group agreed, among other things, that if
we undertook, in our sole discretion, within one year from the date of agreement
a tender offer for our Series 2 Preferred or to issue our common stock for a
portion of our Series 2 Preferred pursuant to a private exchange, that it would
tender or exchange an aggregate of no more than 180,450 shares of the 340,900
shares of the Series 2 Preferred beneficially owned by the Jayhawk Group,
subject to, among other things, the entities owned and controlled by Jack E.
Golsen, our Chairman and Chief Executive Officer (“Golsen”), and his immediate
family, that beneficially own Series 2 Preferred only being able to exchange or
tender approximately the same percentage of shares of Series 2 Preferred
beneficially owned by them as the Jayhawk Group is able to tender or exchange
under the terms of the agreement. In addition, under the agreement, the Jayhawk
Group agreed to vote its shares of our common stock and Series 2 Preferred “for”
an amendment to the Certificate of Designation covering the Series 2 Preferred
to allow us:
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
14. Commitments
and Contingencies (continued)
|
·
|
for
a period of five years from the completion of an exchange or tender to
repurchase, redeem or otherwise acquire shares of our common stock,
without approval of the outstanding Series 2 Preferred irrespective that
dividends are accrued and unpaid with respect to the Series 2 Preferred;
or
|
|
·
|
to
provide that holders of Series 2 Preferred may not elect two directors to
our Board of Directors when dividends are unpaid on the Series 2 Preferred
if less than 140,000 shares of Series 2 Preferred remain
outstanding.
|
During
2007, we made a tender offer for our outstanding Series 2 Preferred at the rate
of 7.4 shares of our common stock for each share of Series 2 Preferred so
tendered. In July 2007, we redeemed the balance of our outstanding shares of
Series 2 Preferred. Pursuant to its terms, the Series 2 Preferred was
convertible into 4.329 shares of our common stock for each share of Series 2
Preferred. As a result of the redemption, the Jayhawk Group converted the
balance of its Series 2 Preferred pursuant to the terms of the Series 2
Preferred in lieu of having its shares redeemed.
During
November 2008, the Jayhawk Group filed suit against us and Golsen in a lawsuit
styled Jayhawk Capital
Management, LLC, et al. v. LSB Industries, Inc., et al., in the United
States District Court for the District of Kansas at Kansas City. The complaint
alleges that the Jayhawk Group should have been able to tender all of its Series
2 Preferred pursuant to the tender offer, notwithstanding the above-described
agreement, based on the following claims against us and Golsen:
|
·
|
fraudulent
inducement and fraud,
|
|
·
|
violation
of 14(d) of the Securities and Exchange Act of 1934 and Rule
14d-10,
|
|
·
|
violation
of 10(b) of the Exchange Act and Rule
10b-5,
|
|
·
|
violation
of 18 of the Exchange Act,
|
|
·
|
violation
of 17-12A501 of the Kansas Uniform Securities Act,
and
|
|
·
|
breach
of fiduciary duty.
|
The
Jayhawk Group seeks damages in an unspecified amount based on the additional
number of common shares it allegedly would have received on conversion of all of
its Series 2 Preferred through the February 2007 tender offer, plus punitive
damages. In May 2008, the General Counsel
for the Jayhawk Group offered to settle its claims against us and Golsen in
return for a payment of $100,000, representing the approximate legal fees it had
incurred investigating the claims at that time. Through counsel, we verbally
agreed to the settlement offer and confirmed the agreement by e-mail. Afterward,
the Jayhawk Group’s General Counsel purported to withdraw the settlement offer,
and asserted that Jayhawk is not bound by any settlement agreement. We contend
that the settlement agreement is binding on the Jayhawk Group. We
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
14. Commitments
and Contingencies (continued)
intend to
contest the lawsuit vigorously, and will assert that Jayhawk is bound by an
agreement to settle the claims for $100,000. Our insurer, a subsidiary of AIG,
has agreed to defend this lawsuit on our behalf and on behalf of Golsen and to
indemnify under a reservation of rights to deny liability under certain
conditions. As of December 31, 2008, a liability of $100,000 has been
established for the Jayhawk claims.
Securities
and Exchange Commission
We have
previously disclosed that the SEC was conducting an informal inquiry of us
relating to the change in inventory accounting from LIFO to FIFO during 2004
involving approximately $500,000 by one of our subsidiaries, which change
resulted in the restatement of our financial statements for each of the three
years in the period ended December 31, 2004 and our March 31, 2005 and June 30,
2005 quarterly financial statements. During April 2008, the staff of the SEC
delivered a formal Wells Notice to us informing us that the staff has
preliminarily decided to recommend to the SEC that it institute a civil
enforcement action against us in connection with the above described matter. All
assertions against us involve alleged violations of Section 13 of the 1934 Act
and do not assert allegations of fraudulent conduct nor seek a monetary civil
fine against us. During May 2008, we made a written submission to the senior
staff of the SEC, and we have had discussions with the senior staff after such
submission. The staff has indicated that it is still their intention to
recommend to the SEC to bring a civil injunction action against us and seek
authority from the SEC to file such action. In addition, the SEC has also made
assertions against our former principal accounting officer based on Section 13
of the 1934 Act, and the SEC staff has also stated its intention to
recommend civil proceedings against him. The former principal accounting officer
resigned as principal accounting officer, effective August 15, 2008, but remains
with the Company as a senior vice president in charge of lending compliance and
cash management and will be involved in our banking relationships, acquisitions
and corporate planning. We are currently in discussions with the staff of the
SEC regarding the settlement of this matter. There are no assurances this matter
will be settled.
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.
15. Derivatives,
Hedges and Financial Instruments
We have
three types of contracts that are accounted for on a fair value basis, which are
interest rate contracts, commodities futures/forward contracts and foreign
currency contracts as discussed below. The valuation of these contracts was
determined based on quoted market prices or, in instances where market quotes
are not available, other valuation techniques or models used to estimate fair
values. The valuations of contracts classified as Level 1 are based on quoted
prices in active markets for identical contracts. The valuations of contracts
classified as Level 2 are
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
15. Derivatives,
Hedges and Financial Instruments (continued)
based on
quoted prices for similar contracts and valuation inputs other than quoted
prices that are observable for these contracts. The valuations of contracts
classified as Level 3 are based on the average ask/bid prices obtained from a
broker relating to a low volume market. However at December 31, 2008, the terms
of the contracts classified as Level 3 do not exceed three months.
Interest
Rate Contracts
As part
of our interest rate risk management, we periodically purchase and/or enter into
various interest rate contracts. In March 2005, we purchased two interest rate
cap contracts for a cost of $590,000, which mature in March 2009. In April 2007,
we purchased two interest rate cap contracts for a cost of $621,000, which set a
maximum three-month LIBOR base rate of 5.35% on $50 million. In April 2008, we
exchanged the two interest rate cap contracts purchased in 2007 for an interest
rate cap contract (“2008 Interest Rate Cap Contract”), which sets a maximum
three-month LIBOR base rate of 4.56% on $25 million. The cost basis of the 2008
Interest Rate Cap Contract was $239,000 based on the estimated fair value of the
two contracts surrendered (which was also the carrying value at the time of the
exchange) in accordance with Accounting Principle Board Opinion No. 29 -
Accounting for Nonmonetary Transactions, as amended (“APB 29”). In
April 2008, we also entered into an interest rate swap at no cost, which sets a
fixed three-month LIBOR rate of 3.24% on $25 million and matures in April
2012. In September 2008, we exchanged the 2008 Interest Rate Cap
Contract for an interest rate swap, which sets a fixed three-month LIBOR rate of
3.595% on $25 million and matures in April 2012. The cost basis of the new
interest rate swap is $354,000 based on the estimated fair value of the 2008
Interest Rate Cap Contract surrendered (which was also the carrying value at the
time of the exchange) in accordance with APB 29.
These
contracts are free-standing derivatives and are accounted for on a
mark-to-market basis in accordance with SFAS 133. At December 31,
2008, the fair value of these contracts (unrealized loss) was $2,437,000 and is
included in current and noncurrent accrued and other liabilities. At December
31, 2007, the fair value of these contracts (unrealized gain) was $426,000 and
is included in other assets. For 2008 and 2007, we recognized losses of
$2,871,000 and $355,000, respectively, and we recognized a gain of $113,000 in
2006 on such contracts. In addition, the cash used to purchase these contracts
is included in cash flows from continuing investing activities.
Commodities
Futures/Forward Contracts
Raw
materials for use in our manufacturing processes include copper used by our
Climate Control Business and anhydrous ammonia and natural gas used by our
Chemical Business. As part of our raw material price risk management, we
periodically enter into futures/forward contracts for these materials, which
contracts are generally accounted for on a mark-to-market basis in accordance
with SFAS 133. At December 31, 2008 and 2007, the fair value of these contracts
(unrealized loss) was $5,910,000 and $172,000 and is included in accrued and
other liabilities. For 2008, 2007 and 2006, we recognized losses of $7,717,000,
$1,317,000 and
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
15. Derivatives,
Hedges and Financial Instruments (continued)
$1,516,000, respectively, on such
contracts. In addition, the cash flows relating to these contracts are included
in cash flows from continuing operating activities.
Foreign
Currency Contracts
One of
our business operations purchases industrial machinery and related components
from vendors outside of the United States. During 2008 as part of our foreign
currency risk management, we entered into several foreign currency contracts,
which set the U.S. Dollar/Euro exchange rates through March 2009. These
contracts are free-standing derivatives and are accounted for on a
mark-to-market basis in accordance with SFAS 133. At December 31, 2008, the fair
value of these contracts (unrealized gain) was $35,000 and is included in
supplies, prepaid items and other (none at December 31, 2007). For 2008, we
recognized losses of $187,000 (none in 2007 and 2006) on such contracts. In
addition, the cash flows relating to these contracts are included in cash flows
from continuing operating activities.
The
following details our assets and liabilities at December 31, 2008 that are
measured at fair value on a recurring basis:
|
Fair
Value Measurements at
December
31, 2008 Using
|
|
Description
|
December
31,
2008 |
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
|
(In
Thousands)
|
|
Assets:
|
||||||||||||||
|
Foreign
currency contracts
|
$
|
35
|
$
|
-
|
$
|
35
|
$
|
-
|
||||||
|
Liabilities:
|
||||||||||||||
|
Commodities
futures/forward contracts
|
$
|
5,910
|
$
|
863
|
$
|
3,659
|
$
|
1,388
|
||||||
|
Interest
rate contracts
|
2,437
|
-
|
2,437
|
-
|
||||||||||
|
Total
|
$
|
8,347
|
$
|
863
|
$
|
6,096
|
$
|
1,388
|
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements (continued)
15. Derivatives,
Hedges and Financial Instruments (continued)
The
following is a reconciliation of the beginning and ending balances for
liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during 2008:
|
Commodities
Futures/Forward
Contracts
|
|
(In
Thousands)
|
|
Beginning
balance
|
$
|
-
|
||
|
Total
realized and unrealized loss included in
earnings
|
(1,388
|
)
|
||
|
Purchases,
issuances, and settlements
|
-
|
|||
|
Transfers
in and/or out of Level 3
|
-
|
|||
|
Ending
balance
|
$
|
(1,388
|
)
|
Realized
and unrealized gains (losses) included in earnings and the income statement
classification are as follows:
|
2008
|
|
(In
Thousands)
|
|
|
Total
losses included in
earnings:
|
|
Cost
of sales
|
$
|
(7,904
|
)
|
|
|
Interest
expense
|
(2,871
|
)
|
||
|
$
|
(10,775
|
)
|
|
|
Change
in unrealized gains and losses relating to
contracts still held at December 31,
2008:
|
|
Cost
of sales
|
$
|
(5,875
|
)
|
|
|
Interest
expense
|
(2,825
|
)
|
||
|
$
|
(8,700
|
)
|
In
accordance with SFAS 107 - Disclosures about Fair Value of Financial Instruments
(“SFAS 107”), 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, 2008 and 2007, 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 contracts, commodities futures/forward contracts,
and foreign currency contracts approximate their fair value since they are
accounted for on a mark-to-market basis, as discussed above. At December 31,
2008, the estimated fair value of the Secured Term Loan is based on defined
LIBOR rates plus 10%
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
15. Derivatives,
Hedges and Financial Instruments (continued)
utilizing
information obtained from the lender. At December 31, 2007, caryring values for
variable debt, including the Secured Term Loan, was believed to
approximate their fair value. Fair values for fixed rate borrowings, other than
the 2007 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. At December 31, 2008, the estimated fair value of
the 2007 Debentures is based on quoted prices obtained from a broker for these
debentures. At December 31, 2007, the estimated fair value of the 2007
Debentures was based on the conversion rate and market price of our common stock
at December 31, 2007.
|
December
31, 2008
|
December
31, 2007
|
|
Estimated
Fair
Value
|
Carrying
Value
|
Estimated
Fair
Value
|
Carrying
Value
|
|
(In
Thousands)
|
|
Variable
Rate:
|
||||||||||||||||
|
Secured
Term Loan
|
$ | 20,939 | $ | 50,000 | $ | 50,000 | $ | 50,000 | ||||||||
|
Working
Capital Revolver Loan
|
- | - | - | - | ||||||||||||
|
Other
debt
|
8 | 8 | 155 | 155 | ||||||||||||
|
Fixed
Rate:
|
||||||||||||||||
|
5.5%
Convertible Senior Subordinated Notes
|
27,338 | 40,500 | 61,632 | 60,000 | ||||||||||||
|
Other
bank debt and equipment financing
|
14,949 | 14,652 | 12,298 | 11,952 | ||||||||||||
| $ | 63,234 | $ | 105,160 | $ | 124,085 | $ | 122,107 | |||||||||
Other
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 $2.8 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, 2008 and 2007, accumulated
other comprehensive loss consisted of the remaining deferred cost of $120,000
and $411,000, respectively. The amount amortized to operations was $291,000,
$290,000 and $289,000 for 2008, 2007 and 2006, respectively. The associated
income tax benefits were minimal in 2008 and there were no income tax benefits
allocated to these expenses in 2007 and 2006. We expect the remaining deferred
cost to be amortized to operations in 2009.
16. Stockholders’
Equity
Approval of Stock Incentive Plan in
2008 - During the second quarter of 2008, our board of directors adopted
our 2008 Incentive Stock Plan (the “2008 Plan”), which plan was approved by our
shareholders at our annual meeting of shareholders held on June 5, 2008. The
number of
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
16. Stockholders’
Equity (continued)
shares of
our common stock available for issuance under the 2008 Plan is 1,000,000 shares,
subject to adjustment. Under the 2008 Plan, awards may be made to any employee,
officer or director of the Company and its affiliated companies. An award may
also be granted to any consultant, agent, advisor or independent contractor for
bona fide services rendered to the Company or any affiliate (as defined in the
2008 Plan), subject to certain conditions. The 2008 Plan will be
administered by the compensation and stock option committee (the “Committee”) of
our board of directors.
Our board
of directors or the Committee may amend the 2008 Plan, except that if any
applicable statute, rule or regulation requires shareholder approval with
respect to any amendment of the 2008 Plan, then to the extent so required,
shareholder approval will be obtained. Shareholder approval will also be
obtained for any amendment that would increase the number of shares stated as
available for issuance under the 2008 Plan. Unless sooner terminated by our
board of directors, the 2008 Plan expires on June 5, 2018.
The
following may be granted by the Committee under the 2008 Plan:
Stock
Options - The Committee may grant either incentive stock options or
non-qualified stock options. The Committee sets option exercise prices and
terms, except that the exercise price of a stock option may be no less than 100%
of the fair market value, as defined in the 2008 Plan, of the shares on the date
of grant. At the time of grant, the Committee will have sole discretion in
determining when stock options are exercisable and when they expire, except that
the term of a stock option cannot exceed 10 years.
Stock
Appreciation Rights (“SARs”) - The Committee may grant SARs as a right in tandem
with the number of shares underlying stock options granted under the 2008 Plan
or on a stand-alone basis. SARs are the right to receive payment per share of
the SAR exercised in stock or in cash equal to the excess of the share’s fair
market value, as defined in the 2008 Plan, on the date of exercise over its fair
market value on the date the SAR was granted. Exercise of an SAR issued in
tandem with stock options will result in the reduction of the number of shares
underlying the related stock option to the extent of the SAR
exercise.
Stock
Awards, Restricted Stock, Restricted Stock Units, and Other Awards - The Committee may grant
awards of restricted stock, restricted stock units, and other stock and
cash-based awards, which may include the payment of stock in lieu of cash
(including cash payable under other incentive or bonus programs) or the payment
of cash (which may or may not be based on the price of our common
stock).
Stock-Based Compensation –
During 2008, the Committee approved the grants under the 2008 Plan of
372,000 shares of qualified stock options (the “2008 Qualified Options”) to
certain employees and our board of directors (with each recipient abstaining as
to himself) approved the grants of 45,000 shares of non-qualified stock options
(“2008 Non-Qualified Options”) to our outside directors. The exercise price of
the 2008 Qualified and Non-Qualified Options was equal to the market value of
our common stock at the date of grant. The 2008 Qualified and
Non-
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
16. Stockholders’
Equity (continued)
Qualified
Options vest at the end of each one-year period at the rate of 16.5% per year
for the first five years and the
remaining unvested options will vest at the end of the sixth year. Pursuant to
the terms of the 2008 Non-Qualified Options, if a termination event occurs, as
defined, the non-vested 2008 Non-Qualified Options will become fully vested and
exercisable for a period of one year from the date of the termination event.
Excluding the non-qualified stock options relating to a termination event, the
2008 Qualified and Non-Qualified Options expire in 2018. Under SFAS
123(R), the fair value for the 2008 Qualified and Non-Qualified Options was
estimated, using an option pricing model, as of the date of the grant, which
date was also the service inception date.
On June
19, 2006, the Committee granted 450,000 shares of non-qualified stock options
(the “2006 Options”) to certain Climate Control Business employees, which were
subject to shareholders’ approval. The exercise price of the 2006 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 2006 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
2006 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 fair
values for the 2008 Qualified and Non-Qualified Options and the 2006 Options
were estimated using a Black-Scholes-Merton option pricing model with the
following assumptions:
|
·
|
risk-free
interest rate 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 based on historical
data;
|
|
·
|
volatility
factors of the expected market price of our common stock based on
historical volatility of our common stock since it has been traded on the
American Stock Exchange (and subsequently, the New York Stock Exchange),
and;
|
|
·
|
a
weighted-average expected life of the options based on the historical
exercise behavior of these employees and outside directors, if
applicable.
|
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements (continued)
16. Stockholders’
Equity (continued)
The
following table summarizes information about these granted stock
options:
|
2008
|
2007
|
2006
|
|||||||||||
|
Weighted-average
risk-free interest rate
|
2.91
|
%
|
5.16
|
%
|
N/A |
|
|||||||
|
Dividend
yield
|
-
|
-
|
N/A |
|
|||||||||
|
Weighted-average
expected volatility
|
35.4
|
%
|
24.7
|
%
|
N/A |
|
|||||||
|
Weighted-average
expected forfeiture rate
|
1.86
|
%
|
0
|
%
|
N/A | ||||||||
|
Weighted-average
expected life (years)
|
5.98
|
5.76
|
N/A | ||||||||||
|
Total
weighted-average remaining vesting period (years)
|
6.64
|
8.46
|
N/A |
|
|||||||||
|
Total
fair value of options granted
|
$
|
1,503,000
|
$
|
6,924,000
|
N/A |
|
|||||||
|
Total
stock-based compensation expense (1)
|
$
|
811,000
|
$
|
421,000
|
N/A |
|
|||||||
|
Income
tax benefit
|
$
|
(316,000
|
)
|
$
|
(164,000
|
)
|
N/A |
|
|||||
(1) For
2008, $803,000 is included in SG&A and $8,000 is included in cost of sales.
For 2007, the total amount is included in SG&A.
For the
2008 Qualified and Non-Qualified Options and the 2006 Options, we will be
amortizing the respective total estimated fair value (adjusted for forfeitures)
through 2014 and 2016, respectively. At December 31, 2008, the total stock-based
compensation expense not yet recognized is $7,166,000 relating to the non-vested
stock options.
Qualified Stock Option Plans -
At December 31, 2008, we have options outstanding under a 1993 Stock
Option and Incentive Plan (“1993 Plan”), a 1998 Stock Option Plan (“1998 Plan”)
and the 2008 Plan as discussed above. The 1993 and 1998 Plans have expired, and
accordingly, no additional options may be granted from these plans. Options
granted prior to the expiration of these plans continue to remain valid
thereafter in accordance with their terms. As discussed above, under the 2008
Plan, we are authorized to grant awards (including options) to purchase up to
1,000,000 shares of our common stock. At December 31, 2008, there are 583,000
awards available to be granted under the 2008 Plan. At December 31, 2008, there
were 13,500 options outstanding related to the 1993 Plan and 274,600 options
outstanding relating to the 1998 Plan, all of which were exercisable, and
372,000 options outstanding relating to the 2008 Plan, none of which were
exercisable. The exercise price of the outstanding options granted under these
plans was equal to the market value of our common stock at the date of
grant.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
16. Stockholders’ Equity
(continued)
The
following information relates to our qualified stock option plans:
|
2008
|
|||||||
|
Shares
|
Weighted-Average
Exercise
Price
|
||||||
|
Outstanding
at beginning of year
|
456,404
|
$
|
1.73
|
||||
|
Granted
|
372,000
|
$
|
9.36
|
||||
|
Exercised
|
(158,304
|
)
|
$
|
1.51
|
|||
|
Cancelled,
forfeited or expired
|
(10,000
|
)
|
$
|
1.25
|
|||
|
Outstanding
at end of year
|
660,100
|
$
|
6.09
|
||||
|
Exercisable
at end of year
|
288,100
|
$
|
1.87
|
||||
|
2008
|
2007
|
2006
|
|||||||||
|
Weighted-average
fair value of options granted during year
|
$
|
3.58
|
|
N/A
|
N/A
|
||||||
|
Total
intrinsic value of options exercised during the year
|
$
|
3,140,000
|
$
|
1,108,000
|
$
|
1,886,000
|
|||||
|
Total
fair value of options vested during the year
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||
The
following table summarizes information about qualified stock options outstanding
and exercisable at December 31, 2008:
|
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
|
202,000
|
0.58
|
$
|
1.25
|
$
|
1,428,000
|
||||||||
|
$
|
2.73
|
65,000
|
2.92
|
$
|
2.73
|
363,000
|
|||||||||
|
$
|
5.10
|
21,100
|
6.92
|
$
|
5.10
|
68,000
|
|||||||||
|
$
|
7.86
|
-
|
$
|
8.17
|
69,000
|
9.92
|
$
|
7.87
|
31,000
|
||||||
|
$
|
9.69
|
-
|
$
|
9.97
|
303,000
|
9.83
|
$
|
9.69
|
(416,000
|
)
|
|||||
|
$
|
1.25
|
-
|
$
|
9.97
|
660,100
|
6.24
|
$
|
6.09
|
$
|
1,474,000
|
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
16. 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
|
202,000
|
0.58
|
$
|
1.25
|
$
|
1,428,000
|
||||||||
|
$
|
2.73
|
65,000
|
2.92
|
$
|
2.73
|
363,000
|
|||||||||
|
$
|
5.10
|
21,100
|
6.92
|
$
|
5.10
|
68,000
|
|||||||||
|
$
|
1.25
|
-
|
$
|
5.10
|
288,100
|
1.57
|
$
|
1.87
|
$
|
1,859,000
|
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 exercise prices are
generally based on the market value of our common stock at the dates of
grants.
In
addition to the 2008 Plan as discussed above, 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 280,000 are available to be granted at December 31, 2008. At
December 31, 2008, there are 45,000 and 15,000 options outstanding related to
the 2008 Plan and Outside Director Plan, respectively.
The
following information relates to our non-qualified stock option
plans:
|
2008
|
|||||||
|
Shares
|
Weighted-Average
Exercise
Price
|
||||||
|
Outstanding
at beginning of year
|
917,500
|
$
|
4.64
|
||||
|
Granted
|
45,000
|
$
|
7.86
|
||||
|
Exercised
|
(332,000
|
)
|
$
|
1.83
|
|||
|
Surrendered,
forfeited, or expired
|
(3,000
|
)
|
$
|
4.19
|
|||
|
Outstanding
at end of year
|
627,500
|
$
|
6.36
|
||||
|
|
|||||||
|
Exercisable
at end of year
|
222,500
|
$
|
3.37
|
||||
|
2008
|
2007
|
2006
|
|||||||||
|
Weighted-average
fair value of options granted during year
|
$
|
3.80
|
$
|
15.39
|
N/A
|
||||||
|
Total
intrinsic value of options exercised during the year
|
$
|
4,357,000
|
$
|
10,042,000
|
$
|
147,000
|
|||||
|
Total
fair value of options vested during the year
|
$
|
692,000
|
$
|
692,000
|
$
|
-
|
|||||
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
16. Stockholders’
Equity (continued)
The
following tables summarize information about non-qualified stock options
outstanding and exercisable at December 31, 2008:
|
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
|
135,000
|
0.58
|
$
|
1.25
|
$
|
954,000
|
|||||||
|
$
|
2.73
|
22,500
|
2.92
|
$
|
2.73
|
126,000
|
||||||||
|
$
|
7.86
|
-
|
$
|
8.01
|
470,000
|
7.96
|
$
|
8.00
|
152,000
|
|||||
|
$
|
1.25
|
-
|
$
|
8.01
|
627,500
|
6.19
|
$
|
6.36
|
$
|
1,232,000
|
|
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
|
135,000
|
0.58
|
$
|
1.25
|
$
|
954,000
|
|||||||
|
$
|
2.73
|
22,500
|
2.92
|
$
|
2.73
|
126,000
|
||||||||
|
$
|
8.01
|
65,000
|
7.75
|
$
|
8.01
|
20,000
|
||||||||
|
$
|
1.25
|
-
|
$
|
8.01
|
222,500
|
2.91
|
$
|
3.37
|
$
|
1,100,000
|
Preferred Share Rights Plan –
On December 2, 2008, we entered into a renewed rights agreement with UMB Bank,
n.a., as rights agent, providing for a new preferred share rights plan, which
renews and amends our existing preferred share rights plan, that expired as of
January 5, 2009. See Note 23-Subsequent Event for a discussion
concerning the new preferred share rights plan.
Other – In November 2007, the
Jayhawk Group exercised a warrant to purchase 112,500 shares of our common stock
for $3.49 per share.
During
2008, we purchased 400,000 shares of treasury stock for the average price of
$12.05 per share.
As of
December 31, 2008, we have reserved 3.7 million shares of common stock issuable
upon potential conversion of convertible debt, preferred stocks and stock
options pursuant to their respective terms.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
17. 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. All of the outstanding shares of the Series B Preferred are owned by
the Golsen Group.
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. As the result of the transactions discussed below, no shares of
Series 2 Preferred were issued and outstanding at December 31, 2008 and
2007.
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 the Jayhawk Agreement with the Jayhawk
Group. Under the Jayhawk Agreement, the Jayhawk Group agreed to tender
(discussed below) 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 in an exchange/tender
offer, with the remaining 189,295 being held by the Jayhawk Group and the Golsen
Group.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
17. 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 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 remaining
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.
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
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
17. Non-Redeemable
Preferred Stock (continued)
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.
Other
Series 2 Preferred Transactions
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 2007, we cancelled 18,300 shares of Series 2 Preferred
previously 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. Each holder of
the Series D Preferred shall be entitled to .875 votes per share. All of the
outstanding shares of Series D Preferred are owned by the Golsen
Group.
Cash Dividends Paid – During
2008, we paid the following cash dividends on our non-redeemable preferred
stock:
|
·
|
$240,000
on the Series B Preferred ($12.00 per share);
and
|
|
·
|
$60,000
on the Series D Preferred ($0.06 per
share).
|
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).
|
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
17. Non-Redeemable
Preferred Stock (continued)
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, 2008, there were no dividends in arrears.
Other - At December 31, 2008,
we are authorized to issue an additional 229,454 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.
18. 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 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, 2008, the monthly installments specified in the 1981 Agreements
total $34,000 and the aggregate undiscounted death benefits are $4,100,000. 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, 2008 and 2007, the liability
for benefits under the 1992 Agreements is $1,111,000 and $1,040,000,
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 4.97% and 5.70% as of December 31, 2008 and 2007, respectively. Future
estimated undiscounted payments aggregate to $2.1 million as of December 31,
2008. For 2008, 2007and 2006 charges to SG&A for these benefits were
$166,000, $106,000 and $75,000, 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, 2008, the aggregate undiscounted death
benefit payments specified in the 1992 Agreements are $302,000. 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.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
18. Executive Benefit
Agreements and Employee Savings Plans (continued)
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 $2,500,000 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 $2,500,000 of the
stated death benefit. As of December 31, 2008, the life insurance policies owned
by us on the life of our CEO have a total face amount of $7,000,000. 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, 2008, the liability for death benefits under the 1981, 1992 and
2005 Agreements is $2,687,000 ($2,051,000 at December 31, 2007), 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.
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, 2008, the total face amount of these
policies is $20,700,000 of which $2,500,000 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 $1,504,000 and
$1,151,000, net of borrowings of $1,967,000 and $1,859,000 at December 31, 2008
and 2007, respectively.
Increases in cash surrender values of $461,000, $548,000 and $432,000 are netted
against the premiums paid for life insurance policies of $832,000, $836,000 and
$837,000 in 2008, 2007 and 2006 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 Cherokee Nitrogen
Company’s (“CNC”) union employees and EDNC employees, which amounts were not
material for each of the three years ended December 31, 2008.
19. 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, we realized insurance
recoveries of $882,000 relating to the business interruption claim, which was
recorded as a reduction to cost of sales.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements (continued)
19. Property
and Business Interruption Insurance Recoveries (continued)
Cherokee
Facility - As a result of damage caused by Hurricane Katrina in August 2005, 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 through the first quarter of 2006. 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 were recorded
as a reduction to cost of sales.
20. Other
Expense, Other Income and Non-Operating Other Income, net
|
Year
ended December 31,
|
|
2008
|
2007
|
2006
|
|
(In
Thousands)
|
|
Other
expense:
|
||||||||||
|
Settlements
and potential settlements of litigation and
potential litigation (1)
|
$
|
592
|
$
|
350
|
$
|
300
|
||||
|
Impairments
of long-lived assets (2)
|
192
|
250
|
286
|
|||||||
|
Losses
on sales and disposals of property and equipment
|
158
|
378
|
-
|
|||||||
|
Income
tax related penalties
|
152
|
34
|
5
|
|||||||
|
Other
miscellaneous expense (3)
|
90
|
174
|
131
|
|||||||
|
Total
other expense
|
$
|
1,184
|
$
|
1,186
|
$
|
722
|
|
Other
income:
|
||||||||||
|
Litigation
judgment and settlements (4)
|
$
|
8,235
|
$
|
3,272
|
$
|
-
|
||||
|
Arbitration
award
|
-
|
-
|
1,217
|
|||||||
|
Other
miscellaneous income (3)
|
241
|
223
|
342
|
|||||||
|
Total
other income
|
$
|
8,476
|
$
|
3,495
|
$
|
1,559
|
|
Non-operating
other income, net:
|
||||||||||
|
Interest
income
|
$
|
1,270
|
$
|
1,291
|
$
|
523
|
||||
|
Miscellaneous
income (3)
|
-
|
73
|
199
|
|||||||
|
Miscellaneous
expense (3)
|
(174
|
)
|
(100
|
)
|
(98
|
)
|
||||
|
Total
non-operating other income, net
|
$
|
1,096
|
$
|
1,264
|
$
|
624
|
|
(1)
|
For
2008, $325,000 relates to potential settlements recognized associated with
various asserted claims, of which $225,000 relates to the Climate Control
Business. In addition, $267,000 relates to various settlements reached, of
which $67,000 relates to the Chemical Business. 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.
|
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
20. Other Expense, Other
Income and Non-Operating Other Income, net (continued)
|
(2)
|
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:
|
|
Year
ended December 31,
|
|
2008
|
2007
|
2006
|
|
(In
Thousands)
|
||||||||||
|
Corporate assets
|
$
|
192
|
$
|
-
|
$
|
-
|
||||
|
Chemical Business
assets
|
-
|
250
|
286
|
|||||||
|
$
|
192
|
$
|
250
|
$
|
286
|
|||||
|
(3)
|
Amounts
represent numerous unrelated transactions, none of which are individually
significant requiring separate
disclosure.
|
|
(4)
|
For
2008, income from litigation judgment and settlements includes
approximately $7.6 million, net of attorneys’ fees, relating to a
litigation judgment involving a subsidiary within our Chemical Business.
On June 6, 2008, we received proceeds of approximately $11.2 million for
this litigation judgment, which includes interest of approximately $1.4
million and from which we paid attorneys’ fees of approximately $3.6
million. The payment of attorneys’ fees of 31.67% of our recovery was
contingent upon the cash receipt of the litigation judgment. Cash flows
relating to this litigation judgment are included in cash flows from
continuing operating activities, except for the portion of the judgment
associated with the recovery of damages relating to property, plant and
equipment and its pro-rata portion of the attorneys’ fees. These cash
flows are included in cash flows from continuing investing activities. In
addition, a settlement was reached for $0.4 million for the recovery of
certain environmental-related costs incurred in previous periods relating
to property used by Corporate and other business operations. 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 approximately $2.7 million
received by the Cherokee Facility and the retention by the Cherokee
Facility of a disputed accounts payable amount of approximately $0.6
million.
|
21. 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.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
21. Segment
Information (continued)
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:
|
·
|
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,
|
|
·
|
anhydrous
ammonia, ammonium nitrate, urea ammonium nitrate, and ammonium nitrate
ammonia solution for agricultural applications,
and
|
|
·
|
industrial
grade ammonium nitrate and solutions for the mining
industry.
|
Our
primary manufacturing facilities are located in El Dorado, Arkansas, Cherokee,
Alabama and Baytown, Texas. 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.
As of
December 31, 2008, our Chemical Business employed 397 persons, with 129
represented by unions under agreements, which will expire in July through
November of 2010.
Other - The business operation
classified as “Other” primarily sells industrial machinery and related
components to machine tool dealers and end users located primarily in North
America.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements (continued)
21. 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:
|
2008
|
2007
|
2006
|
|
(In
Thousands)
|
|
Net
sales:
|
|||||||||||
|
Climate
Control:
|
|||||||||||
|
Geothermal
and water source heat pumps
|
$
|
190,960
|
$
|
165,115
|
$
|
134,210
|
|||||
|
Hydronic
fan coils
|
83,472
|
85,815
|
59,497
|
||||||||
|
Other
HVAC products
|
36,948
|
35,435
|
27,454
|
||||||||
|
Total
Climate Control
|
311,380
|
286,365
|
221,161
|
||||||||
|
Chemical:
|
|||||||||||
|
Industrial
acids and other chemical products
|
162,941
|
95,754
|
95,208
|
||||||||
|
Agricultural
products
|
152,802
|
117,158
|
89,735
|
||||||||
|
Mining
products
|
108,374
|
75,928
|
75,708
|
||||||||
|
Total
Chemical
|
424,117
|
288,840
|
260,651
|
||||||||
|
Other
|
13,470
|
11,202
|
10,140
|
||||||||
|
$
|
748,967
|
$
|
586,407
|
$
|
491,952
|
||||||
|
Gross
profit:
|
|||||||||||
|
Climate
Control
|
$
|
96,633
|
$
|
83,638
|
$
|
65,496
|
|||||
|
Chemical
|
37,991
|
44,946
|
22,023
|
||||||||
|
Other
|
4,256
|
4,009
|
3,343
|
||||||||
|
$
|
138,880
|
$
|
132,593
|
$
|
90,862
|
||||||
|
Operating
income (loss):
|
|||||||||||
|
Climate
Control
|
$
|
38,944
|
$
|
34,194
|
$
|
25,428
|
|||||
|
Chemical
|
31,340
|
35,011
|
9,785
|
||||||||
|
General
corporate expenses and other business operations,
net (1)
|
(11,129
|
)
|
(10,194
|
)
|
(8,074
|
)
|
|||||
|
59,155
|
59,011
|
27,139
|
|||||||||
|
Interest
expense
|
(11,381
|
)
|
(12,078
|
)
|
(11,915
|
)
|
|||||
|
Gain
on extinguishment of debt
|
5,529
|
-
|
-
|
||||||||
|
Non-operating
income, net:
|
|||||||||||
|
Climate
Control
|
1
|
2
|
1
|
||||||||
|
Chemical
|
27
|
109
|
311
|
||||||||
|
Corporate
and other business operations
|
1,068
|
1,153
|
312
|
||||||||
|
Provisions
for income taxes
|
(18,776
|
)
|
(2,540
|
)
|
(901
|
)
|
|||||
|
Equity
in earnings of affiliate - Climate Control
|
937
|
877
|
821
|
||||||||
|
Income
from continuing operations
|
$
|
36,560
|
$
|
46,534
|
$
|
15,768
|
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
21. Segment
Information (continued)
(1)
General corporate expenses and other business operations, net consist of the
following:
|
2008
|
2007
|
2006
|
|
(In
Thousands)
|
|
Gross
profit-Other
|
$
|
4,256
|
$
|
4,009
|
$
|
3,343
|
|||||
|
Selling,
general and administrative:
|
|||||||||||
|
Personnel
costs
|
(7,937
|
)
|
(6,879
|
)
|
(5,862
|
)
|
|||||
|
Professional
fees
|
(4,759
|
)
|
(4,299
|
)
|
(3,004
|
)
|
|||||
|
Office
overhead
|
(650
|
)
|
(646
|
)
|
(598
|
)
|
|||||
|
Property,
franchise and other taxes
|
(313
|
)
|
(314
|
)
|
(198
|
)
|
|||||
|
Advertising
|
(269
|
)
|
(244
|
)
|
(188
|
)
|
|||||
|
Shareholders
relations
|
(74
|
)
|
(154
|
)
|
(58
|
)
|
|||||
|
All
other
|
(1,498
|
)
|
(1,626
|
)
|
(1,221
|
)
|
|||||
|
Total
selling, general and administrative
|
(15,500
|
)
|
(14,162
|
)
|
(11,129
|
)
|
|||||
|
Other
income
|
766
|
53
|
28
|
||||||||
|
Other
expense
|
(651
|
)
|
(94
|
)
|
(316
|
)
|
|||||
|
Total
general corporate expenses and other business operations,
net
|
$
|
(11,129
|
)
|
$
|
(10,194
|
)
|
$
|
(8,074
|
)
|
Information
about our property, plant and equipment and total assets by industry segment is
detailed below:
|
2008
|
2007
|
2006
|
|
(In
Thousands)
|
|
Depreciation
of property, plant and equipment:
|
|||||||||||
|
Climate
Control
|
$
|
3,433
|
$
|
3,195
|
$
|
2,591
|
|||||
|
Chemical
|
10,232
|
8,929
|
8,633
|
||||||||
|
Corporate
assets and other
|
165
|
147
|
157
|
||||||||
|
Total
depreciation of property, plant and equipment
|
$
|
13,830
|
$
|
12,271
|
$
|
11,381
|
|||||
|
Additions
to property, plant and equipment:
|
|||||||||||
|
Climate
Control
|
$
|
12,111
|
$
|
6,778
|
$
|
7,600
|
|||||
|
Chemical
|
25,130
|
9,151
|
6,482
|
||||||||
|
Corporate
assets and other
|
457
|
294
|
37
|
||||||||
|
Total
additions to property, plant and equipment
|
$
|
37,698
|
$
|
16,223
|
$
|
14,119
|
|||||
|
Total
assets at December 31:
|
|||||||||||
|
Climate
Control
|
$
|
117,260
|
$
|
102,737
|
$
|
97,166
|
|||||
|
Chemical
|
145,518
|
121,864
|
109,122
|
||||||||
|
Corporate
assets and other (A)
|
72,989
|
82,953
|
13,639
|
||||||||
|
Total
assets
|
$
|
335,767
|
$
|
307,554
|
$
|
219,927
|
(A) At
December 31, 2008, 2007 and 2006, the amount includes cash and cash equivalents
of $45.9 million, $55.9 million and $1.6 million, respectively. Also at December
31, 2008, and 2007, the amount includes deferred income taxes of $11.4
million and $10.0 million, respectively (none at December 31,
2006).
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
21. 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 that 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
|
2008
|
2007
|
2006
|
|
(In
Thousands)
|
|
Canada
|
$
|
24,749
|
$
|
14,206
|
$
|
14,869
|
||
|
Middle
East
|
4,994
|
9,523
|
688
|
|||||
|
Mexico,
Central and South America
|
2,954
|
2,053
|
3,240
|
|||||
|
Europe
|
2,119
|
3,069
|
1,732
|
|||||
|
South
and East Asia
|
1,645
|
2,218
|
1,271
|
|||||
|
Caribbean
|
491
|
1,119
|
968
|
|||||
|
Other
|
148
|
129
|
390
|
|||||
|
$
|
37,100
|
$
|
32,317
|
$
|
23,158
|
Major
Customers
Net sales
to one customer, Bayer, of our Chemical Business segment represented
approximately 11%, 7% and 7% of our total net sales for 2008, 2007 and 2006,
respectively. See discussion under “Baytown Facility” and “Bayer
Agreement” in Note 14 – Commitments and Contingencies.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
21. Segment
Information (continued)
Net sales
to one customer, Orica USA, Inc., (“Orica”) of our Chemical Business segment
represented approximately 11%, 9% and 10% of our total net sales for 2008, 2007
and 2006, respectively. Under the terms of the Supply Agreement, EDC will supply
from the El Dorado Facility industrial grade ammonium nitrate to Orica through
June 2011.
Unplanned
Maintenance Downtime at the Cherokee Facility
During
the third quarter of 2008, the Cherokee Facility experienced repeated unplanned
maintenance downtime, which downtime reduced production and sales by our
Chemical Business. As a result, interim repairs were made at the Cherokee
Facility during this period. Due to this repeated downtime, the Cherokee
Facility lost approximately 20 days of operation that negatively
impacted our Chemical Business’ operating results in
2008.
22. Related
Party Transactions
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 of the
Jayhawk Group’s agreement to tender shares of Series 2 Preferred in the tender
offer as discussed in Note 17.
After the
completion of our March 2007 tender offer relating to the 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.
During
the fourth quarter of 2008, the Golsen Group acquired from an unrelated third
party $5.0 million of the 2007 Debentures. At December 31, 2008, accrued
interest of approximately $0.1 million relates to the portion of debentures held
by the Golsen Group.
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.
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
22. Related
Party Transactions (continued)
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.
In
March 2008, we paid the dividends totaling approximately $240,000 and
$60,000 on our Series B Preferred and our Series D Preferred,
respectively, 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
and 2006, 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 and $.3 million and $1.6 million in 2006 (none in 2008). The debt
accrued interest at 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.
23. Subsequent
Events (Unaudited)
Preferred Share Rights Plan
– On January 5, 2009, a
renewed shareholder rights plan became effective upon the expiration of our
previous shareholder rights plan. The rights plan will impact a
potential acquirer unless the acquirer negotiates with our board of directors
and the board of directors approves the transaction. Pursuant to the
renewed plan, one preferred share purchase right (a “Right”) is attached to each
currently outstanding or subsequently issued share of our common
stock. Prior to becoming exercisable, the Rights trade together with
our common stock. In general, the Rights will become exercisable if a
person or group (other than the acquirer) acquires or announces a tender or
exchange offer for 15% or more of our common stock. Each Right
entitles the holder to purchase from us one one-hundredth of a share of Series 4
Junior Participating Preferred Stock, no par value (the “Preferred Stock”), at
an exercise price of $47.75 per one one-hundredth of a share, subject to
adjustment. If a person or group acquires 15% or more of our common
stock, each Right will entitle the holder (other than the acquirer) to purchase
shares of our common stock (or, in certain circumstances, cash or other
securities) having a market value of twice the exercise price of a Right at such
time. Under certain circumstances, each Right will entitle the holder
(other than the acquirer) to purchase the common stock of the acquirer having a
market value of twice the exercise price of a Right at such time. In
addition, under certain circumstances, our board of directors may exchange each
Right (other than those held by the acquirer) for one share of our common stock,
subject to adjustment. If the Rights become exercisable, holders of
our common stock (other than the
LSB
Industries, Inc.
Notes to
Consolidated Financial Statements
(continued)
23. Subsequent
Events (Unaudited) (continued)
acquirer),
will receive the number of Rights they would have received if their units had
been redeemed and the purchase price paid in our common stock. Our
board of directors may redeem the Rights at a price of $0.01 per Right generally
at any time before 10 days after the Rights become
exercisable.
Fire at Cherokee Facility - On
February 5, 2009, a small nitric acid plant located at the Cherokee Facility
suffered damage due to a fire. The fire was immediately extinguished and
there were no injuries. The cause of the fire is under investigation and
the extent of the damage to the nitric acid plant is not yet determined.
It is also not yet known when repair or replacement will be completed and the
nitric acid plant put back in operation. The nitric acid plant that
suffered the fire, with a current 182 ton per day capacity, is the smaller of
the two nitric acid plants at the Cherokee Facility. While the volume of
production of finished product at the Cherokee Facility will be impacted, the
Cherokee Facility continues production with the larger of the nitric acid
plants. Our insurance provides for business interruption coverage after a
30-day waiting period for lost profits and extra expense coverage and a $1
million property loss deductible.
Pryor Facility - We have been
considering activating a portion of an idle chemical facility (the “Pryor
Facility”) located in Pryor, Oklahoma and owned by one of our non-ThermaClime
subsidiaries. The activation of the Pryor Facility is subject to
securing a sales agreement with a strategic customer to purchase and distribute
the majority of the urea ammonium nitrate (“UAN”) production. We are currently
in discussions with several large strategic industry customers regarding an
agreement to sell or distribute the UAN production at the Pryor
Facility.
In
February 2009, we received our permits to operate the Pryor Facility. Therefore,
we are proceeding with the preparations to start the facility. Barring
unforeseen delays and subject to securing a sales or distribution agreement as
discussed above, we expect to start production at the Pryor Facility during the
third quarter of 2009. If the Pryor Facility becomes operational, we plan to
produce and sell UAN and anhydrous ammonia. Our initial cost estimate to
activate the Pryor Facility was $15 to $20 million, with approximately 50% being
for capital expenditures and the remainder for expenses. The
estimated start up costs include those cost to bring the plant up to full UAN
production status. Our estimate of the total remaining cost to activate the
Pryor Facility is approximately $13 million to $17 million. Approximately $6
million to $8 million will be capitalized and the remaining portion will be
expensed as incurred. We plan to fund this project from our available
cash on hand and working capital. However, the actual timeframe to begin
production and the total remaining cost to activate the facility could be
significantly different from our current estimates.
LSB
Industries, Inc.
Supplementary
Financial Data
Quarterly
Financial Data (Unaudited)
(In
Thousands, Except Per Share Amounts)
|
Three
months ended
|
|
March
31
|
June
30
|
September
30
|
December
31
|
|
2008
|
|||||||||||||||
|
Net
sales
|
$
|
160,455
|
$
|
198,052
|
$
|
210,920
|
$
|
179,540
|
|||||||
|
Gross
profit (1)
|
$
|
37,757
|
$
|
43,741
|
$
|
31,169
|
$
|
26,213
|
|||||||
|
Income
from continuing operations (1) (2)
|
$
|
10,907
|
$
|
17,924
|
$
|
4,157
|
$
|
3,572
|
|||||||
|
Net
income (loss) from discontinued operations
|
-
|
(17
|
)
|
4
|
-
|
||||||||||
|
Net
income
|
$
|
10,907
|
$
|
17,907
|
$
|
4,161
|
$
|
3,572
|
|||||||
|
Net
income applicable to common stock
|
$
|
10,601
|
$
|
17,907
|
$
|
4,161
|
$
|
3,572
|
|||||||
|
Income
per common share:
|
|||||||||||||||
|
Basic:
|
|||||||||||||||
|
Income
from continuing operations
|
$
|
.50
|
$
|
.85
|
$
|
.20
|
$
|
.17
|
|||||||
|
Income
(loss) from discontinued operations, net
|
-
|
-
|
-
|
-
|
|||||||||||
|
Net
income
|
$
|
.50
|
$
|
.85
|
$
|
.20
|
$
|
.17
|
|||||||
|
Diluted:
|
|||||||||||||||
|
Income
from continuing operations
|
$
|
.46
|
$
|
.75
|
$
|
.18
|
$
|
.16
|
|||||||
|
Income
(loss) from discontinued operations, net
|
-
|
-
|
-
|
-
|
|||||||||||
|
Net
income
|
$
|
.46
|
$
|
.75
|
$
|
.18
|
$
|
.16
|
|||||||
|
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
|
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)
|
|||||||||||||||
|
Changes
in unrealized gains (losses) relating to commodities
contracts still held at period end:
|
|||||||||||||||
|
2008
|
$
|
53
|
$
|
808
|
$
|
(5,391
|
)
|
$
|
(3,576
|
)
|
|||||
|
2007
|
$
|
302
|
$
|
(386
|
)
|
$
|
120
|
$
|
(241
|
)
|
|||||
|
Unplanned
maintenance downtime – Cherokee Facility:
|
|||||||||||||||
|
2008
|
$
|
-
|
$
|
-
|
$
|
(5,100
|
)
|
$
|
-
|
||||||
|
2007
|
$
|
-
|
$
|
-
|
$
|
(1,100
|
)
|
$
|
-
|
||||||
|
Turnaround
costs:
|
|||||||||||||||
|
2008
|
$
|
(247
|
)
|
$
|
(366
|
)
|
$
|
(881
|
)
|
$
|
(4,461
|
)
|
|||
|
2007
|
$
|
(163
|
)
|
$
|
(182
|
)
|
$
|
(534
|
)
|
$
|
(2,483
|
)
|
|||
|
Precious
metals, net of recoveries and gains:
|
|||||||||||||||
|
2008
|
$
|
(2,460
|
)
|
$
|
(1,102
|
)
|
$
|
(1,304
|
)
|
$
|
(1,462
|
)
|
|||
|
2007
|
$
|
(898
|
)
|
$
|
(494
|
)
|
$
|
(278
|
)
|
$
|
(888
|
)
|
|||
|
Changes
in inventory reserves:
|
|||||||||||||||
|
2008
|
$
|
(169
|
)
|
$
|
(15
|
)
|
$
|
(216
|
)
|
$
|
(3,424
|
)
|
|||
|
2007
|
$
|
317
|
$
|
28
|
$
|
15
|
$
|
24
|
|||||||
|
Business
interruption insurance recoveries:
|
|||||||||||||||
|
2007
|
$
|
-
|
$
|
-
|
$
|
1,500
|
$
|
2,250
|
LSB
Industries, Inc.
Supplementary
Financial Data
Quarterly
Financial Data (Unaudited) (continued)
(2) The
following items increased (decreased) income from continuing
operations:
|
Three
months ended
|
|
March
31
|
June
30
|
September
30
|
December
31
|
|
(In
Thousands)
|
|
Judgment,
settlements and potential settlements of litigation and potential
litigation:
|
|||||||||||||||
|
2008
|
$
|
350
|
$
|
7,518
|
$
|
-
|
$
|
(225
|
)
|
||||||
|
2007
|
$
|
-
|
$
|
-
|
$
|
3,272
|
$
|
(350
|
)
|
||||||
|
Gain
on extinguishment of debt:
|
|||||||||||||||
|
2008
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
5,529
|
|||||||
|
Benefit
(provision) for income taxes:
|
|||||||||||||||
|
2008
(A)
|
$
|
(6,720
|
)
|
$
|
(10,709
|
)
|
$
|
(2,388
|
)
|
$
|
1,041
|
||||
|
2007
|
$
|
(344
|
)
|
$
|
(188
|
)
|
$
|
1,549
|
$
|
(3,557
|
)
|
(A)
During the three months ended December 31, 2008, we performed a detailed
analysis of all our deferred tax assets and liabilities and determined that our
deferred tax assets were understated by approximately $1,827,000. As
a part of our analysis, we reviewed the realizability of these deferred tax
assets and determined that a valuation allowance of approximately $268,000 was
required. Accordingly, the addition of the deferred tax assets and
the associated valuation allowance resulted in a tax benefit of $1,559,000 in
our income taxes for the three months ended December 31, 2008. In
addition, the net effect of these adjustments increased basic and diluted net
income per share by $0.07 and $0.06, respectively, for the year ended
December 31, 2008.
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,
|
|
2008
|
2007
|
|
(In
Thousands)
|
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
|
$
|
25,720
|
$
|
35,051
|
|||
|
Accounts
receivable, net
|
46
|
149
|
|||||
|
Supplies,
prepaid items and other
|
85
|
101
|
|||||
|
Due
from subsidiaries
|
32,235
|
6,971
|
|||||
|
Notes
receivable from a subsidiary
|
31,400
|
29,886
|
|||||
|
Total
current assets
|
89,486
|
72,158
|
|||||
|
Property,
plant and equipment, net
|
186
|
156
|
|||||
|
Note
receivable from a subsidiary
|
-
|
6,400
|
|||||
|
Investments
in and due from subsidiaries
|
100,179
|
92,007
|
|||||
|
Other
assets, net
|
2,468
|
3,572
|
|||||
|
$
|
192,319
|
$
|
174,293
|
||||
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
432
|
$
|
401
|
|||
|
Accrued
and other liabilities
|
3,816
|
2,582
|
|||||
|
Redeemable,
noncumulative, convertible preferred stock
|
52
|
56
|
|||||
|
Current
portion of long-term debt
|
9
|
13
|
|||||
|
Total
current liabilities
|
4,309
|
3,052
|
|||||
|
Long-term
debt
|
40,500
|
60,002
|
|||||
|
Due
to subsidiaries
|
2,558
|
2,558
|
|||||
|
Noncurrent
accrued and other liabilities
|
3,947
|
3,146
|
|||||
|
Stockholders’
equity:
|
|||||||
|
Preferred
stock
|
3,000
|
3,000
|
|||||
|
Common
stock
|
2,496
|
2,447
|
|||||
|
Capital
in excess of par value
|
127,337
|
123,336
|
|||||
|
Accumulated
retained earnings (deficit)
|
19,804
|
(16,437
|
)
|
||||
|
152,637
|
112,346
|
||||||
|
Less
treasury stock
|
11,632
|
6,811
|
|||||
|
Total
stockholders’ equity
|
141,005
|
105,535
|
|||||
|
$
|
192,319
|
$
|
174,293
|
See
accompanying notes.
LSB
Industries, Inc.
Schedule
I - Condensed Financial Information of Registrant
Condensed
Statements of Income
|
Year
ended December 31,
|
|
2008
|
2007
|
2006
|
|
(In
Thousands)
|
|
Fees
under service, tax sharing and management agreements with
subsidiaries
|
$
|
3,501
|
$
|
2,801
|
$
|
2,801
|
|||||
|
Selling,
general and administrative expense
|
6,108
|
5,361
|
4,367
|
||||||||
|
Litigation
judgment
|
(7,560
|
)
|
-
|
-
|
|||||||
|
Gain
on sale of precious metals
|
-
|
(4,259
|
)
|
-
|
|||||||
|
Other
expense (income), net
|
65
|
(402
|
)
|
(308
|
)
|
||||||
|
Operating
income (loss)
|
4,888
|
2,101
|
(1,258
|
)
|
|||||||
|
Interest
expense
|
5,988
|
5,142
|
4,452
|
||||||||
|
Gain
on extinguishment of debt
|
(5,529
|
)
|
-
|
-
|
|||||||
|
Interest
and other non-operating income, net
|
(3,342
|
)
|
(3,309
|
)
|
(1,355
|
)
|
|||||
|
Income
(loss) from continuing operations
|
7,771
|
268
|
(4,355
|
)
|
|||||||
|
Equity
in earnings of subsidiaries
|
28,789
|
46,266
|
20,123
|
||||||||
|
Net
income (loss) from discontinued operations
|
(13
|
)
|
348
|
(253
|
)
|
||||||
|
Net
income
|
$
|
36,547
|
$
|
46,882
|
$
|
15,515
|
See
accompanying notes.
LSB
Industries, Inc.
Schedule
I - Condensed Financial Information of Registrant
Condensed
Statements of Cash Flows
|
Year
ended December 31,
|
|
2008
|
2007
|
2006
|
|
(In
Thousands)
|
|
Net
cash flows provided (used) by operating activities
|
$
|
1,140
|
$
|
5,953
|
$
|
(985
|
)
|
||||
|
Cash
flows from investing activities:
|
|||||||||||
|
Capital
expenditures
|
(71
|
)
|
(71
|
)
|
(30
|
)
|
|||||
|
Proceeds
from litigation judgment associated with property, plant and equipment of
a subsidiary
|
5,948
|
-
|
-
|
||||||||
|
Payment
of legal costs relating to litigation judgment associated with property,
plant and equipment of a subsidiary
|
(1,884
|
)
|
-
|
-
|
|||||||
|
Proceeds
from sales of property and equipment
|
-
|
2
|
-
|
||||||||
|
Notes
receivable from a subsidiary
|
-
|
(29,886
|
)
|
(6,400
|
)
|
||||||
|
Payments
received on notes receivable from a subsidiary
|
4,886
|
-
|
-
|
||||||||
|
Payment
(purchase) of senior unsecured notes of a subsidiary
|
-
|
6,950
|
(6,950
|
)
|
|||||||
|
Other
assets
|
(274
|
)
|
(147
|
)
|
(209
|
)
|
|||||
|
Net
cash provided (used) by investing activities
|
8,605
|
(23,152
|
)
|
(13,589
|
)
|
||||||
|
Cash
flows from financing activities:
|
|||||||||||
|
Acquisition
of 5.5% convertible debentures
|
(13,207
|
)
|
-
|
-
|
|||||||
|
Payments
on other long-term debt
|
(6
|
)
|
(4
|
)
|
(1,655
|
)
|
|||||
|
Payments
of debt issuance costs
|
-
|
(209
|
)
|
(356
|
)
|
||||||
|
Proceeds
from 5.5% convertible debentures, net of fees
|
-
|
56,985
|
-
|
||||||||
|
Proceeds
from 7% convertible debentures, net of fees
|
-
|
-
|
16,876
|
||||||||
|
Net
change in due to/from subsidiaries
|
(3,972
|
)
|
(4,832
|
)
|
(1,134
|
)
|
|||||
|
Purchase
of treasury stock
|
(4,821
|
)
|
-
|
-
|
|||||||
|
Proceeds
from exercise of stock options
|
846
|
1,522
|
298
|
||||||||
|
Proceeds
from exercise of warrant
|
-
|
393
|
-
|
||||||||
|
Excess
income tax benefit on stock options exercised
|
2,390
|
1,740
|
-
|
||||||||
|
Dividends
paid on preferred stock
|
(306
|
)
|
(2,934
|
)
|
(262
|
)
|
|||||
|
Acquisition
of non-redeemable preferred stock
|
-
|
(1,292
|
)
|
(95
|
)
|
||||||
|
Net
cash provided (used) by financing activities
|
(19,076
|
)
|
51,369
|
13,672
|
|||||||
|
Net
increase (decrease) in cash
|
(9,331
|
)
|
34,170
|
(902
|
)
|
||||||
|
Cash
at the beginning of year
|
35,051
|
881
|
1,783
|
||||||||
|
Cash
at the end of year
|
$
|
25,720
|
$
|
35,051
|
$
|
881
|
See
accompanying notes.
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 2008, we acquired a portion of the 2007 Debentures. As a result,
approximately $764,000 of the unamortized debt issuance costs associated with
the 2007 Debentures acquired was charged against the gain on extinguishment of
debt in 2008.
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, 2008, 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
|
10,459
|
||
|
$
|
60,459
|
In
addition, the Company has guaranteed approximately $24.4 million of our
subsidiaries insurance bonds and approximately $5.8 million of one of our
subsidiaries purchases of natural gas.
See Notes
12 and 14 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, 2008 and 2007, 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 3, 11, 16 and 17 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.
LSB
Industries, Inc.
Schedule
I - Condensed Financial Information of Registrant
Notes to
Condensed Financial Statements (continued)
5. Litigation Judgment -
See Note 20 of the notes to the Company’s consolidated financial
statements for the discussion of the income from a litigation
judgment.
6. 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 2008 and 2006) 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.
7. Gain on Extinguishment
of Debt - During 2008, we acquired $19.5 million aggregate principal
amount of the 2007 Debentures for $13.2 million and recognized a gain on
extinguishment of debt of $5.5 million, after writing off $0.8 million of the
unamortized debt issuance costs associated with the 2007 Debentures
acquired.
8. 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
2008, 2007 and 2006, the Company earned interest of $699,000, $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 of
which $4,886,000 was repaid in 2008. During 2008 and 2007, the Company earned
interest of $1,671,000 and $801,000, respectively, relating to these demand
notes. In addition, the Company has invested a portion of the net proceeds of
the 2007 Debentures in U.S. Treasury obligations (previously in money market
investments). During 2008 and 2007, the Company earned interest of $651,000 and
$752,000, respectively, relating to these investments.
LSB
Industries, Inc.
Schedule
II - Valuation and Qualifying Accounts
Years
ended December 31, 2008, 2007 and 2006
(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):
|
|
2008
|
$
|
1,308
|
$
|
371
|
$
|
950
|
$
|
729
|
||||||||
|
2007
|
$
|
2,269
|
$
|
858
|
$
|
1,819
|
$
|
1,308
|
||||||||
|
2006
|
$
|
2,680
|
$
|
426
|
$
|
837
|
$
|
2,269
|
|
Inventory-reserve
for slow-moving items (1):
|
|
2008
|
$
|
460
|
$
|
210
|
$
|
156
|
$
|
514
|
||||||||
|
2007
|
$
|
829
|
$
|
29
|
$
|
398
|
$
|
460
|
||||||||
|
2006
|
$
|
1,028
|
$
|
258
|
$
|
457
|
$
|
829
|
|
Notes
receivable - allowance for doubtful accounts (1):
|
|
2008
|
$
|
970
|
$
|
-
|
$
|
-
|
$
|
970
|
||||||||
|
2007
|
$
|
970
|
$
|
-
|
$
|
-
|
$
|
970
|
||||||||
|
2006
|
$
|
970
|
$
|
-
|
$
|
-
|
$
|
970
|
|
Deferred
tax assets - valuation (1):
|
|
2008
|
$
|
-
|
$
|
268
|
$
|
-
|
$
|
268
|
||||||||
|
2007
|
$
|
18,932
|
$
|
(18,932
|
)
|
$
|
-
|
$
|
-
|
|||||||
|
2006
|
$
|
25,598
|
$
|
-
|
$
|
6,666
|
$
|
18,932
|
(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.
ANHYDROUS
AMMONIA
SALES AGREEMENT
THIS
ANHYDROUS AMMONIA SALES AGREEMENT (this "Agreement") is entered into on this
3rd
day of December, 2008, and made effective January 1, 2009 (the
"Effective Date"), between KOCH NITROGEN INTERNATIONAL SÀRL, a Switzerland
corporation, with a branch office located at Grand Cayman, Cayman Islands,
B.W.I. (hereinafter "Seller") and EL DORADO CHEMICAL COMPANY, an Oklahoma
corporation, with principal offices at 16 S. Pennsylvania, Oklahoma City,
Oklahoma 73107 (hereinafter "Buyer"). Seller and Buyer are sometimes
collectively referred to herein as the "Parties" and individually referred to
herein as a "Party".
WITNESSETH:
WHEREAS,
as specified in this Agreement, Buyer and Seller desire to enter into an
anhydrous ammonia sales agreement under which Seller agrees to supply to Buyer,
and Buyer agrees to purchase from Seller, 100% of its Product Requirements (as
defined below) and
WHEREAS,
Seller's intent is to supply Buyer's Product Requirements primarily by pipeline
deliveries and supply Buyer's Railcar Product Requirements (as defined below)
either by railcar or pipeline.
NOW
THEREFORE, in consideration of the mutual promises herein contained, the receipt
and sufficiency of which is hereby acknowledged, the Parties agree as
follows:
I. DEFINITIONS
Whenever
used in this Agreement, the following terms shall have the following respective
meanings:
|
A.
|
"Adder"
shall have the same meaning assigned to that term in Article VI, Section
B.
|
|
B.
|
"Affiliate"
means, with respect to any Person, any other Person directly or indirectly
controlling or controlled by, or under direct or indirect common control
with such Person.
|
PORTIONS
OF THIS DOCUMENT HAVE BEEN OMITTED FROM THIS PUBLIC FILING PURSUANT TO A REQUEST
BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION. THE OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH
THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH
REQUEST.
1
|
|
For purposes of this
definition, the term "control" (including the correlative terms
"controlled by" and "under the common control of"), as used with respect
to any Person, means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of such
Person, through the ownership of voting securities, by contract or
otherwise.
|
|
C.
|
"Ammonia
Pipeline" shall mean the anhydrous ammonia pipeline currently owned by
NuStar Pipeline Operating Partnership,
L.P.
|
|
D.
|
"Ammonia
Pipeline Tariff" means the Ammonia Pipeline's current tariff for
interstate movement of anhydrous ammonia, as amended from time to
time.
|
|
E.
|
"Ammonia
Pipeline Transportation Charge" shall have the same meaning assigned to
that term in Article VI, Section C.
|
|
F.
|
"Buyer
Facility" shall mean Buyer's chemical production facility located at El
Dorado, Arkansas, as presently
configured.
|
|
G.
|
"
*****" shall mean
the ***** per
metric ton of the weekly price range published under the heading "Ammonia
Price Indications, Delivered prices, US Gulf/Tampa, - Tampa" in Fertecon Ammonia Report
("Fertecon") and (ii) the
***** per metric ton of the weekly
price range published under the heading "Ammonia c+f Tampa" in the FMB Weekly Fertilizer Report
("FMB") for the week Product is delivered by pipeline to Buyer or
shipped by railcar to Buyer. For example, if Product is delivered to Buyer
by the Ammonia Pipeline during the week from Monday, December 15, 2003
through Sunday, December 21, 2003,
the ***** published in the December 18,
2003 issue of Fertecon
and the December 18, 2003 issue of FMB shall apply. The
Parties acknowledge that currently, both Fertecon and FMB publish a price
range for Tampa/US Gulf prices and a Tampa only price. The Tampa only
price, as set forth above, shall be used to calculate
the ***** .
If either publication or the price contained in such publication that is
necessary to calculate
the ***** is
not published far a particular week for any reason, then the publication
or price,
|
***** INDICATES INFORMATION IN THIS DOCUMENT WHICH HAS BEEN
OMITTED FROM THIS PUBLIC FILING PURSUANT TO A REQUEST BY THE COMPANY FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION. THE
OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH
REQUEST.
2
|
|
as applicable, from
the previous week shall be used to calculate the *****. Examples of how
***** is calculated are set forth on Exhibit
1.
|
|
H.
|
"Delivery
Point" shall mean: (i) for pipeline deliveries, the discharge side of the
Ammonia Pipeline's Product meter located at Buyer's Facility, or (ii) for
rail or truck deliveries, the point at Buyer's Facility where the truck or
rail cars enter Buyer's Facility, or (iii) an alternate delivery point
along the Ammonia Pipeline; provided that Buyer gives Seller at least
forty-five (45) days written notice prior to the date it wishes to begin
delivery at such alternate delivery
point.
|
|
I.
|
"KNC
Facility" shall mean any of the anhydrous ammonia production facilities
owned by Seller’s affiliate, Koch Nitrogen
Company.
|
|
J.
|
"KNC
Terminal" shall mean Koch Nitrogen Company’s anhydrous ammonia terminal at
Taft, Louisiana, capable of receiving ammonia by vessels, loading and
shipping ammonia in a barge, and re-injecting ammonia into the Ammonia
Pipeline.
|
|
K.
|
"Month"
shall mean a calendar month.
|
|
L.
|
"Performance
Assurance" means collateral in the form of either cash, letter(s) of
credit, or other security acceptable to Seller in its sole
discretion.
|
|
M.
|
"Person"
means any individual, corporation (including any non-profit corporation),
general or limited partnership, limited liability company, joint venture,
estate, trust, unincorporated organization, business, syndicate, sole
proprietorship, association, organization, other entity or governmental
body.
|
|
N.
|
"Price"
shall be described in Article VI, Section A
hereof.
|
|
O.
|
"Product"
shall mean commercial anhydrous ammonia provided hereunder having the
following specifications:
|
Ammonia
(NH3)
Content:
99.5% minimum, by weight %
Water: 0.2%
minimum to 0.5% maximum, by weight %
***** INDICATES INFORMATION
IN THIS DOCUMENT WHICH HAS BEEN OMITTED FROM THIS PUBLIC FILING PURSUANT TO A
REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION. THE OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH
THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH
REQUEST.
3
Oil:
5 ppm maximum, by weight
|
P.
|
"Product
Requirements" shall mean total Product purchased by Buyer for Buyer's
account for further processing at Buyer's Facility, as adjusted to
accommodate Buyer's Railcar Product Requirements. Currently, the Product
Requirements during a calendar year at Buyer's Facility are approximately
165,000 to 175,000 short tons, which includes approximately 45,000 short
tons currently used by Buyer to manufacture finished product on behalf of
Orica USA Inc., but is exclusive of any tolling arrangements by Buyer with
third parties. Product Requirements shall not include approximately 45,000
additional short tons of anhydrous ammonia annually, for production of
finished product for Orica USA Inc. The 45,000 additional short tons
referenced above shall be excluded from the Product Requirements during
the Term of this Agreement, unless Buyer requests and Seller elects, at
Seller's sole option, to include such quantity in the Product
Requirements. Provided that Buyer has given Seller at least sixty (60)
days prior written notice, Product Requirements shall not include Product
supplied to Buyer's Facility which shall be produced by Buyer or an
Affiliate of Buyer and physically delivered to Buyer's
Facility.
|
|
Q.
|
"Seller"
shall mean Seller.
|
|
R.
|
"short
ton" shall mean 2,000 pounds.
|
|
S.
|
"Taxes"
shall have the same meaning assigned to that term in Article IX
hereof.
|
|
T.
|
"Total
Credit Exposure" shall mean the sum of the (i) outstanding invoice(s) for
Product delivered from Seller to Buyer, (ii) the estimated invoice for
Product delivered to Buyer but not yet invoiced by Seller, and (iii) the
estimated invoice amount for Product that shall be delivered from Seller
to Buyer until the payment due date of the oldest outstanding invoice,
less the amount of any Performance
Assurance.
|
II. TERM
|
A.
|
Term. The term
of this Agreement (the "Term") shall commence at 12:01 a.m. central time
on January 1, 2009 and shall terminate at 11:59 p.m. on December 31,
2010,
|
4
|
|
("OriginalTermination
Date") unless otherwise terminated earlier in accordance with this
Agreement or extended pursuant to Section B
below.
|
|
B.
|
Renewal. At the
Original Termination Date, this Agreement may be extended for a one (1)
year period (commencing on January 1st
and ending on December 31st)
upon the written agreement of both Seller and Buyer made no later than
November 1st
of the then current year. Notwithstanding the foregoing, neither Party
shall be obligated to renew this
Agreement.
|
III. QUANTITY
|
A.
|
Quantity.
During the Term, Buyer shall purchase from Seller one hundred percent
(100%) of its Product Requirements for Buyer's Facility. However, in the
event Buyer installs railcar unloading capabilities at Buyer's Facility,
then Buyer shall have the option to purchase up to twelve percent (12%) of
Buyer's Product Requirements during a calendar year from a third party
("Railcar Product Requirements"); provided, such Railcar Product
Requirements must be delivered to Buyer's Facility by railcar; and
provided further, Buyer gives Seller the right of first refusal to match
any bona fide third party railcar delivered price. Buyer shall provide
Seller with a written copy of such third party offer. In the event Seller
determines to meet the price for any Railcar Product Requirements to
Buyer's Facility within two (2) business days after its receipt of a
written copy of the third party offer, Seller shall have the option to
deliver the Railcar Product Requirements to Buyer's Facility either by
railcar or pipeline. In addition, if Buyer installs railcar unloading
capabilities at Buyer's Facility, then Seller may request, from time to
time, that Buyer take delivery of a specified quantity of Buyer's Product
Requirements by railcar, instead of delivery by pipeline, during each
calendar year; provided Seller gives Buyer thirty (30) days written notice
that Seller wants to deliver Product by railcar. Buyer shall make
reasonable commercial efforts to accommodate Seller's request as stated
above; however, it shall be Buyer's option to grant such
request.
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B.
|
No Resale.
Buyer shall use the Product delivered to Buyer for processing at Buyer's
Facility only, and shall not resell, transfer, exchange, or otherwise
assign Product without
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5
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|
first
obtaining the prior written consent of Seller, which consent may be
granted or withheld by Seller in its sole
discretion.
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|
C.
|
Measurement.
The quantity of Product delivered hereunder to Buyer by the Ammonia
Pipeline shall be governed by the weights and measures taken by meters
owned by the Ammonia Pipeline at the Delivery Point pursuant to the
Ammonia Pipeline Tariff. For truck or rail deliveries, the quantity of
Product delivered to Buyer shall be governed by the weights and measures
taken as the trucks or rail cars are loaded at the KNC Facility, KNC
Terminal, alternative Seller supply sources, or at an alternative third
party supply source and as stated on the bill of lading. The foregoing
measurements of said quantities shall be final and conclusive, unless
proven to be in error.
|
IV. QUALITY
|
|
All
Product delivered hereunder shall conform to the specifications set forth
in Article I, Section O. All claims by Buyer that any Product delivered
hereunder does not conform to the specifications set forth in Article I,
Section O, shall be made in writing and sent within thirty (30) days after
Seller's delivery of such Product to the Delivery Point. Failure to give
written notice of such claim within the specified time shall constitute an
unqualified acceptance of the Product and a waiver by Buyer of all claims
with respect thereto.
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6
V. WARRANTIES
|
A.
|
As
its exclusive warranties, Seller warrants to Buyer that, at the Delivery
Point: (i) the Product shall conform to the specifications specifically
set forth in Article I, Section O and (ii) title to the Product shall be
free from any security interest, lien, or encumbrance. EXCEPT AS
SPECIFICALLY SET FORTH IN THE PRECEDING SENTENCE, (I) BUYER ACKNOWLEDGES
AND AGREES THAT KOCH NITROGEN, AND ITS RESPECTIVE AFFILIATES HAVE NOT
MADE, DO NOT MAKE, AND EXPRESSLY DISCLAIM ANY WARRANTIES, REPRESENTATIONS,
COVENANTS, OR GUARANTEES, EITHER EXPRESS OR IMPLIED, WHETHER ARISING BY
OPERATION OF LAW OR OTHERWISE, AS TO THE MERCHANTABILITY, QUANTITY,
CONDITION, OR QUALITY OF THE PRODUCT OR ITS SUITABILITY OR FITNESS FOR ANY
PARTICULAR PURPOSE OR USE AND (II) THE PRODUCT IS SOLD "AS
IS".
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|
B.
|
Seller's
liability, and Buyer's exclusive remedy, for any cause of action arising
out of or related to the breach of the warranty above, is, at Buyer's
option, limited to (i) replacement of the non-conforming Product at the
Delivery Point or (ii) a refund to Buyer of the portion of the Price
allocable to such non conforming Product. IN NO EVENT WILL SELLER'S
CUMULATIVE LIABILITY UNDER THE AGREEMENT EXCEED THE TOTAL SALES PRICE OF
THE PRODUCT OR THE COST OF SUBSTITUTE PRODUCT, WHETHER ARISING UNDER
WARRANTY, GUARANTEE, CONTRACT, NEGLIGENCE, STRICT LIABILITY,
INDEMNIFICATION, FAILURE OF ESSENTIAL PURPOSE OR ANY OTHER CAUSE OR
COMBINATION OF CAUSES WHATSOEVER. WITHOUT LIMITATION ON THE FOREGOING,
UNDER NO CIRCUMSTANCES SHALL EITHER KOCH NITROGEN OR BUYER BE LIABLE OR
HAVE ANY RESPONSIBILITY TO THE OTHER OR ANY OTHER THIRD PARTY FOR ANY
INDIRECT, SPECIAL, CONSEQUENTIAL, EXEMPLARY, OR PUNITIVE DAMAGES,
INCLUDING, WITHOUT LIMITATION, LOST EARNINGS, LOST PROFITS, OR BUSINESS
INTERRUPTION.
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7
VI. PRICE
|
A.
|
Price. Except
as set forth below, for each short ton of Product sold to Buyer hereunder,
Seller shall charge, and Buyer shall pay to Seller, the following
Price:
|
|
|
Price
per short ton = *****.
|
|
|
However,
in the event Seller agrees to sell any of Buyer's Railcar Product
Requirements as set forth in Article III, Section A, then the Price- for
each short ton of Product sold to Buyer as Railcar Product Requirements
shall be as determined in accordance with Article III, Section A and
documented in writing between the Parties. The Price shall be determined
on
a ***** basis.
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B.
|
Adder. Adder
shall equal ***** per short
ton. However, if the Ammonia Pipeline Transportation Charge is
modified as set forth in Section VI C. of this Agreement, the Parties
agree to modify the Adder as set forth in Section VI
C.
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C.
|
Ammonia Pipeline
Transportation Charge. The Ammonia Pipeline Transportation Charge
per short ton shall be a flat rate of ***** per short ton from Taft,
Louisiana or Sterlington, Louisiana to the Delivery Point for pipeline
deliveries. In the event
the **** is
increased
above ***** ,
then the Ammonia Pipeline Transportation Charge for both injection points
shall be changed to the revised Ammonia Pipeline Tariff rate as published
for ***** . Notwithstanding
the foregoing, starting January 1, 2009, for the first increase of the
Ammonia Pipeline Transportation Charge in each calendar year of the Term,
Seller will, up to a maximum
of ***** per
short ton, decrease the amount of the Adder per short ton by an amount
equal to *****. For
any other increases of the Ammonia Pipeline Charge in the same calendar
year, the Adder shall not be
changed.
|
***** INDICATES INFORMATION
IN THIS DOCUMENT WHICH HAS BEEN OMITTED FROM THIS PUBLIC FILING PURSUANT TO A
REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION. THE OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH
THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH
REQUEST.
8
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D.
|
Market Publications
and Prices. If either (a) Fertecon or FMB or (b) the price
contained in such publication that is necessary to calculate
the ***** is
not published for three (3) consecutive weeks, then Seller and Buyer shall
meet in person, negotiate, and agree on a substitute publication or price,
as applicable, within thirty (30) days of such event. During such thirty
(30) day period, the publication or price that is published, as
applicable, shall solely be used to calculate the Price hereunder. For
example, if FMB
was not published for three (3) consecutive weeks in March 2005,
then Fertecon
would solely be used to calculate the
*****.
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|
E.
|
Demurrage.
Railcars shall be allowed ten (10) days of free time from the earlier of
constructive or actual placement of the railcar at Buyer's Facility until
being released by Buyer to the railroad. In the event Buyer is unable to
obtain actual placement of railcars within a reasonable period of time
after constructive placement due to issues beyond Buyer's control, then
Seller shall adjust the free time allowed provided Buyer has notified
Seller of this delay within three (3) business days of the delay. Any
excess time shall be billed at $50.00 per car per
day.
|
VII. CREDIT,
SECURITY AND PAYMENT TERMS
|
A.
|
If
Seller provides Buyer a line of credit to facilitate purchases under this
Agreement, such credit line may be amended, decreased or terminated at any
time at the sole discretion of Koch by providing notice to
Buyer. Upon written notice of Seller’s election to decrease or
terminate Buyer’s credit line, Buyer may terminate this
Agreement. Buyer’s failure to give written notice to Koch of
the termination of this Agreement within thirty (30) days from the date of
such notice shall constitute an unqualified acceptance of such reduction
or termination and a waiver by Buyer of the right to terminate this
Agreement In addition to any other rights or remedies to which
Seller may be entitled at law or in equity, in the event that Seller
determines, in its sole discretion, that (a) the creditworthiness or
future performance of Buyer is impaired or unsatisfactory, Seller may (i)
immediately suspend deliveries of all Product; (ii) require prepayment by
wire transfer at least two (2) business days prior to a scheduled shipment
of Product; or (iii) require Performance Assurance at least three (3)
business days prior to a scheduled shipment of
Product.
|
***** INDICATES
INFORMATION IN THIS DOCUMENT WHICH HAS BEEN OMITTED FROM THIS PUBLIC FILING
PURSUANT TO A REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE
SECURITIES AND EXCHANGE COMMISSION. THE OMITTED INFORMATION HAS BEEN
FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION
FOR PURPOSES OF SUCH REQUEST.
9
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B.
|
Seller
shall prepare and fax to Buyer a weekly invoice by Tuesday of every week
during the Month in an amount equal to the Price per short ton based on
the previous Friday's Price multiplied by the short tons delivered to
Buyer during the period from the previous Monday through Sunday based on
the meter reading at the Delivery Point provided by Buyer to Seller every
Monday. In the event, Seller agrees to sell to Buyer any of Buyer's
Railcar Product Requirements as set forth in Article III, Section A, then
Seller shall prepare and fax to Buyer a weekly invoice by Tuesday of such
week, in an amount equal to the Price per short ton as determined in
accordance with Article VI, Section A multiplied by the short tons shipped
by Seller to Buyer during the period from the previous Monday through
Sunday based an the bill of lading quantity for such railcar shipments
during the week. In the event Seller supplies to Buyer both Product
Requirements and Railcar Product Requirements during any given week, then
Seller shall prepare and fax Buyer two (2) separate invoices. Any Product
returned to Seller in a railcar shall be deemed abandoned by Buyer and
Buyer shall not receive any credit, payment, or other consideration for
any abandoned Product, unless Buyer has provided written notification to
Seller that Product in excess of three (3) short tons may remain in the
railcar due to operational issues at Buyer's
Facility.
|
|
C.
|
Twenty-one
(21) days after the invoice date, Buyer shall pay the full amount of each
invoice by wire transfer of immediately available funds to such account as
Seller designates in writing. If the payment due date is a Saturday,
Sunday, or holiday where banks are authorized to be closed, Buyer shall
make such payment on the business day next succeeding such due date.
Interest shall be charged on all past due amounts owed by Buyer hereunder
at an interest rate equal to the lesser of 12% per annum and the maximum
rate permitted by law, from the payment due date until paid in full (the
"Default Rate"). Buyer agrees to accept as originals facsimile copies of
invoices from Seller.
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|
D.
|
For
invoices prepared and faxed to Buyer by Seller, Buyer shall wire transfer
funds to Seller’s designated bank account in London as designated on
Seller’s invoice. The current wiring instructions for payment to Seller
are as follows:
|
10
Koch
Nitrogen International Sàrl
JP Morgan
Chase London
Account
#25090201 USD
SWIFT:
CHASGB2L
VIII. DELIVERY
|
A.
|
Notices. No
later than the 1st
calendar day of the Month immediately prior to the Month of delivery of
Product, Buyer shall notify Seller in writing of the amount of short tons
and method of delivery that Buyer wishes to receive for such Month of
delivery. Buyer shall promptly notify Seller in writing of any known or
anticipated changes that will not permit Buyer to receive the monthly
quantity of Product.
|
|
B.
|
Title and Risk of
Loss. Seller shall deliver the Product hereunder to Buyer at the
Delivery Point. Title and risk of loss of Product shall pass from Seller
to Buyer and delivery shall occur when the Product passes the Delivery
Point. Prior to delivery and transfer of title and risk of loss of the
Product to Buyer, Seller agrees to be responsible for any damages or
injury arising in connection with the Product. At and after delivery and
transfer of title and risk of loss of the Product to Buyer, Buyer agrees
to be responsible for any damages or injury arising in connection with the
Product.
|
|
C.
|
Shipper of
Record. Koch Nitrogen Company shall ship Product for Seller on the
Ammonia Pipeline to Buyer at Buyer’s Facility and Koch Nitrogen Company
will be the shipper of record.
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11
IX. TAXES
|
|
Buyer
shall pay all material taxes, assessments, duties, fees, levies,
penalties, licenses or charges imposed by any government authority
("Taxes") which may now or hereafter be imposed on or with respect to the
Product at or after title and risk of loss passes to Buyer. If Seller is
required to remit or pay Taxes that are Buyer's responsibility hereunder,
Buyer shall reimburse Seller for such Taxes within ten (10) days of
receipt of written notice hereunder. As the Buyer is assessed Taxes, both
Parties agree to mutually work together to mitigate any
assessment.
|
X. FORCE
MAJEURE
|
A.
|
Neither
Seller nor Buyer shall be liable for any failure or delay in performance
under this Agreement (except for the obligation to make money payments due
hereunder for Product already purchased) due to a Force Majeure event. A
"Force Majeure" event shall mean any event which may be due in whole or in
part to any contingency, delay, failure, cause or other occurrence of any
nature beyond a Party's reasonable control, which (i) physically prevents
Seller from transporting or delivering the Product to or from the (a) KNC
Terminal or (b) the Ammonia Pipeline, or (ii) which physically prevents
Buyer from receiving or using Product at Buyer's Facility. Examples of
Force Majeure events shall include, but not be limited to, the following:
(a) physical events such as acts of God, disease, plague, landslides,
lightning, earthquakes, fires, storms such as hurricanes or tornados, or
explosions; (b) acts of others such as terrorist attacks, riots, sabotage,
insurrections or wars; (c) breakage or accident to critical machinery or
critical equipment; and (d) material allocation or material curtailment of
natural gas or electricity, in either case under (c) or (d), rendering a
Party incapable of satisfying its obligations under this Agreement (except
for the obligation to make money payments due hereunder for Product
already purchased) for more than fifteen (15) consecutive days or twenty
(20) days in any thirty (30) day
period.
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12
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B.
|
The
term "Force Majeure" shall not include (i) an event caused by a Party's
sole negligence or willful misconduct; (ii) Seller's ability to sell, or
Buyer's ability to purchase from a third party, Product at a price more
advantageous than the Price; (iii) Buyer's loss of markets for products
produced at Buyer's Facility; (iv) shutdown of KNC's Terminal or Buyer's
Facility for reasons other than a Force Majeure event; and (v) routine or
scheduled maintenance at KNC's Terminal or Buyer's
Facility.
|
|
C.
|
If
a Force Majeure event occurs, the declaring Party may exercise its right
under this Article X by giving timely notice thereof to the other Party
setting forth with reasonable particularity the nature of the Force
Majeure event. The declaring Party shall only be excused from performance
hereunder during the duration of, and only to the extent of, the Force
Majeure event. Under no circumstance shall (i) Seller be obligated to cure
any deficiencies in deliveries of Product caused by Force Majeure or (ii)
Buyer be obligated to cure any deficiencies in Product purchased caused by
Force Majeure. Further, neither Seller nor Buyer (except as set forth in
Article X, Section D below) shall be obligated to take any action which
would result in increasing such Party's performance costs under this
Agreement beyond the costs which it would have incurred in the absence of
such Force Majeure event. The declaring Party shall give the other Party
prompt notice of when the Force Majeure event
ends.
|
|
D.
|
Notwithstanding
any other provision of this Agreement, if the Ammonia Pipeline is
interrupted or curtailed due to a Force Majeure event which prevents or
delays Seller from making all or a portion of the required deliveries of
Product hereunder, Seller shall use commercially reasonable efforts to
arrange, at Buyer's cost and expense, rail or trucking transportation
service from an alternative supply source to Buyer's Facility. Ammonia
Pipeline allocation shall not constitute a Force Majeure event; provided,
however, that a mechanical breakdown or any interruption of the Ammonia
Pipeline may constitute a Force Majeure event. For the duration of the
Force Majeure event, if (i) Seller's deliveries of Product to Buyer are
impeded due to a Force Majeure event, or
|
13
|
|
(ii) the Ammonia
Pipeline is allocated or curtailed, Seller shall have the right to
apportion deliveries on a pro-rata basis (based up Seller's sales
commitments or contracts) among Buyer, Seller's present and future
customers (including regular customers not then under contract), and
Seller or its Affiliates. Notwithstanding any other provision of this
Agreement, Seller shall not be required to (a) cause ammonia production at
the KNC Facility to resume or (b) to purchase Product from a third party,
in either case, to remove a Force Majeure
event.
|
XI. DEFAULT
AND REMEDIES
|
A.
|
Defaults by
Buyer. Upon the occurrence of any of the following events: (i)
Seller shall not have received any payment due from Buyer hereunder by the
date such payment is due under this Agreement, and such failure shall
remain uncured for a period of two (2) business days after written notice
thereof, (ii) the failure of Buyer to perform any other obligation in this
Agreement and such failure is not excused or cured within five (5)
business days after written notice thereof; (iii) the occurrence of a
Bankruptcy Event with respect to Buyer or its Affiliates; or (iv) the
failure by any Performance Assurance provider of Buyer to perform any
obligation of such Performance Assurance provider under any document
executed and delivered in connection herewith, and such failure shall
remain uncured for a period of three (3) business days after written
notice thereof; then Seller, in its sole discretion and without prior
notice to Buyer, may do any one or more of the following: (a) suspend
performance under the Agreement; (b) terminate the Agreement, whereby any
and all obligations of Buyer, including payments due, will, at the option
of Seller, become immediately due and payable; and/or (c) Set-off against
any amount that Seller owes to Buyer under this Agreement. If Seller
suspends performance and withholds delivery of the Product as permitted
above, it may sell the Product to a third party and deduct from the
proceeds of such sale the purchase price and all reasonable costs
resulting from Buyer's default as identified above, including, without
limitation, all costs associated with the transportation, storage, and
sale of the Product. The foregoing rights, which shall include, but not be
limited to, specific performance,
|
14
|
|
shall be cumulative
and alternative and in addition to any other rights or remedies to which
Seller may be entitled at law or in equity. In addition, Seller shall be
entitled to recover from Buyer all court costs, attorneys' fees and
expenses incurred by Seller in connection with Buyer's default, and
interest on past due amounts at the Default Rate. "Set-off" means set-off,
offset, combination of accounts, netting of dollar amounts of monetary
obligations, right of retention or withholding or similar right to which
Seller is entitled (whether arising under this Agreement, applicable law,
or in equity) that is exercised by Seller. "Bankruptcy Event" means the
occurrence of any of the following events with respect to a Person: (i)
filing of a petition or otherwise commencing, authorizing or acquiescing
in the commencement of a proceeding or cause of action under any
bankruptcy, insolvency, reorganization or similar law, or if any such
petition is filed or commenced against it; (ii) making of an assignment or
any general arrangement for the benefit of creditors; (iii) having a
bankruptcy petition filed against it and such petition is not withdrawn or
dismissed within sixty (60) days after such filing; (iv) otherwise
becoming bankrupt or insolvent (however evidenced); (v) having a
liquidator, administrator, custodian, receiver, trustee, conservator or
similar official appointed with respect to it or any substantial portion
of its property or assets; or (vi) being generally unable to pay its debts
as they fall due.
|
|
B.
|
Defaults by
Seller. Upon the occurrence of any of the following events: (i) the
failure of Seller to perform any obligation in this Agreement and such
failure is not excused or cured within ten (10) days after written notice
thereof, provided, however, that Seller shall have an additional ten (10)
day period (commencing immediately upon the expiration of the initial ten
(10) day period) to cure such failure if Seller commences curative action
within such ten (10) day period and proceeds diligently and in good faith
thereafter to cure such failure until completion or (ii) a Bankruptcy
Event with respect to Seller, then Buyer, in its sole discretion and
without limitation, may terminate this Agreement, and Buyer's remedies
shall be cumulative and alternative and in addition to any other rights or
remedies to which Buyer may be entitled at law or in equity. Subject to
Article V, Section C, if Buyer is the prevailing party in any action,
litigation, or lawsuit against Seller for its default hereunder, Buyer
shall be entitled to recover from Seller all court costs, attorneys' fees
and expenses incurred by Buyer in connection with
Seller's
|
15
|
|
default hereunder,
and interest on past due amounts at the Default Rate. In addition to the
foregoing, if. (i) Seller fails to perform a material obligation in this
Agreement and (ii) Buyer notifies it in writing of such failure, then only
while such failure remains uncured, Buyer may purchase Product from
another Person and Buyer's Product Requirements shall be reduced by the
amount of Product Buyer purchased from such other
Person.
|
XII. RIGHTS
NOT WAIVED
|
|
The
waiver by either Party of any default of this Agreement by another Party
shall not be deemed to be a waiver of any successive or other default of
this Agreement. Each and every right, power and remedy may be excused from
time to time and so often and in such order as may be deemed expedient by
the Party, and the exercise of any such right, power or remedy shall not
be deemed a waiver of the right to exercise at the same time or
thereafter, any other right, power or
remedy.
|
Xlll. NOTICES
|
|
Any
notices, requests or other communications required or permitted by any
provision of this Agreement shall be in writing and shall be deemed
delivered if delivered by hand, facsimile, national overnight courier
service, or mailed by U.S. Postal Service, postage prepaid, by registered
or certified mail, as follows:
|
If to
Seller:
Koch
Nitrogen International Sàrl
P.O. Box
31359 KY1-1206
Grand
Cayman, Cayman Islands, B.W.I.
Attention:
Walker Hess, Managing Director
Fax:
(345) 946-9325
16
With copy
to Koch Nitrogen Company:
Koch
Nitrogen Company
4111 East
37th Street North
Wichita,
Kansas 67220
Attention: Dion
Mick
Director
Industrial Ammonia Sales & Product Planning
Fax:
(316) 828-4084
If to
Buyer:
El Dorado
Chemical Company
16 S.
Pennsylvania
Oklahoma
City, Oklahoma 73107
Attention:
Tony M. Shelby
Fax:
(405) 236-5067
With copy
to:
El Dorado
Chemical Company
16 5.
Pennsylvania
Oklahoma
City, Oklahoma 73107
Attn:
David Shear, General Counsel
Fax:
(405)236-1209
Any Party
may change the address to which notices are given by mailing written notice
thereof to the other Party as provided above.
XIV. ASSIGNMENT
|
|
No
Party shall assign or delegate, or permit by assignment or delegation, by
operation of law or otherwise, any of its rights and obligations under
this Agreement to any Person without first obtaining the prior written
consent of the other Parties, which consent shall not be unreasonably
withheld, conditioned, delayed or denied. Notwithstanding the foregoing,
each Party shall be allowed to assign this Agreement to an Affiliate upon
providing written notice to the other Parties, provided no such transfer
shall operate to relieve the transferring Party of its obligations
hereunder. Any assignment or delegation, or attempted assignment or
delegation, in violation of this Article XIV shall be null and void, shall
be considered a material breach of this Agreement, and shall permit the
other Parties, in addition to any other rights which it may hereunder or
at law or in equity, to
|
17
|
|
terminate
this Agreement and exercise any remedies available to the non-breaching
Party hereunder or at law or in
equity.
|
XV. ENTIRE
AGREEMENT; AMENDMENT
|
|
This
greement shall supersede all prior negotiations, discussions, and dealings
concerning the subject matter hereof, and shall constitute the entire
agreement between Seller and Buyer concerning the subject matter
hereof. No Party shall claim any amendment, modification or release of any
provisions hereof unless the same is in writing and such writing: (i)
specifically refers to this Agreement; (ii) specifically identifies the
term amended; and (iii) is signed by duly authorized representatives of
Seller and Buyer.
|
XVI CONFIDENTIALITY
|
|
Except
(i) as may be agreed to in writing on a case by case basis, (ii) for
communications between Buyer and Orica USA, Inc., (iii) as may be
necessary to perform its obligations herein, or (iv) as required by law,
both Parties shall maintain in confidence a!1 information concerning costs
and price to be disclosed in connection with the other's performance under
this Agreement. Such information shall be disclosed to no one other than
officers and other employees who need to know the same in connection with
performance under this Agreement, and such officers and other employees
shall be advised of the confidential nature of such information, or when
disclosure is required by law. The Parties shall take all proper
precautions to prevent such information from being acquired by any
unauthorized person or entity.
|
XVII. ARTICLE
AND SECTION HEADINGS
|
|
Article
and section headings are for the convenience of the Parties and are not
considered parts of this Agreement, it being stipulated that any headings
in conflict with the substantive provisions of this Agreement shall have
no force and effect.
|
XVIII. GOVERNING
LAW; NO JURY TRIAL
|
|
The
Agreement and its execution, performance, interpretation, construction and
enforcement shall be governed by the law, both procedural and substantive,
of the State of
|
18
|
|
Kansas,
without regard to its conflicts of law rules. No course of dealing,
course of performance, or usage of trade shall be considered in the
interpretation or enforcement of this Agreement. Any action or proceeding
between Seller and Buyer relating to this Agreement shall be commenced and
maintained exclusively in the State of Kansas or in the Federal courts
governing Kansas, and each Party submits itself unconditionally and
irrevocably to the personal jurisdiction of such courts. EACH PARTY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT
MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUIT, ACTION, CLAIM OR
PROCEEDING RELATING TO THIS
AGREEMENT.
|
XIX. SEVERABILITY
|
|
The
provisions of this Agreement are severable and, if any provisions are
determined to be void or unenforceable in whole or in part, the remaining
provisions shall remain unaffected and shall be binding and enforceable in
accordance with the terms hereof.
|
XX. MISCELLANEOUS
|
A.
|
Additional Rules of Interpretation and
Construction.
|
|
1.
|
No Construction Against Draftsman. No implications or inferences
shall be drawn from the deletion of or addition to the terms of previous
drafts of this Agreement. Seller and Buyer acknowledge that each has had
the opportunity to participate in the preparation of this Agreement and,
therefore, in the event of any ambiguity in, or controversy with respect
to the meaning of, any term or provision contained in this Agreement, no
presumption or inference shall be drawn against any Party in the
interpretation of this Agreement by reason of the participation by such
Party or its attorneys in the preparation of this
Agreement.
|
|
2.
|
Gender. Words of any gender in this Agreement shall include
the other gender, and words in the singular number shall include the
plural, when the context requires.
|
19
|
3.
|
Days. The term "days", as used herein, shall mean actual days
occurring, including, Saturdays, Sundays and national holidays. The term
"business days" shall mean days other than Saturdays, Sundays and national
holidays.
|
|
4.
|
Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
executed counterparts together shall constitute one
agreement.
|
|
B.
|
Binding Effect. Without
limitation of the foregoing, this Agreement shall inure to the benefit of
and be binding upon Seller and Buyer, including their respective
successors and assigns.
|
|
C.
|
Brokers. Any
commissions, fees and expenses in connection with any broker or agent
retained by Seller shall be the sole responsibility of Seller. Any
commissions, fees and expenses in connection with any broker or agent
retained by Buyer shall be the sole responsibility of
Buyer.
|
|
D.
|
Independent
Contractors. Seller and Buyer are independent contractors only
and are not partners, master/servant, principaUagent or involved herein as
parties to any other similar legal relationship with respect to the
transactions contemplated under this Agreement or otherwise, and no
fiduciary, trust, or advisor relationship, nor any other relationship
imposing vicarious liability shall exist between the parties under this
Agreement or otherwise at law.
|
|
E.
|
No Third Party Beneficiaries.
This Agreement is solely for the benefit of, and shall inure to the
benefit of, Buyer and Seller, and shall not otherwise be deemed to confer
upon or give to any third party any right, claim, cause of action or other
interest herein.
|
|
F.
|
Survival of Terms and Conditions.
This Agreement, and all covenants, promises, agreements,
conditions, warranties, representations and understandings contained
herein, or contained in any modification, change or amendment of this
Agreement pursuant to Article XV hereof, shall survive the termination or
expiration of the term of this Agreement for purposes of enforcement of
rights occurring prior to such termination or
expiration.
|
20
IN
WITNESS WHEREOF, the Parties have executed this Agreement to be effective on the
Effective Date by their respective officers thereunto duly
authorized.
KOCH
NITROGEN INTERNATIONAL SÀRL
By: _____________________________
Title: ____________________________
EL
DORADO CHEMICAL COMPANY
By: /s/ Tony M. Shelby
Title: Vice President
21
EXHIBIT
1
Examples
of how the ***** is calculated in Article I, Section G is as
follows:
|
|
FMB Weekly Fertilizer Report |
|
|
Fertecon Ammonia
Report
|
FMB
Weekly Fertilizer Report
|
|||
| ***** | ***** | ||||
| Publication Date | ***** | ***** | ***** | ||
| December 4, 2003 | ***** | ***** | ***** | ***** | |
| December 11, 2003 | ***** | ***** | ***** | ***** | |
| December 18, 2003 | ***** | ***** | ***** | ***** | |
| December 25, 2003 | ***** | ***** | |||
| Delivery Dates | Publication Date Used | ***** | |
| December 1 to 7, 2003 | December 4, 2003 | ***** | |
| December 8 to 14, 2003 | December 11, 2003 | ***** | |
| December 15 to 21, 2003 | December 18, 2003 | ***** | |
| December 22 to 28, 2003 | December 18, 2003 | ***** |
All
prices in the above example are stated as a dollar ($) per metric ton
price.
***** INDICATES INFORMATION IN THIS DOCUMENT
WHICH HAS BEEN OMITTED FROM THIS PUBLIC FILING PURSUANT TO A REQUEST BY THE
COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE
COMMISSION. THE OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH
THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH
REQUEST.
#193855
Exhibit
21.1
LSB INDUSTRIES, INC.
SUBSIDIARY
LISTING
Revised
November 4, 2008
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
Chemical Company (f/k/a 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), the Registration Statement
(Form S-8 No. 333-153103) pertaining to the 2008 Incentive Stock Plan, of LSB
Industries, Inc. and in the related Prospectuses of our reports dated March 12,
2009, 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 this Annual Report (Form 10-K)
for the year ended December 31, 2008.
ERNST
& YOUNG LLP
Oklahoma
City, Oklahoma
March 12,
2009
Exhibit 3(i).1
RESTATED CERTIFICATE OF INCORPORATION
OF
LSB INDUSTRIES, INC.
FIRST: The name of this Corporation
shall be:
LSB INDUSTRIES, INC.
LSB INDUSTRIES, INC. hereafter
referred to as �Corporation� or �LSB�.
The date of filing of the
Corporation's original Certificate of Incorporation with the Secretary of State
of Delaware was January 21, 1977.
SECOND. The address of its
registered agent in the State of Delaware shall be 1209 Orange Street,
Wilmington, New Castle County, Delaware 19801. The name of its agent at such
address shall be The Corporation Trust Company.
THIRD: The nature of the business or
the purposes to be conducted or promoted by the Corporation shall be to engage
in any lawful act or activity for which corporations may be organized under the
General Corporation Law of Delaware, including, but not limited to, the
following:
(1) To design, manufacture, sell and
distribute all types of bearings and other components for automobiles, trucks
and other motor vehicles as original equipment and as replacement parts.
(2) To design, manufacture, sell and
distribute all kinds of fan coils and other components for heat transfer and air
conditioning systems.
(3) To design, manufacture, sell and
distribute all other goods, wares and commodities of every sort, kind or
description.
(4) To carry on the business of
distributors, wholesalers, retailers or agents of merchandise, goods, wares and
commodities of every sort, kind or description, and to carry on any other
business, whether manufacturing or otherwise.
(5) To engage in the transportation
of property by motor vehicle; to engage in the general transportation and
communication business and to buy, sell, lease, own or operate other motor
carriers, broadcasting stations and facilities; to buy, sell, lease, own or
operate terminals and warehouses and engage in warehousing business; to buy,
sell, deal and engage in the sale of motor vehicles and parts.
(6) To make and purchase materials
for the construction of buildings; to erect buildings; to own, manage, operate,
lease and sell buildings; to conduct and carry on the business of builders for
the purpose of building, repairing or doing any other work in connection with
any and all classes of buildings and improvements,
1
including the locating, laying out
and construction of roads, avenues, sewers, bridges, wells and generally all
classes of buildings, erections and works, both public and private, or integral
parts thereof. To purchase, take, own, hold, deal in, mortgage or otherwise
encumber and to lease, sell, exchange, convey, transfer or in any manner
whatever dispose of real property; to acquire lands for the purpose of
prospecting for and obtaining oil, gas and other minerals; to drill oil wells,
and to acquire drilling rigs or other machinery necessary to such purposes; and
to produce and market oil and other minerals.
(7) To enter into partnerships or
other arrangements for sharing profits or to cooperate with any entity carrying
on any business capable of being conducted so as to benefit this Corporation; to
acquire the assets and assume the liabilities of any entity; to pay for the same
in cash, stock or otherwise; to hold or dispose of the property so purchased;
and to conduct any business so acquired.
(8) To borrow and lend money and to
negotiate loans; to draw, accept and endorse notes, accounts receivable, bonds,
stocks, debentures or other securities; to subscribe for, acquire, hold and
dispose of shares of stock, bonds, accounts, and other securities of any
government, person or corporation.
(9) To purchase or otherwise
acquire, apply for, register, hold, use, assign, sell or in any manner dispose
of and grant licenses, franchises, or other rights in, and in any manner deal
with patents, inventions, improvements, processes, formulas, trademarks, trade
names or copyrights.
(10) To have one or more offices and
to conduct any or all of its operations and business and to promote its objects
anywhere, without restriction as to place or amount.
(11) To do any or all of the things
herein set forth as principal, agent, contractor, trustee or otherwise, alone or
jointly, with natural persons or any legal entity.
(12) The objects and purposes
specified herein shall be regarded as independent objects and purposes and,
except where otherwise expressed, shall be in no way limited nor restricted by
reference to or inference from the terms of any other clause or paragraph of
this Restated Certificate of Incorporation.
The foregoing shall be constructed
both as objects and powers, and the enumeration thereof shall not be held to
limit or restrict in any manner the general powers conferred on this Corporation
by the laws of the State of Delaware.
FOURTH: (A) The total number of
shares of stock which the Corporation shall have authority to issue is Forty
Five Million Two Hundred Fifty Thousand (45,250,000), of which
(1) Forty Million
(40,000,000) shares shall be Common Stock of the par value of Ten Cents
($.10) a share;
2
(2) Two Hundred Fifty Thousand
(250,000) shares shall be Preferred Stock of the par value of One Hundred
Dollars ($100) a share; and
(3) Five Million
(5,000,000) shares shall be Class C Preferred Stock, no par value.
For purposes of all other provisions
of this Restated Certificate of Incorporation, the term �Preferred Stock� shall
mean the Preferred Stock, Class C Preferred Stock and all other classes of
preferred stock authorized under this paragraph (A).
(B) The preference, qualifications,
limitations, restrictions and relative rights of each class are as follows:
(1) Preferred Stock. The Preferred
Stock (which, as defined in paragraph (A) of this Article, includes the
Preferred Stock, Class C Preferred Stock and all other classes of preferred
stock authorized under paragraph (A) of this Article) may be issued from
time to time in one or more series, each of such series to have such
designations, preference and relative, participating, optional, voting or other
special rights and qualifications, limitations or restrictions thereof as are
stated and expressed in a resolution or resolutions providing for the issue of
such series as determined and adopted by the Board of Directors. Authority is
hereby expressly granted to the Board of Directors to authorize one or more
series of Preferred Stock (as defined in paragraph (A) of this Article)
and, with respect to each such series, to fix by resolution or resolutions
providing for the issue of such series any or all of the following matters:
(a) the number of shares to
constitute such series and the distinctive designation thereof;
(b) whether or not the shares of
such series will be entitled to receive dividends, the dividend rate on the
shares of such series, and whether or not dividends on the shares of such series
shall be cumulative, and if cumulative, the date or dates from which dividends
shall accumulate;
(c) whether or not the shares of
such series will have voting rights, and the voting rights, if any, of the
shares of such series;
(d) whether or not the shares of any
such series shall be redeemable, and, if redeemable, the premium, if any, over
and above the par value thereof and any dividend accrued thereon which the
shares of such series shall be entitled to receive upon the redemption thereof;
(e) whether or not the shares of
such series shall be subject to the operation of retirement or sinking funds to
be applied to the purchase or redemption of such shares for retirement, and if
such retirement or sinking fund or funds are to be established, the annual
amount thereof and the terms and provisions relative to the operation thereof;
3
(f) whether or not the shares of
such series shall be convertible into, or exchangeable for, shares of any other
class or classes or of any other series of the same or any other class or
classes of stock of the Corporation and the conversion price or prices or the
rate or rates at which such exchange may be made, with such adjustments, if any,
as shall be stated and expressed or provided in such resolution or resolutions;
(g) the rights of the shares of such
series in the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, and the amount of premium, if any, over and above
the par value thereof and any dividends accrued thereon, which the shares of
such series shall be entitled to receive upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation;
(h) the conditions and restrictions,
if any, on the creation of indebtedness of the Corporation, or any subsidiary,
or on the authorization or issue of additional stock ranking on a parity with or
prior to the shares of such series as to dividends and upon liquidation; and
(i) any other preference and
relative, participating, optional or special rights, qualifications, limitations
or restrictions thereof as the Board of Directors may deem advisable.
(2) Common Stock. (a) Each
share of Common Stock shall entitle the holder thereof to one vote, in person or
by proxy, at any and all meetings of the Stockholders of the Corporation, on all
propositions before such meetings.
(b) Dividends on the Common Stock
shall be payable only if, when and as declared by the Board of Directors of the
Corporation.
(C) The number of authorized shares
of any class of the Corporation, including but without limitation the Preferred
Stock and the Common Stock, may be increased or decreased by the affirmative
vote of the holders of a majority of the stock of the Corporation entitled to
vote without regard to class.
(D) Any and all rights, title and
claim in or to any dividends declared by the Corporation, whether in cash, stock
or otherwise, which are unclaimed by the stockholder entitled thereto for a
period of six years after the close of business on the payment date, shall be
and be deemed to be extinguished and abandoned; and such unclaimed dividends in
the possession of the Corporation, its transfer agents or other agents or
depositories, shall at such time become the absolute property of the Corporation
free and clear of any and all claims of any persons whatsoever.
4
No shareholder of this Corporation
shall have any pre-emptive or preferential right of subscription to any shares
of stock of this Corporation, whether now or hereafter authorized, issued or
sold, or to any obligations convertible into stock of this Corporation, whether
now or hereafter authorized, issued or sold, nor any right of subscription to
any thereof.
(E) Designations, rights and
preferences of Preferred Stock outstanding as of the date of this Restated
Certificate of Incorporation:
CONVERTIBLE, NONCUMULATIVE
PREFERRED STOCK
The Corporation may issue one series
of up to 4,662 shares of Convertible, Noncumulative Preferred Stock, within the
Corporation�s class of Preferred Stock, par value $100 per share, and this
series of Convertible, Noncumulative Preferred Stock shall have the following
designations, rights and preferences:
Designation. The
shares of such series of Preferred Stock shall be designated as �Convertible,
Noncumulative Preferred Stock�, hereinafter called �Convertible Preferred
Stock�.
Dividends. The
holders of the Convertible Preferred Stock will receive noncumulative cash
dividends out of surplus or net profits, when, as and if such dividends are
declared by the board of directors of LSB Industries, Inc. (�LSB�) at the rate
of 10% per annum of the par value of such Convertible Preferred Stock and
no more, payable annually on the first day of April beginning in 1984, in
preference to holders of LSB common stock (�Cash Dividends�). Each holder of a
fractional one-half share of the Convertible Preferred Stock will receive
one-half of the per share Cash Dividend when, as and if such Cash Dividends are
declared by the Board of Directors of LSB. No Cash Dividends will be paid unless
there are funds available after the payment of interest to The National Bank of
Chicago, First Chicago International, Mercantile National Bank at Dallas, Bank
of Oklahoma, N.A., The Liberty National Bank & Trust Co. of Oklahoma
City, The First National Bank of Fort Worth, Centerre Bank, N.A., Fidelity Bank,
N.A., Chase Manhattan Bank, N.A., Chase Bank International, First City National
Bank of Houston, J. Henry Schroder Bank & Trust Company, Banco di Roma
and The Prudential Insurance Company of America (hereinafter collectively called
�Senior Lenders�) and such Senior Lenders consent to the payment of such Cash
Dividends, if required by an agreement between the Senior Lenders and LSB.
Voting Rights. Each
holder of the Convertible Preferred Stock will be entitled to one vote for each
share of Convertible Preferred Stock (or one-half of one vote for each
fractional one-half share of such Convertible Preferred Stock) held of record in
his or her name on all matters submitted to a vote of the share-holders of LSB.
The holders of such Convertible Preferred Stock and the holders of shares of
Common Stock of LSB shall vote together as one class.
5
Conversion Privilege.
The Convertible Preferred Stock will be convertible at any time at the election
of the holder thereof into fully paid and nonassessable shares of LSB common
stock. Each share of Convertible Preferred Stock shall be convertible into 40
shares of LSB common stock; provided however, that each holder of a fractional
one-half share of Convertible Preferred Stock shall be entitled to convert such
fractional one-half share into 20 shares of LSB Common Stock.
In the event that LSB shall
(i) pay to the holders of its common stock a stock dividend payable in its
common stock, the number of shares of common stock issuable upon conversion of
the Convertible Preferred Stock shall be proportionately adjusted, effective as
of the date of payment of such stock dividend; or (ii) have a stock-split,
reclassification, recapitalization, combination of shares or similar corporate
rearrangement (other than a stock dividend which is provided for in
(i) above), without any consideration therefor being received by the
Company, increasing or decreasing the number of outstanding shares of LSB�s
common stock, the number of shares of common stock issuable upon conversion of
the Convertible Preferred Stock shall be proportionately increased or decreased,
effective as of the date of the payment of or happening of such event; or
(iii) consolidated with or merge into another corporation, in which LSB is
the non-surviving corporation, or sell all or substantially all of LSB�s assets
as an entirety under one plan or arrangement to another corporation and such
consolidation, merger or sale shall be effected in such a way that holders of
LSB�s common stock shall be entitled to receive stock, securities or assets with
respect to or in exchange for such common stock, then after the effective date
of such consolidation, merger or sale each share of Convertible Preferred Stock
shall be convertible into (in lieu of LSB common stock) the number of shares of
stock or other securities or assets to which such holder of the Convertible
Preferred Stock would have been entitled upon such consummation if the holder of
the Convertible Preferred Stock had so exercised his right of conversion under
such Convertible Preferred Stock immediately prior to such consolidation, merger
or sale, and LSB shall make lawful provision therefor as part of such
consolidation, merger or sale.
LSB shall not be required to issue
any fraction of a share of common stock upon any conversion, but (i) may
deliver scrip therefor, which shall not entitle the bearer thereof to vote, or
to receive dividends or to any other or further right or interest, except to
convert the same in amounts aggregating one or more whole shares of LSB common
stock into whole shares of LSB common stock, at any time (within a period, fixed
by the Board of Directors of LSB, which shall be stated in the scrip), or
(ii) may pay in cash therefor an amount equal to the same fraction of the
fair market value of a full share of LSB common stock. For such purpose of
determining the fair market value of LSB common stock, the fair market value of
a share of LSB common stock shall be the last recorded sale price of such a
share of LSB common stock on
6
the American Stock Exchange on the
day immediately preceding the date upon which such Convertible Preferred Stock
is surrendered for conversion or, if there be no recorded sale price on such
day, the last quoted bid price per share of LSB common stock on such Exchange at
the close of trading on such date. If LSB common stock shall not be at the time
dealt in on the American Stock Exchange, such fair market value of LSB common
stock shall be the prevailing market value of such common stock on any other
securities exchange or in the open market, as determined by LSB, which
determination shall be conclusive.
Any conversion may be effected by
holders of Convertible Preferred Stock by giving to LSB written notice of an
election to convert at least ten business days prior to the date of conversion.
Notwithstanding anything herein to
the contrary, the right to convert the Convertible Preferred Stock into shares
of LSB common stock is subject to LSB listing the underlying common stock with
the American Stock Exchange, if LSB common stock is at that time listed on such
Exchange.
Redemption Rights.
Each share of Convertible Preferred Stock will be redeemable by LSB at par
value, $100 per share, (for each fractional one-half share of Convertible
Preferred Stock one-half of said par value) at the option of the holder of such
stock to the extent that LSB earns net profits after all of the debt owed by LSB
to the Senior Lenders has been paid in full. For this purpose, �net profits� is
defined as net income as determined under generally accepted accounting
principles.
LSB may at any time, or from time to
time as shall be permit-ted under the laws of Delaware, redeem the whole or any
part of its Convertible Preferred Stock by paying to the holders thereof in cash
$100 per share ($50 for a fractional one-half share of such Convertible
Preferred Stock) at the date fixed for redemption in the notice of redemption.
Holders of the Convertible Preferred Stock may convert such stock into LSB
common stock as provided above at any time prior to the notice for redemption.
Preference Upon
Liquidation. In the event of any liquidation or dissolution (whether
voluntary or involuntary) of LSB, before any payment will be made to the holders
of LSB common stock, the holders of Convertible Preferred Stock will be entitled
to be paid in full the par value of their share (for each fractional one-half
share of Convertible Preferred Stock one-half of said par value) to the extent
that funds are available, but will not be entitled to participate any further in
the distribution of the assets of LSB.
SERIES B 12% CUMULATIVE,
CONVERTIBLE PREFERRED STOCK
The Corporation may issue one series
of up to Twenty Thousand (20,000) shares of Series B 12% Cumulative,
Convertible Preferred
7
Stock, within the Corporation�s
class of Preferred Stock, par value $100 per share, and the Series B 12%
Cumulative, Convertible Preferred Stock shall have the following designations,
rights and preferences:
1. Designation. The
shares of this series of Preferred Stock shall be designated as �Series B 12%
Cumulative, Convertible Preferred Stock� (hereinafter called �Series B Preferred
Stock�), having a par value of $100 per share, with said Series B Preferred
Stock to consist of Twenty Thousand (20,000) shares.
2. Dividends. The
holders of shares of the Series B Preferred Stock shall be entitled to receive
cash dividends, but only when, as and if declared by the Board of Directors of
LSB, at the rate of twelve percent (12%) per annum of the par value of such
Series B Preferred Stock and no more, payable annually on such date in each year
as shall be fixed by the Board of Directors of LSB (�Cash Dividends�).
If Cash Dividends on the Series B
Preferred Stock for any year shall not have been paid or set apart in full for
the Series B Preferred Stock, the aggregate deficiency shall be cumulative and
shall be paid or set apart for payment before any dividends shall be paid upon
or set apart for payment for any class of common stock of LSB (other than a
dividend payable in common stock of LSB).
Any accumulation of dividends on the
Series B Preferred Stock shall not bear interest. The holders of Series B
Preferred Stock shall not be entitled to receive any dividends thereon other
than the dividends provided for in this paragraph 2.
Cash Dividends on Series B Preferred
Stock shall be declared if, when and as the Board of Directors shall in their
sole discretion deem advisable, and only from the net profits or surplus of the
Corporation as such shall be fixed and determined by the said Board. The
determination of the Board of Directors at any time of the amount of net profits
or surplus available for a Cash Dividend shall be binding and conclusive on the
holders of all the stock of the Corporation at the time outstanding.
3. No Preemptive Rights.
No holder of the Series B Preferred Stock shall be entitled, as of right, to
purchase or subscribe for any part of the unissued stock of LSB or of any stock
of LSB to be issued by reason of any increase of the authorized capital stock of
the Corporation, or to purchase or subscribe for any bonds, certificates of
indebtedness, debentures or other securities convertible into or carrying
options or warrants to purchase stock or other securities of LSB or to purchase
or subscribe for any stock of LSB purchased by LSB or by its nominee or
nominees, or to have any other preemptive rights now or here-after defined by
the laws of the State of Delaware.
8
4. Preference on Liquidation,
etc. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of LSB, or any reduction in its capital resulting in
any distribution of assets to its stockholders, the holders of the Series B
Preferred Stock shall be entitled to receive in cash out of the assets of LSB,
whether from capital or from earnings, available for distribution to its
stockholders, before any amount shall be paid to the holders of the common stock
of LSB the sum of One Hundred and No/100 Dollars ($100) (the par value of the
Series B Preferred Stock) per share, plus an amount equal to all ac-cumulated
and unpaid Cash Dividends thereon the date fixed for payment of such
distributive amount. The purchase or redemption by LSB of stock of any class, in
any manner permitted by law, shall not for the purpose of this paragraph be
regarded as a liquidation, dissolution or winding up of LSB or as a reduction of
its capital. Neither the consolidation nor merger of LSB with or into any other
corporation or corporations, nor the sale or transfer by LSB of all or any part
of its assets, shall be deemed to be a liquidation, dissolution or winding up of
LSB for the purposes of this paragraph. A dividend or distribution to
stockholders from net profits or surplus earned after the date of any reduction
of capital shall not be deemed to be a distribution resulting from such
reduction in capital. No holder of Series B Preferred Stock shall be entitled to
receive or participate in any amounts with respect thereto upon any liquidation,
dissolution or winding up of LSB other than the amounts provided for in this
paragraph. If, in the event of any such liquidation, dissolution or winding up
of LSB, there shall be shares of more than one class or series of Preferred
Stock outstanding, and such other class or classes or series of Preferred Stock
by their terms have a parity with the Series B Preferred Stock, and in such
event there shall be assets distributable upon all shares of the Series B
Preferred Stock and of such other classes or series of Preferred Stock in an
amount less than the amount of which the holders thereof are entitled, then any
amount available to be paid upon all such shares of Preferred Stock (including
this Series B Preferred Stock) shall be divided among said classes or series of
Preferred Stock in proportion to the aggregate amounts which would have been
paid to the holders of the shares of each class or series had they received
payment in the full amount to which they would be entitled in such event.
5. Voting Rights.
Subject to the provisions of this paragraph 5, at every meeting of stockholders
of LSB each holder of the Series B Preferred Stock shall be entitled to one
(1) vote for each share of Series B Preferred Stock held of record in his,
her or its name on all matters submitted to a vote of the shareholders of LSB.
The Series B Preferred Stock, the common stock of LSB and any other stock of LSB
having voting rights shall vote together as one class.
6. Conversion
Privileges. Subject to the terms of this paragraph 6, the holder of
record of any share or shares of Series B Preferred Stock shall have the right
at anytime, at his, her or
9
its option and election, to convert
each such share into 33.3333 shares of fully paid and nonassessable shares of
common stock of LSB on the following terms and conditions:
(a) LSB shall at the time of such
conversion pay to the holder of record of any share or shares of Series B
Preferred Stock any accrued but unpaid dividends on said Series B Preferred
Stock so surrendered for conversion, except: (i) as otherwise limited by
law or by any agreement or instrument to which LSB is a party or may be bound
by, and (ii) that the amount of the dividend paid for the then current
annual dividend period in which such conversion occurs shall be pro-rated for
that portion of such year that has elapsed prior to the time the holder of such
share or shares of Series B Preferred Stock exercises his, her or its rights of
conversion. If LSB is limited by law from paying such accrued but unpaid
dividends, in whole or in part, on the share or shares of Series B Preferred
Stock surrendered for conversion at the time such are surrendered for
conversion, then LSB shall only be required to pay that amount of such accrued
but unpaid dividends as allowed by such law at the time of such conversion and
no more. If LSB is limited under any agreement from paying such accrued but
unpaid dividends, in whole or in part, on the share or shares of Series B
Preferred Stock surrendered for conversion at the time such are surrendered for
conversion, then LSB shall pay to the holder of record thereof that portion of
such accrued but unpaid dividends that LSB is unable to pay on such share or
shares of Series B Preferred Stock at the time such are surrendered for
conversion due to said agreement (�Unpaid Dividends�) when LSB is no longer
prohibited from paying such Unpaid Dividends under an agreement and prior to any
dividends being paid upon or set apart for payment for any class of common stock
of LSB (other than a dividend payable in common stock of LSB); and in connection
therewith, LSB and such holder shall, at the time of such conversion, enter into
a separate contract, the terms of which are to be satisfactory to LSB and such
holder, evidencing LSB�s obligation to pay to the holder thereof the Unpaid
Dividends (without interest) after such conversion when LSB is no longer
prohibited from paying such under an agreement and prior to any dividends being
paid upon or set apart for payment for any class of common stock of LSB (other
than a dividend payable in common stock of LSB).
(b) In the event that LSB shall
(i) pay to the holders of its common stock a stock dividend payable in its
common stock, the number of shares of common stock issuable upon conversion of
the Series B Preferred Stock shall be proportionately adjusted, effective as of
the date of payment of such stock dividend; or (ii) have a stock split,
reclassification, recapitalization, combination of shares or similar corporate
rearrangement (other than a stock dividend which is provided for in
(i) above), without any consideration therefor being received by LSB,
increasing or decreasing the number of outstanding shares of LSB�s common stock,
the number of shares of common stock issuable upon conversion of the Series B
Preferred Stock shall be proportionately increased or
10
decreased, effective as of the date
of the payment of or happening of such event; or (iii) be consolidated with
or merge into another corporation, in which LSB is the nonsurviving corporation,
or sell all or substantially all of LSB�s assets as an entirety under one plan
or arrangement to another corporation and such consolidation, merger or sale
shall be effected in such a way that holders of LSB�s common stock shall be
entitled to receive stock, securities or assets with respect to or in exchange
for such common stock, then after the effective date of such consolidation,
merger or sale each share of Series B Preferred Stock shall be convertible into
(in lieu of LSB common stock) the number of shares of stock or other securities
or assets to which such holder of the Series B Preferred Stock would have been
entitled to upon such consummation as if the holder of the Series B Preferred
Stock had so exercised his, her or its right of conversion under such Series B
Preferred Stock immediately prior to such consolidation, merger or sale, and LSB
shall make lawful provision therefor as part of such consolidation, merger or
sale.
(c) LSB shall not be required to
issue any fraction of a share of common stock upon any conversion, but
(i) may deliver scrip therefor, which shall not entitle the bearer thereof
to vote, or to receive dividends or to any other or further right or interest,
except to convert the same in amounts aggregating one or more whole shares of
LSB common stock at any time within a period, fixed by the Board of Directors of
LSB, which shall be stated in the scrip, or (ii) may pay in cash therefor
an amount equal to the same fraction of the fair market value of a full share of
LSB common stock. For such purpose of determining the fair market value of LSB
common stock, the fair market value of a share of LSB common stock, shall be the
last recorded sale price of such a share of LSB common stock on the American
Stock Exchange on the date immediately preceding the date upon which such Series
B Preferred Stock is surrendered for conversion or, if there be no recorded sale
price on such day, the last quoted bid price per share of LSB common stock on
such Exchange at the close of trading on such date. If LSB common stock shall
not be at the time dealt in on the American Stock Exchange, such fair market
value of LSB common stock shall be the prevailing market value of such common
stock on any other securities exchange or in the open market, as determined by
LSB, which determination shall be conclusive.
(d) Notwithstanding anything herein
to the contrary, the right to convert the Series B Preferred Stock into shares
of LSB common stock is subject to LSB listing the underlying common stock with
the American Stock Exchange, if LSB common stock is at that time listed on such
Exchange. LSB shall at all times reserve and keep available solely for purpose
of issue upon conversion of the Series B Preferred Stock, as herein provided,
such number of shares of common stock as shall be issuable upon the conversion
of all outstanding Series B Preferred Stock.
(e) Any holder of a share or shares
of Series B Preferred Stock desiring to convert such Series B Preferred Stock
11
into common stock of LSB shall
surrender the certificate or certificates representing the share or shares of
Series B Preferred Stock so to be converted, duly endorsed to LSB in blank, with
the signature of said endorsement guaranteed by a national bank or investment
banking firm, at the principal office of LSB (or such other place as may be
designated by LSB), and shall give written notice to LSB at said office that he
elects to convert the same, and setting forth the name or names (with the
address or addresses) in which the shares of common stock are to be issued.
(f) The issuance of certificates for
shares of common stock upon conversion of the Series B Preferred Stock shall be
made without charge for tax in respect of such issuance; however, if any
certificate is to be issued in any name other than that of the holder of record
of the Series B Preferred Stock so converted, the person or persons requesting
the issuance thereof shall pay to LSB the amount of any tax which may be payable
in respect of any transfer involved in such issuance, or shall establish to the
satisfaction of the Corporation that such tax has been paid or is not due and
payable.
7. Redemption. There
shall be no mandatory or optional redemption rights with respect to the Series B
Preferred Stock.
8. Status of Reacquired
Shares. Shares of the Series B Preferred Stock which have been issued and
reacquired in any manner (until LSB elects to retire them) shall (upon
compliance with any applicable provisions of the laws of the State of Delaware)
have the status of authorized and unissued shares of the class of Preferred
Stock of LSB undesignated as to series and may be redesignated and reissued.
9. Miscellaneous. The
shares of the Series B Preferred Stock shall not be subject to the operation of
or to the benefit of any retirement or sinking fund. The shares of the Series B
Preferred Stock shall not have any other relative, participating, optional or
other rights and powers not set forth above.
$2.20 SERIES 1 CONVERTIBLE
EXCHANGEABLE CLASS C PREFERRED STOCK
The Corporation may issue one series
of up to 977,500 shares of $2.20 Series 1 Convertible Exchangeable Class C
Preferred Stock within the Corporation�s class of Class C Preferred Stock, no
par value, and the $2.20 Series 1 Convertible Exchangeable Class C Preferred
Stock shall have the following designations, rights and preferences:
(A) DESIGNATION AND SIZE OF ISSUE
The distinctive designation of this
series shall be �$2.20 Series 1 Convertible Exchangeable Class C Preferred
Stock� (hereinafter referred to as �this Series�). The number of shares which
shall constitute this Series shall be 977,500 shares, no par value, with a
stated value of $20 per share.
12
(B) DIVIDENDS
(1) The annual rate of dividends
payable on each share of this Series shall be $2.20.
(2) Dividends on this Series shall
be payable in cash, when and as declared by the Board of Directors of the
Corporation. Such dividends, when and as declared by the Board of Directors,
shall be payable quarterly in arrears on the first day of January, April, July
and October of each year, commencing April 1, 1987 (each such date
hereinafter referred to as a �Dividend Payment Date�), except that if such date
is not a Business Day (as hereinafter defined), then such dividend shall be
payable on the next succeeding calendar day which is a Business Day. The amount
of dividends payable on shares of this Series for each full quarterly dividend
period shall be computed by dividing by four the annual rate per share set forth
in Section (B)(1). Dividends payable on shares of this Series for the initial
dividend period and for any period less than a full quarterly period shall be
computed on the basis of a 360-day year of twelve 30-day months. Dividends shall
be payable to the record holders of shares of this Series as of the close of
business on a date, not more than sixty (60) days preceding the payment
date thereof, fixed by the Board of Directors of the Corporation. Dividends in
arrears may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to record holders of shares of this Series as of the
close of business on a date, not more than sixty (60) days preceding the
payment date thereof, fixed by the Board of Directors of the Corporation. As
used in this resolution, the term �Business Day� means a day other than Saturday
or Sunday and other than a day on which banking institutions in New York, New
York are authorized by law or executive order to close.
(3) Dividends payable on shares of
this Series shall be cumulative and shall accumulate on each Dividend Payment
Date from the date of original issue. Accumulation of dividends shall not bear
interest.
(4) Except as hereinafter provided,
so long as any shares of this Series are outstanding, no dividend (other than a
dividend payable in Common Stock or in any other stock of the Corporation
ranking junior to this Series as to dividends and distributions upon liquidation
(collectively, the �Junior Stock�)) shall be declared or paid or set aside for
payment, and no other distribution shall be declared or made, upon the Junior
Stock or upon any other stock of the Corporation ranking on a parity with this
Series as to dividends or distributions upon liquidation, nor shall any Junior
Stock nor any other stock of the Corporation ranking on a parity with this
Series as to dividends or distributions upon liquidation be redeemed, purchased
or otherwise acquired for any consideration (or any moneys be paid to or made
13
available for a sinking fund for the
redemption of any shares of any such stock) by the Corporation (except by
conversion into or exchange for Junior Stock of the Corporation) unless, in each
case, the full cumulative dividends on all outstanding shares of this Series
shall have been paid or contemporaneously are declared and paid through the last
Dividend Payment Date. When dividends are not paid in full upon the shares of
this Series and any other preferred stock of the Corporation ranking on a parity
as to dividends with this Series, all dividends declared upon shares of this
Series and any other preferred stock of the Corporation ranking on a parity as
to dividends with this Series shall be declared pro rata so that the amount of
dividends declared per share on this Series and such other preferred stock shall
in all cases bear to each other the same ratio that accrued dividends per share
on the shares of this Series and such other preferred stock bear to each other;
provided, however, that dividends on preferred stock that provides for
noncumulative dividends shall be entitled to participate, and shall rank on a
party, to the extent of dividends due in the then current period for which such
dividends are paid. Holders of shares of this Series shall not be entitled to
any dividends, whether payable in cash, property or stock, in excess of the full
cumulative dividends, as herein provided, on this Series. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on this Series which may be in arrears.
(C) REDEMPTION
(1) The Corporation, at the option
of the Board of Directors, may, subject to the provisions of Sections (B)(4),
(C)(2) and (C)(8) hereof, redeem at any time or from time to time all or any
part of the outstanding shares of this Series. The redemption price for each
share of this Series called for redemption during the periods set forth below
shall be the amount set forth opposite such period.
|
If Redeemed During the
Twelve-Month Period Beginning January 1
|
Redemption Price Per Share |
||
|
1987
|
$ | 22.20 | |
|
1988
|
$ | 21.98 | |
|
1989
|
$ | 21.76 | |
|
1990
|
$ | 21.54 | |
|
1991
|
$ | 21.32 | |
|
1992
|
$ | 21.10 | |
|
1993
|
$ | 20.88 | |
|
1994
|
$ | 20.66 | |
|
1995
|
$ | 20.44 | |
|
1996
|
$ | 20.22 | |
14
and $20 if redeemed on or after
January 1, 1997 together in each case with accumulated and unpaid dividends
to the date fixed for redemption.
(2) Notwithstanding the provisions
of Section (C)(1) above, the Corporation may not redeem any shares of this
Series prior to January 1, 1991 unless the Closing Price (as determined in
Section (C)(3)) of the Corporation�s Common Stock shall have equaled or exceeded
140% of the then applicable conversion price per share (as fixed or determined
in accordance with Section (D)) for at least twenty (20) Trading Days (as
hereinafter defined) within thirty (30) consecutive Trading Days ending
within five Trading Days prior to the date notice of redemption is mailed. For
purposes of this resolution, Trading Day means, so long as the Common Stock is
listed or admitted to trading on the American Stock Exchange (or any successor
to such Exchange), a day on which the American Stock Exchange (or such
successor) is open for the transaction of business, or, if the Common Stock is
not listed or admitted to trading on such Exchange, a day on which the principal
national securities exchange on which the Common Stock is listed is open for the
transaction of business, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, a day on which any New York Stock
Exchange member firm is open for the transaction of business.
(3) For purposes of this resolution,
the Closing Price of the Corporation�s Common Stock on a Trading Day shall be
the last recorded sale price of such Common Stock on the American Stock Exchange
on such day, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices on the American Stock Exchange, or, if the
Common Stock is not listed or admitted to trading on such Exchange, on the
principal national securities exchange on which the Common Stock is listed or
admit-ted to trading, or, if it is not listed or admitted to trading on any
national securities exchange, the average of the closing bid and asked prices as
furnished by any New York Stock Exchange member firm selected from time to time
by the Board of Directors of the Corporation for such purpose (other than the
Corporation or a subsidiary thereof).
(4) In the event that fewer than all
the outstanding shares of this Series are to be redeemed, the number of shares
to be redeemed shall be determined by the Board of Directors, and the shares to
be redeemed shall be determined by lot or on a pro rata basis.
(5) In the event the Corporation
shall redeem shares of this Series, notice of such redemption shall be given by
first class mail, postage prepaid, mailed not less than thirty (30) nor
more than sixty (60) days prior to the redemption date, to each record
holder of the shares to be redeemed, at such holder�s address as the same
appears on the books of the Corporation. Each such notice shall state:
(i) the redemption date; (ii) the total number of shares of this
Series to be redeemed and, if fewer than
15
all the shares held by such holder
are to be redeemed, the number of such shares to be redeemed from such holder;
(iii) the redemption price; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price; (v) that dividends on the shares to be redeemed will cease to accrue
on such redemption date; and (vi) the conversion rights of the shares to be
redeemed, the period within which conversion rights may be exercised, and the
conversion rate at the time applicable.
(6) If notice shall have been given
as provided in Section (C)(5) and the Corporation shall have provided moneys at
the time and place specified for the payment of the redemption price pursuant to
such notice, then from and after the redemption date, dividends on the shares of
this Series so called for redemption shall cease to accrue, such shares shall no
longer be deemed to be outstanding, and all rights of the holders thereof as
stockholders of the Corporation (except the right to receive from the
Corporation the redemption price without interest) shall cease. Upon surrender
(in accordance with the notice) of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of Directors of the
Corporation shall so require and the notice shall so state), such shares shall
be redeemed by the Corporation at the redemption price set forth in Section
(C)(1). In case fewer than all the shares represented by any such certificate
are to be redeemed, a new certificate shall be issued representing the
unredeemed shares, without cost to the holder thereof.
(7) Any shares of this Series which
have been redeemed shall, after such redemption, have the status of authorized
but unissued shares of Class C Preferred Stock, without designation as to
series, until such shares are once more designated as part of a particular
series by the Board of Directors.
(8) Notwithstanding the foregoing
provisions of this Section (C), unless the full cumulative dividends on all
outstanding shares of this Series and any other preferred stock ranking on a
parity with this Series shall have been paid or contemporaneously are declared
and paid through the last Dividend Payment Date, no shares of this Series shall
be redeemed, and the Corporation shall not purchase or otherwise acquire any
shares of this Series.
(D) CONVERSION RIGHTS
(1) Each holder of a share of this
Series shall have the right, at any time, or, as to any share of this Series
called for redemption or exchange, at any time prior to the close of business on
the date immediately preceding the date fixed for such redemption or exchange
(unless the Corporation defaults in (i) the payment of the redemption
price, (ii) the issuance of the Debentures, as defined in Section (E), in
exchange for the shares of the Series, or (iii) the payment of the final
dividend on the
16
Exchange Date), to convert such
share into fully paid and nonassessable shares of Common Stock of the
Corporation at a rate of 6.956 shares of Common Stock for each share of this
Series; provided, however, that if the Corporation�s consolidated income before
provision for income taxes, extraordinary items and gain or loss from a sale not
in the ordinary course of business of operating assets or subsidiaries within
the Corporation�s Bearing Business (after deducting cost and expenses charged
against the accrual for restructuring cost) for the year ending
December 31, 1987, is not a positive number, then on and after the date the
Corporation releases such earnings information for the full calendar year of
1987 each share of this Series shall be convertible into 7.619 shares of Common
Stock (equivalent to a conversion price of $2-5/8 per share of Common
Stock), subject in any event to further adjustment as provided in this Section
(D). For purposes of this resolution, except as the context may otherwise
require, the relationship between the �conversion rate� and the �conversion
price� shall be established by formula such that the conversion price shall
equal twenty (20) divided by the conversion rate. For purposes of this
Section (D)(1), �Bearing Business� is defined as the manufacture, distribution
or sale by the Corporation or a subsidiary of the Corporation of automotive
bearings and automotive replacement parts and the sale of the remaining
inventory of industrial bearings by the Corporation and/ or subsidiaries of the
Corporation.
(2) If any shares of this Series are
surrendered for conversion subsequent to the record date preceding a Dividend
Payment Date but on or prior to such Dividend Payment Date (except shares called
for redemption on a redemption date between such record date and Dividend
Payment Date), the registered holder of such shares at the close of business on
such record date shall be entitled to receive the dividend payable on such
shares on such Dividend Payment Date notwithstanding the conversion thereof.
Shares of this Series surrendered for conversion during the period from the
close of business on any record date for the payment of dividends next preceding
any Dividend Payment Date to the opening of business on such Dividend Payment
Date shall (except in the case of shares which have been called for redemption
on a redemption date within such period) be accompanied by payment in New York
Clearing House funds or other funds acceptable to the Corporation of an amount
equal to the dividend payable on such Dividend Payment Date on the shares being
surrendered for conversion. Except as provided in this Section (D)(2), no
adjustments in respect of or payments of dividends on shares surrendered for
conversion or any dividend on the Common Stock issued upon conversion shall be
made upon the conversion of any shares of this Series.
(3) The Corporation shall not be
required, in connection with any conversion of shares of this Series, to issue a
fraction of a share of its Common Stock, but in lieu thereof the Corporation
shall, subject to Section (D)(6)(e), make a cash payment (calculated to the
nearest cent�five mills being
17
considered as nearer to the next
highest cent) equal to such fraction multiplied by the Closing Price of the
Common Stock on the last Trading Day prior to the date of conversion.
(4) Any holder of shares of this
Series electing to convert such shares into Common Stock shall surrender the
certificate or certificates for such shares at the office of the Transfer Agent
therefore (or at such other place as the Corporation may designate by notice to
the holders of shares of this Series) during regular business hours, duly
endorsed to the Corporation or in blank, or accompanied by instruments of
transfer to the Corporation or in blank, in form satisfactory to the
Corporation, and shall give written notice to the Corporation at such office
that such holder elects to convert such shares of this Series. The Corporation
shall, as soon as practicable (subject to Section (D)(6)(e) hereof) after such
deposit of certificates for shares of this Series, accompanied by the written
notice above prescribed and the payment of cash in the amount required by
Section (D)(2), issue and deliver at such office to the holder for whose account
such shares were surrendered, or to his nominee, certificates representing the
number of shares of Common Stock and the cash, if any, to which such holder is
entitled upon such conversion.
(5) Conversion shall be deemed to
have been made as of the date of surrender of certificates for the shares of
this Series to be converted and the giving of written notice and payment, as
prescribed in Section (D)(2) and (D)(4); and the person entitled to receive the
Common Stock issuable upon such conversation shall be treated for all purposes
as the record holder of such Common Stock on such date. The Corporation shall
not be required to deliver certificates for shares of its Common Stock while the
stock transfer books for such stock or for this Series are duly closed for any
purpose, but certificates for shares of Common Stock shall be issued and
delivered as soon as practicable after the opening of such books.
(6) The conversion rate shall be
adjusted from time to time as follows:
(a) In case the Corporation shall,
at any time or from time to time while any of the shares of this Series are
outstanding, (i) pay a dividend in shares of its Common Stock,
(ii) subdivide its outstanding shares of Common Stock, (iii) combine
its outstanding shares of Common Stock into a smaller number of shares, or
(iv) issue by reclassification of its shares of Common Stock any shares of
stock of the Corporation, the conversion price and the conversion rate in effect
immediately prior to such action shall be adjusted so that the holder of any
shares of this Series thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock and other securities of the
Corporation which such holder would have owned or have been entitled to receive
immediately following such
18
action had such shares of this
Series been converted immediately prior thereto. An adjustment made pursuant to
this Section (D)(6)(a) shall become effective retroactively to immediately after
the opening of business on the day following the record date for the
determination of shareholders entitled to receive such dividend or distribution
in the case of a dividend or distribution and shall become effective immediately
after the opening of business on the day following the effective date in the
case of a subdivision, combination or reclassification. If, as a result of an
adjustment made pursuant to this Section (D)(6)(a), the holder of any shares of
this Series thereafter surrendered for conversion shall become entitled to
receive shares of two or more classes of capital stock of the Corporation, the
Board of Directors (whose determination shall be conclusive) shall determine the
allocation of the adjusted conversion price and/or conversion rate between or
among shares of such classes of capital stock.
(b) In case the Corporation shall,
at any time or from time to time while any of the shares of this Series are
outstanding, issue rights or warrants to all holders of shares of its Common
Stock entitling them to subscribe for or purchase shares of Common Stock (or
securities convertible into shares) at a price per share less than the current
market price per share of Common Stock (as defined in Section (D)(6)(d)), at
such record date, the conversion rate shall be adjusted so that it shall equal
the rate determined by multiplying the conversion rate in effect immediately
prior to the date of issuance of such rights or warrants by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding on
the date of issuance of such rights or warrants plus the number of additional
shares of Common Stock offered for subscription or purchase, and the denominator
of which shall be the number of shares of Common Stock outstanding on the date
of issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered would purchase
at such current market price. Such adjustment shall become effective on the date
of issuance retroactively to immediately after the opening of business on the
day following the record date for the determination of stockholders entitled to
receive such rights and warrants.
(c) In case the Corporation shall,
at any time or from time to time while any of this Series are outstanding,
distribute to all holders of its Common Stock shares of stock other than Common
Stock, evidences of its indebtedness or assets (excluding cash dividends or cash
distributions payable out of consolidated earnings or retained earnings, or
dividends payable in shares of
19
Common Stock) or rights or warrants
to acquire assets of the Company (excluding cash dividends or distributions or
dividends payable in shares of Common Stock or those rights or warrants referred
to in (b)), then in each such case the conversion rate in effect immediately
prior to such distribution shall be adjusted so that it shall equal the rate
determined by multiplying the conversion rate in effect immediately prior to the
date of such distribution by a fraction, the numerator of which shall be the
current market price per share (determined as provided in Section (D)(6)(d)) of
the Common Stock on the record date referred to below, and the denominator of
which shall be such current market price per share of the Common Stock less the
then fair market value (as determined by the Board of Directors of the
Corporation, whose determination shall be conclusive) of the portion of the
assets or securities or evidences of indebtedness so distributed or of such
subscription rights or warrants applicable to one share of Common Stock. Such
adjustment shall become effective retroactively to immediately after the opening
of business on the date following the record date for the determination of
stockholders entitled to receive such distribution.
(d) For the purpose of any
computation under Section (D)(6)(b) and (D)(6)(c), the current market price of a
share of Common Stock on any date shall be the average of the daily Closing
Prices for 10 consecutive Trading Days before the day in question. The Closing
Price shall be determined as provided in Section (C)(3).
(e) The Corporation shall be
entitled to make such additional adjustments in the conversion price, in
addition to those required by subsections (D)(6)(a), (D)(6)(b) and (D)(6)(c), as
shall be necessary in order that any dividend or distribution in shares of
stock, subdivision, reclassification or combination of shares of Common Stock,
issuance of rights or warrants, evidences of indebtedness or assets (other than
cash), referred to above, shall not be taxable to holders of this Series or of
the Common Stock.
(f) In any case in which this
Section (D)(6) shall require that an adjustment be made retroactively to
immediately after the opening of business on the day following a record date,
the Corporation may elect to defer (but only for five (5) Business Days
following the filing of the statement referred to in Section (D)(6)(h)) issuing
to the holder of any shares of this Series converted after such record date
(i) the shares of Common Stock and other capital stock of the Corporation
issuable upon such conversion over and above (ii) the shares of Common
Stock and other capital stock of the Corporation issuable upon such conversion
on the basis of the conversion rate prior to adjustment.
20
(g) Notwithstanding any other
provisions of this Section (D)(6), the Corporation shall not be required to make
any adjustment of the conversion rate unless such adjustment would require an
increase or decrease of at least 1% in such rate. Any lesser adjustment shall be
carried forward and shall be made at the time of, and together with, the next
subsequent adjustment which, together with, the next subsequent adjustment
which, together with any adjustment or adjustments so carried forward, shall
amount to an increase or decrease of at least 1% in such rate.
(h) Whenever an adjustment in the
conversion rate is required, the Corporation shall forthwith place on file with
its Transfer Agent a statement signed by its President or Vice President and by
its Secretary or Treasurer or one of its Assistant Secretaries or Assist-ant
Treasurers, stating the adjusted conversion rate determined as provided herein.
Such statements shall set forth in reasonable detail such facts as shall be
necessary to show the reason and the manner of computing such adjustment.
Promptly after the adjustment of the conversion rate, the Corporation shall mail
a notice thereof to each holder of shares of this Series.
(i) The term �Common Stock� as used
in this resolution means the Corporation�s Common Stock, $.10 par value, as the
same exists at the date of filing of the Certificate of Designations relating to
this Series or any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value. In
the event that at any time as a result of an adjustment made pursuant to Section
(D)(6)(a), the holder of any share of this Series thereafter surrendered for
conversion shall become entitled to receive any shares of the corporation other
than shares of its Common Stock, the conversion rate of such other shares so
receivable upon conversion of any share shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to Common Stock contained in subparagraphs
(a) through (g) of this Section (D)(6), and the provisions of Section
(D)(1) through (5) and (7) through (11) with respect to the
Common Stock shall apply on like or similar terms to any such other shares.
(7) In case of either (a) any
consolidation or merger to which the Corporation is a party, other than a merger
or consolidation in which the Corporation is the surviving or continuing
corporation and which does not result in any reclassification
21
of, or change (other than a change
in par value or from par value to no par value or from no par value to par
value, or as a result of a subdivision or combination) in, outstanding shares of
Common Stock, or (b) any sale or conveyance to another corporation of
substantially all of the assets of the Corporation, then the Corporation, or
such successor corporation, as the case may be, shall make appropriate provision
so that the holder of each share of this Series then outstanding shall have the
right to convert such share of this Series into the kind and amount of shares of
stock or other securities and property receivable upon such consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
into which such shares of this Series might have been converted immediately
prior to such consolidation, merger, sale or conveyance, subject to adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section (D). The provisions of this Section (D)(7) shall
apply similarly to successive consolidations, mergers, sales or conveyances.
(8) Any shares of this Series which
shall at any time have been converted shall, after such conversion, have the
status of authorized but unissued shares of Class C Preferred Stock, without
designation as to series until such shares are once more designated as part of a
particular series by the Board of Directors. The Corporation shall at all times
reserve and keep avail-able out of its authorized but unissued stock, for the
purposes of effecting the conversion of the shares of this Series, such number
of its duly authorized shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of this Series;
provided, however, that nothing contained herein shall preclude the Corporation
from satisfying its obligations in respect of the conversion of the shares by
delivery of purchased shares of Common Stock which are held in the treasury of
the Corporation.
(9) If any shares of Common Stock
required to be reserved for purposes of conversion of shares of this Series
hereunder require registration with or approval of any governmental authority
before such shares may be issued upon conversion, the Corporation shall cause
such shares to be duly registered or approved, as the case may be. The
Corporation will endeavor to list the shares of Common Stock required to be
delivered upon conversion of shares of this Series prior to such delivery upon
each national securities exchange upon which the outstanding Common Stock is
listed at the time of such delivery.
(10) The Corporation shall pay any
and all issue or other taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of shares of this Series
pursuant hereto. The Corporation shall not, however, be required to pay any tax
which is payable in respect of any transfer involved in the issue or delivery of
Common Stock in a name other than that in which the shares of this Series so
converted were registered, and no such issue or delivery shall be
22
made unless and until the person
requesting such issue has paid to the Corporation the amount of such tax, or has
established, to the satisfaction of the Corporation, that such tax has been
paid.
(11) Before taking any action that
would result in the conversion price being less than the then par value of the
Common Stock, the Corporation shall take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Corporation may validly
and legally issue fully paid and nonassessable shares of Common Stock at the
conversion price.
(E) EXCHANGE FOR DEBENTURES
(1) The shares of this Series are
exchangeable in whole, but not in part, at the sole option of the Corporation,
at any time on and after January 1, 1989, on any Dividend Payment Date,
into the Corporation�s 11% Convertible Subordinated Debentures Due 2006 (the
�Debentures�) described in the Corporation�s Registration Statement on Form S-2
(Registration No. 33-9848) as filed with the Securities and Exchange
Commission (the �Registration Statement�); provided, that on or prior to the
date fixed for such exchange (the �Exchange Date�) the Corporation shall have
paid to the holders of outstanding shares of this Series and of preferred stock
ranking on a parity with this Series all accumulated and unpaid dividends to the
Exchange Date. Holders of outstanding shares of this Series shall be entitled to
receive $1,000 principal amount of Debentures in exchange for each fifty
(50) share of this Series held on the Exchange Date.
(2) In the event the Corporation
shall exchange shares of this Series, notice of such exchange shall be given by
first class mail, postage prepaid, mailed not less than thirty (30) nor
more than sixty (60) days prior to the Exchange Date, to each record holder
of shares of this Series, at such holder�s address as same appears on the books
of the Corporation. Each such notice shall state: (a) the Exchange Date;
(b) the place or places where certificates for the shares of this Series
are to be surrendered for exchange into Debentures; (c) that dividends on
such shares to be exchanged will cease to accrue on the Exchange Date; and
(d) the conversion price of such shares to be redeemed, the period within
which such conversion rights may be exercised and the conversion rate at the
time applicable. Prior to giving notice of intention to exchange, the
Corporation shall execute and deliver with a bank or trust company selected by
the Corporation, and qualify under the Trust Indenture Act of 1939, an Indenture
(the �Indenture�) in substantially the form filed as an exhibit to the
Registration Statement with such changes therein as may be required by law or
usage. The Corporation shall cause the Debentures to be authenticated on the
Dividend Payment Date on which the exchange is effective, and the Corporation
shall pay interest on the Debentures at the rate and on the dates specified in
the Indenture from the Exchange Date pursuant to the terms of the Indenture.
23
(3) Notice having been mailed as
aforesaid, from and after the Exchange Date (unless the Corporation shall
default in issuing Debentures in exchange for shares of this Series or in making
the final dividend payment on the Exchange Date), dividends on the shares of
this Series shall cease to accrue, such shares shall no longer be deemed to be
outstanding, and all rights of the holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation the Debentures)
shall cease. Upon surrender (in accordance with the notice provided for above in
Section (E)(2)) of the certificates for any shares of this Series so exchanged
(properly endorsed or assigned for transfer, if the Board of Directors shall so
require and the notice shall so state), such shares shall be exchanged by the
Corporation into Debentures as aforesaid.
(4) All shares of this Series which
have been exchanged shall, after such exchange, have the status of authorized
but unissued shares of Class C Preferred Stock, without designation as to series
until such shares are once more designated as part of a particular series by the
Board of Directors.
(F) VOTING
(1) Except as otherwise specifically
provided in this Section (F), the holders of the series of this Series shall not
be entitled to vote on any matter.
(2) The shares of this Series shall
have the following voting rights:
(a) Subject to the terms and
conditions set forth in this Section (F)(2), if and whenever at any time or
times dividends payable on shares of this Series shall have been in arrears and
unpaid in an aggregate amount equal to or exceeding the amount of dividends
payable thereon for six consecutive quarterly dividend periods, then the holders
of shares of this Series, together with the holders of any other series of
preferred stock of the Corporation as to which dividends are in arrears and
unpaid in an aggregate amount equal to or exceeding the amount of dividends
payable thereof for six consecutive quarterly dividend periods and which has the
right to elect additional directors in such event, shall have the exclusive
right, voting separately as a class, to elect two additional directors of the
Corporation, such directors to be in addition to the number of directors
constituting the Board of Directors immediately prior to the accrual of such
right. The directors, other than the two additional directors referred to above,
are to be elected by the other class or classes of stock entitled to vote
therefore at each meeting of stockholders held for the purpose of electing
directors, and the holders of this Series shall not be entitled to vote for such
directors.
(b) Such voting right created
pursuant to Section (F)(2)(a) above may be exercised initially either at a
special meeting of the holders of the shares of this Series and such other
series of preferred stock having
24
such voting right, called as
hereinafter provided, or at any annual meeting of stockholders held for the
purpose of electing directors and thereafter at each such annual meeting until
such time as all dividends accumulated on the shares of this Series shall have
been paid in full or funds sufficient therefore set aside for payment thereof,
at which time such voting right and the term of the directors elected pursuant
to Section (F)(2)(a) shall immediately terminate, subject to revesting on the
basis set forth in Section (F)(2)(a).
(c) At any time when such voting
right created pursuant to Section (F)(2)(a) shall have vested in holders of the
shares of this Series and such other series of preferred stock having such
voting right and if such right shall not already have been initially exercised,
a proper officer of the Corporation shall, upon the written request of the
record holders of 10% in number of the shares of this Series and such other
series of preferred stock having such voting right then outstanding, addressed
to the Secretary of the Corporation, call a special meeting of the holders of
the shares of this Series and such other series of preferred stock having such
voting right for the purse of electing the two additional directors referred to
in Section (F)(2)(a). Such meeting shall be held at the earliest practicable
date upon the notice required for annual meetings of stockholders at the place
for holding annual meetings of stockholders of the Corporation or, if none, at a
place designated by the Board of Directors. If such meeting is not called by the
proper officers of the Corporation within 30 days after the personal service of
such written request upon the Secretary of the Corporation, or within 35 days
after mailing the same within the United States of America, by registered mail,
addressed to the Secretary of the Corporation at its principal office (such
mailing to be evidenced by the registry receipt issued by the postal
authorities), then the record holders of 10% in number of the shares of this
Series and such other series of preferred stock then outstanding which would be
entitled to vote at such meeting may designate in writing one of their number to
call such meeting at the expense of the Corporation, and such meeting may be
called by such person so designated upon the notice required for annual meetings
of stockholders and shall be held at the same place as is elsewhere provided for
this Section (F)(2)(c) or such other place as is selected by such designated
stockholder. Any holder of the shares of this Series and such other series of
25
preferred stock then outstanding who
would be entitled to vote at such meeting shall have access to the stock books
of the Corporation for the purpose of causing a meeting of stockholders to be
called pursuant to the provisions of this Section (F)(2). Notwithstanding the
provisions of this Section (F)(2), no such special meeting shall be called
during a period within 90 days immediately preceding the date fixed for the next
annual meeting of stockholders.
(d) At any meeting held for the
purpose of electing directors at which the holders of the shares of this Series
and such other series of preferred stock shall have the right to elect the
additional two directors as provided in Section (F)(2)(a) hereof, the presence
in person or by proxy of the holders of fifty (50%) percent of the then
outstanding shares of this Series and such other series of preferred stock
having such right shall be required and shall be sufficient to constitute a
quorum of such class for the election of the additional two directors by such
class. At any such meeting or adjournment thereof (i) the absence of a
quorum of the holders of this Series and such other series of preferred stock
having such right shall not prevent the election of directors other than the
additional two directors to be elected by the holders of this Series and such
other series of preferred stock, and the absence of a quorum or quorums of the
holders of capital stock entitled to elect such other directors shall not
prevent the election of the additional two directors to be elected by the
holders of this Series and such other series of preferred stock entitled to
elect such two additional directors and (ii) except as otherwise required
by law, in the absence of a quorum of the holders of stock entitled to vote for
the election of directors together as a class, a majority of the holders present
in person or by proxy of such class shall have the power to adjourn the meeting
for the election of directors which the holders of such class are entitled to
elect, from time to time, without notice other than announcement at the meeting,
until a quorum is present.
(e) Any vacancy in the Board of
Directors in respect of either of the two additional directors elected by
holders of this Series and such other series of preferred stock pursuant to the
voting right created under Section (F)(2)(a) shall be filled by vote of the
remaining director so elected, or if there be no such
- 26 -
remaining director, by the holders
of this Series and such other series of preferred stock then outstanding
entitled to elect such director or directors at a special meeting called in
accordance with the procedures
(f) set forth in Section (F)(2)(c),
or if no such special meeting is called, at the next annual meeting of
stock-holders, subject to the provisions of Section (F)(2)(b) hereof. Upon any
termination of such voting right, as provided in Section (F)(2)(b) hereof,
subject to the requirements of the Delaware General Corporation Law, the term of
office of the two additional directors elected by holders of this Series and
such other series of preferred stock voting together as a class shall
immediately terminate.
(g) So long as any shares of this
Series remain outstanding, the Corporation shall not, without the affirmative
vote at a meeting or the written consent with or without a meeting of the
holders of at least a majority in number of shares of this Series then
outstanding, amend, alter or repeal any of the provisions of the Certificate of
Designations relating to this Series or the Corporation�s Certificate of
Incorporation so as to affect adversely the preferences, special rights or
powers of the shares of this Series.
(h) So long as any shares of this
Series remain outstanding, the Corporation shall not amend the Corporation�s
Certificate of Incorporation so as to create any additional class of preferred
stock (i) that is senior to this Series as to dividends or distributions
upon liquidation without the affirmative vote at a meeting or the written
consent with or without a meeting of the holders of at least two-thirds in
number of the shares of this Series then outstanding, or (ii) that is equal
in preference as to dividends or distributions upon liquidation without the
affirmative vote at a meeting or the written consent with or without a meeting
of the holders of at least a majority in number of the shares of this Series
then outstanding.
(i) So long as any shares of this
Series remain outstanding, the Corporation shall not amend the Corporation�s
Certificate of Incorporation so as to increase or decrease the aggregate number
of shares of the Corporation�s Class C Preferred Stock, no par value, or
increase or decrease the par value of the shares of the Corporation�s Class C
Preferred Stock, without the
- 27 -
affirmative vote at a meeting or the
written consent with or without a meeting of the holders of at least a majority
in number of all shares of the Corporation�s Class C Preferred Stock then
outstanding (which includes, but is not limited to, the shares of this Series
then outstanding).
(G) LIQUIDATION RIGHTS
(1) Upon the dissolution,
liquidation or winding up of the Corporation, whether voluntary or involuntary,
the holders of the shares of this Series shall be entitled to receive out of the
assets of the Corporation available for distribution to stockholders, before any
payment or distribution shall be made on the Common Stock or on any other class
of stock ranking junior to this Series upon liquidation, the amount of $20 per
share, plus all accumulated and unpaid dividends to the date of final
distribution.
(2) Neither the sale, lease or
exchange (for cash, shares of stock securities or other consideration) of all or
substantially all the property and assets of the Corporation nor the merger of
consolidation of the Corporation into or with any other corporation or the
merger or consolidation of any other corporation into or with the Corporation,
shall be deemed to be a dissolution, liquidation or winding up, voluntary or
involuntary, for the purposes of this Section (G).
(3) After the payment to the holders
of the shares of this Series of the full preferential amounts provided for in
this Section (G), the holders of this Series as such shall have no right or
claim to any of the remaining assets of the Corporation.
(4) In the event the assets of the
Corporation available for distribution to the holders of shares of this Series
upon any dissolution, liquidation or winding up of the Corporation, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such holders are entitled pursuant to Section (G)(1), no such distribution
shall be made on account of any shares of any other class or series of Preferred
Stock ranking on a parity with the shares of this Series upon such dissolution,
liquidation or winding up unless proportionate distributive amounts shall be
paid on account of the shares of this Series and shares of such other class or
series ranking on a parity with the shares of this Series, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such dissolution, liquidation or
winding up.
- 28 -
(H) PRIORITY
(1) For purposes of this resolution,
any stock of any class or series of the Corporation shall be deemed to rank:
(i) Prior or senior to the shares of
this Series, either as to dividends or upon liquidation, if the holders of such
class or classes shall be entitled to the receipt of dividends or of amounts
distributable upon dissolution, liquidation or winding up of the Corporation,
whether voluntary or involuntary, as the case may be, in preference or priority
to the holders of shares of this Series.
(ii) On a parity with or equal to
shares of this Series, either as to dividends or upon liquidation, whether or
not the dividend rates, Dividend Payment Dates, or redemption or liquidation
prices per share or sinking fund provisions, if any, are different from those of
this Series, if the holders of such stock are entitled to the receipt of
dividends or of amounts distributable upon dissolution, liquidation or winding
up of the Corporation, whether voluntary or involuntary, in proportion to their
respective dividend rates or liquidation prices, without preference or priority,
one over the other, as between the holders of such stock and the holders of
shares of this Series; and
(iii) Junior to shares of this
Series, either as to dividends or upon liquidation, if such class or series
shall be Common Stock or if the holders of shares of this Series shall be
entitled to receipt of dividends or of amounts distributable upon dissolution,
liquidation or winding up of the Corporation, whether voluntary or involuntary,
as the case may be, in preference or priority to the holders of shares of such
class or series.
(I) MISCELLANEOUS
During the period that shares of
this Series are outstanding and except as otherwise provided in this Section
(I), the Corporation may not distribute to all of the holders of the
Corporation�s Common Stock any securities of Friedrich Climate Master, Inc.
and/or International Environmental Corporation and/or any entity (other than the
Corporation) which owns at least a majority of the outstanding voting securities
of Friedrich Climate Master, Inc. and/or International Environmental
Corporation, except that the prohibition contained in this Section
(I) shall terminate and be null and void and no longer effective if, at any
time after the original issuance of this Series, the Closing Price of the
Corporation�s Common Stock Equals or exceeds 160% of the conversion price then
in effect for the shares of this Series.
- 29 -
FIFTH: The number of directors of
the Corporation shall be specified in the by-laws of the Corporation and such
number may from time to time be increased or decreased by or in the manner
provided in said by-laws, provided the number of directors of the Corporation
shall not be less than three (3). The directors shall be divided into three
(3) classes. Each class shall consist, as nearly as may be possible, of
one-third of the whole number of the Board of Directors. The term of office of
those directors of the fist class shall expire at the annual meeting of the
stockholders of the Corporation next ensuing; the term of office of the
directors of the second class shall expire one year thereafter; and the term of
office of the directors of the third class shall expire two years thereafter. At
each annual election the successors to the class of directors whose terms have
expired in that year shall be elected to hold office for a term of three
(3) years. Each director elected shall hold office until his successor is
elected and qualified. Directors and officers need not be shareholders.
Elections of directors need not be by written ballot.
Any newly created directorships or
any decrease in directorships resulting from any increase or decrease in the
authorized number of directors shall be apportioned by the Board of Directors
among the three (3) classes of directors as to make all classes as nearly
equal in number as possible. No decrease by the board of the number of directors
shall shorten the term of any incumbent director.
Any vacancy occurring in the Board
of Directors caused by death, resignation or removal, and any newly created
directorship resulting from an increase in the number of directors, shall be
filled only by a majority of the directors then in office, although less than a
quorum, or by the sole remaining director. Each director chosen to fill a
vacancy or newly created directorship shall hold office until the next election
of the class for which such director shall have been chosen and until his
successor is duly elected and qualified.
SIXTH: No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the board or committee thereof which authorizes
the contract or transaction, or solely because his or their votes are
- 30 -
counted for such purpose, if:
(1) the material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of Directors or
the committee, and the board or committee in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(2) the material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the shareholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the shareholders; or (3) the contract or transaction
is fair as to the Corporation as of the time it is authorized, approved or
ratified by the Board of Directors, a committee thereof, or the shareholders.
Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or of a committee which authorizes
the contract or transaction.
SEVENTH: The existence of the
Corporation will be perpetual.
EIGHTH: In furtherance and not in
limitation of the powers conferred by the laws of the state of Delaware, the
Board of Directors of this Corporation is expressly authorized:
(A) To make, alter, amend, add to,
revise, or repeal the by-laws of the Corporation.
(B) To authorize and cause its
officers to execute mortgages and liens on the property, both real and personal,
and upon the franchises of this Corporation.
(C) To set apart out of any funds of
the Corporation avail-able for dividends a reserve or reserves for any lawful
corporate purpose and to abolish any such reserve in the manner in which it was
created.
(D) The Board of Directors may, by
resolution passed by a majority of the hole board, designate one or more
committees, each committee to consist of two or more of the directors of the
Corporation. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. Any such committee, to the extent provided in the
resolution or in the by-laws of the Corporation, shall have and may exercise the
powers of the Board of Directors in the management of the business and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it. In the absence or disqualification of any
member of such committee or committees, the member or members thereof present at
any meeting and not disqualified from voting, whether or not he or they
constitute a quorum, may unanimously appoint another member of the
- 31 -
Board of Directors to act at the
meeting in place of such absent or disqualified member. Such committee or
committees shall have such name or names as may be stated in the by-laws of the
Corporation or as may be determined from time to time by resolution adopted by
the Board of Directors.
(E) The Board of Directors shall
have power to issue bonds, debentures and other obligations, either
non-convertible or convertible into the Corporation�s stock, upon such terms, in
such manner and under such conditions in conformity with law, as may be fixed by
the Board of Directors prior to the issuance of such bonds, debentures and other
obligations.
(F) To grant rights to convert any
of the securities issued by this Corporation into shares of any class or classes
of stock and options to purchase or subscribe for shares of any classes or
classes upon such terms and conditions as may be determined by the Board if
Directors.
(G) To provide and establish a plan
for the subscription and issue of any of its authorized and unissued shares, or
sale of any treasury shares held by it, to the employees of the Corporation or
to the employees of any subsidiary corporation, or to a trustee upon their
behalf, upon such terms and conditions as may be determined by the Board of
Directors.
(H) An officer elected or appointed
by the Board of Directors may be removed at any time by the board whenever in
its judgment the best interest of the Corporation would be served thereby.
NINTH: The Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (including,
but not limited to, any action, suit or proceeding by or in the right of the
Corporation), whether civil, criminal or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, and shall advance expenses to such person reasonably incurred
in connection therewith, to the fullest extent permitted by the relevant
provisions of the Delaware General Corporation Law, as such law presently exists
or hereafter may be amended.
TENTH: Meetings of stockholders may
be held within or without the State of Delaware as the by-laws may provide. The
books of the Corporation may be kept (subject to any provisions contained in the
statutes) outside the State of Delaware at such place or places as may be
designated from time to time by the Board of Directors of the Corporation.
- 32 -
ELEVENTH: In addition to any
affirmative vote of holders of the outstanding capital stock required by law or
by the provisions of this Restated Certificate of Incorporation, the affirmative
vote of the holders of not less than two-thirds of the outstanding voting stock
of the Corporation voting as a single class shall be required for the approval
or authorization of any (i) merger or consolidation of the Corporation with
or into any other corporation, or (ii) sale, lease or exchange of all or
substantially all of the assets of the Corporation to or with any other
corporation, person or entity; provided, however, that such two-thirds voting
requirement shall not be applicable if (a) the Corporation is merged with a
corporation in which at least two-thirds of the outstanding shares of each class
of stock of such corporation is owned by the Corporation, or (b) if a
transaction described in clauses (i) or (ii) above has been approved
by a vote of at least a majority of the members of the Board of Directors of the
Corporation. If such two-thirds voting requirement of the outstanding voting
stock of the Corporation shall not be applicable under the provisions of clauses
(a) or (b) above, then in such event transactions specified in
(i) or (ii) above shall require only such affirmative vote as is
required by law, regulation or any other provision of this Restated Certificate
of Incorporation.
TWELFTH: The by-laws of the
Corporation may be adopted, altered, amended or repealed only by (i) the
affirmative vote of not less than a majority of the Board of Directors of the
Corporation or (ii) the affirmative vote of not less than two-thirds of the
outstanding voting stock of the Corporation voting as a single class.
THIRTEENTH: A director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director�s duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law,
as the same exists or hereafter may be amended, or (iv) for any transaction
from which the director derived an improper personal benefit. If the Delaware
General Corporation Law hereafter is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the Corporation, in addition to the limitation on personal liability
provided herein, shall be limited to the fullest extent permitted by the amended
Delaware General Corporation Law. Any repeal or modification of this Article
THIRTEENTH by the stockholders of the Corporation shall be
- 33 -
prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
Corporation existing at the time of such repeal or modification.
FOURTEENTH: The Corporation reserves
the right to amend, alter, change or repeal any provision contained in this
Restated Certificate of Incorporation, in any manner now or hereafter prescribed
by statute, and all rights conferred upon stockholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the affirmative vote
of not less than two-thirds of the outstanding voting stock of the Corporation
voting as a single class shall be required to repeal, amend, modify, change or
alter Articles FIFTH, ELEVENTH, or TWELFTH of this Restated Certificate of
Incorporation or to adopt any provision inconsistent with Articles FIFTH,
ELEVENTH OR TWELFTH of this Restated Certificate of Incorporation.
IN WITNESS WHEREOF, this Restated
Certificate of Incorporation, having been duly adopted by the Board of Directors
and the Stockholders of the Corporation in accordance with Sections 242 and 245
of the Delaware General Corporation Law, has been executed this 27th day of
August, 1987 by the President of the Corporation.
|
/s/ Jack E.
Golsen
|
| Jack E. Golsen |
| President |
| ATTEST: |
|
/s/ Irwin H.
Steinhorn
|
| Irwin H. Steinhorn |
| Secretary |
- 34 -
CERTIFICATE OF DESIGNATIONS
of
SERIES 2 PARTICIPATING CLASS C
PREFERRED STOCK
of
LSB INDUSTRIES, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
LSB INDUSTRIES, INC., a corporation
organized and existing under the General Corporation Law of the State of
Delaware (hereinafter called the �Corporation�), hereby certifies that the
following resolution was duly adopted by the Board of Directors of the
Corporation as required by Section 151 of the General Corporation Law at a
meeting duly called and held on February 16 and 17, 1989:
RESOLVED, that pursuant to the
authority granted to and vested in the Board of Directors of this Corporation
(herein after called the �Board of Directors� or the �Board�) in accordance with
the provisions of the Corporation�s Certificate of Incorporation, the Board of
Directors hereby creates a series of Class C Preferred Stock, no par value (the
�Class C Preferred Stock�), of the Corporation and hereby states the designation
and number of shares, and does hereby establish and fix the relative rights,
preferences, designations and relative participating, optional and other special
rights, and qualifications, limitations and restrictions thereof as follows:
Series 2 Participating Class C
Preferred Stock:
Section 1. Designation and
Amount. The shares of such series shall be designated as �Series 2
Participating Class C Preferred Stock� (the �Series 2 Class C Preferred Stock�)
and the number of shares constituting the Series 2 Class C Preferred Stock shall
be 200,000. Such number of shares may be increased or decreased by resolution of
the Board of Directors; provided, that no
decrease shall reduce the number of shares of Series 2 Class C Preferred Stock
to a number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series 2 Class C Preferred Stock.
- 1 -
Section 2. Dividends and
Distributions.
(A) Subject to the rights of the
holders of any shares of any series of Class C Preferred Stock (or any other
series of Preferred Stock or any similar stock) ranking prior and superior to
the Series 2 Class C Preferred Stock with respect to dividends, if any, the
holders of shares of Series 2 Class C Preferred Stock, in preference to the
holders of Common Stock, par value $.10 per share (the �Common Stock�), of the
Corporation, and of any other junior stock, shall be entitled to receive, when,
as and if declared by the Board of Directors out of funds legally available for
the purpose, quarterly dividends payable in cash on the last business day of
March, June, September and December in each year (each such date being referred
to herein as a �Quarterly Dividend Payment Date�), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series 2 Class C Preferred Stock, in an amount per share (rounded
to the nearest cent) equal to the greater of (a) $1, or (b) subject to
the provision for adjustment hereafter set forth, 100 times the aggregate per
share amount of all cash dividends, and 100 times the aggregate per share amount
of all cash dividends, and 100 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions, other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series 2 Class C Preferred Stock. In the event
the Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount to which holders of shares of Series 2 Class C Preferred Stock were
entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
- 2 -
(B) The Corporation shall declare a
dividend or distribution on the Series 2 Class C Preferred Stock as provided in
paragraph (A) of this Section immediately after it declares a dividend or
distribution on the Common Stock (other than a dividend payable in shares of
Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date a dividend of $1 per share on the
Series 2 Class C Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue
and be cumulative on outstanding shares of Series 2 Class C Preferred Stock from
the Quarterly Dividend Payment Date next preceding the date of issue of such
shares, unless the date of issue of such shares is prior to the record date for
the first Quarterly Dividend Payment Date, in which case dividends on such
shares shall begin to accrue from the date of issue of such shares, or unless
the date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of shares of Series 2 Class C
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on the
shares of Series 2 Class C Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the termination of
holders of shares of Series 2 Class C Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record date shall
be not more than 60 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The
holders of shares of Series 2 Class C Preferred Stock shall have the following
voting rights:
(A) Each share of Series 2 Class C
Preferred Stock shall entitle the holder thereof to 100 votes on all matters
submitted to a vote to the stockholders of the Corporation.
- 3 -
(B) Except as otherwise provided
herein, in the Certificate of Incorporation of the Corporation, in any other
Certificate of Designation of the Corporation creating a series of Class C
Preferred Stock or other preferred stock or any similar stock, or by law, the
holders of shares of Series 2 Class C Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the Corporation having general
voting rights shall vote together as one class on all matters submitted to a
vote of stockholders of the Corporation.
(C) Except as set forth herein or in
the Certificate of Incorporation of the Corporation as in effect on the date
hereof, or as otherwise provided by law, holders of Series 2 Class C Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or
other dividends or distributions payable on the Series 2 Class C Preferred Stock
as provided in Section 2 are in arrears, thereafter and until all accrued
and unpaid dividends and distributions, whether or not declared, on shares of
Series 2 Class C Preferred Stock outstanding shall have been paid in full, or
declared and a sum sufficient for the payment therefor be set apart for payment
and be in the process of payment, the Corporation shall not:
(i) declare or pay dividends, or
make any other distributions, on any shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the Series 2
Class C Preferred Stock;
(ii) declare or pay dividends, or
make any other distributions, on any shares of stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding up) with the Series
2 Class C Preferred Stock, except dividends paid ratably on the Series 2 Class C
Preferred Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled;
- 4 -
(iii) redeem or purchase or
otherwise acquire for consideration shares of any stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding up) to the Series 2
Class C Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either as to dividends or
upon dissolution, liquidation or winding up) to the Series 2 Class C Preferred
Stock; or
(iv) redeem or purchase or otherwise
acquire for consideration any shares of Series 2 Class C Preferred Stock, or any
shares of stock ranking on a parity with the Series 2 Class C Preferred Stock,
except in accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit
any subsidiary of the Corporation to purchase or otherwise acquire for
consideration any shares of stock of the Corporation unless the Corporation
could, under paragraph (A) of this Section 4, purchase or otherwise
acquire such shares at such time in such manner.
Section 5. Reacquired Shares.
Any shares of Series 2 Class C Preferred Stock purchased or otherwise acquired
by the Corporation in any manner whatsoever shall be retired and cancelled
promptly after the acquisition thereof. All such shares shall upon their
cancellation become authorized but unissued shares of Class C Preferred Stock
and may be reissued as part of a new series of Class C Preferred Stock subject
to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation of the Corporation, or in any other Certificate of
Designations creating a series of Class C Preferred Stock or any other preferred
stock or any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or
Winding Up. Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (1) to the holders of shares
- 5 -
of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the Series 2
Class C Preferred Stock unless, prior thereto, the holders of shares of Series 2
Class C Preferred Stock shall have received $100 per share, plus an amount equal
to accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment, provided that the holders of shares of
Series 2 Class C Preferred Stock shall be entitled to receive an aggregate
amount per share, subject to the provision for adjustment hereinafter set forth,
equal to 100 times the aggregate amount to be distributed per share to holders
of shares of Common Stock, or (2) to the holders of shares of stock ranking
on a parity (either as to dividends or upon liquidation, dissolution or winding
up) with the Series 2 Class C Preferred Stock, except distributions made ratably
on the Series 2 Class C Preferred Stock and all such parity stock in proportion
to the total amounts to which the holders of all such shares are entitled upon
such liquidation, dissolution or winding up. In the event the Corporation shall
at any time declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Series 2 Class C Preferred Stock were entitled immediately
prior to such event under the proviso in clause (1) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event, and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger,
etc. In case the Corporation shall enter into any consolidation, merger,
combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then in any such case each share of Series 2 Class C Preferred Stock
shall at the same time be similarly exchanged or changed into an amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of
- 6 -
Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series 2 Class C Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The
shares of Series 2 Class C Preferred Stock shall not be redeemable.
Section 9. Amendment. So long as
any shares of the Series 2 Class C Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote of at least a majority in
number of shares of the Series 2 Class C Preferred Stock then outstanding,
amend, alter, or repeal any of the provisions of this Certificate of Designation
or the Corporation�s Certificate of Incorporation so as to affect adversely the
preferences, special rights or powers of the shares of Series 2 Class C
Preferred Stock.
IN WITNESS WHEREOF, this Certificate
of Designation is executed on behalf of the Corporation by its President and
attested by its Secretary this 17th day of February, 1989.
| LSB INDUSTRIES, INC. | ||||||
| ATTEST: | ||||||
|
/s/ Larry McLaine
|
/s/ Jack E.
Golsen
|
|||||
| (SEAL) | Secretary | President | ||||
- 7 -
CERTIFICATE OF ELIMINATION
OF
$2.20 SERIES 1 CONVERTIBLE
EXCHANGEABLE CLASS C PREFERRED STOCK
OF
LSB INDUSTRIES, INC.
LSB INDUSTRIES, INC., a corporation
organized and existing under the General Corporation Law of the State of
Delaware (hereinafter called the �Corporation�), hereby certifies the following:
1. That the terms and conditions of
the Certificate of Designations of $2.20 Series 1 Convertible Exchangeable Class
C Preferred Stock of the Corporation (the �Series 1 Preferred�), filed on
December 19, 1986 (the �Certificate of Designations�), were incorporated
into the Restated Certificate of Incorporation of the Company, filed on
September 2, 1987 (the �Restated Certificate of Incorporation�).
2. That all outstanding shares of
the Series 1 Preferred have been converted into shares of common stock of the
Company or have been redeemed pursuant to the terms and conditions of the
Restated Certificate of Incorporation, and all shares of Series 1 Preferred that
were owned by the Company or its subsidiaries as treasury shares have been
retired pursuant to the Unanimous Written Consent of the Board of Directors of
the Corporation dated February 9, 1993.
3. That no shares of Series 1
Preferred remain outstanding.
4. That all shares of the Series 1
Preferred which have been redeemed, converted or retired have the status of
authorized and unissued shares of the Class C Preferred Stock of the Corporation
without designation as to series, until such shares are once more designated as
part of a particular series by the Board of Directors.
5. That on April 1, 1993, the
Board of Directors of the Company duly adopted the following resolution:
RESOLVED, that no authorized shares
of Series 1 Preferred remain outstanding and no shares of Series 1 Preferred
will be issued subject to the Restated Certificate of Incorporation which
incorporates the Certificate of Designation previously filed with respect to the
Series 1 Preferred.
- 1 -
6. That pursuant to the provisions
of � 151(g) of the Delaware General Corporation Law, upon the effective date of
the filing of this Certificate, this Certificate will have the effect of
eliminating from the Restated Certificate of Incorporation only those matters
set forth in the Restated Certificate of Incorporation with respect to the $2.20
Series 1 Convertible Exchangeable Class C Preferred Stock.
IN WITNESS WHEREOF, this Certificate
of Elimination has been executed this 30th day of April, 1993, by the
President of the Company.
| LSB INDUSTRIES, INC. | ||||||
| ATTEST: | ||||||
|
/s/ David M.
Shear
|
By |
/s/ Jack E.
Golsen
|
||||
| David M. Shear, Secretary | Jack E. Golsen, President | |||||
| President | ||||||
| (SEAL) | ||||||
- 2 -
CERTIFICATE OF DESIGNATIONS
of the
$3.25 CONVERTIBLE EXCHANGEABLE CLASS
C PREFERRED STOCK,
SERIES 2
of
LSB INDUSTRIES, INC.
Pursuant to Section 151 of the
General Corporation Law of the State
of Delaware
The undersigned duly authorized
officer of LSB Industries, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware, in accordance with the
provisions of Section 103 thereof, and pursuant to Section 151
thereof, DOES HEREBY CERTIFY:
That pursuant to the authority
conferred upon the Board of Directors by the Restated Certificate of
Incorporation of LSB Industries, Inc. (the �Corporation�), the Board of
Directors of the Corporation on April 20, 1993, and a duly authorized
committee of the Board of Directors on May 19, 1993, approved the creation,
issuance and voting power of a new series of authorized but unissued shares of
the Corporation�s Class C Preferred Stock, no par value, consisting of up to
920,000 shares of the series of Class C Preferred Stock, designated as the $3.25
Convertible Exchangeable Class C Preferred Stock, Series 2, with the Board of
Directors of the Corporation and a committee of the Board of Directors having
been duly authorized by the Board of Directors fixing the designations and any
of the preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the conversion
into, or exchange of such shares for, shares of any other class or classes of
stock of the Corporation or fix the exact number of shares of the series of
$3.25 Convertible Exchangeable Class C Preferred Stock, Series 2, to be issued
by the Corporation, and that Board of Directors and the committee adopted the
following resolution creating the series of $3.25 Convertible Exchangeable Class
C Preferred Stock, Series 2.
- 1 -
RESOLVED, that pursuant to the
authority expressly granted to and vested in the Board of Directors (the
�Board�) of LSB Industries, Inc. (the �Corporation�) by provisions of the
Restated Certificate of Incorporation of LSB Industries, Inc. (the �Certificate
of Incorporation�) and the General Corporation Law of the State of Delaware, the
issuance of a series of Class C Preferred Stock, be, and the same hereby is,
authorized, and the Board and the committee of the Board hereby fix the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof as follows:
1. Designation and
Amount. The designation of such series of preferred stock authorized by
this resolution shall be �$3.25 Convertible Exchangeable Class C Preferred
Stock, Series 2�, and the number of shares constituting such series shall be
800,000 (up to an aggregate of 920,000 shares, based on the number of additional
shares issued pursuant to the overallotment option granted by the Corporation
pursuant to the Underwriting Agreement, dated May 19, 1993, between the
Corporation and Lazard Fr�res & Co.), with a stated value of $50.00 per
share. Such series is referred to herein as the �Convertible Exchangeable
Preferred Stock�.
2. Rank. All shares of
Convertible Exchangeable Preferred Stock shall rank prior to all of the
Corporation�s Common Stock, par value $0.10 per share (the �Common Stock�), and
to all other classes and series of equity securities of the Corporation now or
hereafter authorized, issued or outstanding (the Common Stock and such other
classes and series of equity securities collectively are referred to herein as
the �Junior Stock�), other than any classes or series of equity securities of
the Corporation now or hereafter authorized, issued or outstanding ranking on a
parity with (the �Parity Stock�) or senior to (the �Senior Stock�) the
Convertible Exchangeable Preferred Stock as to dividend rights or rights upon
liquidation, winding up or dissolution of the Corporation. The Convertible
Exchangeable Preferred Stock shall be junior to all outstanding debt of the
Corporation. The Convertible Exchangeable Preferred Stock shall be subject to
the creation of Senior Stock, Parity Stock and Junior Stock to the extent not
expressly prohibited by the Certificate of Incorporation, now or hereafter
issued, both as to payment of dividends and as to distributions of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
- 2 -
3. Dividends.
(a) The holders of Convertible
Exchangeable Preferred Stock shall be entitled to receive, when, as and if
declared by the Board out of funds at the time legally available therefor,
dividends at the rate of $3.25 per annum per share, and no more, which shall be
fully cumulative, shall accrue without interest (including any interest, sum of
money in lieu of interest or other property paid on account of any dividend
payment or payments which may be in arrears) from the date of original issuance
and shall be payable in cash quarterly in arrears on
June 15, September 15, December 15 and March 15 of
each year commencing June 15, 1993 (the �Dividend Due Dates�) (except that if
any such date is not a Business Day, then such dividend shall be payable on the
next Business Day following such Dividend Due Date, provided that, for
the purposes of computing such dividend payment, no interest or such in lieu of
interest shall accrue from such Dividend Due Date to the next Business Day
following such Dividend Due Date) to holders of record as they appear in the
securities register of the Corporation on such record date, not more than 60 nor
less than 10 days preceding each Dividend Due Date as is fixed by the Board. For
purposes herein, the term Business Day shall mean any day (except a Saturday or
Sunday or any day on which banking institutions are authorized or required to
close in the State of New York). Subject to the next paragraph of this
Section 3, dividends on account of dividends in arrears for any past
dividend period may be declared at any time and paid on any business Day,
without reference to any regular dividend payment date. The amount of dividends
payable per share of Convertible Exchangeable Preferred Stock for each quarterly
dividend period shall be computed by dividing the annual dividend amount by
four. The amount of dividends payable for the initial dividend period and any
period shorter than a full quarterly dividend period shall be computed on the
basis of a 360-day year of twelve 30-day months. Dividends paid on shares of
Convertible Exchangeable Stock in an amount less than the total amount of such
dividends at the time accumulated and payable on such shares shall be allocated
pro rata among all such shares at the time outstanding.
No dividends or other distributions,
other than dividends payable solely in shares of Common Stock or other Junior
Stock or distributions of Rights, as defined below, shall be declared, paid or
set apart for payment on, and no purchase, redemption or other acquisition shall
be made by the Corporation of, any shares of Common Stock or other Junior
Stock(or any payment made in respect of or made available to a sinking fund for
the redemption of any shares
- 3 -
of such Junior Stock) unless and
until all cumulative and unpaid dividends on the Convertible Exchangeable
Preferred Stock shall have been paid or declared and set apart for payment
through the last Dividend Due Date.
If at any time any dividend on any
Senior Stock shall be in default, in whole or in part, then (except to the
extent allowed by the terms of such Senior Stock) no dividend shall be paid or
declared and set apart for payment on the Convertible Exchangeable Preferred
Stock unless and until all accrued and unpaid dividends with respect to such
Senior Stock, including the full dividends for the then-current dividend period,
shall have been paid or declared and set apart for payment, without interest. No
full dividends shall be paid or declared and set apart for payment on any class
or series of Parity Stock for any period unless full cumulative dividends have
been, or contemporaneously are, paid or declared and set apart for such payment
on the Convertible Exchangeable Preferred Stock for all dividend payment periods
terminating on or prior to the date of payment of such full cumulative
dividends. No full dividends shall be paid or declared and set apart for payment
on the Convertible Exchangeable Preferred Stock for any period unless full
cumulative dividends have been, or contemporaneously are, paid or declared and
set apart for payment on the Parity Stock for all dividend periods terminating
on or prior to the date of payment of such full cumulative dividends. When
dividends are not paid in full upon the Convertible Exchangeable Preferred Stock
and the Parity Stock, all dividends paid or declared and set aside for payment
upon shares of Convertible Exchangeable Preferred Stock and the Parity Stock
shall be paid or declared and set aside for payment pro rata so that the amount
of dividends paid or declared and set aside for payment per share on the
Convertible Exchangeable Preferred Stock and the Parity Stock shall in all cases
bear to each other the same ratio that accrued and unpaid dividends per share on
the shares of Convertible Exchangeable Preferred Stock and the Parity Stock bear
to each other.
(b) The Corporation shall not permit
any Subsidiary (as defined in Section 6(m) below) of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (a) of this
Section 3, purchase or otherwise acquire such shares at such time and in
such manner.
(c) Any reference to �distribution�
contained in this Section 3 shall not be deemed to include any distribution
made in connection with any liquidation, dissolution or winding up of the
corporation, whether voluntary or involuntary.
- 4 -
4. Liquidation
Preference. In the event of a liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of Convertible
Exchangeable Preferred Stock shall be entitled to receive out of the assets of
the Corporation available for distribution to shareholders, an amount equal to
the dividends accrued and unpaid thereon on the date of final distribution to
such holders, whether or not declared, without interest, and a sum equal to
$50.00 per share, and no more, before any payment shall be made or any assets
distributed to the holders of Common Stock or any other Junior Stock; provided, however, that such
rights shall accrue to the holders of Convertible Exchangeable Preferred Stock
only in the event that the Corporation�s payments with respect to the
liquidation preferences of the holders of the Senior Stock and the rights of the
Parity Stock are fully met. The entire assets of the Corporation available for
distribution after the liquidation preferences of the Senior Stock are fully met
shall be distributed ratably among the holders of the Convertible Exchangeable
Preferred Stock and Parity Stock in proportion to the respective preferential
amounts to which each is entitled (but only to the extent of such preferential
amounts). Neither a consolidation or merger of the Corporation with another
corporation nor a sale or transfer of all or substantially all of the
Corporation�s assets for cash, securities or other property will be considered a
liquidation, dissolution or winding up of the Corporation. After payment of the
full amount of the liquidating distribution to which the Convertible
Exchangeable Preferred Stock is entitled, the holders of Convertible
Exchangeable Preferred Stock will not be entitled to any further participation
in any distribution of the assets of the Company.
5. Redemption at Option of the
Corporation. The Corporation may not redeem the Convertible Exchangeable
Preferred Stock prior to June 15, 1996. The Corporation, at its option may
at any time on or after June 15, 1996 redeem in whole at any time, or from
time to time in part, the Convertible Exchangeable Preferred Stock on any
Business Day set by the Board (the �Redemption Date�), at the following cash
redemption prices per share if redeemed during the twelve-month period beginning
June 15 of the year specified below:
|
Year
|
Redemption Price | ||
|
1996
|
$ | 52.28 | |
|
1997
|
51.95 | ||
|
1998
|
51.63 | ||
|
1999
|
51.30 | ||
|
2000
|
50.98 | ||
|
2001
|
50.65 | ||
|
2002
|
50.33 | ||
- 5 -
and thereafter at $50.00 per share,
plus, in each case, an amount in cash equal to all dividends on the Convertible
Exchangeable Preferred Stock accrued and unpaid thereon, whether or not
declared, pro rata to the date fixed for redemption (subject to the right of the
holder of record on the record date for the payment of a dividend to receive the
dividend due on the corresponding Dividend Due Date, or the next Business Day
thereafter, as the case may be), such sum being hereinafter referred to as the
�Redemption Price�.
In case of the redemption of less
than all of the then outstanding Convertible Exchangeable Preferred Stock, the
Corporation shall designate by lot, or in such other manner as the Board may
reasonably determine, the shares to be redeemed, or shall effect such redemption
pro rata. Without the consent of the holders of at least two-thirds of the then
outstanding Convertible Exchangeable Preferred Stock, the Corporation shall not
redeem less than all of the Convertible Exchangeable Preferred Stock at any time
outstanding until all dividends accrued and in arrears, whether or not declared,
upon all Convertible Exchangeable Preferred Stock then outstanding shall have
been paid for all past dividend periods.
Not more than 60 nor less than 30
days prior to the Redemption Date, notice by first class mail, postage prepaid,
shall be given to the holders of record of the Convertible Exchangeable
Preferred Stock to be redeemed, addressed to such holders at their last
addresses as shown on the books of the Corporation. Each such notice of
redemption shall specify the Redemption Date, the Redemption Price, the place or
places of payment, that payment will be made upon the later of the Redemption
Date or presentation and surrender of the shares of Convertible Exchangeable
Preferred Stock, that on and after the Redemption Date, dividends will cease to
accumulate on such shares and that the right of holders to convert such shares,
as provided in Section 6 hereof, shall terminate at the close of business
ten days prior to the Redemption Date.
- 6 -
Any notice which is mailed as herein
provided shall be conclusively presumed to have been duly given, whether or not
the holder of the Convertible Exchangeable Preferred Stock receives such notice;
and failure to give such notice by mail, or any defect in such notice, to the
holders of any shares designated for redemption shall not affect the validity of
the proceedings for the redemption of any other shares of Convertible
Exchangeable Preferred Stock. On or after the date fixed for redemption as
stated in such notice, each holder of the shares called for redemption shall
surrender the certificate evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive payment of
the Redemption Price. If less than all the shares represented by any such
surrendered certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares. If, on the date fixed for redemption, funds
necessary for the redemption shall be available therefor and shall have been
irrevocably deposited or set aside, then, notwithstanding that the certificates
evidencing any shares so called for redemption shall not have been surrendered,
the dividends with respect to the shares so called shall cease to accrue after
the date fixed for redemption, the shares shall no longer be deemed outstanding,
the holders thereof shall cease to be stockholders, and all rights whatsoever
with respect to the shares so called for redemption (except the right of the
holders to receive the Redemption Price without interest upon surrender of their
certificates therefor) shall terminate.
The shares of Convertible
Exchangeable Preferred Stock, shall not be subject to mandatory redemption or
the operation of any purchase, retirement, or sinking fund.
6. Conversion Privilege.
(a) The holder of any share of
Convertible Exchangeable Preferred Stock shall have the right, at such holder�s
option (but if such share is called for redemption or exchange, then in respect
of such share only to and including, but not after, the close of business on the
Business Day immediately preceding the date fixed for such redemption or
exchange, provided that no
default by the Corporation in the payment of the applicable Redemption Price or
in the exchange of such share, as the case may be, shall have occurred and be
continuing on the date fixed for such redemption or exchange, as the case may
be) to convert such share on any Business Day into that number of fully paid and
non-assessable shares of Common Stock (calculated as to each conversion to the
nearest 1/100th of a share of
- 7 -
Common Stock) obtained by dividing
$50.00 by the Conversion Price then in effect. The Conversion Price shall
initially be $11.55 per share and shall be subject to adjustment as set forth
below.
(b) Conversion
Procedures. Any holder of shares of Convertible Exchangeable Preferred
Stock desiring to convert such shares into Common Stock shall surrender the
certificate or certificates for such shares of Convertible Exchangeable
Preferred Stock at the office of the transfer agent for the Convertible
Exchangeable Preferred Stock (the �Transfer Agent�), which certificate or
certificates, if the Corporation shall so require, shall be duly endorsed to the
Corporation or in blank, or accompanied by proper instruments of transfer to the
Corporation or in blank, accompanied by irrevocable written notice to the
Corporation that the holder elects so to convert such shares of Convertible
Exchangeable Preferred Stock and specifying the name or names (with address) in
which a certificate or certificates for Common Stock are to issued.
The Corporation covenants that it
will, as soon as practicable after such deposit of certificates for Convertible
Exchangeable Preferred Stock accompanied by the written notice of conversion and
compliance with any other conditions herein contained, deliver at such office of
such Transfer Agent to the person for whose account such shares of Convertible
Exchangeable Preferred Stock were so surrendered, or to his nominee or nominees,
certificates for the number of full shares of Common Stock to which he shall be
entitled as aforesaid, together with a cash adjustment of any fraction of a
share as hereinafter provided. Subject to the following provisions of this
paragraph, such conversion shall be deemed to have been made as of the date of
such surrender of the shares of Convertible Exchangeable Preferred Stock to be
converted, and the person or persons entitle to receive the Common Stock
deliverable upon conversion of such Convertible Exchangeable Preferred Stock
shall be treated for all purposes as the record holder or holders of such Common
Stock on such date; provided, however, that the
Corporation shall not be required to convert any shares of Convertible
Exchangeable Preferred Stock while the stock transfer books of the Corporation
are closed for any purpose, but the surrender of Convertible Exchangeable
Preferred Stock for conversion during any period while such books are so closed
shall become effective for conversion immediately upon the reopening of such
books as if the surrender had been made on the date of such reopening, and the
conversion shall be at the Conversion Price in effect on such date.
- 8 -
(c) In the case of any share of
Convertible Exchangeable Preferred Stock which is surrendered for conversion
after any record date established by the Board with respect to the payment of a
dividend on the Convertible Exchangeable Preferred Stock and on or prior to the
opening of business on the next succeeding Dividend Due Date (or, if such
Dividend Due Date is not a Business Day, before the close of business on the
next Business Day following such Dividend Due Date), the dividend due on such
date shall be payable on such date to the holder of record of such share as of
such preceding record date notwithstanding such conversion. Shares of
Convertible Exchangeable Preferred Stock surrendered for conversion during the
period from the close of business on any record date established by the Board
with respect to the payment of a dividend on the Convertible Exchangeable
Preferred Stock immediately preceding any Dividend Due Date to the opening of
business on such Dividend Due Date (or, if such Dividend Due Date is not a
Business Day, before the opening of business on the next Business Day following
such Dividend Due Date) shall, except in the case of shares of Convertible
Exchangeable Preferred Stock which have been called for redemption on a
Redemption Date within such period, be accompanied by payment in New York
Clearing House funds or other funds acceptable to the Corporation in an amount
equal to the dividend payable on such Dividend Due Date on the shares of
Convertible Exchangeable Preferred Stock being surrendered for conversion. The
dividend with respect to a share of Convertible Exchangeable Preferred Stock
called for redemption on a Redemption Date during the period from the close of
business on any record date established by the Board with respect to the payment
of a dividend on the Convertible Exchangeable Preferred Stock next preceding any
Dividend Due Date to the opening of business on such Dividend Due Date (or, if
such Dividend Due Date is not a Business Day, before the opening of business on
the next Business Day following such Dividend Due Date) shall be payable on such
Dividend Due Date (or, if such Dividend Due Date is not a Business Day, before
the opening of business on the next Business Day following such Dividend Due
Date) to the holder of record of such share on such dividend record date
notwithstanding the conversion of such share of Convertible Exchangeable
Preferred Stock after such record date and prior to the opening of business on
such Dividend Due Date (or, if such Dividend Due Date is not a Business Day,
before the opening of business on the next Business Day following such Dividend
Due Date), and the holder converting such share of Convertible Exchangeable
Preferred Stock need not include a payment of such dividend amount upon
surrender of such share of Convertible Exchangeable Preferred Stock.
- 9 -
(d) for conversion. Except as
provided in this paragraph, no payment or adjustment shall be made upon any
conversion on account of any dividends accrued on shares of Convertible
Exchangeable Preferred Stock surrendered for conversion or on account of any
dividends on the Common Stock issued upon conversion.
(e) No Fractional Shares.
No fractional shares or scrip representing fractional shares of Common Stock
shall be issued upon conversion of Convertible Exchangeable Preferred Stock. If
more than one certificate representing shares of Convertible Exchangeable
Preferred Stock shall be surrendered for conversion at one time by the same
holder, the number of full shares issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Convertible
Exchangeable Preferred Stock so surrendered. Instead of any fractional share of
Common Stock which would otherwise be issuable upon conversion of any shares of
Convertible Exchangeable Preferred Stock, the Corporation will pay a cash
adjustment in respect of such fractional interest in an amount equal to the same
fraction of the market price per share of Common Stock (as reasonably determined
by the Board or in any manner reasonably prescribed by the Board, which, so long
as the Common Stock is listed on the American Stock Exchange the �ASE�) shall be
the last reported sale price on the ASE) at the close of business on the day of
conversion.
(f) The Conversion Price shall be
adjusted from time to time as follows:
(i) In case the Corporation shall
pay or make a dividend in shares of Common Stock on any class of capital stock
of the Corporation, the Conversion Price in effect immediately prior to the
opening of business on the next Business Day following the date fixed for
determination of stockholders entitled to receive such dividend shall be reduced
by multiplying such Conversion Price by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding at the close of business on
the date fixed for such determination and the denominator shall be the sum of
such number of shares and the total number of shares constituting such dividend,
such reduction to become effective immediately prior to the opening of business
on the next Business Day following the date fixed for such determination. For
the purposes of this clause (i), the number of shares of Common Stock at any
time outstanding shall not include shares held in the treasury of the
Corporation but shall include shares issuable in respect of scrip certificates
issued in lieu of fractions of shares of Common Stock. The
- 10 -
Corporation covenants that it will
not pay any dividend on shares of Common Stock held in the treasury of the
Corporation.
(ii) In case the Corporation shall
hereafter issue rights, options or warrants to all holders of its Common Stock
entitling them to subscribe for or purchase shares of Common Stock (not being
available on an equivalent basis to holders of the Convertible Exchangeable
Preferred Stock upon conversion) at a price per share less than the Current
Market Price (as defined below) of the Common Stock on the date fixed for the
determination of stockholders entitled to receive such rights, options or
warrants (other than pursuant to a dividend reinvestment plan or the Rights as
defined in Section 6(e)(iv) below), the Conversion Price in effect
immediately prior to the opening of business on the next Business Day following
the date fixed for such determination shall be reduced by multiplying the
Conversion Price in effect immediately prior to the close of business on the
date fixed for the determination of holders of Common Stock entitled to receive
such rights, options or warrants by a fraction of which the numerator shall be
the number of shares of Common Stock outstanding at the close of business on the
date fixed for such determination plus the number of shares of Common Stock
which the aggregate of the offering price of the total number of shares of
Common Stock so offered for subscription or purchase would purchase at such
current market price and the denominator shall be the number of shares of Common
Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately prior
to the opening of business on the next Business Day following the date fixed for
such determination. For the purposes of this clause (ii), the number of shares
of Common Stock at any time outstanding shall not include shares held in the
treasury of the Corporation but shall include shares issuable in respect of
scrip certificates issued in lieu of fractions of shares of Common Stock. The
Corporation covenants that it will not issue any such rights, options or
warrants in respect of shares of Common Stock held in the treasury of the
Corporation.
(iii) In case the outstanding shares
of Common Stock shall be subdivided into a greater number of shares of Common
Stock, the Conversion Price in effect immediately prior to the opening of
business on the
- 11 -
next Business Day following the day
upon which such subdivision becomes effective shall be proportionally reduced,
and conversely, in case outstanding shares of Common Stock shall each be
combines into a smaller number of shares of Common Stock, the Conversion Price
in effect immediately prior to the opening of business on the next Business Day
following the day upon which such combination becomes effective shall be
proportionately increased.
(iv) In case the Corporation shall,
by dividend or otherwise, distribute to all holders of its Common Stock
evidences of its indebtedness or assets (including securities, but excluding
Rights, any rights, options or warrants referred to in clause (ii) of this
Section 6(e), any dividend of distribution paid exclusively in cash and any
dividend referred to in clause (i) of this Section 6(e)), the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the close of business on the date fixed for the determination of stockholders
entitled to receive such distribution by a fraction of which (A) the
numerator shall be the Current Market Price at the close of business on the date
fixed for such determination less the then fair market value (as determined by
the Board, whose reasonably determination shall be conclusive and described in a
Board resolution) of the portion of the assets or evidences of indebtedness so
distributed applicable to one share of Common Stock (the amount calculated
pursuant to this clause (A) being hereinafter referred to as the �Adjusted
Market Price�) and (B) the denominator shall be such Current Market Price,
such adjustment to become effective immediately prior to the opening of business
on the next Business Day following the date fixed for the determination of
stockholders entitled to receive such distribution.
Notwithstanding the foregoing, in
the event of any dividend or distribution by the Corporation to all holders of
its Common Stock consisting exclusively of capital stock of Equity Bank for
Savings, F.A. (�Equity Bank�), LSB Chemical Corp. or El Dorado Chemical Company
(�EDC�), or any of their respective subsidiaries, the Corporation may, at its
option, in consultation with an independent financial advisor selected by the
Board of Directors, elect to make no adjustment or a partial adjustment to the
Conversion Price (the Conversion Price, as unadjusted or as partially adjusted,
as the case may be, the �Modified
- 12 -
Conversion Price�) less than the
full adjustment to the Conversion Price required by this clause (iv) (the
Conversion Price, as it would have been fully adjusted, the �Fully Adjusted
Conversion Price�). In the event the Corporation makes such election, the
Corporation shall pay to each holder of record of shares of Convertible
Exchangeable Preferred Stock as such holder appears in the securities register
of the Corporation at the close of business on the day such distribution is
effected an amount in cash for each such share held by such holder equal to the
product of (A) the difference between (x) the quotient of
(1) $50.00 divided by (2) the Fully
Adjusted Conversion Price minus (y) the
quotient of (1) $50.00 divided by (2) the
Modified Conversion Price times (B) the
Adjusted Market Price. The Corporation shall mail a notice to all holders of
Convertible Exchangeable Preferred Stock, at their last addresses as they shall
appear in the security register, of such dividend or distribution and of the
Corporation�s election to make any such cash payment at least 30 days in advance
of the record date for the determination of the holders of Common Stock entitled
to receive such dividend or distribution.
With respect to the Preferred Stock
Purchase Rights (as defined in the Rights Agreement, dated as of
February 17, 1989 between the Corporation and the Liberty National Bank and
Trust Corporation of Oklahoma City), and, in the event that, after the date
hereof, the Corporation should distribute rights, options or warrants issued by
the Corporation to all holders of Common Stock entitling the holders thereof to
subscribe for or purchase shares of Common Stock or preferred stock, which
rights, options or warrants (A) are deemed to be transferred with such
shares of Common Stock, (B) are not exercisable and (C) are also issued in
respect of future issuances of Common Stock, in each case in clauses
(A) through (C) until the occurrence of a specified event or events
(such Preferred Stock Purchase Rights and such rights, options or warrants, if
any, collectively, �Rights�), each holder of the Convertible Exchangeable
Preferred Stock who converts any shares of Convertible Exchangeable Preferred
Stock shall (but only if the Rights have not been previously redeemed) be
entitled to receive upon such conversion, in addition to the shares of Common
Stock issuable upon such conversion, a number of such Rights to be determined as
follows: (Y) if such conversion occurs on or prior to the date for the
distribution to the holders of Rights of separate certificates evidencing such
Rights (the �Distribution Date�), the same number
- 13 -
of Rights to which a holder of a
number of shares of Common Stock equal to the number of shares issued upon such
conversion is entitled at the time of such conversion in accordance with the
terms and provisions of and applicable to such Rights; and (Z) if such
conversion occurs after the Distribution Date, the same number of Rights to
which a holder of the number of shares of Common Stock, into which such shares
of Convertible Exchangeable Preferred Stock so converted were convertible on the
Business Day immediately preceding the Distribution Date, would have been
entitled on the Distribution Date in accordance with the terms and provisions of
and applicable to the Rights.
(v) In case the Corporation shall,
by dividend or otherwise, distribute to all holders of its Common Stock cash
(excluding any cash that is distributed upon a merger or consolidation to which
Section 6(m) applies or as part of a distribution referred to in clause
(iv) of this Section 6(e)) in an aggregate amount that, combined
together with (I) the aggregate amount of any other distributions to all
holders of its Common Stock made exclusively in cash within the 12 months
preceding the date of payment of such distribution and in respect of which no
adjustment pursuant to this clause (v) or clause (vi) of this
Section 6(e) has been made and (II) the aggregate of any cash plus the fair
market value (as determined by the Board of Directors) as of the last time
tender could have been made pursuant to such tender offer, as it may have been
amended (such time, the �Expiration Time�) of consideration payable in respect
of any tender offer by the Corporation or any of its Subsidiaries for all or any
portion of the Common Stock concluded within the 12 months preceding the date of
payment of such distribution and in respect of which no adjustment pursuant to
this clause (v) or clause (vi of this Section 6(e) has been made,
exceeds 10% of the product of the Current Market Price per share of the Common
Stock on the date for the determination of holders of shares of Common Stock
entitled to receive such distribution times the number of shares of Common Stock
outstanding on such date, then, and in each such case, immediately after the
close of business on such date for determination, the Conversion Price shall be
reduced so that the same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the close of business on the
date fixed for determination
- 14 -
(vi) of the stockholders entitled to
receive such distribution by a fraction (i) the numerator of which shall be
equal to the Current Market Price per share of the Common Stock on the date
fixed for such determination less an amount equal to the quotient of
(x) the excess of such combined amount over such 10% and (y) the
number of shares of Common Stock outstanding on such date for determination and
(ii) the denominator of which shall be equal to the Current Market Price
per share of the Common Stock as of such date for determination.
(vii) In case a tender offer (the
�Tender Offer�) made by the Corporation or any Subsidiary for all or any portion
of the Common Stock shall expire and the Tender Offer (as amended upon the
expiration thereof) shall require the payment to stockholders based on the
acceptance (up to any maximum specified in the terms of the tender offer) of
Purchased Shares (as defined below) of an aggregate consideration having a fair
market value (as determined by the Board of Directors) as of the Expiration Time
of such tender offer that combined together with (I) the aggregate of the
cash plus the fair market value (as determined by the Board of Directors) of
consideration payable in respect of any other tender offer (determined as of the
Expiration Time of such other tender offer) by the Corporation or any Subsidiary
for all or any portion of the Common Stock expiring within the 12 months
preceding the expiration of the Tender Offer and in respect of which no
adjustment pursuant to clause (v) of this Section 6(e) or this clause
(vi) has been made and (II) the aggregate amount of any distributions to
all holders of the Corporation�s Common Stock made exclusively in cash within 12
month preceding the expiration of the Tender Offer and in respect of which no
adjustment pursuant to clause (v) of this Section 6(e) or this clause
(vi) has been made, exceeds 10% of the product of the Current Market Price
per share of the Common Stock as of the Expiration Time of the Tender Offer
times the number of shares of Common Stock outstanding (including any tendered
shares) at the Expiration Time of the Tender Offer, then, and in each such case,
immediately prior to the opening of business on the day after the date of the
Expiration Time of the Tender Offer, the Conversion Price shall be adjusted so
that the same shall equal the price determined by multiplying the Conversion
Price immediately prior to close of business on the date of the Expiration Time
of the Tender Offer by a fraction (i) the numerator of which shall be equal
to (A) the
- 15 -
product of (I) the Current
Market Price per share of the Common Stock as of the Expiration Time of the
Tender Offer and (II) the number of shares of Common Stock outstanding
(including any tendered shares) at the Expiration Time of the Tender Offer less
(B) the amount of cash plus the fair market value (determined as foresaid)
of the aggregate consideration payable to stockholders based on the acceptance
(up to any maximum specified in the terms of the Tender Offer) of Purchased
Shares as defined below, and (ii) the denominator of which shall be equal
to the product of (A) the Current Market Price per share of the Common
Stock as of the Expiration Time of the Tender Offer and (B) the number of
shares of Common Stock outstanding (including any tendered shares) as of the
Expiration Time of the Tender Offer less the number of all shares validly
tendered and not withdrawn as of the Expiration Time of the Tender Offer (the
shares deemed so accepted up to any such maximum, being referred to as the
�Purchased Shares�).
(viii) The reclassification of
Common Stock into securities other than Common Stock (other than any
reclassification upon a consolidation or merger to which Section 6(m)
applies) shall be deemed to involve (a) a distribution of such securities
other than Common Stock to all holders of Common Stock (and the effective date
of such reclassification shall be deemed to be �the date fixed for the
determination of stockholders entitled to receive such distribution� and the
�date fixed for such determination� within the meaning of clause (iv) of
this Section 6(e)), and (b) a subdivision or combination, as the case
may be, of the number of shares of Common Stock outstanding immediately prior to
such reclassification into the number of shares of Common Stock outstanding
immediately thereafter (and the effective date of such reclassification shall be
deemed to be �the day upon which such subdivision becomes effective� or �the day
upon which such combination becomes effective�, as the case may be, and �the day
upon which such subdivision or combination becomes effective� within the meaning
of clause (iii) of this Section 6(e) above).
(ix) For the purpose of any
computation under clause (ii), (iv), (v), (vi) or (vii) of this
Section 6(e), the current market price per share of Common Stock (the
�Current Market Price�) on any day shall be deemed to be the average of the
daily closing prices per share for the five consecutive Trading Days selected by
the Board commencing not more than
- 16 -
10 Trading Days before, and ending
not later than, the earlier of the day in question and the day before the Ex
Date (as defined below) with respect to the issuance, payment or distribution on
the date of the expiration of the tender offer requiring such computation. For
this purpose, the term �Ex Date�, when used with respect to any issuance or
distribution, shall mean the first date on which the Common Stock trades regular
way on the applicable securities exchange or in the applicable securities market
without the right to receive such issuance or distribution. �Trading Day� means
each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on
which the Common Stock is not traded on the applicable securities exchange or on
the applicable securities market. The closing price for each day shall be the
reported last sale price regular way or, in case no such reported sale takes
place on such day, the average of the reported closing bid and asked prices
regular way, in either case on the ASE or, if the Common Stock is not listed or
admitted to trading on such Exchange, on the principal national securities
exchange on which the Common Stock is listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the
National Association of Securities Dealers Automated Quotations National Market
System (the �NASDAQ/NMS�) or, if the Common Stock is not listed or admitted to
trading on any national securities exchange or quoted on the NASDAQ/NMS, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by any New York Stock Exchange member firm reasonably selected from
time to time by the Board for that purpose.
(g) No adjustment in the Conversion
Price shall be required unless such adjustment (plus any adjustments not
previously made by reason of this Section 6(f)) would require an increase
or decrease of at least one percent in such Conversion Price; provided, however, that any
adjustments which by reason of this Section 6(f) is not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section shall be made to the nearest cent or to the
nearest 1/100 of a share of Common Stock, as the case may be.
(h) Whenever the Conversion Price is
adjusted as herein provided:
(i) the Corporation shall compute
the adjusted Conversion Price in accordance with Section 6(e) and shall
prepare a certificate signed by the treasurer of the Corporation setting forth
the adjusted
- 17 -
Conversion Price and showing in
reasonably detail the facts upon which such adjustment is based, and such
certificate shall forthwith be filed with the Transfer Agent; and
(ii) a notice stating that the
Conversion Price has been adjusted and setting forth the adjusted Conversion
Price shall forthwith be required, and as soon as practicable after it is
required, such notice shall be mailed by the Corporation to all holders of
Convertible Exchangeable Preferred Stock at their last addresses as they shall
appear in the security register.
(i) In case:
(i) the Corporation shall declare a
dividend or other distribution on its Common Stock (other than a dividend
payable exclusively in cash that would not cause an adjustment to the Conversion
Price to take place pursuant to Section 6(e) above); or
(ii) the Corporation or any
Subsidiary (as defined below in Section 6(m)) shall make a tender offer for
the Common Stock (other than a tender offer that would not cause an adjustment
to the Conversion Price pursuant to clause (v) or (vi) of
Section 6(m); or
(iii) the Corporation shall
authorize the granting to all holders of this Common Stock of rights, options or
warrants to subscribe for or purchase any shares of capital stock of any class
(other than Rights); or
(iv) of any reclassification of the
Common Stock of the Corporation (other than a subdivision or combination of its
outstanding shares of Common Stock), or of any consolidation, merger or share
exchange to which the Corporation is a party and for which approval of any
stockholders of the Corporation is required, or of the sale or transfer of all
or substantially all of the assets of the Corporation; or
(v) of the voluntary or involuntary
dissolution, liquidation or winding up on the Corporation;
then the Corporation shall cause to
be filed with the Transfer Agent, and shall cause to be mailed to all holders of
the Convertible Exchangeable Preferred Stock at their last addresses as they
shall appear in the security
- 18 -
register, at least 20 days (or 10
days in any case specified in clause (i) or (ii) above) prior to the
effective date hereinafter specified, a notice stating (x) the date on
which a record has been taken for the purpose of such dividend, distribution or
grant of rights, options or warrants, or, if a record is not to be taken, the
date as of which the identity of the holders of Common Stock of record entitled
to such dividend, distribution, rights, options or warrants was determined, or
(y) the date on which such reclassification, consolidation, merger, share
exchange, sale, transfer, dissolution, liquidation or winding up is expected to
become effective, and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, share exchange, sale, transfer, dissolution, liquidation
or winding up. Neither the failure to give such notice nor any defect therein
shall affect the legality or validity of the proceedings described in clauses
(i) through (v) of this Section 6(h).
(j) The Corporation shall at all
times reserve and keep available out of its authorized but unissued Common
Stock, for the purpose of effecting the conversion of Convertible Exchangeable
Preferred Stock, the full number of shares of Common Stock then issuable upon
the conversion of all outstanding shares of Convertible Exchangeable Preferred
Stock.
(k) The Corporation covenants that
it will pay any and all taxes that may be payable in respect of the issue or
delivery of shares of Common Stock on conversion of Convertible Exchangeable
Preferred Stock pursuant hereto. The Corporation shall not, however, be required
to pay any tax which may be payable in respect of any transfer involved in the
issue and delivery of shares of Common Stock in a name other than that of the
holder of the shares of Convertible Exchangeable Preferred Stock to be
converted, and no such issue or delivery shall be made unless and until the
person requesting such issue has paid to the Corporation the amount of any such
tax, or has established to the satisfaction of the Corporation that such tax has
been paid.
(l) The Corporation covenants that
all shares of Common Stock which may be issued upon conversion of Convertible
Exchangeable Preferred Stock will upon issue be fully paid and nonassessable
and, except as provided in Section 6(j) above, the Corporation covenants
that it will pay all taxes, liens and charges with respect to the issue thereof.
- 19 -
(m) All shares of Convertible
Exchangeable Preferred Stock delivered for conversion shall be delivered to the
Transfer Agent to be cancelled by or at the direction of the Transfer Agent,
which shall dispose of the same.
(n) Special Conversion Rights
upon Corporate Change or Ownership Change. If a Corporate Change (as
defined below) has occurred with respect to the Corporation, except as otherwise
provided below, each holder of Convertible Exchangeable Preferred Stock shall
have the right, at the holder�s option, for a period of 45 days after the
mailing of a notice by the Corporation that a Corporate Change has occurred, to
convert all, but not less than all, of such holder�s Convertible Exchangeable
Preferred Stock into Marketable Stock (as defined below) with an aggregate
Applicable Value (as defined below) equal to the aggregate Stated Value (as
defined below) of the Convertible Exchangeable Preferred Stock for which
conversion is elected before the close of business on any Business Day. The
Corporation may, at its option, in lieu of providing Common Stock upon any such
conversion, provide the holders who have elected to convert under this
Section 6(m) with cash in an amount equal to the aggregate Stated Value of
that portion of the Convertible Exchangeable Preferred Stock for which such
conversion is elected and for which the Corporation elects to pay such cash. Any
such election by the Corporation may be for all or any portion of the
Convertible Exchangeable Preferred Stock for which such conversion under this
Section 6(m) was elected by the holders thereof. Shares of Convertible
Exchangeable Preferred Stock which are not converted as provided above will
remain convertible into the kind and amount of securities, cash or other assets
which the holders of the Convertible Exchangeable Preferred Stock would have
owned immediately after the Corporate Change if the holders had converted the
Convertible Exchangeable Preferred Stock immediately before the effective date
of the Corporate Change. The Corporation covenants that it will notify the
registered holders of Convertible Exchangeable Preferred Stock of any Corporate
Change at least 30 days in advance of the effective date of any such Corporate
Change in order to allow such holders an opportunity to exercise their
conversion rights prior to the effective date of such Corporate Change and
before the special conversion right provided in this Section 6(m)
commences.
If an Ownership Change (as defined
below) should occur with respect to the Corporation, except as otherwise
provided below, each holder of the Convertible Exchangeable Preferred Stock
shall have the right, at the holder�s option, for a period of 45 days after the
mailing of a
- 20 -
notice by the Corporation that an
Ownership Change has occurred, to convert all, but not less than all, of such
holder�s Convertible Exchangeable Preferred Stock into Common Stock with an
aggregate Applicable Value equal to the aggregate Stated Value of the
Convertible Exchangeable Preferred Stock for which conversion is elected before
the close of business on any Business Day; provided that, should
the 45th day after the mailing of such notice not be a Business Day, then
holders of Convertible Exchangeable Preferred Stock shall additionally have the
right to exercise their special conversion rights before the close of business
on the next Business Day following the 45th day after the mailing of such
notice. The Corporation may, at its option, in lieu of providing Common Stock
upon any such conversion, provide to the holders who have elected to convert
under this Section 6(m) cash in an amount equal to the aggregate Stated
Value of that portion of the Convertible Exchangeable Preferred Stock for which
such conversion was elected and for which the Corporation elects to pay such
cash. Any such election by the Corporation may be for all or any portion of the
Convertible Exchangeable Preferred Stock for which such conversion under this
Section 6(m) was elected by the holders thereof. The special conversion
right arising upon an Ownership Change will only be applicable with respect to
the first Ownership Change that occurs after the date of original issuance of
the Convertible Exchangeable Preferred Stock.
If a Corporate Change or an
Ownership Change occurs with respect to the Corporation, then, within 30 days
after the occurrence of such Corporate Change or Ownership Change, as the case
may be, the Corporation covenants that it will mail to each registered holder of
Convertible Exchangeable Preferred Stock a notice setting forth details
regarding the special conversion right available to such holder based upon such
Corporate Change or Ownership Change. A holder of Convertible Exchangeable
Preferred Stock must exercise the special conversion right, if at all, within
the applicable period (as specified above) after the mailing of such notice by
the Corporation. Exercise of such special conversion right shall be irrevocable
and dividends on Convertible Exchangeable Preferred Stock tendered for
conversion shall cease to accrue from and after the conversion date. The
conversion date with respect to the exercise of a special conversion right
arising upon a Corporate Change or Ownership Change shall be the 45th day after
the mailing of the notice by the Corporation that a Corporate Change or
Ownership Change, as the case may be, has occurred.
- 21 -
As used in this Section 6(m), a
�Corporate Change� with respect to the Corporation shall be deemed to have
occurred at such time as the Corporation shall consummate any transaction of
merger or consolidation of the Corporation, or shall convey, sell, lease,
assign, transfer or otherwise dispose of, all or substantially all of the
Corporation�s property, business or assets, except that none of the following
shall constitute a corporate change:
(i) the merger or consolidation of
any Subsidiary of the Corporation with or into the Corporation (provided that
the Corporation shall be the continuing or surviving corporation) or the merger
of consolidation of the Corporation or any Subsidiary with or into any one or
more wholly-owned Subsidiaries of the Corporation (provided that a wholly-owned
Subsidiary shall be the continuing or surviving corporation); and
(ii) any sale, lease, transfer or
other disposition by any wholly-owned Subsidiary of any or all of its assets
(upon voluntary liquidation or otherwise) to the Corporation or any sale, lease
transfer or other disposition by the Corporation of any or all of its assets to
a wholly-owned Subsidiary of the Corporation; and
(iii) any sale, lease, transfer or
other disposition by the Corporation of any or all of the capital stock or
assets of any or all of LSB Chemical Corp., Equity Bank, or EDC, or any of their
respective subsidiaries, or any business acquired after the date hereof; and
(iv) any merger, consolidation,
sale, lease, assignment, transfer or disposition pursuant to which the
consideration received and to be received by holders of the Common Stock
consists solely of Marketable Stock.
As used in this Section 6(m),
an �Ownership Change� with respect to the Corporation shall be deemed to have
occurred at such time as any Person (other than Jack E. Golsen and members of
his Immediate Family and any entity Controlled by Jack E. Golsen and members of
his Immediate Family), together with its affiliates and associates, is or
becomes the beneficial owner, directly or indirectly, of more than 50% of the
outstanding Common Stock of the Corporation pursuant to a transaction that does
not constitute a Corporate Change with respect to the Corporation. �Control�
means the possession, directly or
- 22 -
indirectly, of the power to direct
or cause the direction of the management or policies of a person, whether
through the ownership of voting securities, by contract or otherwise and
�Controlled� shall have the meaning correlative thereto. �Immediate Family� of
any person means the spouse, siblings, parents, children, nieces and nephews of
such person.
As used in this Section 6(m)
the �Applicable Value� of a share of the Common Stock or a share of common stock
of a corporation that is the successor to all or substantially all of the
business and assets of the Corporation as the result of a Corporate Change,
shall be the higher of the Market Value or the Reference Value (as defined
below).
As used in this Section 6(m)
the �Market Value� of a share of the Common Stock or a share of common stock of
a corporation that is the successor to all or substantially all of the business
and assets of the Corporation as the result of a Corporate Change, shall be the
average of the closing market prices of such common stock for the five Trading
Days ending on the last Trading Day preceding the date of the Corporate Change
or Ownership Change.
As used in this Section 6(m)
the term �Marketable Stock� shall mean Common Stock or common stock of any
corporation that is the successor to all or substantially all of the business or
assets of the Corporation as a result of a Corporate Change, as the case may be,
which is (or will, upon distribution there, be) listed on a national securities
exchange or approved for quotation in the NASDAQ/NMS or any similar system of
automated dissemination of quotations of securities prices in the United States.
As used in this Section 6(m),
�Stated Value� of a share of Convertible Exchangeable Preferred Stock converted
during the 45-day period following the notice of a Corporate Change or an
Ownership Change shall mean $50.00 plus accrued and unpaid dividends, whether or
not declared, to the conversion date.
As used in this Section 6(m)
�Subsidiary� means a corporation more than 50% of the outstanding voting stock
of which is owned, directly or indirectly, by the Corporation or by one or more
other Subsidiaries, or by the Corporation and one or more other Subsidiaries.
As used in this Section 6(m)
the term �Reference Value� shall initially mean $6.42 per share (which is an
amount equal to two-thirds of the closing price of the Common Stock on the
Business Day immediately prior to the
- 23 -
date of original issuance of the
Convertible Exchangeable Preferred Stock); provided, however, that in the
event of any adjustment to the Conversion Price, the Reference Value shall also
be adjusted so that the ratio of the Reference Value to the Conversion Price,
after giving effect to any such adjustment, shall always be the same as the
ratio of $6.42 to the initial Conversion Price ($11.55 per share) (without
giving effect to any adjustment); provided, further, that if the
Market Value of a share of common stock of a corporation that is the successor
to all or substantially all of the business and assets of the Corporation as the
result of a Corporate Change is less than the Reference Value (as calculated
above), then the Reference Value shall be equal to the amount determined by
multiplying the Market Value per share of such successor corporation�s common
stock by a fraction of which the numerator shall be the Reference Value of the
Common Stock (as calculated above) and the denominator shall be the Market Value
of the Common Stock.
Any notice by the Corporation which
is mailed as provided in this Section 6(m) shall be conclusively presumed
to have been duly given, whether or not the holder of Convertible Exchangeable
Preferred Stock receives such notice; and failure to give such notice by mail,
or any defect in such notice, to the holders of any shares shall not affect the
validity of the proceedings for the conversion of any other shares of
Convertible Exchangeable Preferred Stock. An election by a holder of Convertible
Exchangeable Preferred Stock to have the Corporation convert such stock pursuant
to this Section 6(m) shall become irrevocable when made. On or after the
date fixed for conversion as stated in any notice delivered by the Corporation,
each holder of the shares called for conversion shall surrender the certificates
evidencing such shares to the Corporation at the place designated in such notice
and shall thereupon be entitled to receive consideration in accordance with the
terms of this Section 6(m). If less than all the shares represented by any
such surrendered certificates are converted, a new certificate shall be issued
representing the unconverted shares. If, on the date fixed for conversion under
any provision of this Section 6(m), notwithstanding that the certificates
evidencing any shares which the holders thereof had elected to have converted
shall not have been surrendered, the dividends with respect to such shares shall
cease to accrue, such shares shall no longer be deemed outstanding, the holders
thereof shall cease to be holders of Convertible Exchangeable Preferred Stock,
and all rights whatsoever with respect to such shares (except the right of the
holders to receive the consideration upon surrender of their certificates
therefor) shall terminate.
- 24 -
(n) Reservation of Shares;
Transfer Taxes; Etc. The Corporation shall at all times reserve and keep
available, out of its authorized and unissued stock, solely for the purpose of
effecting the conversion of the Convertible Exchangeable Preferred Stock, such
number of shares of its Common Stock, free of preemptive rights, as shall from
time to time be sufficient to effect the conversion of all shares of Convertible
Exchangeable Preferred Stock from time to time outstanding. The Corporation
shall from time to time, in accordance with the laws of the State of Delaware,
increase the authorized number of shares of Common Stock if at any time the
number of shares of Common Stock not outstanding shall not be sufficient to
permit the conversion of all the then outstanding shares of Convertible
Exchangeable Preferred Stock.
If any shares of Common Stock
required to be reserved for purposes of conversion of the Convertible
Exchangeable Preferred Stock hereunder require registration with or approval of
any governmental authority under any Federal or State law before such shares may
be issued upon conversion, the Corporation covenants that it will in good faith
and as expeditiously as possible endeavor to cause such shares to be duly
registered or approved, as the case may be. If the Common Stock is listed on the
ASE or any other national securities exchange, the Corporation covenants that it
will, if permitted by the rules of such exchange, list and keep listed on such
exchange, upon official notice of issuance, all shares of Common Stock issuable
upon conversion of the Convertible Exchangeable Preferred Stock.
The Corporation covenants that it
will pay any and all issue or other taxes that may be payable in respect of any
issue or delivery of shares of Common Stock on conversion of the Convertible
Exchangeable Preferred Stock. The Corporation shall not, however, be required to
pay any tax which may be payable in respect of any transfer involved in the
issue or delivery of Common Stock (or other securities or assets) in a name
other than that in which the shares of Convertible Exchangeable Preferred Stock
so converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such issue has paid to the Corporation the
amount of such tax or has established, to the satisfaction of the Corporation,
that such tax has been paid.
- 25 -
Before taking any action which would
cause an adjustment reducing the Conversion Price below the then par value of
the Common Stock, the Corporation covenants that it will take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Corporation may validly and legally issue fully paid and non-assessable shares
of Common Stock at the Conversion Price as so adjusted.
(o) Other Changes in Conversion
Price. The Corporation may, but shall not be obligated to, made such
decreases in the Conversion Price, in addition of those required or allowed by
this Section 6, as shall be determined by it, as evidenced by a resolution
of the Board, to be advisable in order to avoid or diminish any income tax to
holders of Common Stock resulting from any dividend or distribution of any
capital stock of the Corporation or issuance of rights, options or warrants to
purchase or subscribe for any such stock or from any event treated as such for
income tax purposes.
7. Voting Rights.
(a) General. The holders
of Convertible Exchangeable Preferred Stock will not have any voting rights
except as set forth below or as otherwise required by law. In connection with
any right to vote, each holder of Convertible Exchangeable Preferred Stock will
have one vote for each share held, with no right to cumulate votes.
(b) Default Voting
Rights. Whenever dividends on the Convertible Exchangeable Preferred
Stock shall be in arrears and unpaid, whether or not declared, in an amount
equal to at least six quarterly dividends (whether or not consecutive)
(i) the number of members of the Board shall be increased by two, effective
as of the time of election of such directors as hereinafter provided, and
(ii) the holders of the Convertible Exchangeable Preferred Stock (voting
separately as a class with all other affected classes or series of the Parity
Stock upon which like voting rights have been conferred and are exercisable)
will have the exclusive right to vote for and elect such two additional
directors of the Corporation at any meeting of stockholders of the Corporation
at which directors are to be elected held during the period that any dividends
on the Convertible Exchangeable Preferred Stock remain in arrears. The right of
the holders of the Convertible Exchangeable Preferred Stock to vote for such two
additional directors shall terminate, subject to re-vesting in the event of a
subsequent similar arrearage, when all cumulative and unpaid dividends on the
Convertible Exchangeable Preferred Stock
- 26 -
have been declared and set apart for
payment. The term of office of all directors so elected shall terminate
immediately upon the termination of the right of the holders of the Convertible
Exchangeable Preferred Stock and such Parity Stock to vote for such two
additional directors, subject to the requirements of Delaware law.
At any time when such voting right
created pursuant to this Section 7(b) shall have vested in holders of the
shares of Convertible Exchangeable Preferred Stock and if such right shall not
already have been initially exercised, a proper officer of the Corporation
shall, upon the written request of the record holders of 10% in number of the
shares of Convertible Exchangeable Preferred Stock and any other series of
preferred stock having such voting right then outstanding, addressed to the
Secretary of the Corporation, call a special meeting of the holders of the
shares of Convertible Exchangeable Preferred Stock and such other series of
preferred stock having such voting right for the purpose of electing such two
additional directors. Such meeting shall be held at the earliest practicable
date upon the notice required for annual meetings of stockholders at the place
for holding annual meetings of stockholders of the Corporation or, if none, at a
place designated by the Board of Directors. If such meeting is not called by the
proper officers of the Corporation within 30 days after the personal service of
such written request upon the Secretary of the Corporation, or within 35 days
after mailing the same within the United States of America, by registered mail,
addressed to the Secretary of the Corporation at its principal office (such
mailing to be evidenced by the registry receipt issued by the postal
authorities), then the record holders of 10% in number of shares of Convertible
Exchangeable Preferred Stock and such other series of preferred stock then
outstanding which would be entitled to vote at such meeting may designate in
writing one of their number to call such meeting at the expense of the
Corporation, and such meeting may be called by such person so designated upon
the notice required for annual meetings of stockholders and shall be held at the
same place as is elsewhere provided for in this Section 7(b) or such other
place as is selected by such designated stockholder. Any holder of the shares of
Convertible Exchangeable Preferred Stock and such other series of preferred
stock then outstanding who would be entitled to vote at such meeting shall have
access to the stock books of the Corporation for the purpose of causing a
meeting of stockholders to be called pursuant to the provisions of this
Section 7(b). Notwithstanding the provisions of this Section 7(b), no
such special meeting shall be called during a period within 90 days immediately
preceding the date fixed for the next annual meeting of stockholders.
- 27 -
The holders of the Convertible
Exchangeable Preferred Stock and any Parity Stock referred to above voting as a
class shall have the right to remove without cause at any time and replace any
directors such holders have elected pursuant to this Section 8.
(c) Class Voting Rights.
So long as any shares of Convertible Exchangeable Preferred Stock remain
outstanding, the Corporation shall not, without the affirmative vote or written
consent of the holders of at least two-thirds of all outstanding Convertible
Exchangeable Preferred Stock voting separately as a class, (i) amend, alter
or repeal (by merger or otherwise) any provision of the Certificate of
Incorporation of the Corporation, as amended, so as adversely to affect the
relative rights, power, preferences, qualifications, limitation or restrictions
of the Convertible Exchangeable Preferred Stock, or (ii) increase the
authorized amount of the Convertible Exchangeable Preferred Stock. A class vote
on the part of the Convertible Exchangeable Preferred Stock shall, without
limitation, specifically not be deemed to be required (except as otherwise
required by law or resolution of the Board) in connection with: (a) the
authorization, issuance or increase in the authorized amount of any shares of
Common Stock or other Junior Stock or (b) an increase in the amount of any
bonds, mortgages, debentures or other obligations of the Corporation. In
addition, the Corporation shall not increase the authorized amount of the
Convertible Exchangeable Preferred Stock without the vote or written consent of
the holders of at least a majority of the shares of Convertible Exchangeable
Preferred Stock then outstanding, voting or consenting separately as a class.
8. Exchange. The shares
of Convertible Exchangeable Preferred Stock are exchangeable at the option of
the Corporation in whole, but not in part, on any dividend payment date
beginning June 15, 1996 for the Corporation�s 6.5% Convertible Subordinated
Debentures due 2018 (the �Debentures�), to be issued under an Indenture (the
�Indenture�) between the Corporation and Liberty Bank and Trust Company of
Oklahoma City, N.A., as trustee, or such other party as may reasonably be
selected by the Board to then act as trustee under the Indenture (the
�Trustee�), which shall be in substantially the form filed as an exhibit to the
Corporation�s Registration Statement on Form S-2 (Registration
No. 33-61640) as filed with the Securities and Exchange Commission and as
amended as of May 18, 1993, competed as set forth therein and with such
changes as may
- 28 -
be required by law or usage. Holders
of the outstanding shares of Convertible Exchangeable Preferred Stock will be
entitled to receive $50.00 principal amount of the Debentures in exchange for
each share of Convertible Exchangeable Preferred Stock held by them at the time
of exchange. Dividends due on the shares of Convertible Exchangeable Preferred
Stock will be mailed to holders of record in the regular course.
No such exchange of Debentures for
shares of Convertible Exchangeable Preferred Stock shall be made unless on or
prior to the dividend payment date on which such exchange is to be made
(i) the Indenture shall have been executed and delivered by the Corporation
and the Trustee; (ii) a certificate of the President or any Vice President
of the Corporation, reasonably satisfactory to the Trustee, to the effect that
the Indenture in question is duly qualified under the Trust Indenture Act of
1939 as then in effect, that the Debentures are valid and binding obligations of
the Corporation in accordance with their terms and that all necessary corporate
and governmental approvals, including without limitation any securities
registrations, for the issuance of the Debentures have been obtained and
(iii) an opinion of counsel to the Corporation, reasonably satisfactory to
the Trustee, to the same effect as the foregoing certificate has been delivered
to the Trustee. Such certificate and opinion shall be available for inspection
during normal business hours by the holders of the Convertible Exchangeable
Preferred Stock upon request to the Trustee.
Upon such exchange or the exchange
date specified in the notice mailed by the Corporation as hereinafter provided,
whichever occurs first, the rights of the holders of Convertible Exchangeable
Preferred Stock as stockholders of the Corporation shall cease (except the right
to receive on the date of exchange an amount equal to the amount of accrued and
unpaid dividends on the Convertible Exchangeable Preferred Stock to the date of
exchange and the Debentures), and the person or persons entitled to receive the
Debentures issuable upon such redemption and exchange shall be treated for all
purposes as the registered holder or holders of such Debentures. The Corporation
covenants that it will mail to each record holder of the Convertible
Exchangeable Preferred Stock, at such holder�s address of record, written notice
of its intention to exchange the Convertible Exchangeable Preferred Stock not
less than 30 nor more than 60 days prior to the exchange date. Such notice shall
state: (i) the exchange date; (ii) the place or places where
certificates for such shares are to be surrendered in exchange for Debentures;
and (iii) that dividends on the shares to be
- 29 -
exchanged will cease to accrue on
such exchange date. Upon surrender in accordance with said notice of the
certificates for any shares so exchanged (properly endorsed or assigned for
transfer, if the Corporation shall so require and the notice shall so state),
the Corporation covenants that it will cause the Debentures to be authenticated
and issued in exchange for such shares of Convertible Exchangeable Preferred
Stock to be mailed to each holder of the shares of Convertible Exchangeable
Preferred Stock at such holder�s address of record or such other address as the
holder shall specify upon such surrender of such certificates.
If on the exchange date the
Corporation shall be in default in the payment of any dividends, whether or not
declared (including cumulative dividends, if applicable), on Convertible
Exchangeable Preferred Stock or on any shares of Senior Stock or Parity Stock,
or if such exchange shall on such date be prohibited by applicable law, then no
shares of the Convertible Exchangeable Preferred Stock shall be exchanged.
9. Outstanding Shares.
For purposes of this Certificate of Designations, all shares of Convertible
Exchangeable Preferred Stock shall be deemed outstanding except (i) from
the date fixed for redemption pursuant to Section 5 hereof, all shares of
Convertible Exchangeable Preferred Stock that have been so called for redemption
under Section 5 and not converted at the option of the holder thereof
pursuant to Section 6 hereof if funds necessary for the redemption of such
shares are available, (ii) from the date of exchange determined pursuant to
Section 8 hereof, all shares of Convertible Exchangeable Preferred Stock so
called for exchange for Debentures if an amount equal to all accrued and unpaid
dividends on such shares has been set apart for payment and the Debentures are
issuable upon surrender of such shares; (iii) from the date of surrender of
certificates representing shares of Convertible Exchangeable Preferred Stock,
all shares of Convertible Exchangeable Preferred Stock converted into Common
Stock; and (iv) from the date of registration of transfer, all shares of
Convertible Exchangeable Preferred Stock held of record by the Corporation or
any subsidiary of the Corporation.
10. Status of Acquired
Shares. Shares of Convertible Exchangeable Preferred Stock redeemed by
the Corporation pursuant to Section 5 or received upon conversion pursuant
to Section 6 or upon exchange pursuant to Section 8 or otherwise
acquired by the Corporation will be restored to the status of authorized but
unissued shares of Class C Preferred Stock, without designation as to class
- 30 -
or series, and may thereafter be
issued, but not as shares of Convertible Exchangeable Preferred Stock and not in
a manner inconsistent with the terms of this Certificate of Designations.
11. Preemptive Rights.
The holders of Convertible Exchangeable Preferred Stock are not entitled to any
preemptive or subscription rights in respect of any securities of the
Corporation.
12. Severability of
Provisions. Whenever possible, each provision hereof shall be interpreted
in a manner as to be effective and valid under applicable law, but if any
provision hereof is held to be prohibited by or invalid under applicable law,
such provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating or otherwise adversely affective the remaining
provisions hereof. If a court of competent jurisdiction should determine that a
provision hereof would be valid or enforceable if a period of time were extended
or shortened or a particular percentage were increased or decreased, then such
court may make such change as shall be necessary to render the provision in
question effective and valid under applicable law.
IN WITNESS WHEREOF, LSB INDUSTRIES,
INC. has caused this Certificate of Designations to be duly executed by its
President and attested to by its Secretary and has caused its corporate seal to
be affixed hereto, this May 19, 1993.
| LSB INDUSTRIES, INC. | ||||
| [Corporate Seal] | By: |
/s/ Jack Golsen
|
||
| Jack E. Golsen | ||||
| President | ||||
| ATTEST: |
|
/s/ David M.
Shear
|
| Secretary |
- 31 -
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF
INCORPORATION
OF
LSB INDUSTRIES, INC.
| TO: | SECRETARY OF STATE | |
| STATE OF DELAWARE |
LSB INDUSTRIES, INC., a Delaware
corporation (the �Company�), for the purpose of amending its Restated
Certificate of Incorporation, as provided by Section 242 of the Delaware
General Corporation Law, hereby certifies:
7. Paragraph (A) of Article
FOURTH of the Restated Certificate of Incorporation of the Company is hereby
amended to read as follows:
�(A) The total number of shares of
stock which the Corporation shall have authority to issue is eighty million two
hundred fifty thousand (80,250,000) of which
a. seventy-five million
(75,000,000) shares shall be Common Stock of the par value of ten cents
($.10) a share;
b. two hundred fifty thousand
(250,000) shares shall be Preferred Stock of the par value of one hundred
dollars ($100) a share; and
c. five million
(5,000,000) shares shall be Class C Preferred Stock, no par value.
For purposes of all other provisions
of this Certificate of Incorporation, the term �Preferred Stock� shall mean the
Preferred Stock, Class C Preferred Stock and all other classes of preferred
stock authorized under this paragraph (A).�
8. No other provisions of the
Restated Certificate of Incorporation of the Company are amended or changed by
this Amendment.
9. At a meeting of the Board of
Directors held on the 5th day of August, 1993, a resolution was duly adopted
setting forth the foregoing proposed amendment to paragraph (A) of Article
FOURTH of the Restated Certificate of Incorporation of the Company, declaring
such amendment to be advisable and setting the next Annual Meeting of
Shareholders of the Company for consideration thereof.
- 1 -
10. Thereafter, pursuant to said
resolution of its Board of Directors, the Annual Meeting of Shareholders of the
Company was duly called and held on September 13, 1993, at which meeting
the necessary number of shares as required by statute were voted in favor of
such amendment.
SUCH AMENDMENT WAS DULY ADOPTED IN
ACCORDANCE WITH THE PROVISIONS OF SECTION 242 OF THE DELAWARE GENERAL
CORPORATION LAW.
IN WITNESS WHEREOF, the undersigned
does cause this Certificate to be signed by its President and attested by its
Secretary this 14th day of September, 1993.
| LSB INDUSTRIES, INC., | ||||||
| a Delaware Corporation | ||||||
| ATTEST: | ||||||
|
/s/ Heidi Brown
|
By |
/s/ Jim D. Jones
|
||||
| Assistant Secretary | Jim D. Jones, Vice President | |||||
| (SEAL) | ||||||
- 2 -
CERTIFICATE OF CHANGE OF LOCATION OF
REGISTERED OFFICE
AND OF REGISTERED AGENT
It is hereby certified that:
1. The name of the corporation
(hereinafter called the �Corporation�) is LSB INDUSTRIES, INC.
2. The registered office of the
Corporation within the State of Delaware is hereby changed to 9 East Loockerman
Street, City of Dover 19901, County of Kent.
3. The registered agent of the
Corporation within the State of Delaware is hereby changed to Capitol Services,
Inc., the business office of which is identical with the registered office of
the corporation as hereby changed.
4. The Corporation has authorized
the changes hereinbefore set forth by resolution of its Board of Directors.
Signed on 8/21/98.
|
/s/ David R. Goss
|
| Signature |
|
David R. Goss,
V.P.
|
| Printed Name and Title |
LSB INDUSTRIES, INC.
CERTIFICATE OF DESIGNATIONS
OF
SERIES 3 PARTICIPATING CLASS
C PREFERRED STOCK
LSB Industries, Inc. (the
�Corporation�), a corporation organized and existing under the General
Corporation Law of the State of Delaware, does hereby certify that, pursuant to
the authority conferred upon the Board of Directors by the Corporation�s
Restated Certificate of Incorporation, as amended, and pursuant to the
provisions of Section 151 of the Delaware Corporation Law, the Board of
Directors of the Corporation has adopted resolutions, a copy of which is
attached hereto, establishing and providing for the issuance of a series of
preferred stock, no par value, designated as Series 3 Participating Class C
Preferred Stock and has established and fixed the voting powers, designations,
preferences and relative participating, optional and other special rights and
qualifications, limitations and restrictions of such Series 3 Participating
Class C Preferred Stock as set forth in the attached resolutions.
| Dated: February 2, 1999. | LSB INDUSTRIES, INC. | |||
| By |
/s/ Heidi L. Brown,
VP
|
|||
| Heidi L. Brown, Vice President | ||||
| and Managing Counsel | ||||
| ATTEST: |
|
/s/ David M.
Shear
|
| David M. Shear, Secretary |
LSB INDUSTRIES, INC.
RESOLUTIONS OF THE BOARD OF
DIRECTORS
FIXING THE NUMBER AND DESIGNATING
THE RIGHTS,
PRIVILEGES, RESTRICTIONS AND
CONDITIONS ATTACHING
TO THE
SERIES 3 PARTICIPATING CLASS
C PREFERRED STOCK
Creation of Series 3 Participating
Class C Preferred Stock
RESOLVED, that pursuant to the
authority granted to and vested in the Board of Directors of LSB Industries,
Inc. (the �Corporation�) (hereinafter called the �Board of Directors� or the
�Board�) in accordance with the provisions of the Corporation�s Restated
Certificate of Incorporation, the Board of Directors hereby creates a new series
of Class C Preferred Stock, no par value, designated as Series 3 Participating
Class C Preferred Stock, no par value, of the Corporation and hereby states the
designation and number of shares, and does hereby establish and fix the relative
rights, preferences, designations and relative participating, optional and other
special rights, and qualifications, limitations and restrictions thereof as
follows:
Series 3 Participating Class C
Preferred Stock
Section 1. Designation and
Amount. The shares of such series shall be designated as �Series 3
Participating Class C Preferred Stock� (�Series 3 Class C Preferred Stock�), the
shares of such series shall be no par value, and the number of shares
constituting the Series 3 Class C Preferred Stock shall be 250,000. Such number
of shares of Series 3 Class C Preferred Stock may be increased or decreased by
resolution of the Board of Directors; provided, that no
decrease shall reduce the number of shares of Series 3 Class C Preferred Stock
to a number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series 3 Class C Preferred Stock.
Section 2. Dividends and
Distributions.
(A) Subject to the prior and
superior rights of the holders of any shares of any series of the Corporation�s
preferred stock and/or Class C Preferred Stock ranking prior and superior to the
shares of Series 3 Class C Preferred Stock with respect to dividends, if any,
the holders of shares of Series 3 Class C Preferred Stock, in preference to the
holders of Common Stock, par value $0.10 per share (the �Common Stock�), of the
Corporation, and of any other junior stock, shall be entitled to receive, when,
as and if declared by the Board of Directors out of funds legally available for
the purpose, quarterly dividends payable in cash on the last business day of
March, June, September and December in each year (each such date being referred
to herein as a
Exhibit �A�
Page 1 of 6
�Quarterly Dividend Payment Date�),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series 3 Class C Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of
(a) $1, or (b) subject to the provision for adjustment hereafter set
forth, 100 times the aggregate per share amount of all cash dividends, and 100
times the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a share of
Series 3 Class C Preferred Stock. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount to which holders of
shares of Series 3 Class C Preferred Stock were entitled immediately prior to
such event under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a
dividend or distribution on the Series 3 Class C Preferred Stock as provided in
paragraph (A) of this Section immediately after it declares a dividend or
distribution on the Common Stock (other than a dividend payable in shares of
Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the
Series 3 Class C Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue
and be cumulative on outstanding shares of Series 3 Class C Preferred Stock from
the Quarterly Dividend Payment Date next preceding the date of issue of such
shares of Series 3 Class C Preferred Stock, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue and be
cumulative from the date of issue of such shares, or unless the date of issue is
a Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series 3 Class C Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series 3 Class C Preferred
Stock in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series 3 Class C Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
Exhibit �A�
Page 2 of 6
Section 3. Voting Rights. The
holders of shares of Series 3 Class C Preferred Stock shall have the following
voting rights:
(A) Each share of Series 3 Class C
Preferred Stock shall entitle the holder thereof to 100 votes on all matters
submitted to a vote of the stockholders of the Corporation.
(B) Except as otherwise provided
herein, in the Restated Certificate of Incorporation of the Corporation, in any
other Certificate of Designation of the Corporation or by applicable law, the
holders of shares of Series 3 Class C Preferred Stock, the holders of shares of
Common Stock and the holders of any other class or series of capital stock of
the Corporation having general voting rights shall vote together as one class on
all matters submitted to a vote of stockholders of the Corporation.
(C) Except as set forth herein or as
otherwise required by applicable law, holders of Series 3 Class C Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent that they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or
other dividends or distributions payable on the Series 3 Class C Preferred Stock
as provided in Section 2 hereof are in arrears, thereafter and until all
accrued and unpaid dividends and distributions, whether or not declared, on
shares of Series 3 Class C Preferred Stock outstanding shall have been paid in
full, or declared and a sum sufficient for the payment therefor be set apart for
payment and be in the process of payment, the Corporation shall not:
(i) declare or pay dividends, or
make any other distributions, on any shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the Series 3
Class C Preferred Stock;
(ii) declare or pay dividends, or
make any other distributions, on any shares of stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding up) with the Series
3 Class C Preferred Stock, except dividends paid ratably on the Series 3 Class C
Preferred Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or
otherwise acquire for consideration shares of any stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding up) to the Series 3
Class C Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either as to dividends or
upon dissolution, liquidation or winding up) to the Series 3 Class C Preferred
Stock; or
Exhibit �A�
Page 3 of 6
(iv) redeem or purchase or otherwise
acquire for consideration any shares of Series 3 Class C Preferred Stock, or any
shares of stock ranking on a parity with the Series 3 Class C Preferred Stock,
except in accordance with the purchase offer made in writing or by publication
(as determined by the Board of Directors) to all holders of such shares upon
such terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will result in fair
and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit
any subsidiary of the Corporation to purchase or otherwise acquire for
consideration any shares of stock of the Corporation unless the Corporation
could, under paragraph (A) of this Section 4, purchase or otherwise
acquire such shares at such time and in such manner.
Section 5. Reacquired Shares.
Any shares of Series 3 Class C Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and cancelled promptly
after the acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Class C Preferred Stock and may be
reissued as part of a new series of Class C Preferred Stock subject to the
conditions and restrictions on issuance set forth herein, in the Restated
Certificate of Incorporation of the Corporation, or in any other Certificate of
Designations creating a series of Class C Preferred Stock or any other preferred
stock or any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or
Winding Up. Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (1) to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series 3 Participating Class C Preferred Stock unless, prior
thereto, the holders of shares of Series 3 Class C Preferred Stock shall have
received $100 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment,
provided that the holders of shares of Series 3 Class C Preferred Stock shall be
entitled to receive an aggregate amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100 times the aggregate amount to be
distributed per share to holders of shares of Common Stock, or (2) to the
holders of shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series 3 Class C Preferred
Stock, except distributions made ratably on the Series 3 Class C Preferred Stock
and all such parity stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the aggregate amount to which holders of shares of Series 3
Class C Preferred Stock were entitled immediately prior to such event under the
proviso in clause (1) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event, and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Exhibit �A�
Page 4 of 6
Section 7. Consolidation, Merger,
etc. In case the Corporation shall enter into any consolidation, merger,
combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then in any such case each share of Series 3 Class C Preferred Stock
shall at the same time be similarly exchanged or changed into an amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount set forth in
the preceding sentence with respect to the exchange or change of shares of
Series 3 Class C Preferred Stock shall be adjusted by multiplying such amount by
a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 8. No Redemption. The
shares of Series 3 Class C Preferred Stock shall not be redeemable.
Section 9. Ranking. The Series 3
Class C Preferred Stock shall rank junior to all other series of the
Corporation�s Class C Preferred Stock and all other series of the Corporation�s
other classes of preferred stock as to the payment of dividends and the
distribution of assets upon any liquidation, dissolution or winding up of the
Corporation unless the terms of any such series shall provide otherwise.
Exhibit �A�
Page 5 of 6
Section 10. Amendment. So long as
any shares of the Series 3 Class C Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote of at least a majority in
number of shares of the Series 3 Class C Preferred Stock then outstanding,
amend, alter, or repeal any of the provisions of this Certificate of
Designations or the Corporation�s Restated Certificate of Incorporation so as to
affect adversely the preferences, special rights or powers of the shares of
Series 3 Class C Preferred Stock.
Exhibit �A�
Page 6 of 6
CERTIFICATE OF ELIMINATION
OF
SERIES 2 PARTICIPATING CLASS C
PREFERRED STOCK
OF
LSB INDUSTRIES, INC.
LSB INDUSTRIES, INC., a corporation
existing under the General Corporation Law of the State of Delaware (hereinafter
called the �Corporation�), hereby certifies the following:
1) That the Certificate of
Designations of Series 2 Participating Class Preferred Stock of the Corporation
(the �Series 2 Preferred�) was filed with the Delaware Secretary of State on
February 21, 1989 (the �Series 2 Certificate of Designations�).
2) That no shares of the Series 2
Preferred have been issued by the Corporation, and no shares of Series 2
Preferred are outstanding.
3) That effective April 12,
1999, the Board of Directors of the Corporation duly adopted the following
resolutions:
RESOLVED, no authorized shares of
Series 2 Participating Class C Preferred Stock are outstanding, and no shares of
Series 2 Participating Class C Preferred Stock will be issued subject to the
Certificate of Designations previously filed with respect to the Series 2
Participating Class C Preferred Stock; and
FURTHER RESOLVED, that the officers
of the Corporation are hereby authorized and directed, for and on behalf of the
Corporation, to execute and deliver the Certificate of Elimination to the
Secretary of State of Delaware regarding the Series 2 Participating Class C
Preferred Stock.
4) That pursuant to the provisions
of Section 151(g) of the Delaware General Corporation Law, upon the
effective date of filing of this Certificate, this Certificate will have the
effect of eliminating from the Corporations Restated Certificate of
Incorporation all matters set forth in the Series 2 Certificate of Designations
with respect to the Series 2 Preferred.
IN WITNESS WHEREOF, this Certificate
of Elimination has been executed this 12th day of April, 1999, by the President
of the Corporation.
| ATTEST: | LSB INDUSTRIES, INC. | |||||
|
/s/ David M.
Shear
|
By: |
/s/ Jack E.
Golsen
|
||||
| David M. Shear, Secretary | Jack E. Golsen, President | |||||
[CORPORATE SEAL]
CERTIFICATE OF DESIGNATIONS
OF
LSB INDUSTRIES, INC.
LSB Industries, Inc. (the
�Corporation� or �LSB�), a corporation organized and existing under the Delaware
General Corporation Law, hereby certifies pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware, that the following resolutions
relating to the issuance of a new series of Class C Preferred Stock, no par
value, of the Corporation consisting of 1,000,000 shares were duly adopted by a
Special Committee of the members of the Board of Directors of the Corporation at
a meeting held on October 9, 2001, pursuant to resolutions of the whole
Board of Directors of the Corporation.
RESOLVED, that pursuant to authority
expressly granted to and vested in the Board of Directors of LSB Industries,
Inc. (�LSB� or the �Corporation�) by the provisions of the Restated Certificate
of Incorporation of LSB, the Board of Directors of LSB does hereby create, and
LSB may issue, pursuant to the terms of the Agreement, dated October 18,
2001, between LSB, Prime Financial Corporation, an Oklahoma corporation
(�Prime�) and a wholly owned subsidiary of LSB, and Stillwater National Bank and
Trust Company (�Stillwater Bank�) (the �Agreement�), from LSB�s Class C
Preferred Stock, no par value, a new series consisting of 1,000,000 shares
designated as �Series D 6% Cumulative, Convertible Class C Preferred Stock,� no
par value, and hereby fixes the designations, preferences, rights and privileges
of such Series D 6% Cumulative, Convertible Class C Preferred Stock and the
qualifications, limitations or restrictions thereof, as follows:
1. Designation.
The shares of this series of Class C Preferred Stock shall be designated as
�Series D 6% Cumulative, Convertible Class C Preferred Stock� (hereinafter
called �Series D Preferred Stock�), having no par value, with said Series D
Preferred Stock to consist of one million (1,000,000) shares.
2. Dividends;
Cumulative. The holders of shares of the Series D Preferred Stock
shall be entitled to receive cash dividends, but only when, as and if declared
by the Board of Directors of LSB, in a manner as permitted by law, at the rate
of
- 1 -
six percent (6%) per annum of
the Liquidation Preference (as defined below) of such Series D Preferred Stock
and no more, payable annually on such date in each year as shall be fixed by the
Board of Directors of LSB (�Cash Dividends�).
If Cash Dividends on the Series D
Preferred Stock for any year shall not have been paid or set apart in full for
the Series D Preferred Stock, the aggregate deficiency shall be cumulative and
shall be paid or set apart for payment before any dividends shall be paid upon
or set apart for payment for any class of common stock of LSB (other than a
dividend payable in common stock of LSB).
Any accumulation of dividends on the
Series D Preferred Stock shall not bear interest. The holders of Series D
Preferred Stock shall not be entitled to receive any dividends thereon other
than the dividends provided for in this paragraph 2.
Cash Dividends on Series D Preferred
Stock shall be declared if, when and as the Board of Directors shall in their
sole discretion deem advisable, and only from the net profits or surplus of the
Corporation, in a manner as permitted by law as such shall be fixed and
determined by the said Board of Directors. The determination of the Board of
Directors at any time of the amount of net profits or surplus available for a
Cash Dividend shall be binding and conclusive on the holders of all the Series D
Preferred Stock of the Corporation at the time outstanding.
Except as otherwise provided in the
last paragraph of this Section 2, when dividends are not paid in full upon
the shares of this Series D Preferred Stock and any other preferred stock of LSB
ranking on a parity as to dividends with this Series D Preferred Stock, all
dividends declared upon shares of this Series D Preferred Stock and any other
preferred stock of LSB ranking on a parity as to dividends with Series D
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share on this Series D Preferred Stock and such other preferred
stock shall in all cases bear to each other the same ratio that accrued
dividends per share on the shares of this Series D Preferred Stock and such
other preferred stock bear to each other; provided, however, that dividends on
preferred stock that provides for non-cumulative dividends shall be entitled to
participate, and shall rank on a parity, to the extent of dividends due in the
then current period for which such dividends are paid. Holders of share of
Series D Preferred Stock shall not be entitled to any dividends, whether payable
in cash, property or stock, in excess of the full cumulative dividends,
- 2 -
as herein provided, on this Series D
Preferred Stock. No interest or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on this Series D
Preferred Stock which may be in arrears.
Notwithstanding anything herein to
the contrary, if at any time any dividend on LSB�s then outstanding $3.25
Convertible Exchangeable Class C Preferred Stock, Series 2 ($3.25 Preferred�)
shall be in default, in whole or in part, then no dividend shall be paid or
declared and set apart for payment on the Series D Preferred Stock unless and
until all cumulative accrued and unpaid dividends with respect to such $3.25
Preferred shall have been paid or declared and set apart for payment.
3. No Preemptive Rights.
No holder of the Series D Preferred Stock shall have any preemptive rights. No
holder of the Series D Preferred Stock shall be entitled to purchase or
subscribe for any part of the unissued stock of LSB or of any stock of LSB to be
issued by reason of any increase of the authorized capital stock of LSB, or to
purchase or subscribe for any bonds, certificates of indebtedness, debentures or
other securities convertible into or carrying options or warrants to purchase
stock or other securities of LSB or to purchase or subscribe for any stock of
LSB purchased by LSB or by its nominee or nominees, or to have any other
preemptive rights now or hereafter defined by the laws of the State of Delaware.
4. Preference on Liquidation,
etc. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of LSB, or any reduction in its capital resulting in
any distribution of assets to its stockholders, the holders of the Series D
Preferred Stock shall be entitled to receive in cash out of the assets of LSB,
whether from capital or from earnings, available for distribution to its
stockholders, before any amount shall be paid to the holders of the common stock
of LSB, the sum of One and No/100 Dollar ($1.00), per share (�Liquidation
Preference�), plus an amount equal to all accumulated and unpaid Cash Dividends
thereon as of the date fixed for payment of such distributive amount. The
purchase or redemption by LSB of stock of any class, in any manner permitted by
law, shall not for the purpose of this paragraph be regarded as a liquidation,
dissolution or winding up of LSB or as a reduction of its capital. Neither the
consolidation nor merger of LSB with or into any other corporation or
corporations, nor the sale or transfer by LSB of all or any part of its assets,
shall be deemed to be a liquidation, dissolution or
- 3 -
winding up of LSB for the purpose of
this paragraph. A dividend or distribution to stockholders from net profits or
surplus earned after the date of any reduction of capital shall not be deemed to
be a distribution resulting from such reduction in capital. No holders of Series
D Preferred Stock shall be entitled to receive or participate in any amounts
with respect thereto upon any liquidation, dissolution or winding up of LSB
other than the amounts provided for in this paragraph. If, in the event of any
such liquidation, dissolution or winding up of LSB, there shall be shares of
more than one class or series of preferred stock outstanding, and such other
class or classes or series of preferred stock by their terms have a parity with
the Series D Preferred Stock, and in such event there shall be assets
distributable upon all shares of the Series D Preferred Stock and of such other
classes or series of preferred stock in an amount less than the amount of which
the holders thereof are entitled, then any amount available to be paid upon all
such shares of preferred stock (including the Series D Preferred Stock) shall be
divided among said classes or series of preferred stock in proportion to the
aggregate amounts which would have been paid to the holders of the shares of
each class or series had they received payment in the full amount to which they
would be entitled in such event.
5. Voting Rights.
Subject to the provisions of this paragraph 5, at every meeting of stockholders
of LSB each holder of the Series D Preferred Stock shall be entitled to .875
votes for each share of Series D Preferred Stock held of record in his, her or
its name on all matters submitted to a vote of the stockholders of LSB. The
Series D Preferred Stock, the Common Stock (as defined below) of LSB, LSB�s
Series B 12% Cumulative, Convertible Preferred Stock, par value $100.00 per
share, and LSB�s Series of Convertible Non-Cumulative Preferred Stock, par value
$100.00 per share, shall vote together as one class.
6. Conversion
Privileges. Subject to the terms of this paragraph 6, the holder of
record of any share or shares of Series D Preferred Stock shall have the right
at any time, at his, her or its option and election, to convert four
(4) shares of Series D Preferred Stock into one (1) share of LSB
common stock, par value $0.10 per share (�Common Stock�), (equivalent to a
conversion price of $4.00 per share of LSB Common Stock) on the following terms
and conditions:
(a) LSB shall at the time of such
conversion pay to the holder of record of any share or shares of Series D
Preferred Stock
- 4 -
any accrued but unpaid dividends on
said Series D Preferred Stock so surrendered for conversion, except: (i) as
otherwise limited by law or by any agreement or instrument to which LSB is a
party or may be bound by (including, but not limited to, this Certificate of
Designations), and (ii) that the amount of the dividend paid for the then
current annual dividend period in which such conversion occurs shall be
pro-rated for that portion of such year that has elapsed prior to the time the
holder of such share or shares of Series D Preferred Stock exercises his, her or
its rights of conversion. If LSB is limited by law from paying such accrued but
unpaid dividends, in whole or in part, on the share or shares of Series D
Preferred Stock surrendered for conversion at the time such are surrendered for
conversion, then LSB shall only be required to pay that amount of such accrued
but unpaid dividends as allowed by such law at the time of such conversion and
no more. If LSB is limited under any agreement (including, but not limited to,
this Certificate of Designations) from paying such accrued but unpaid dividends,
in whole or in part, on the share or shares of Series D Preferred Stock
surrendered for conversion at the time such are surrendered for conversion, then
LSB shall pay to the holder of record thereof that portion of such accrued but
unpaid dividends that LSB is unable to pay on such share or shares of Series D
Preferred Stock at the time such are surrendered for conversion due to said
agreement (�Unpaid Dividends�) when LSB is no longer prohibited from paying such
Unpaid Dividends under an agreement and prior to any dividends being paid upon
or set apart for payment for any class of Common Stock of LSB (other than a
dividend payable in Common Stock of LSB); and in connection therewith, LSB and
such holder shall, at the time of such conversion, enter into a separate
contract, the terms of which are to be satisfactory to LSB and such holder,
evidencing LSB�s obligation to pay to the holder thereof the Unpaid Dividends
(without interest) after such conversion when LSB is no longer prohibited from
paying such under an agreement and prior to any dividends being paid upon or set
apart for payment for any class of Common Stock of LSB (other than a dividend
payable in Common Stock of LSB).
(b) In the event that LSB shall
(i) pay to the holders of its Common Stock a stock dividend payable in its
Common Stock, the number of shares of Common Stock issuable upon conversion of
the Series D Preferred Stock shall be proportionately adjusted, effective as of
the date of payment of such stock dividend; or (ii) have a stock split,
reclassification, recapitalization, combination of outstanding shares or similar
corporate rearrangement (other than a
- 5 -
stock dividend which is provided for
in (i) above), without any consideration therefor being received by LSB,
increasing or decreasing the number of shares of LSB�s Common Stock, the number
of shares of Common Stock issuable upon conversion of the Series D Preferred
Stock shall be proportionately increased or decreased, effective as of the date
of the payment of or happening of such event; or (iii) be consolidated with
or merge into another corporation, in which LSB is the non-surviving
corporation, or sell all or substantially all of LSB�s assets as an entirety
under one plan or arrangement to another corporation and such consolidation,
merger or sale shall be effected in such a way that holders of LSB�s Common
Stock shall be entitled to receive stock, securities or assets with respect to
or in exchange for such Common Stock, then after the effective date of such
consolidation, merger or sale each share of Series D Preferred Stock shall be
convertible into (in lieu of LSB Common Stock) the number of shares of stock or
other securities or assets to which such holder of the Series D Preferred Stock
would have been entitled to upon such consummation as if the holder of the
Series D Preferred Stock had so exercised his, her or its right of conversion
under such Series D Preferred Stock immediately prior to such consolidation,
merger or sale, and LSB shall make lawful provision therefor as part of such
consolidation, merger or sale.
(c) LSB shall not be required to
issue any fraction of a share of Common Stock upon any conversion, but
(i) may deliver scrip therefor, which shall not entitle the bearer thereof
to vote, or to receive dividends or to any other or further right or interest,
except to convert the same in amounts aggregating one or more whole shares of
LSB Common Stock at any time within a period, fixed by the Board of Directors of
LSB, which shall be stated in the scrip, or (ii) may pay in cash therefor
an amount equal to the same fraction of the fair market value of a full share of
LSB Common Stock. For such purpose of determining the fair market value of LSB
Common Stock, the fair market value of a share of LSB Common Stock, shall be the
last recorded sale price of such a share of LSB Common Stock on a national
securities exchange on the day immediately preceding the date upon which such
Series D Preferred Stock is surrendered for conversion or, if there be no
recorded sale price on such day, the last quoted bid price per share of LSB
Common Stock on such exchange at the close of trading on such date. If LSB
Common Stock shall not be at the time dealt in on a national security exchange,
such fair market value of LSB Common Stock shall be the prevailing market value
of such Common Stock on any other securities exchange or in the open market, as
determined by LSB, which determination shall be conclusive.
- 6 -
(d) Any holder of a share or shares
of Series D Preferred Stock desiring to convert such Series D Preferred Stock
into Common Stock of LSB shall surrender the certificate or certificate
representing the share or shares of Series D Preferred Stock so to be converted,
duly endorsed to LSB in blank, with the signature of said endorsement guaranteed
by a national bank or investment banking firm, at the principal office of LSB
(or such other place as may be designated by LSB), and shall give written notice
to LSB at said office that he elects to convert the same, and setting forth the
name or names (with the address or addresses) in which the shares of Common
Stock are to be issued.
(e) The issuance of certificates for
shares of Common Stock upon conversion of the Series D Preferred Stock shall be
made without charge for tax in respect of such issuance; however, if any
certificate is to be issued in any name other than that of the holder of record
of the Series D Preferred Stock so converted, the person or persons requesting
the issuance thereof shall pay to LSB the amount of any tax which may be payable
in respect of any transfer involved in such issuance, or shall establish to the
satisfaction of LSB that such tax has been paid or is not due and payable.
7. Redemption. There
shall be no mandatory or optional redemption rights with respect to the Series D
Preferred Stock.
8. Status of Reacquired
Shares. Shares of the Series D Preferred Stock which have been issued and
reacquired in any manner (until LSB elects to retire them) shall (upon
compliance with any applicable provisions of the laws of the State of Delaware)
have the status of authorized and unissued shares of the class of Class C
Preferred Stock of LSB undesignated as to series and may be redesignated and
reissued.
9. Priority.
(a) For purposes of this resolution, any stock of any class or series of
LSB shall be deemed to rank:
(i) Prior or senior to the shares of
this Series D Preferred Stock either as to dividends or upon liquidation, if the
holders of such class or classes shall be entitled to the receipt of dividends
or of amounts distributable upon dissolution, liquidation or winding up of LSB,
whether
- 7 -
voluntary or involuntary, as the
case may be, in preference or priority to the holders of shares of this Series D
Preferred Stock;
(ii) On a parity with or equal to
shares of this Series D Preferred Stock, either as to dividends or upon
liquidation, whether or not the dividend rates, dividend payment dates or
redemption or liquidation prices per share or sinking fund provisions, if any,
are different from those of this Series D Preferred Stock, if the holders of
such stock are entitled to the receipt of dividends or of amounts distributable
upon dissolution, liquidation or winding up of LSB, whether voluntary or
involuntary, in proportion to their respective dividend rates or liquidation
prices, without preference or priority, one over the other, as between the
holders of such stock and the holders of shares of this Series D Preferred
Stock; and
(iii) Junior to shares of this
Series D Preferred Stock, either as to dividends or upon liquidation, if such
class or series shall be Common Stock or if the holders of shares of this Series
D Preferred Stock shall be entitled to receipt of dividends or of amounts
distributable upon dissolution, liquidation or involuntary, as the case may be,
in preference or priority to the holders of shares of such class or series.
10. Miscellaneous. The
shares of the Series D Preferred Stock shall not be subject to the operation of
or to the benefit of any retirement or sinking fund. The shares of the Series D
Preferred Stock shall not have any other relative, participating, optional or
other rights and powers not set forth above.
IN WITNESS WHEREOF, this Corporation
has caused this Certificate of Designations to be signed and attested by its
duly authorized officers this 18th day of October, 2001.
| LSB INDUSTRIES, INC. | ||
| By: |
/s/ Jack E.
Golsen
|
|
| Jack E. Golsen, President | ||
|
/s/ David M.
Shear
|
| David M. Shear, Secretary |
- 8 -
CERTIFICATE
OF AMENDMENT
TO THE
CERTIFICATE
OF DESIGNATIONS OF
THE
$3.25 CONVERTIBLE
EXCHANGEABLE CLASS C PREFERRED
STOCK, SERIES 2
OF
LSB INDUSTRIES,
INC.
| To: | Secretary of State | |
| State of Delaware |
LSB Industries, Inc., a Delaware
corporation (the �Company�), for the purpose of amending its Restated
Certificate of Incorporation by amending the Certificate of Designations of the
$3.25 Convertible Exchangeable Class C Stock, Series 2 (the �Certificate of
Designations�), as provided by Section 242 of the Delaware General
Corporation Law, hereby certifies:
1. The Certificate of Designations
was originally filed with the Secretary of State on May 21, 1993.
2. The second paragraph of
Section 3(a) of the Certificate of Designations is hereby amended and
restated to read in its entirety as follows:
No dividends or other distributions,
other than dividends payable solely in shares of Common Stock or other Junior
Stock or distributions of Rights, as defined below, shall be declared, paid or
set apart for payment on, and, except as otherwise provided below in this
Section 3(a), no purchase, redemption or other acquisition shall be made by
the Corporation of, any shares of Common Stock or other Junior Stock (or any
payment made in respect of or made available to a sinking fund for the
redemption of any shares of Junior Stock) unless and until all cumulative and
unpaid dividends on the Convertible Exchangeable Preferred Stock shall have been
paid or declared and set apart for payment through the last dividend Due Date.
Notwithstanding the foregoing, during the period that cumulative and unpaid
dividends exist on the Convertible Exchangeable Preferred Stock, the Corporation
may purchase, redeem or otherwise acquire in any manner or for any reason any
shares of Common Stock or other Junior Stock (including, but not limited to,
pursuant to existing or future stock option plans or otherwise) for a period of
five years from the completion of an exchange or tender offer by the Corporation
occurring after January 1, 2007, for at least 180,000 outstanding shares of
the Convertible Exchangeable Preferred Stock.
3. The first sentence of the first
paragraph of Section 7(b) of the Certificate of Designations is hereby
amended and restated to read in its entirety as follows:
If, and only so long as, at least
140,000 shares of Convertible Exchangeable Preferred Stock are issued and
outstanding (excluding shares held in treasury), whenever dividends on the
Convertible Exchangeable Preferred Stock shall be in arrears and unpaid, whether
or not declared, in an amount equal to at least six quarterly dividends (whether
or not consecutive) (i) the number of members of the Board shall be
increased by two, effective as of the time of election of such directors as
hereinafter provided, and (ii) the
- 1 -
holders of the Convertible
Exchangeable Preferred Stock (voting separately as a class with all other
affected classes or series of the Parity Stock upon which like voting rights
have been conferred and are exercisable) will have the exclusive right to vote
for and elect such two additional directors of the Corporation at any meeting of
stockholders of the Corporation at which directors are to be elected held during
the period that any dividends on the Convertible Exchangeable Preferred Stock
remain in arrears.
4. No other provisions of the
Certificate of Designations or the Restated Certificate of Incorporation of the
Company are amended or changed by this Amendment.
5. At a meeting of the Board of
Directors held on the 9th day of January 2007, a resolution was duly adopted
setting forth the foregoing proposed amendment declaring such amendment to be
advisable and setting a Special Meeting of Stockholders of the Company for
consideration thereof.
6. Thereafter, pursuant to said
resolution of its Board of Directors, the Special Meeting of Stockholders of the
Company was duly called and held on March 6, 2007, at which meeting the
necessary number of shares as required by statute and the Certificate of
Designations were voted in favor of such amendment.
SUCH
AMENDMENT WAS DULY
ADOPTED IN ACCORDANCE
WITH THE PROVISIONS
OF SECTION 242 OF
THE DELAWARE GENERAL
CORPORATION LAW.
IN
WITNESS WHEREOF, the undersigned does cause this
Certificate to be signed by its Chief Executive Officer and attested by its
Secretary this 6th day of March 2007.
| LSB INDUSTRIES, INC., a Delaware corporation | ||||
| Attest: | ||||
|
/s/ David M.
Shear
|
/s/ Jack E.
Golsen
|
|||
| David M. Shear, Secretary | Jack E. Golsen, Chief Executive Officer | |||
- 2 -
State of Delaware
Secretary of State
Division of
Corporations
Delivered 06:32 PM
10/12/2007
Filed 06:32 PM
10/12/2007
SRV 071113807 � 0833781
FILE
CERTIFICATE OF ELIMINATION
OF
$3.25 CONVERTIBLE EXCHANGEABLE CLASS
C
PREFERRED STOCK, SERIES 2
OF
LSB INDUSTRIES, INC.
LSB INDUSTRIES, INC., a corporation
organized and existing under the General Corporation Law of the State of
Delaware (hereinafter called the �Corporation�), hereby certifies the following:
1. That the Certificate of
Designations of the $3.25 Convertible Exchangeable Class C Preferred Stock,
Series 2, no par value, of the Corporation (the �$3.25 Preferred�) was filed
with the Delaware Secretary of State on May 21, 1993 (the �Certificate of
Designations�).
2. That no shares of $3.25 Preferred
are outstanding.
3. That all shares of the $3.25
Preferred have been converted, exchanged, redeemed or otherwise acquired by the
Corporation, and such shares have the status of authorized and unissued shares
of the Corporation�s Class C Preferred Stock, without designation as to class or
series, until such shares are once more designated as part of a particular
series by the Board of Directors.
4. That effective October 10,
2007, the Board of Directors of the Corporation unanimously adopted the
following resolutions:
RESOLVED, no authorized shares of
the Corporation�s $3.25 Preferred are outstanding;
FURTHER RESOLVED, no authorized
shares of the $3.25 Preferred will be issued subject to the Certificate of
Designations previously filed with respect to the $3.25 Preferred; and
FURTHER RESOLVED, that the officers
of the Corporation are hereby authorized and directed, for and on behalf of the
Corporation, to execute and deliver the Certificate of Elimination to the
Secretary of State of the State of Delaware regarding the $3.25 Preferred.
5. That pursuant to the provisions
of � 151(g) of the Delaware General Corporation Law, upon the effective date of
the filing of this Certificate, this Certificate will have the effect of
eliminating from the Corporation�s Restated Certificate of Incorporation only
those matters set forth in the Restated Certificate of Incorporation, as
amended, with respect to the $3.25 Preferred.
- 1 -
IN WITNESS WHEREOF, this Certificate
of Elimination has been executed this 12th day of October 2007, by the
President of the Company.
| ATTEST: | LSB INDUSTRIES, INC. | |||||
|
/s/ Heidi Brown
|
By: |
/s/ Jack E.
Golsen
|
||||
| Secretary | Jack E. Golsen, President | |||||
| (SEAL) | ||||||
- 2 -
FORM
OF
CERTIFICATE
OF DESIGNATIONS
of
SERIES 4
JUNIOR PARTICIPATING CLASS C PREFERRED STOCK
of
LSB
INDUSTRIES, INC.
(Pursuant
to Section 151 of the
Delaware
General Corporation Law)
_____________________________________________
LSB
INDUSTRIES, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware (hereinafter called the “Corporation”),
hereby certifies that the following resolution was duly adopted by the Board of
Directors of the Corporation as required by Section 151 of the General
Corporation Law at a meeting duly called and held on November 13,
2008:
Creation
of Series 4 Junior Participating Class C Preferred Stock
RESOLVED,
that pursuant to the authority granted to and vested in the Board of Directors
of this Corporation (hereinafter called the “Board of Directors” or the “Board”)
in accordance with the provisions of the Corporation’s Restated Certificate of
Incorporation, the Board of Directors hereby creates a new series of Class C
Preferred Stock, no par value, designated as Series 4 Junior Participating Class
C Preferred Stock, no par value, of the Corporation and hereby states the
designation and number of shares, and does hereby establish and fix the relative
rights, preferences, designations and relative participating, optional and other
special rights, and qualifications, limitations and restrictions thereof as
follows:
Series 4
Junior Participating Class C Preferred Stock
Section
1. Designation and Amount. The shares of such series shall be designated as
“Series 4 Junior Participating Class C Preferred Stock” (“Series 4 Class C
Preferred Stock”), the shares of such series shall be no par value, and the
number of shares constituting the Series 4 Class C Preferred Stock shall be
350,000. Such number of shares of Series 4 Class C Preferred Stock may not be
issued in fraction of a share (other than fractions which are integral multiples
of one one-hundredth of a preferred share). The number of shares constituting
Series 4 Class C Preferred Stock may be increased or decreased by resolution of
the Board of Directors; provided, that no decrease shall reduce the number of
shares of Series 4 Class C Preferred Stock to a number less than the number of
shares then outstanding plus the number of shares reserved for issuance upon the
exercise of outstanding options, rights or warrants or upon the conversion
of
Page 1 of
6
any
outstanding securities issued by the Corporation convertible into Series 4 Class
C Preferred Stock.
Section
2. Dividends and Distributions.
(A)
Subject to the prior and superior rights of the holders of any shares of any
series of the Corporation’s preferred stock and/or Class C Preferred Stock
ranking prior and superior to the shares of Series 4 Class C Preferred Stock
with respect to dividends, if any, the holders of shares of Series 4 Class C
Preferred Stock, in preference to the holders of Common Stock, par value $0.10
per share (the “Common Stock”), of the Corporation, and of any other junior
stock, shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the last business day of March, June, September and December
in each year (each such date being referred to herein as a “Quarterly Dividend
Payment Date”), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series 4 Class C
Preferred Stock, in an amount per share (rounded to the nearest cent) equal to
the greater of (a) $1.00, or (b) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions, other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series 4 Class C Preferred Stock. In the event the
Corporation shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount to which holders of shares of Series 4 Class C Preferred Stock were
entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
(B) The
Corporation shall declare a dividend or distribution on the Series 4 Class C
Preferred Stock as provided in paragraph (A) of this Section immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1 per share on the Series 4
Class C Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C)
Dividends shall begin to accrue and be cumulative on outstanding shares of
Series 4 Class C Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series 4 Class C Preferred Stock,
unless the date of issue of such shares is prior to the record date for the
first Quarterly Dividend Payment Date, in which case dividends
Page 2 of
6
on such
shares shall begin to accrue and be cumulative from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of Series
4 Class C Preferred Stock entitled to receive a quarterly dividend and before
such Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on
the shares of Series 4 Class C Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series 4 Class C Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record date shall
be not more than 60 days prior to the date fixed for the payment
thereof.
Section
3. Voting Rights. The holders of shares of Series 4 Class C Preferred Stock
shall have the following voting rights:
(A) Each
share of Series 4 Class C Preferred Stock shall entitle the holder thereof to
100 votes on all matters submitted to a vote of the stockholders of the
Corporation.
(B)
Except as otherwise provided herein, in the Restated Certificate of
Incorporation of the Corporation, in any other Certificate of Designation of the
Corporation or by applicable law, the holders of shares of Series 4 Class C
Preferred Stock, the holders of shares of Common Stock and the holders of any
other class or series of capital stock of the Corporation having general voting
rights shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(C)
Except as set forth in this Certificate of Designations or as otherwise required
by applicable law, holders of Series 4 Class C Preferred Stock shall have no
special voting rights and their consent shall not be required (except to the
extent that they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section
4. Certain Restrictions.
(A)
Whenever quarterly dividends or other dividends or distributions payable on the
Series 4 Class C Preferred Stock as provided in Section 2 hereof are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series 4 Class C Preferred Stock outstanding shall
have been paid in full, or declared and a sum sufficient for the payment
therefor be set apart for payment and be in the process of payment, the
Corporation shall not:
i.
declare or pay dividends, or make any other distributions, on any shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series 4 Class C Preferred Stock;
ii.
declare or pay dividends, or make any other distributions, on any shares of
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series 4 Class C Preferred Stock, except
dividends paid ratably on the Series 4 Class C Preferred Stock and all such
parity stock on which dividends are
Page 3 of
6
payable
or in arrears in proportion to the total amounts to which the holders of all
such shares are then entitled;
iii.
redeem or purchase or otherwise acquire for consideration shares of any stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series 4 Class C Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or winding up)
to the Series 4 Class C Preferred Stock; or
iv.
redeem or purchase or otherwise acquire for consideration any shares of Series 4
Class C Preferred Stock, or any shares of stock ranking on a parity with the
Series 4 Class C Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series or
classes.
(B) The
Corporation shall not permit any subsidiary of the Corporation to purchase or
otherwise acquire for consideration any shares of stock of the Corporation
unless the Corporation could, under paragraph (A) of this Section 4, purchase or
otherwise acquire such shares at such time and in such manner.
Section
5. Reacquired Shares. Any shares of Series 4 Class C Preferred Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Class C
Preferred Stock and may be reissued as part of a new series of Class C Preferred
Stock subject to the conditions and restrictions on issuance set forth herein,
in the Restated Certificate of Incorporation of the Corporation, or in any other
Certificate of Designations creating a series of Class C Preferred Stock or any
other preferred stock or any similar stock or as otherwise required by
law.
Section
6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or
winding up of the Corporation, no distribution shall be made (1) to the holders
of shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series 4 Class C Preferred Stock unless, prior
thereto, the holders of shares of Series 4 Class C Preferred Stock shall have
received $100 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment,
provided that the holders of shares of Series 4 Class C Preferred Stock shall be
entitled to receive an aggregate amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100 times the aggregate amount to be
distributed per share to holders of shares of Common Stock, or (2) to the
holders of shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series 4 Class C Preferred
Stock, except distributions made ratably on the Series 4 Class C Preferred Stock
and all such parity stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the Corporation shall at any time declare
or
Page 4 of
6
pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the aggregate amount to which holders of shares of Series 4
Class C Preferred Stock were entitled immediately prior to such event under the
proviso in clause (1) of the preceding sentence shall be adjusted by multiplying
such amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
Section
7. Consolidation, Merger, etc. In case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case each share of Series 4 Class C
Preferred Stock shall at the same time be similarly exchanged or changed into an
amount per share, subject to the provision for adjustment hereinafter set forth,
equal to 100 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount set forth in
the preceding sentence with respect to the exchange or change of shares of
Series 4 Class C Preferred Stock shall be adjusted by multiplying such amount by
a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section
8. No Redemption. The shares of Series 4 Class C Preferred Stock shall not be
redeemable.
Section
9. Ranking. The Series 4 Class C Preferred Stock shall rank junior to all other
series of the Corporation’s Class C Preferred Stock and all other series of the
Corporation’s other classes of preferred stock as to the payment of dividends
and the distribution of assets upon any liquidation, dissolution or winding up
of the Corporation unless the terms of any such series shall provide
otherwise.
Section
10. Amendment. So long as any shares of the Series 4 Class C Preferred Stock are
outstanding, the Corporation shall not, without the affirmative vote of at least
a majority in number of shares of the Series 4 Class C Preferred Stock then
outstanding, amend, alter, or repeal any of the provisions of this Certificate
of Designations or the Corporation’s Restated Certificate of Incorporation so as
to affect adversely the preferences, special rights or powers of the shares of
Series 4 Class C Preferred Stock.
Page 5 of
6
IN
WITNESS WHEREOF, this Certificate of Designation is executed on behalf of the
Corporation by its President and attested by its Secretary this ____ day of
_____________, 2009.
LSB
INDUSTRIES, INC.
ATTEST:
Secretary
President
(SEAL)
Page 6 of
6
CERTIFICATE
OF ELIMINATION
OF
SERIES 3
PARTICIPATING CLASS C
PREFERRED
STOCK
OF
LSB
INDUSTRIES, INC.
____________________________________________
LSB
INDUSTRIES, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware (hereinafter called the “Corporation”),
hereby certifies the following:
1. That
the Certificate of Designations of the Series 3 Participating Class C Preferred
Stock, no par value, of the Corporation (the “Series 3 Preferred”) was filed
with the Delaware Secretary of State on February 5, 1999 (the “Certificate of
Designations”).
2. That
no shares of the Series 3 Preferred are outstanding and no shares of Series 3
Preferred subject to the Certificate of Designations previously filed with
respect to the Series 3 Preferred will be issued.
3. All
shares of Series 3 Preferred reserved for issuance shall have the status of
authorized and unissued shares of the Corporation’s Class C Preferred
Stock.
4. That
effective November 13, 2008, the Board of Directors of the Corporation
unanimously adopted the following resolutions:
RESOLVED
FURTHER, that upon the Existing Rights Plan Expiration Date it does not appear
that any shares of the series designated as Series 3 Participating Class C
Preferred Stock will be issued and outstanding and, if, upon the Existing Rights
Plan Expiration Date, no shares of Series 3 Participating Class C Preferred
Stock are outstanding, the officers of the Corporation are hereby authorized and
directed, for and on behalf of the Corporation, to execute, deliver and file
with the Delaware Secretary of State a Certificate of Elimination to eliminate
the Series designated as Series 3 Participating Class C Preferred
Stock.
5. That
pursuant to the provisions of § 151(g) of the Delaware General Corporation Law,
upon the effective date of the filing of this Certificate, this Certificate will
have the effect of eliminating from the Corporation’s Restated Certificate of
Incorporation only those matters set forth in the Certificate of Designations,
with respect to the Series 3 Preferred.
IN
WITNESS WHEREOF, this Certificate of Elimination has been executed this 7th day
of January 2009, by the Chief Financial Officer of the Company.
LSB
INDUSTRIES, INC.
By: /s/
Tony M. Shelby
Tony M.
Shelby,
Chief
Financial Officer
FORM
OF
CERTIFICATE
OF DESIGNATIONS
of
SERIES 4
JUNIOR PARTICIPATING CLASS C PREFERRED STOCK
of
LSB
INDUSTRIES, INC.
(Pursuant
to Section 151 of the
Delaware
General Corporation Law)
_____________________________________________
LSB
INDUSTRIES, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware (hereinafter called the “Corporation”),
hereby certifies that the following resolution was duly adopted by the Board of
Directors of the Corporation as required by Section 151 of the General
Corporation Law at a meeting duly called and held on November 13,
2008:
Creation
of Series 4 Junior Participating Class C Preferred Stock
RESOLVED,
that pursuant to the authority granted to and vested in the Board of Directors
of this Corporation (hereinafter called the “Board of Directors” or the “Board”)
in accordance with the provisions of the Corporation’s Restated Certificate of
Incorporation, the Board of Directors hereby creates a new series of Class C
Preferred Stock, no par value, designated as Series 4 Junior Participating Class
C Preferred Stock, no par value, of the Corporation and hereby states the
designation and number of shares, and does hereby establish and fix the relative
rights, preferences, designations and relative participating, optional and other
special rights, and qualifications, limitations and restrictions thereof as
follows:
Series 4
Junior Participating Class C Preferred Stock
Section
1. Designation and Amount. The shares of such series shall be designated as
“Series 4 Junior Participating Class C Preferred Stock” (“Series 4 Class C
Preferred Stock”), the shares of such series shall be no par value, and the
number of shares constituting the Series 4 Class C Preferred Stock shall be
350,000. Such number of shares of Series 4 Class C Preferred Stock may not be
issued in fraction of a share (other than fractions which are integral multiples
of one one-hundredth of a preferred share). The number of shares constituting
Series 4 Class C Preferred Stock may be increased or decreased by resolution of
the Board of Directors; provided, that no decrease shall reduce the number of
shares of Series 4 Class C Preferred Stock to a number less than the number of
shares then outstanding plus the number of shares reserved for issuance upon the
exercise of outstanding options, rights or warrants or upon the conversion
of
Page 1 of
6
any
outstanding securities issued by the Corporation convertible into Series 4 Class
C Preferred Stock.
Section
2. Dividends and Distributions.
(A)
Subject to the prior and superior rights of the holders of any shares of any
series of the Corporation’s preferred stock and/or Class C Preferred Stock
ranking prior and superior to the shares of Series 4 Class C Preferred Stock
with respect to dividends, if any, the holders of shares of Series 4 Class C
Preferred Stock, in preference to the holders of Common Stock, par value $0.10
per share (the “Common Stock”), of the Corporation, and of any other junior
stock, shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the last business day of March, June, September and December
in each year (each such date being referred to herein as a “Quarterly Dividend
Payment Date”), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series 4 Class C
Preferred Stock, in an amount per share (rounded to the nearest cent) equal to
the greater of (a) $1.00, or (b) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions, other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series 4 Class C Preferred Stock. In the event the
Corporation shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount to which holders of shares of Series 4 Class C Preferred Stock were
entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
(B) The
Corporation shall declare a dividend or distribution on the Series 4 Class C
Preferred Stock as provided in paragraph (A) of this Section immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1 per share on the Series 4
Class C Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C)
Dividends shall begin to accrue and be cumulative on outstanding shares of
Series 4 Class C Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series 4 Class C Preferred Stock,
unless the date of issue of such shares is prior to the record date for the
first Quarterly Dividend Payment Date, in which case dividends
Page 2 of
6
on such
shares shall begin to accrue and be cumulative from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of Series
4 Class C Preferred Stock entitled to receive a quarterly dividend and before
such Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on
the shares of Series 4 Class C Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series 4 Class C Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record date shall
be not more than 60 days prior to the date fixed for the payment
thereof.
Section
3. Voting Rights. The holders of shares of Series 4 Class C Preferred Stock
shall have the following voting rights:
(A) Each
share of Series 4 Class C Preferred Stock shall entitle the holder thereof to
100 votes on all matters submitted to a vote of the stockholders of the
Corporation.
(B)
Except as otherwise provided herein, in the Restated Certificate of
Incorporation of the Corporation, in any other Certificate of Designation of the
Corporation or by applicable law, the holders of shares of Series 4 Class C
Preferred Stock, the holders of shares of Common Stock and the holders of any
other class or series of capital stock of the Corporation having general voting
rights shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(C)
Except as set forth in this Certificate of Designations or as otherwise required
by applicable law, holders of Series 4 Class C Preferred Stock shall have no
special voting rights and their consent shall not be required (except to the
extent that they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section
4. Certain Restrictions.
(A)
Whenever quarterly dividends or other dividends or distributions payable on the
Series 4 Class C Preferred Stock as provided in Section 2 hereof are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series 4 Class C Preferred Stock outstanding shall
have been paid in full, or declared and a sum sufficient for the payment
therefor be set apart for payment and be in the process of payment, the
Corporation shall not:
i.
declare or pay dividends, or make any other distributions, on any shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series 4 Class C Preferred Stock;
ii.
declare or pay dividends, or make any other distributions, on any shares of
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series 4 Class C Preferred Stock, except
dividends paid ratably on the Series 4 Class C Preferred Stock and all such
parity stock on which dividends are
Page 3 of
6
payable
or in arrears in proportion to the total amounts to which the holders of all
such shares are then entitled;
iii.
redeem or purchase or otherwise acquire for consideration shares of any stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series 4 Class C Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or winding up)
to the Series 4 Class C Preferred Stock; or
iv.
redeem or purchase or otherwise acquire for consideration any shares of Series 4
Class C Preferred Stock, or any shares of stock ranking on a parity with the
Series 4 Class C Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series or
classes.
(B) The
Corporation shall not permit any subsidiary of the Corporation to purchase or
otherwise acquire for consideration any shares of stock of the Corporation
unless the Corporation could, under paragraph (A) of this Section 4, purchase or
otherwise acquire such shares at such time and in such manner.
Section
5. Reacquired Shares. Any shares of Series 4 Class C Preferred Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Class C
Preferred Stock and may be reissued as part of a new series of Class C Preferred
Stock subject to the conditions and restrictions on issuance set forth herein,
in the Restated Certificate of Incorporation of the Corporation, or in any other
Certificate of Designations creating a series of Class C Preferred Stock or any
other preferred stock or any similar stock or as otherwise required by
law.
Section
6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or
winding up of the Corporation, no distribution shall be made (1) to the holders
of shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series 4 Class C Preferred Stock unless, prior
thereto, the holders of shares of Series 4 Class C Preferred Stock shall have
received $100 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment,
provided that the holders of shares of Series 4 Class C Preferred Stock shall be
entitled to receive an aggregate amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100 times the aggregate amount to be
distributed per share to holders of shares of Common Stock, or (2) to the
holders of shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series 4 Class C Preferred
Stock, except distributions made ratably on the Series 4 Class C Preferred Stock
and all such parity stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the Corporation shall at any time declare
or
Page 4 of
6
pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the aggregate amount to which holders of shares of Series 4
Class C Preferred Stock were entitled immediately prior to such event under the
proviso in clause (1) of the preceding sentence shall be adjusted by multiplying
such amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
Section
7. Consolidation, Merger, etc. In case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case each share of Series 4 Class C
Preferred Stock shall at the same time be similarly exchanged or changed into an
amount per share, subject to the provision for adjustment hereinafter set forth,
equal to 100 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount set forth in
the preceding sentence with respect to the exchange or change of shares of
Series 4 Class C Preferred Stock shall be adjusted by multiplying such amount by
a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section
8. No Redemption. The shares of Series 4 Class C Preferred Stock shall not be
redeemable.
Section
9. Ranking. The Series 4 Class C Preferred Stock shall rank junior to all other
series of the Corporation’s Class C Preferred Stock and all other series of the
Corporation’s other classes of preferred stock as to the payment of dividends
and the distribution of assets upon any liquidation, dissolution or winding up
of the Corporation unless the terms of any such series shall provide
otherwise.
Section
10. Amendment. So long as any shares of the Series 4 Class C Preferred Stock are
outstanding, the Corporation shall not, without the affirmative vote of at least
a majority in number of shares of the Series 4 Class C Preferred Stock then
outstanding, amend, alter, or repeal any of the provisions of this Certificate
of Designations or the Corporation’s Restated Certificate of Incorporation so as
to affect adversely the preferences, special rights or powers of the shares of
Series 4 Class C Preferred Stock.
Page 5 of
6
IN
WITNESS WHEREOF, this Certificate of Designation is executed on behalf of the
Corporation by its President and attested by its Secretary this ____ day of
_____________, 2009.
LSB
INDUSTRIES, INC.
ATTEST:
Secretary
President
(SEAL)
Page 6 of
6
CERTIFICATE
OF ELIMINATION
OF
SERIES 3
PARTICIPATING CLASS C
PREFERRED
STOCK
OF
LSB
INDUSTRIES, INC.
____________________________________________
LSB
INDUSTRIES, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware (hereinafter called the “Corporation”),
hereby certifies the following:
1. That
the Certificate of Designations of the Series 3 Participating Class C Preferred
Stock, no par value, of the Corporation (the “Series 3 Preferred”) was filed
with the Delaware Secretary of State on February 5, 1999 (the “Certificate of
Designations”).
2. That
no shares of the Series 3 Preferred are outstanding and no shares of Series 3
Preferred subject to the Certificate of Designations previously filed with
respect to the Series 3 Preferred will be issued.
3. All
shares of Series 3 Preferred reserved for issuance shall have the status of
authorized and unissued shares of the Corporation’s Class C Preferred
Stock.
4. That
effective November 13, 2008, the Board of Directors of the Corporation
unanimously adopted the following resolutions:
RESOLVED
FURTHER, that upon the Existing Rights Plan Expiration Date it does not appear
that any shares of the series designated as Series 3 Participating Class C
Preferred Stock will be issued and outstanding and, if, upon the Existing Rights
Plan Expiration Date, no shares of Series 3 Participating Class C Preferred
Stock are outstanding, the officers of the Corporation are hereby authorized and
directed, for and on behalf of the Corporation, to execute, deliver and file
with the Delaware Secretary of State a Certificate of Elimination to eliminate
the Series designated as Series 3 Participating Class C Preferred
Stock.
5. That
pursuant to the provisions of § 151(g) of the Delaware General Corporation Law,
upon the effective date of the filing of this Certificate, this Certificate will
have the effect of eliminating from the Corporation’s Restated Certificate of
Incorporation only those matters set forth in the Certificate of Designations,
with respect to the Series 3 Preferred.
IN
WITNESS WHEREOF, this Certificate of Elimination has been executed this 7th day
of January 2009, by the Chief Financial Officer of the Company.
LSB
INDUSTRIES, INC.
By: /s/
Tony M. Shelby
Tony M.
Shelby,
Chief
Financial Officer
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 12,
2009 /s/ Jack E. Golsen
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 12,
2009 /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, 2008, 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 12,
2009
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, 2008, 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:
|
(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 the
Company.
|
/s/ Tony M. Shelby
Tony M.
Shelby
Executive
Vice President of Finance
and Chief
Financial Officer
March 12,
2009
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.