OMB APPROVALOMB Number: 3235-0059Expires: January 31, 2008Estimated average burdenhours per response . . . . . 14UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549SCHEDULE 14AProxy Statement Pursuant to Section 14(a) of the SecuritiesExchange Act of 1934 (Amendment No. )Filed by the Registrant xFiled by a Party other than the Registrant oCheck the appropriate box:o Preliminary Proxy Statemento Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))x Definitive Proxy Statemento Definitive Additional Materialso Soliciting Material Pursuant to 240.14a-12LSB INDUSTRIES, INC.(Name of Registrant as Specified In Its Charter)(Name of Person(s) Filing Proxy Statement, if other than the Registrant)Payment of Filing Fee (Check the appropriate box):
and state how it was determined):4) Proposed maximum aggregate value of transaction:5) Total fee paid:Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a SEC 1913(05-05) currently valid OMB control number.o Fee paid previously with preliminary materials.o Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.1) Amount Previously Paid:2) Form, Schedule or Registration Statement No.:3) Filing Party:4) Date Filed:
LSB
INDUSTRIES, INC.
16
South Pennsylvania Avenue
Post
Office Box 754
Oklahoma
City, OK 73101
FAX:
(405) 235-5067
Notice
of Annual Meeting of Stockholders
To
Be Held July 6, 2006
To
the
Stockholders of
LSB
Industries, Inc.
The
Annual Meeting of the Stockholders of LSB Industries, Inc. (the "Company")
will
take place at the Company's offices located at 16 S. Pennsylvania Avenue,
Oklahoma City, Oklahoma, on Thursday, July 6, 2006, at 11:30 a.m. (CDT), for
the
purpose of considering and acting upon the following matters:
| (1) |
The
election of 4 nominees to the Board of
Directors;
|
| (2) |
The
ratification of the appointment of the independent registered public
accounting firm; and
|
| (3) |
Any
other business which properly may come before the meeting or any
adjournment of the meeting.
|
The
Board
of Directors has fixed the close of business on May 15, 2006, as the record
date
for the determination of holders of the common stock and voting preferred stock
of the Company entitled to receive notice of, and to vote at, the Annual
Meeting.
To
ensure
the presence of a quorum at the Annual Meeting, please sign and promptly return
the enclosed Proxy Card in the accompanying self-addressed envelope, which
requires no postage if mailed in the United States.
The
Company is distributing its 2005 Annual Report to Stockholders with the enclosed
proxy soliciting material.
By
order
of the Board of Directors
David
M.
Shear
Secretary
Oklahoma
City, Oklahoma
June
7,
2006
LSB
INDUSTRIES, INC.
16
South Pennsylvania Avenue
Post
Office Box 754
Oklahoma
City, OK 73101
PROXY
STATEMENT FOR
ANNUAL
MEETING OF STOCKHOLDERS
To
Be Held July 6, 2006
SOLICITATION
OF PROXIES
Solicitation
This
Proxy Statement is furnished in connection with the solicitation by the Board
of
Directors of LSB Industries, Inc. (the "Company") of proxies to be voted at
the
Annual Meeting of Stockholders (the "Annual Meeting") to take place on Thursday,
July 6, 2006, at 11:30 a.m. at the Company's offices located at 16 South
Pennsylvania Avenue, Oklahoma City, Oklahoma and at any adjournment thereof.
This Proxy Statement and the Proxy Card are being first sent to the stockholders
of the Company on or about June 7, 2006.
The
Company may use the services of its directors, officers, and employees to
solicit proxies personally, by mail, the internet, or telephone, without
additional compensation therefore. The Company will bear all of the costs of
preparing, printing, assembling, and mailing this Proxy Statement and the Proxy
Card and all of the costs of the solicitation of the proxies. The Company will
also reimburse any bank, broker-dealer, or other custodian, nominee, or
fiduciary for its reasonable expenses incurred in completing the mailing of
proxy materials to the beneficial owners of the Company's Common Stock and
voting Preferred Stock.
Revocation
of Proxy
Any
stockholder giving his or her proxy may revoke it at any time before its
exercise by (a) notifying the Secretary of the Company, by facsimile or in
writing, (b) returning a later-dated proxy card, or (c) attending the Annual
Meeting and voting in person.
Stockholder
Proposals
In order
to be considered for inclusion in the proxy materials for the Company's 2007
Annual Meeting of Stockholders, any proposal of a stockholder intended to be
presented at such meeting must be delivered in writing to the Secretary of
the
Company no later than February 7, 2007.
STOCKHOLDERS
ENTITLED TO VOTE
Record
Date and Voting Securities
Only the
record holders of shares of the Common Stock and voting Preferred Stock of
the
Company, as of the close of business on May 15, 2006 (the "Record Date"), will
have the right to receive notice of, and to vote at, the Annual Meeting. As
of
the close of business on the Record Date, the Company had the following shares
of Common Stock and voting Preferred Stock issued and outstanding: (a)
13,780,856 shares of Common Stock (excluding 3,324,889 shares held in treasury);
(b) 809 shares of Convertible Noncumulative Preferred Stock; (c) 20,000 shares
of Series B 12% Cumulative Convertible Preferred Stock (“Series B Preferred”);
and (d) 1,000,000 shares of Series D 6% Cumulative Convertible Preferred Stock
("Series D Preferred"). Each stockholder of record, as of the Record Date,
will
have one vote for each share of Common Stock and voting Preferred Stock of
the
Company (except each share of Series D Preferred will have .875 of one vote)
that the stockholder owned as of the Record Date.
All
shares of Common Stock and voting Preferred Stock will vote together as a single
class on all matters coming before the Annual Meeting, and a majority of all
of
the outstanding shares of Common Stock and voting Preferred Stock of the
Company, represented as a single class, entitled to notice of, and to vote
at,
the Annual Meeting, represented in person or by proxy, will constitute a quorum
for the meeting.
1
Votes
will be tabulated by an inspector of election appointed by the Company's Board
of Directors. Pursuant to the General Corporation Law of the State of Delaware,
only votes cast "For" a matter constitute affirmative votes, except proxies
in
which the stockholder fails to make a specification as to whether he votes
"For", "Against", "Abstains" or "Withholds" as to a particular matter shall
be
considered as a vote "For" that matter. Votes in which the stockholder specifies
that he is "Withholding" or "Abstaining" from voting are counted for quorum
purposes, but will not be counted as votes cast on such matter. Broker non-votes
are counted for quorum purposes, but are not considered as votes "For" a
particular matter.
There
were no stockholder proposals submitted for the Annual Meeting. The Board of
Directors does not intend to bring any matter before the Annual Meeting other
than matters specifically referred to in the notice of the Annual Meeting,
nor
does the Board of Directors know of any other matter that anyone else proposes
to present for action at the Annual Meeting. However, if any other matter is
properly brought before the Annual Meeting, the persons named in the
accompanying proxy or their duly constituted substitutes acting at the Annual
Meeting will be deemed authorized to vote or otherwise act thereon in accordance
with their judgment on such matter.
PROPOSAL
1
ELECTION
OF DIRECTORS
General
The
Board of Directors has nominated Robert C. Brown, M.D., Barry H. Golsen, David
R. Goss, and John A. Shelley to serve a three-year term expiring in 2009. Each
of the nominees is presently serving as a director of the Company.
If
any of
the nominees become unable or unwilling to serve for good cause (an event which
the Board of Directors does not anticipate), the person or persons named in
the
Proxy Card as the proxies will vote for the election of the person or persons
recommended by a majority of the independent directors then serving on the
Board
of Directors. The proxies cannot be voted for a greater number of persons than
the number of nominees.
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 their successors are duly elected and qualified. Messrs. Brown,
Golsen, Goss and Shelley are in the class whose term is expiring as of the
Annual Meeting.
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 three nor more than thirteen. The Board of Directors
currently consists of thirteen members.
The
terms
of the Company's $3.25 Convertible Exchangeable Class C Preferred Stock, Series
2 ("Series 2 Preferred") provide that whenever dividends on the Series 2
Preferred are in arrears and unpaid in an amount equal to at least six quarterly
dividends: (a) the number of members of the Board of Directors of the Company
shall be increased by two effective as of the time of election of such
directors; (b) the Company shall, upon the written request of the record holders
of at least 10% of the shares of Series 2 Preferred, call a special meeting
of
the Series 2 Preferred holders for the purpose of electing such two additional
directors; (c) the Series 2 Preferred holders have the exclusive right to vote
for and elect such two additional directors; and (d) the term of office of
such
directors will terminate immediately upon the termination of the right of the
Series 2 Preferred holders to vote for such two additional directors, subject
to
the requirements of Delaware law. In
2002,
the holders of the Series 2 Preferred
2
elected
Grant J. Donovan and Dr. N. Allen Ford to serve as directors pursuant to the
terms of the Series 2 Preferred. The
Series 2 Preferred holders have the right to remove without cause at any time
and replace either of the two directors that the Series 2 Preferred holders
have
elected.
Approval
of each nominee for election to the Board of Directors will require the
affirmative vote of a plurality of the votes cast by the holders of the voting
securities of the Company, voting together as one class.
The
following sets forth certain information regarding the nominees and all other
directors whose term will continue after the Annual Meeting.
Nominees:
|
Robert
C. Brown, M.D.,
age 75. Dr. Brown first became a director in 1969. His term will
expire as
of this annual meeting. 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
is a
graduate of Tufts University and received his medical degree 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.
|
|
Barry
H. Golsen, J.D.,
age 55. Mr. Golsen first became a director in 1981. His term will
expire
as of this annual meeting. 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 has both his
undergraduate and law degrees from the University of
Oklahoma.
|
|
David
R. Goss,
age 65. Mr. Goss first became a director in 1971. His term will expire
as
of this annual meeting. 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.
|
|
John
A. Shelley,
age 55. Mr. Shelley first became a director in 2005. His term will
expire
as of this annual meeting. 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 previously owned by the Company. Mr. Shelley
is
a graduate of the University of
Oklahoma.
|
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION
OF
THE FOUR NOMINEES AS DIRECTORS OF THE COMPANY
Continuing
Directors:
|
Raymond
B. Ackerman,
age 83. Mr. Ackerman first became a director in 1993. His term will
expire
in 2008. From 1972 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 Commerce and Industry Hall
of Honor
in 1993.
|
|
Charles
A. Burtch,
age 70. Mr. Burtch first became a director in 1999. His term will
expire
in 2007. 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.
|
|
3
|
|
Jack
E. Golsen,
age 77. Mr. Golsen first became a director in 1969. His term will
expire
in 2007. 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
in biochemistry.
|
|
Bernard
G. Ille, age
79. Mr. Ille first became a director in 1971. His term will expire
in
2008. Mr. Ille served as President and Chief Executive Officer of
United
Founders Life from 1966 to 1988. He served as President and Chief
Executive Officer of First Life Assurance Company from 1988, until
it was
acquired by another company in 1994. During his tenure as President
of
these two companies, he served as Chairman of the Oklahoma Guaranty
Association for ten years and was President of the Oklahoma Association
of
Life Insurance Companies for two terms. He 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.
|
|
Horace
G. Rhodes,
age 78. Mr. Rhodes first became a director in 1996. His term will
expire
in 2007. 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
64. Mr. Shelby first became a director in 1971. His term will expire
in
2008. Mr. Shelby, a certified public accountant, is our Executive
Vice
President of Finance and Chief Financial Officer, a position he has
held
for more than five years. Prior to becoming our Executive Vice President
of Finance and Chief Financial Officer, he served as Chief Financial
Officer of a subsidiary of the Company and was with the accounting
firm of
Arthur Young & Co., a predecessor to Ernst & Young LLP. Mr. Shelby
is a graduate of Oklahoma City University.
|
|
Donald
W. Munson, age
73. Mr. Munson first became a director in 1997. His term will expire
in
2008. From 1988, until his retirement in 1992, Mr. Munson served
as
President and Chief Operating Officer of Lennox Industries. Prior
to 1998,
he served as Executive Vice President of Lennox Industries' Division
Operations, President of Lennox Canada and Managing Director of Lennox
Industries' European Operations. Prior to joining Lennox Industries,
Mr.
Munson served 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.
|
Continuing
Directors elected by the holders of Series 2 Preferred:
|
Grant
J. Donovan,
age 49. Mr. Donovan first became a director in 2002. Mr. Donovan
is
President and founder of Galehead, Inc., a company specializing in
the
collections of accounts receivable in the international maritime
trade
business. Prior to forming Galehead, Inc., Mr. Donovan was a partner
in a
real estate development firm specializing in revitalizing functionally
obsolete industrial buildings. Mr. Donovan received his MBA from
Stanford
University and his undergraduate degree in Civil Engineering from
the
University of Vermont. He currently is on the board of directors
of
EngenderHealth, a 50 year-old international aid organization focused
on
improving women's healthcare.
|
|
|
4
|
|
|
Dr.
N. Allen Ford,
age 63. Dr. Ford first became a director in 2002. Dr. Ford joined
the
University of Kansas in 1976 where his teaching and research duties
focus
mainly on taxation. At the University of Kansas, Professor Ford has
won
several teaching awards and is the Larry D. Horner/KPMG Peat Marwick
Distinguished Professor of Accounting. Dr. Ford teaches the following
courses in taxation: individual, corporate, partnership, S corporation,
gift and estate tax. He is active in professional organizations such
as
the American Taxation Association and the American Accounting Association.
He received his Ph.D. in Accounting from the University of
Arkansas.
|
|
Board
Independence
The
Board of Directors has determined that each of Messrs. Ackerman, Burtch,
Donovan, Ford, Ille, Munson and Rhodes is an "independent director" in
accordance with the current listing standards of the American Stock Exchange
(the "AMEX"). In
connection with the Board's determination as to whether John A. Shelley is
independent, the Board considered, in addition to any transactions between
the
Company and Mr. Shelley discussed under "Certain Relationships and Related
Transactions", that the Bank of Union, of which Mr. Shelley is President and
Chief Executive Officer, has substantial outstanding loans to Jack E. Golsen,
members of his immediate family, and/or entities in which Mr. Golsen and his
immediate family own or control (the "Golsen Group") and the Golsen Group’s
pledge of shares of LSB common stock, among other things, to secure these
loans.
Certain
Committees and Meetings of the Board of Directors
The
Board of Directors of the Company held ten meetings in 2005. During 2005, no
director attended fewer than 75% of the aggregate of the total number of
meetings of the Board of Directors and the total number of meetings held by
all
committees of the Board of Directors on which he served, except for Messrs.
Donovan, Ford and Munson who attended 64%, 73% and 73%, respectively, of such
meetings.
The
Company has an Executive Compensation and Option Committee and an Audit
Committee. The Company does not have a nominating committee.
The
Company's Executive Compensation and Option Committee sets the compensation
of
all officers of the Company. The members of the Executive Compensation and
Option Committee are the following non-employee directors: Mr. Ille and Mr.
Rhodes. During 2005, the Executive Compensation and Option Committee had two
meetings.
The
Company's Audit Committee assists the Board of Directors in monitoring the
integrity of the financial statements of the Company, the independent registered
public accounting firm's qualifications and independence, the performance of
the
Company's internal audit function and independent registered public accounting
firm, and the Company's compliance with legal and regulatory requirements.
In
carrying out these purposes, the Audit Committee, among other
things:
| · |
appoints,
evaluates, and approves the compensation of, the Company's independent
registered public accounting firm;
|
| · |
pre-approves
all auditing services and permitted non-audit services; annually
considers
the qualifications and independence of the independent registered
public
accounting firm;
|
| · |
reviews
recommendations of independent registered public accounting firm
concerning the Company's accounting principles, internal controls
and
accounting procedures and
practices;
|
| · |
reviews
and approves the scope of the annual
audit;
|
| · |
reviews
and discusses with the independent registered public accounting firm
the
audited financial statements;
|
| · |
performs
such other duties as set forth in the Audit Committee
Charter
|
| · |
reviews
and discusses with the independent registered public accounting firm
the
unaudited quarterly financial statements.
|
5
The
members of the Audit Committee are Messrs. Ille, Burtch, Rhodes, and Ackerman.
The Board has determined that each member of the Audit Committee is independent,
as defined in the current listing standards of the AMEX and Section 10A-3 of
the
Securities Act of 1933, as amended. During 2005, the Audit Committee had seven
meetings. The Audit Committee operates under a written charter.
Nominations
of Directors The
Board
of Directors does not have a standing nominating committee. The Board believes
that the Company is best served by having all of its independent directors
serve
in the capacity of a nominating committee. Accordingly, each director nominee
must be selected or recommended for the Board's nomination by a majority of
the
independent directors of the Board. Upon recommendation by a majority of the
independent directors, all of the Company's directors participate in the
consideration of director nominees. In considering candidates for directorship,
the independent directors consider the entirety of each candidate's credentials,
but do not have any specific minimum qualifications that must be met by a
candidate in order to be recommended as a nominee.
In
March
2002, the holders of the Company's Series 2 Preferred elected Dr. N. Allen
Ford
and Mr. Grant Donovan to serve as members of the Company's Board of Directors
pursuant to the terms of the Series 2 Preferred.
The
By-laws of the Company provide that only persons nominated by or at the
direction of: (a) the Board of Directors of the Company, or (b) any stockholder
of the Company entitled to vote for the election of the directors that complies
with certain notice procedures, shall be eligible for election as a director
of
the Company. In accordance with our By-laws, the Board of Directors will
consider director nominations submitted by a stockholder if the stockholder
gives written notice of the proposed nomination to the Secretary of the Company
at the Company's principal executive office not less than 50 days prior to
the
date of the meeting of stockholders to elect directors; except, if less than
60
days' notice or prior disclosure of the date of such meeting is given to the
stockholders, then written notice by the stockholder must be received by the
Secretary of the Company not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed
or
such public disclosure was made. In addition, if the stockholder proposes to
nominate any person, the stockholder's written notice to the Company must
provide all information relating to such person that is required to be disclosed
in solicitation of proxies pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.
Communication
with the Board of Directors and Directors Attendance at Annual
Meetings
The
Company's Board of Directors believes that it is important for the Company
to
have a process whereby its stockholders may send communications to the Board.
Accordingly, stockholders who wish to communicate with the Board of Directors
or
a particular director may do so by sending a letter to David Shear, Senior
Vice
President, General Counsel and Secretary at 16 S. Pennsylvania Avenue, Oklahoma
City, OK 73107. The mailing envelope must contain a clear notation indicating
that the enclosed letter is a "Stockholder-Board Communication" or
"Stockholder-Director Communication." All such letters must identify the author
as a stockholder and clearly state whether the intended recipients are all
members of the Board of Directors or only certain specified individual
directors. Mr. Shear will make copies of all such letters and circulate them
to
the appropriate director or directors. Although the Company does not currently
have a policy with respect to the attendance of its directors at the Annual
Meeting, the Company encourages each of its directors to attend whenever
possible. A majority of the directors attended the Company's 2005 Annual Meeting
of Stockholders.
Code
of Ethics
The
Chief Executive Officer, the Chief Financial Officer, the Principal Accounting
Officer and the controller of the Company, and each of our subsidiaries, or
persons performing similar functions, are subject to our Code of Ethics.
6
We
and
all our subsidiary companies have adopted a Statement of Policy Concerning
Business Conduct applicable to our employees. This policy was amended in May
2005. Our Amended Statement of Policy Concerning Business Conduct and the Code
of Ethics is available on our website at http://www.lsb-okc.com. We will post
any amendments to these documents, as well as any waivers that are required
to
be disclosed pursuant to the rules of either the Securities and Exchange
Commission or the AMEX, on our website.
Compensation
of Directors
In 2005,
we compensated our non-employee directors for their services as directors on
our
Board. Certain non-employee directors also served on the Board of Directors
of
our subsidiary, ThermaClime, without additional compensation. Our non-employee
directors also received compensation for each meeting of the Board of Directors
attended during 2005. The aggregate compensation paid in 2005 to our Directors
for Board-related services was $218,660.
Mr.
Ackerman received additional compensation for his services on the Audit and
Public Relations and Marketing Committees. Dr. Brown received additional
compensation for his services on the Benefits and Programs Committee and as
a
medical director for the Company's employee medical plan. Mr. Burtch received
additional compensation for his services on the Audit Committee. Mr. Ille
received additional compensation for his services on the Audit, Public Relations
and Marketing, and Executive Compensation and Option Committees. Mr. Munson
received additional compensation for consulting services in connection with
developing our European business. Mr. Rhodes received additional compensation
for his services on the Audit and Executive Compensation and Option Committees.
In
2005,
the non-employee directors of the Company were eligible to receive options
to
purchase the Company's Common Stock under the Outside Directors Stock Purchase
Plan. The Company did not grant options under this plan during 2005.
The
following table shows the compensation of our non-employee directors during
2005:
|
|
|
Committee
and Consulting Services
|
Director
Services |
|||
|
Mr.
Ackerman
|
$
|
20,000
|
$
|
12,500
|
|
Dr.
Brown
|
$
|
20,000
|
$
|
12,500
|
|
Mr.
Burtch
|
$
|
20,000
|
$
|
12,000
|
|
Mr.
Donovan
|
$
|
-
|
$
|
12,500
|
|
Dr.
Ford
|
$
|
-
|
$
|
12,000
|
|
Mr.
Ille
|
$
|
20,000
|
$
|
12,000
|
|
Mr.
Munson
|
$
|
15,160
|
$
|
11,500
|
|
Mr.
Rhodes
|
$
|
20,000
|
$
|
12,500
|
|
Mr.
Shelley
|
$
|
-
|
$
|
6,000
|
Audit
Committee Report Management
has the primary responsibility for the financial statements and the reporting
process, including the system of internal control; the Audit Committee oversees
the Company's financial reporting process on behalf of the Board of Directors.
In fulfilling its oversight responsibilities, the Audit Committee reviewed
the
audited financial statements in the Annual Report with management, including
a
discussion of the quality, not just the acceptability, of the accounting
principles; the reasonableness of significant judgments; and the clarity of
disclosures in the financial statements.
The
Committee reviewed with the independent registered public accounting firm,
who
are responsible for expressing an opinion on the conformity of those audited
financial statements with generally accepted accounting principles, their
judgments as to the quality, not just the acceptability, of the
Company's
7
accounting
principles and such other matters as are required to be discussed with the
Committee under generally accepted auditing standards (including Statement
on
Auditing Standards No. 61). In addition, the Committee has discussed with the
independent registered public accounting firm the auditors' independence from
management and the Company, and has received and reviewed the written
disclosures and the letter from the independent registered public accounting
firm required by the Independence Standards Board (including Independence
Standards Board Standard No. 1), and considered the compatibility of nonaudit
services with the auditors' independence.
The
Committee discussed with the Company's internal auditors and independent
registered public accounting firm the overall scope and plans for their
respective audits. The Committee meets with the internal auditors and
independent registered public accounting firm, with and without management
present, to discuss the results of their examinations, their evaluations of
the
Company's internal control, and the overall quality of the Company's financial
reporting. The Committee held seven meetings during 2005.
In
reliance on the reviews and discussions referred to above, the Committee
recommended to the Board of Directors (and the Board has approved) that the
audited financial statements be included in the Annual Report on Form 10-K
for
the year ended December 31, 2005 for filing with the Securities and Exchange
Commission. The Committee appointed Ernst & Young LLP as the Company's
independent registered public accounting firm for 2006.
Members
of the Committee:
Bernard
G. Ille (Chairman)
Horace
G.
Rhodes
Charles
A. Burtch
Raymond
B. Ackerman
Notwithstanding
anything to the contrary set forth in the Company's filings under the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
that might incorporate by reference previous or future filings, including this
Proxy Statement, in whole or in part, the foregoing report of the Audit
Committee and any statements regarding the independence of the Audit Committee
members shall not be incorporated by reference into any such
filings.
Fees
Paid to Independent Registered Public Accounting Firm
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, 2005 and 2004, 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 Securities and Exchange
Commission for those fiscal years were approximately $734,500 and $613,500,
respectively.
Audit-Related
Fees
Ernst
& Young LLP billed the Company $231,300 and $139,800 during 2005 and 2004,
respectively, for audit-related services, which included benefit plan audit
and
accounting consultations which included assistance with the Securities Exchange
Commission (“SEC”) comment letters and related restatements during
2005.
Tax
Fees
Ernst
& Young LLP billed $112,943 and $101,209 during 2005 and 2004, 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
8
fiscal
years ended December 31, 2005 and 2004.
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, 2005 and 2004
is compatible with maintaining its independence.
Audit
Committee's Pre-Approval Policies and Procedures All
audit
and non-audit services that may be provided by our principal accountant, Ernst
& Young LLP, to the Company require pre-approval by the Audit Committee.
Further, Ernst & Young LLP shall not provide those services to the Company
specifically prohibited by the Securities and Exchange Commission, including
bookkeeping or other services related to the accounting records or financial
statements of the audit client; financial information systems design and
implementation; appraisal or valuation services, fairness opinion, or
contribution-in-kind reports; actuarial services; internal audit outsourcing
services; management functions; human resources; broker-dealer, investment
adviser, or investment banking services; legal services and expert services
unrelated to the audit; and any other service that the Public Company Accounting
Oversight Board determines, by regulation, is impermissible.
Security
Ownership of Certain Beneficial Owners
The
following table sets forth certain information as of the Record Date, regarding
the ownership of our voting Common Stock and voting Preferred Stock by (a)
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 the Record Date.
|
Name
and Address
of
Beneficial
Owner
|
Title
of
Class
|
Amounts
of
Shares
Beneficially
owned
(1)
|
Percent
of
Class+
|
|
Jack
E. Golsen and
members
of his family (2)
|
Common
Voting
Preferred
|
4,845,288
1,020,000
|
(3
(4
|
)
)
|
(5
(6
|
)
)
|
(6)
|
31.8
99.9
|
%
%
|
|||
|
Kent
C. McCarthy & affiliates (7)
|
Common
|
2,798,086
|
(7
|
)
|
18.1
|
%
|
||||||
|
Paul
J. Denby (8)
|
Common
|
1,147,818
|
(8
|
)
|
8.2
|
%
|
||||||
|
James
W. Sight (9)
|
Common
|
875,521
|
(9
|
)
|
6.3
|
%
|
+
Because
of the requirements of the Securities and Exchange Commission 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 the
Record Date 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.
9
(2)
Includes Jack E. Golsen and the following members of his family: wife, Sylvia
H.
Golsen; son, Barry H. Golsen (a Director, Vice Chairman of the Board of
Directors, President of the Company and its Climate Control Business); son,
Steven J. Golsen (Executive officer of several subsidiaries of the Company);
daughter, Linda F. Rappaport; and SBL Corporation (“SBL”) and its wholly owned
subsidiary, Golsen Petroleum Corporation (“GPC”). All of the outstanding shares
of SBL are beneficially owned by the members of the Golsen family. The address
of Jack E. Golsen, Sylvia H. Golsen, Barry H. Golsen, Linda F. Rappaport; and
SBL is 16 South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107; and Steven
J. Golsen's address is 7300 SW 44th Street, Oklahoma City, Oklahoma 73179.
See
"Certain Relationships and Related Transactions."
(3)
Includes (a) the following shares over which Jack E. Golsen ("J. Golsen") has
the sole voting and dispositive power: (i) 25,000 shares that he owns of record,
(ii) 4,000 shares that he has the right to acquire upon conversion of a
promissory note, (iii) 133,333 shares that he has the right to acquire upon
the
conversion of 4,000 shares of the Company's Series B Preferred owned of record
by a trust, of which he is the sole trustee, (iv) 119,929 shares owned of record
by a trust, of which he is the sole trustee, and (v) 176,500 shares that he
has
the right to acquire within the next 60 days under the Company's stock option
plans; (b) 838,747 shares owned of record by a trust, of which Sylvia H. Golsen
is the sole trustee, over which she and her husband, J. Golsen, share voting
and
dispositive power; (c) 302,889 shares over which Barry H. ("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 75,000 shares
that he has the right to acquire within the next 60 days under the Company's
stock option plans; (d) 240,165 shares over which Steven J. Golsen ("S. Golsen")
has the sole voting and dispositive power and 55,000 shares that he has the
right to acquire within the next 60 days under the Company's stock option plans;
(e) 178,606 shares held in trust for the grandchildren and great grandchild
of
J. Golsen and Sylvia H. Golsen of which B. Golsen, S. Golsen and Linda F.
Rappaport ("L. Rappaport") jointly share voting and dispositive power; (f)
82,552 shares owned of record by L. Rappaport over which she has sole voting
and
dispositive power; (g) 1,527,099 shares owned of record by SBL, 39,177 shares
that SBL has the right to acquire upon conversion of 9,050 shares of the
Company's non-voting $3.25 Convertible Exchangeable Class C Preferred Stock,
Series 2 (the "Series 2 Preferred"), 400,000 shares that SBL has the right
to
acquire upon conversion of 12,000 shares of Series B Preferred owned of record
by SBL, and 250,000 shares that SBL has to right to acquire upon conversion
of
1,000,000 shares of the Company's Series D 6% cumulative, convertible Class
C
preferred stock ("Series D Preferred") owned of record by SBL and (h) 88,100
shares owned of record by GPC, 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
175,325 shares that GPC has the right to acquire upon conversion of 40,500
shares of Series 2 Preferred owned of record by GPC.
(4)
Includes: (a) 4,000 shares of Series B Preferred owned of record by a trust,
of
which J. Golsen is the sole trustee, over which he has the sole voting and
dispositive power; (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, Sylvia H. Golsen, B. Golsen, S.
Golsen, and L. Rappaport share the voting and dispositive power and (d)
1,000,000 shares of Series D Preferred owned of record by SBL.
(5)
Does
not include 70,200 shares of Common Stock that L. Rappaport's husband owns
of
record and 185,000 shares which he has the right to acquire within the next
60
days under the Company's stock option plans, all of which L. Rappaport disclaims
beneficial ownership. Does not include 256,120 shares of Common Stock owned
of
record by certain trusts for the benefit of B. Golsen, S. Golsen, and L.
Rappaport over which B. Golsen, S. Golsen and L. Rappaport have no voting or
dispositive power. Heidi Brown Shear, an officer of the Company and the niece
of
J. Golsen, is the Trustee of each of these trusts.
10
(6)
J.
Golsen disclaims beneficial ownership of the shares that B. Golsen, S. Golsen,
and L. Rappaport each have the sole voting and investment power over as noted
in
footnote (3) above. B. Golsen, S. Golsen, and L. Rappaport disclaim beneficial
ownership of the shares that J. Golsen has the sole voting and investment power
over as noted in footnotes (3) and (4) and the shares owned of record by Sylvia
H. Golsen. Sylvia H. Golsen disclaims beneficial ownership of the shares that
J.
Golsen has the sole voting and dispositive power over as noted in footnotes
(3)
and (4) above.
(7)
Jayhawk Institutional Partners, L.P. (“Jayhawk Institutional”), Kent C.
McCarthy, Jayhawk Capital Management Company, LLC (“Jayhawk Capital”), and
Jayhawk Investments, L.P. (“Jayhawk Investments”) (collectively, the “Jayhawk
Parties”) as a group beneficially own 2,798,086 shares of our common stock,
which includes 1,124,700 shares of common stock, 1,435,886 shares of common
stock receivable upon conversion of 331,690 shares of Series 2 Preferred,
112,500 shares of common stock that may be acquired upon exercise of warrants,
and 125,000 shares of common stock that may be acquired upon conversion of
$1
million principal amount of the 7% Convertible Senior Subordinated Debentures
due 2011 (the “2006 Debentures”). The common stock beneficially owned by the
Jayhawk Parties includes (a) 1,933,147 shares of common stock that Jayhawk
Institutional owns or has the right to acquire, including (i) 953,700 shares
of
common stock, (ii) 741,947 shares of common stock receivable upon the conversion
of 171,390 shares of Series 2 Preferred, (iii) 112,500 shares of common stock
receivable upon the exercise of warrants, and (iv) 125,000 shares of common
stock receivable upon the conversion of $1 million principal amount of the
2006
Debentures, (b) 590,909 shares of common stock receivable by Jayhawk Investments
upon conversion of 136,500 shares of Series 2 Preferred, and (c) 274,030 shares
Mr. McCarthy personally owns or has the right to acquire, including 171,000
shares of common stock owned directly and 103,030 shares of common stock
receivable upon the conversion of 23,800 shares of Series 2 Preferred. The
foregoing beneficial ownership is based on a conversion rate of 125 shares
per
$1,000 principal amount of the 2006 Debentures. Such beneficial ownership is
subject to change based upon the terms of the 2006 Debentures, which provide
that (a) at any time prior to September 1, 2006 and on or after March 1, 2009,
the conversion rate is 125 shares per $1,000 principal amount of the 2006
Debentures, and (b) during the period from September 1, 2006 to February 28,
2009, the conversion rate declines every six months, starting at 141.25 shares
and ending at 129.23 shares per $1,000 principal amount of the 2006 Debentures.
Jayhawk Capital, as the investment advisor and manager of Jayhawk Institutional
and the investment advisor and general partner of Jayhawk Investments, is deemed
to beneficially own the securities held by Jayhawk Institutional and Jayhawk
Investments. Mr. McCarthy, as the manager and sole member of Jayhawk Capital,
has sole voting and dispositive power over our securities held by Jayhawk
Capital, Jayhawk Institutional and Jayhawk Investments. Mr. McCarthy disclaims
beneficial ownership of all such shares and the 2006 Debentures other than
his
personal holdings. Mr. McCarthy’s address is 8201 Mission Road, Suite 110,
Prairie Village, Kansas 66208. See “Certain Relationships and Related
Transactions.”
(8)
Paul
J. Denby advised the Company that he has voting and dispositive power over
1,147,818 shares of Common Stock (which includes 181,818 shares of Common Stock
receivable upon conversion of 42,000 shares of Series 2 Preferred). This number
of shares includes 49,329 shares beneficially owned by Mr. Denby's spouse over
which Mr. Denby shares voting and dispositive power. Mr. Denby's address is
4613
Redwood Court, Irving, Texas 75038.
(9)
James
W. Sight has sole voting and dispositive power over 875,521 shares of Common
Stock (which includes 153,368 shares of Common Stock receivable upon conversion
of 35,428 shares of Series 2 Preferred). Mr. Sight's address is 8500 College
Boulevard, Overland Park, Kansas 66210.
11
Security
Ownership of Management
The
following table sets forth certain information obtained from the directors
of
the Company and the directors and executive officers of the Company as a group
as to their beneficial ownership of our voting Common Stock and voting Preferred
Stock as of the Record Date.
|
Name
of
Beneficial
Owner
|
Title
of Class
|
Amount
of Shares Beneficially Owned (1)
|
Percent
of Class+
|
|
Raymond
B. Ackerman
|
Common
|
21,000
|
(2)
|
*
|
||||
|
Robert
C. Brown, M.D.
|
Common
|
208,329
|
(3)
|
1.5
|
%
|
|||
|
Charles
A. Burtch
|
Common
|
15,000
|
(4)
|
*
|
||||
|
Grant
J. Donovan
|
Common
|
42,951
|
(5)
|
*
|
||||
|
Dr.
N. Allen Ford
|
Common
|
1,432
|
(6)
|
*
|
||||
|
Barry
H. Golsen
|
Common
Voting
Preferred
|
3,170,062
1,016,000
|
(7)
(7)
|
21.3
99.5
|
%
%
|
|||
|
Jack
E. Golsen
|
Common
Voting
Preferred
|
3,910,543
1,020,000
|
(8)
(8)
|
25.9
99.9
|
%
%
|
|||
|
David
R. Goss
|
Common
|
312,272
|
(9)
|
2.2
|
%
|
|||
|
Bernard
G. Ille
|
Common
|
45,000
|
(10)
|
|||||
|
Donald
W. Munson
|
Common
|
16,432
|
(11)
|
*
|
||||
|
Horace
G. Rhodes
|
Common
|
20,000
|
(12)
|
*
|
||||
|
David
M. Shear
|
Common
|
170,812
|
(13)
|
1.2
|
%
|
|||
|
Tony
M. Shelby
|
Common
|
356,029
|
(14)
|
2.5
|
%
|
|||
|
Directors
and Executive Officers as a group (14 persons)
|
Common
Voting
Preferred
|
5,902,765
1,020,000
|
(15)
|
36.8
99.9
|
%
%
|
*
Less
than 1%.
+
See
footnote + to the table under "Security Ownership of Certain Beneficial Owners."
(1)
The
Company based the information, with respect to beneficial ownership, on
information furnished by each director or officer, contained in filings made
with the Securities and Exchange Commission, or contained in the Company's
records. As of the Record Date, John A. Shelley did not beneficially own any
of
our voting Common Stock or voting Preferred Stock.
(2)
This
amount includes the following shares over which Mr. Ackerman shares voting
and
dispositive power: (a) 2,000 shares held by Mr. Ackerman's trust, and (b) 4,000
shares held by the trust of Mr. Ackerman's wife. The remaining 15,000 shares
of
Common Stock included herein are shares that Mr. Ackerman may acquire pursuant
to currently exercisable non-qualified stock options granted to him by the
Company.
(3)
The
amount shown includes 15,000 shares of Common Stock that Dr. Brown may acquire
pursuant to currently exercisable non-qualified stock options granted to him
by
the Company. The shares, with respect to which Dr. Brown shares the voting
and
dispositive power, consists of 122,516 shares owned by Dr. Brown's wife, 50,727
shares owned by Robert C. Brown, M.D., Inc., a corporation wholly-owned by
Dr.
Brown, and 20,086 shares held by the Robert C. Brown M.D., Inc. Employee Profit
Sharing Plan, of which Dr. Brown serves as the trustee. 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.
12
(4)
Mr.
Burtch has sole voting and dispositive power over these shares, which may be
acquired by Mr. Burtch pursuant to currently exercisable non-qualified stock
options granted to him by the Company.
(5)
The
amount includes (a) 42,451 shares of common stock, including 30,251 shares
that
Mr. Donovan has the right to acquire upon conversion of 6,988 shares of Series
2
Preferred, over which Mr. Donovan has the sole voting and dispositive power,
and
(b) 500 shares owned of record by Mr. Donovan's wife, voting and dispositive
power of which are shared by Mr. Donovan and his wife.
(6)
The
amount includes (a) 1,000 shares of common stock which Dr. Ford has sole voting
and dispositive power, and (b) 432 shares that Dr. Ford’s wife has the right to
acquire upon conversion of 100 shares of Series 2 Preferred over which voting
and dispositive power are shared by Dr. Ford and his wife.
(7)
See
footnotes (3), (4), and (6) 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.
(8)
See
footnotes (3), (4), and (6) 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.
(9)
Mr.
Goss has the sole voting and dispositive power over these shares, which include
200,000 shares that Mr. Goss has the right to acquire within 60 days pursuant
to
options granted under the Company's stock option plans.
(10)
The
amount includes (a) 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) 30,000 shares owned of record by
Mr.
Ille's wife, voting and dispositive power of which are shared by Mr. Ille and
his wife.
(11)
Mr.
Munson has the sole voting and dispositive power over these shares, which
include (a) 432 shares of Common Stock that Mr. Munson has the right to acquire
upon conversion of 100 shares of Series 2 Preferred and (b) 15,000 shares that
Mr. Munson may purchase pursuant to currently exercisable non-qualified stock
options.
(12)
Mr.
Rhodes has sole voting and dispositive power over these shares, which include
15,000 shares that may be acquired by Mr. Rhodes pursuant to currently
exercisable non-qualified stock options granted to him by the
Company.
(13)
Mr.
Shear has the sole voting and dispositive power over these shares, which include
160,544 shares that Mr. Shear has the right to acquire within 60 days pursuant
to options granted under the Company's stock option plans. This amount does
not
include, and Mr. Shear disclaims beneficial ownership of, the shares
beneficially owned by Mr. Shear's wife, who is the Vice President and Managing
Counsel of the Company, which consist of 13,146 shares over which she has the
sole voting and dispositive power, 22,760 shares that she has the right to
acquire within 60 days pursuant to options granted under the Company's stock
option plans, and 281,708 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 200,000 shares that Mr. Shelby has the right to acquire within 60 days
pursuant to options granted under the Company's stock option plans and 15,151
shares that Mr. Shelby has the right to acquire upon conversion of 3,500 shares
of Series 2 Preferred.
(15)
The
amount shown includes 1,081,044 shares of Common Stock that executive officers,
directors, or entities controlled by executive officers and directors of the
Company have the right to acquire within 60 days.
13
Section
16(a) Beneficial Ownership Reporting
Based
solely on a review of copies of the Forms 3, 4 and 5 and amendments thereto
furnished to the Company with respect to 2005, or written representations that
no such reports were required to be filed with the Securities and Exchange
Commission, the Company believes that during 2005 all directors and officers
of
the Company and beneficial owners of more than 10% of any class of equity
securities of the Company registered pursuant to Section 12 of the Exchange
Act
filed their required Forms 3, 4, or 5, as required by Section 16(a) of the
Exchange Act of 1934, as amended, on a timely basis, except for Kent McCarthy
and his affiliates inadvertently filed one late Form 5 to report one
transaction; Dr. Ford inadvertently filed one late Form 5 to report one
transaction; and Mr. Goss filed an amended Form 4 to report two gifts.
Certain
Relationships and Related Transactions
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. Under such agreement, Northwest is paid $2,000 a month to perform
all such examinations. Dr. Robert C. Brown (a director of the Company) is Vice
President and Treasurer of Plaza Medical Group, P.C.
Prime
and John A. Shelley In
August
1996, Prime Financial Corporation, a subsidiary of the Company, made a loan
to
John A. Shelley (elected a director of the Company during the 2005 Annual
Meeting) in the principal sum of $50,000, bearing an annual rate of interest
of
9%, payable on demand. The loan was evidenced by a demand promissory note and
was made as part of his severance package as President of Equity Bank when
the
Company sold Equity Bank. The note was fully reserved by the Company. The
Company has never demanded repayment of the principal or any accrued interest
under the note. The Company wrote off the note in 2005 prior to the 2005 Annual
Meeting.
Jayhawk
Parties
During
March 2006, the Jayhawk Parties beneficially owned approximately 17.4% of our
common stock (which includes shares that may be issued upon conversion of
outstanding preferred stock and exercise of an outstanding warrant), purchased
$1 million principal amount of our 2006 debentures from us in connection with
our private placement of $18 million of the 2006 Debentures.
During
April 2006, $1.036 million of the net proceeds from the 2006 Debentures were
used to purchase from certain of the Jayhawk Parties approximately $1 million
principal amount of our subsidiary’s 10-3/4% Senior Unsecured Notes, plus
accrued and unpaid interest due thereon.
Effective
March 25, 2003, the Company completed a private placement to Jayhawk
Institutional of 450,000 shares of its common stock and a five-year warrant
to
purchase up to 112,500 share of its common stock at an exercise price of $3.49
per share, subject to anti-dilution adjustments under certain conditions. The
total price paid by Jayhawk Institutional to the Company for the shares of
common stock and the warrant was $1,570,500. Jayhawk has certain registration
rights.
Designer
Rugs
One of
our manufacturing facilities sustained substantial water damage in its office
area resulting from the improper installation by an unrelated third-party
vendor. As a result of the water damage, it became necessary to replace all
of
the carpet in the office area of the facility. During the first quarter of
2006,
we purchased replacement carpet from a company (“Designer Rugs”) owned by Linda
F. Rappaport, the daughter of Jack E. Golsen, our Chairman and Chief Executive
Officer, and sister of Barry H. Golsen, our President. We paid approximately
$159,000 to Designer Rugs for the new carpet, removal of the damaged carpeting
and installation of the new carpet. We believe that insurance will reimburse
us
for the cost of the carpet and installation except for a deductible amount
of
$25,000.
Family
Relationships
Jack E.
Golsen is the father of Barry H. Golsen and the brother-in-law of Robert C.
Brown, M.D. Robert C. Brown, M.D. is the uncle of Barry H. Golsen. David M.
Shear is the nephew by marriage to Jack E. Golsen and son-in-law of Robert
C.
Brown, M.D.
14
EXECUTIVE
COMPENSATION
AND
OTHER INFORMATION
Executive
Compensation
The
following table shows the aggregate compensation which we and our subsidiaries
paid or accrued to our Chief Executive Officer and each of our other four most
highly-paid executive officers (which includes our Vice Chairman of the Board
of
Directors who also serves as President of the Company and its Climate Control
Business) (together, the “named executive officers”).
Summary
Compensation Table
|
Annual
Compensation
|
|
Name
and Position
|
Year
|
Salary
($)
(1)
|
Bonus
($)
(2)
|
All
Other
Compensation ($) |
|
Jack
E. Golsen,
Chairman
of the Board of Directors and Chief Executive Officer
|
2005
2004
2003
|
477,400
495,762
477,400
|
-
-
-
|
112,365
61,133
23,000
|
(3)
(3)
(3)
|
||||
|
Barry
H. Golsen,
Vice
Chairman of the Board of Directors, President, and President of the
Climate Control Business
|
2005
2004
2003
|
411,600
339,162
326,600
|
35,000
85,000
85,000
|
-
-
-
|
|||||
|
David
R. Goss,
Executive
Vice President of Operations
|
2005
2004
2003
|
260,500
239,366
209,577
|
-
30,000
-
|
-
-
-
|
|||||
|
Tony
M. Shelby,
Executive
Vice President of Finance and Chief Financial Officer
|
2005
2004
2003
|
240,000
249,231
214,108
|
35,000
30,000
-
|
-
-
-
|
|||||
|
David
M. Shear,
Senior
Vice President and General Counsel
|
2005
2004
2003
|
212,558
212,885
184,077
|
30,000
30,000
-
|
-
-
-
|
(1)
We
pay the executive officers on a bi-weekly basis. For 2004, there were 27
bi-weekly payments compared to 26 in 2005 and 2003.
(2)
Bonuses are paid for services rendered as determined by the Executive
Compensation and Option Committee.
(3)
For
2004 and 2003, amounts relate to life insurance premiums paid by the Company
under a $3 million split dollar endorsement life insurance policy purchased
in
1996 by the Company on the life of Mr. Golsen (the "Split Dollar Policy").
The
Split Dollar Policy was replaced in 2005. Mr. Golsen has no obligation to repay
the Company any amounts paid by the Company under the Split Dollar Policy.
In
2005, the Company purchased and now owns three whole life insurance policies
on
Mr. Golsen's life, totaling $7 million in death benefits. Pursuant to a Death
Benefit Agreement between us and Mr. Golsen, $2.5 million of these death
benefits are payable to Mr. Golsen’s family or designated beneficiary. For 2005,
the amount relates to Mr. Golsen’s prorata share of the life insurance premiums
for these new policies based on the amount of proceeds to be paid to Mr.
Golsen’s family or designated beneficiary in relation to the total amount of
proceeds to be received by the Company. See "Other Plans" for a description
of
the Death Benefit Agreement.
Option
Grants in 2005
The
Company did not grant stock options to any of the named executive officers
during 2005.
15
Aggregated
Option Exercises in 2005 and Year-End Option Values
The
following table sets forth information concerning the number and year-end value
of stock options held by each of the named executive officers during 2005.
|
Name |
Shares
Acquired on Exercise
|
Value
Realized
|
Number
of Securities Underlying Unexercised Options at FY End
(1)
Exercisable/Unexercisable
|
Value
of Unexercised
In-the-Money
Options at Fiscal Year End
(1)
(2) Exercisable/Unexercisable
|
|
Jack
E. Golsen
|
-
|
-
|
176,500
/ -
|
$
|
864,850
/ $ -
|
|||||
|
Barry
H. Golsen
|
-
|
-
|
75,000
/ -
|
$
|
335,538
/ $ -
|
|||||
|
David
R. Goss
|
-
|
-
|
200,000
/ -
|
$
|
709,675
/ $ -
|
|||||
|
Tony
M. Shelby
|
-
|
-
|
200,000
/ -
|
$
|
709,675
/ $ -
|
|||||
|
David
M. Shear
|
-
|
-
|
164,544
/ -
|
$
|
597,066
/ $ -
|
(1)
The
stock options granted under the Company's stock option plans became exercisable
20% after one year from date of grant, an additional 20% after two years, an
additional 30% after three years, and the remaining 30% after four
years.
(2)
The
values are based on the difference between (a) the price of the Company's Common
Stock on the AMEX at the close of trading on December 30, 2005 of $6.15 per
share and (b) the exercise price of the option. The actual value realized by
a
named executive officer on the exercise of these options depends on the market
value of the Company's Common Stock on the date of exercise.
Other
Plans The
Board
of Directors has adopted an LSB Industries, Inc., Employee Savings Plan (the
"401(k) Plan") for the employees (including executive officers) of the Company
and its subsidiaries, excluding employees covered under union agreements and
certain other employees. The 401(k) Plan is funded by employee contributions,
and the Company and its subsidiaries make no contributions to the 401(k) Plan
(with limited matching exceptions at three subsidiary locations). The amount
that an employee may contribute to the 401(k) Plan equals a certain percentage
of the employee's compensation, with the percentage based on the employee'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 employee's compensation each pay period, in
accordance with the employee's instructions, and pays the amount into the 401(k)
Plan for the employee's benefit. The salary and bonus set forth in the Summary
Compensation Table above includes any amounts contributed during the 2005,
2004,
and 2003 fiscal years pursuant to the 401(k) Plan by the named executive
officers of the Company.
On
May
12, 2005, the Company entered into a certain death benefit agreement (“2005
Agreement”) with Jack E. Golsen. This agreement replaced certain existing
benefits that were payable to Mr. Golsen under a split dollar insurance policy
purchased by the Company on Mr. Golsen's life in 1996 and a second policy
purchased in 2002, each of which were replaced in 2005. 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 have been purchased and are owned by the Company. The life insurance
policies owned by the Company provide a stated death benefit of $7 million.
The
Company is obligated to keep in existence no less than $2.5 million of the
stated death benefit.
During
1981, the Company entered into individual death benefit agreements (the "1981
Agreements") with certain key employees. Under the 1981 Agreements, the
designated beneficiary of an employee will receive a monthly benefit for a
period
16
of
ten
years if the employee 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 employee at anytime prior to
the
employee's death. The Company has purchased life insurance on the life of each
employee 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 employee. The following table sets forth
the amounts of annual benefits payable to the designated beneficiary or
beneficiaries of the executive officers named in the Summary Compensation Table
under the 1981 Agreements.
|
Name
of Individual
|
Amount
of Annual Payment
|
|
Jack
E. Golsen
|
$
|
175,000
|
||
|
Barry
H. Golsen
|
$
|
30,000
|
||
|
David
R. Goss
|
$
|
35,000
|
||
|
Tony
M. Shelby
|
$
|
35,000
|
||
|
David
M. Shear
|
$
|
N/A
|
During
1992, the Company entered into a non-qualified arrangement with certain key
employees of the Company and its subsidiaries 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"). Under the 1992 Agreements,
the
employee is eligible to receive a designated benefit (“Benefit”) as set forth in
the 1992 Agreements. If prior to attaining the age 65, the employee dies while
in the employment of the Company or a subsidiary of the Company, the designated
beneficiary of the employee 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 employee at any time and for any reason prior
to the death of the employee. The Company has purchased insurance on the life
of
each employee covered under the 1992 Agreements where the Company is the owner
and sole beneficiary of the 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 employee becomes
incapacitated prior to retirement or prior to reaching age 65, the employee
may
request the Company to cash-in any life insurance on the life of such employee
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 executive officers named
in
the Summary Compensation Table under the 1992 Agreements.
|
Name
of Individual
|
Amount
of Annual
Benefit
|
Amount
of Annual Death Benefit
|
|
Barry
H. Golsen
|
$
|
17,480
|
$
|
11,596
|
||||
|
David
R. Goss (1)
|
$
|
17,403
|
$
|
-
|
||||
|
Tony
M. Shelby
|
$
|
15,605
|
$
|
16,486
|
||||
|
David
M. Shear
|
$
|
17,822
|
$
|
7,957
|
(1)
During 2005, Mr. Goss reached the age of 65. As a result, Mr. Goss is receiving
a monthly benefit of $1,450 which began in December 2005.
Employment
Contracts and Termination of Employment and Change in Control
Arrangements
(a)
Termination of Employment and Change in Control
Agreements
We have
entered into severance agreements with each of Jack E. Golsen, Barry H. Golsen,
Tony M. Shelby, David R. Goss, David M. Shear, and certain other
officers.
Each
severance agreement provides (among other things) that if, within 24 months
after the occurrence of a change in control (as defined) of the Company, the
Company terminates the officer's employment other than for cause (as defined),
or the officer terminates his employment for good reason (as defined), the
Company
17
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 Securities and Exchange Commission and, in any event, would mean when:
(a) 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 (i) any person, firm,
corporation, entity, or group which, as of the date of the severance agreement,
has that ownership, or (ii) 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; (b) 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 (c) 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: (a) 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; (b) the conviction of a felony; (c) the embezzlement
by
the officer of Company assets resulting in substantial personal enrichment
of
the officer at the expense of the Company; or (d) 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: (a) the conviction of Mr. Golsen of a felony
involving moral turpitude after all appeals have been completed; or (b) 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 (i) 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 (ii) 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 (a) 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; (b) the relocation of the officer; (c) any
purported termination by the Company of the officer's employment with
the
18
Company
otherwise than as permitted by the severance agreement; or (d) 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 of no change
in control had occurred.
Except
for the severance agreement with Jack E. Golsen, each severance agreement runs
until the earlier of: (a) three years after the date of the severance agreement,
or (b) the officer's normal retirement date from the Company; however, beginning
on the first anniversary of the severance agreement and on each annual
anniversary thereafter, the term of the severance agreement automatically
extends for an additional one-year period, unless the Company gives notice
otherwise at least 60 days prior to the anniversary date. The severance
agreement with Jack E. Golsen is effective for a period of three years from
the
date of the severance agreement; except that, commencing on the date one year
after the date of such severance agreement and on each annual 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.
(b)
Employment Agreement We
have
an employment agreement with Jack E. Golsen, the Chairman of the Board and
Chief
Executive Officer of the Company, which requires the Company to employ Mr.
Golsen as an executive officer of the Company. The current term of the
employment agreement will expire March 21, 2008; however, pursuant to an
amendment to the employment agreement approved by the Board of Directors, the
term will be automatically renewed for up to three additional three-year
periods. 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.
Under
the terms of such employment agreement, Mr. Golsen (a) shall be paid an annual
base salary at his 1995 base rate, as adjusted from time to time by the
Executive Compensation and Option Committee, but such shall never be adjusted
to
an amount less than Mr. Golsen's 1995 base salary, (b) shall be paid an annual
bonus in an amount as determined by the Executive Compensation and Option
Committee, and (c) shall receive from the Company certain other fringe benefits.
The employment agreement was amended in 2005 to reflect the termination of
a
split dollar life insurance policy on Mr. Golsen's life and the new Death
Benefit Agreement, as discussed above under “Other Plans.”
The
employment agreement provides that Mr. Golsen's employment may not be
terminated, except (a) upon conviction of a felony involving moral turpitude
after all appeals have been exhausted, (b) 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, and (c) Mr. Golsen's death. However, no
such
termination under (a) or (b) above 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 (a) or (b) above.
If
Mr.
Golsen's employment is terminated in breach of the employment agreement, then
he
shall, in addition to his other rights and remedies, receive and the Company
shall pay to Mr. Golsen (a) in a lump sum 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 (b) 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) and within 24 months after such change in control Mr.
19
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.
Compensation
Committee Interlocks and Insider Participation
Our
Executive Compensation and Option Committee has the authority to set the
compensation of all our officers. This Committee generally considers and
approves the recommendations of the Chief Executive Officer. The Chief Executive
Officer does not make a recommendation regarding his own salary. The members
of
the Executive Compensation and Option Committee are the following non-employee
directors: Bernard G. Ille and Horace G. Rhodes. Neither Mr. Ille nor Mr. Rhodes
is, or ever has been, an officer or employee of the Company or any of its
subsidiaries. During 2005, the Executive Compensation and Option Committee
had
two meetings.
See
"Compensation of Directors" for information concerning compensation paid to
each
non-employee director of the Company during 2005 for services as a director
to
the Company.
Report
of Executive Compensation and Option Committee
General The
Executive Compensation and Option Committee ("Committee") is presently comprised
of Bernard G. Ille and Horace G. Rhodes, neither of whom is a current or former
employee of the Company. The Committee is responsible for reviewing and
approving the compensation paid to executive officers of the Company.
Compensation
Policy for Executive Officers Although
the Committee has not established specific quantitative compensation policies
for executive officers of the Company, including the Chief Executive Officer,
the Committee reviews each executive officer's performance on behalf of the
Company. The guiding principle of the Committee is based on the following
objectives: (a) to attract and retain qualified executives in a highly
competitive environment who will play significant roles in achieving the
Company's goals; (b) to reward executives for strategic management and the
long-term enhancement of stockholder value; (c) to create a performance-oriented
environment that rewards performance with respect to financial and operational
goals of the Company; and, (d) to motivate executives to protect the interests
of the Company in all situations. The key elements of the Company's executive
compensation program have consisted of a base salary, bonus and stock
options.
As
to the
compensation (base salary and bonus) paid or payable to executive officers,
other than the Chief Executive Officer, the Chief Executive Officer makes a
recommendation to the Committee. The Committee considers such recommendations.
The Chief Executive Officer's recommendation with respect to base salary and
bonus and the Committee's approval or disapproval of such recommendation is
primarily based on the objectives set forth above.
The
Committee considers the payment of bonuses to be consistent with the objectives
set forth above. As a result, bonuses were paid in 2005, 2004 and 2003. See
"Executive Compensation."
Jack
E.
Golsen has been Chief Executive Officer of the Company since its formation
in
1969. In March 1996, the Company entered into an employment agreement with
Mr.
Golsen, which sets Mr. Golsen's salary at his 1995 base rate, as adjusted from
time to time by the Committee. In determining any adjustments to Mr. Golsen's
compensation, the Committee takes into account the fact that Mr. Golsen
continues the strategy of developing the Company through internal growth,
acquisitions, redeployment of assets and personnel, the complexity of issues
20
required
to be dealt with, and development of international markets. There were no
increases in Mr. Golsen's annual salary for 2003, 2004 or 2005.
Since
1996, the Company has owned a $3 million split dollar endorsement life insurance
policy on the life of Jack E. Golsen in order to provide a death benefit for
Mr.
Golsen's family. In 2002, the Company purchased an additional $2 million life
insurance policy. The proceeds of those policies were to fund a $2.5 million
death benefit to Mr. Golsen's family. In March 2005, the Committee determined
that due, in part, to certain ambiguities with, and the implementation of,
Sarbanes Oxley Act of 2002, the Company should replace the split dollar policy
and the additional policy on Mr. Golsen's life. As a result, the Committee
recommended and the Board of Directors approved the termination of the existing
policies and the purchase of three new whole life insurance policies on Mr.
Golsen's life, having an aggregate stated death benefit of $7 million. In
connection with the purchase of the new policies, the Committee recommended
and
the Board of Directors approved a Death Benefit Agreement between the Company
and Mr. Golsen. The agreement provides for the payment of $2.5 million to Mr.
Golsen's family or designated beneficiary upon the Company's receipt of $2.5
million of insurance proceeds under the new policies. The amount payable under
the Death Benefit Agreement to Mr. Golsen's family or designated beneficiary
is
the same amount that would have been payable under the prior two
policies.
The
Company utilizes the granting of stock options to compensate executive officers
of the Company. This practice is founded on the belief that stock options offer
executive officers a valuable incentive to achieve increased profitability
of
the Company in order to enhance stockholder value. There are no specific factors
used to determine the number of options granted or to the timing of such grants;
however, certain criteria are considered such as length of service, level of
responsibility, and the achievement of the Company's earnings objectives. No
stock options were granted to the Chief Executive Officer and other named
executive officers of the Company during 2005.
Members
of the Committee:
*
Horace
G. Rhodes, Chairman
*
Bernard
G. Ille
The
foregoing report of the Executive Compensation and Option Committee shall not
be
considered incorporated by reference by any general statement incorporating
by
reference this Proxy Statement into any filing under the Securities Act of
1933
or the Securities Exchange Act of 1934 (collectively, the "Acts"), except to
the
extent that the Company specifically incorporates this information by reference,
and shall not otherwise be deemed to be soliciting material or to be filed
under
such Acts.
Performance
Graph
The
following table compares the yearly percentage change in the cumulative total
stockholder return of (a) the Company, (b) a composite index ("Peer Group")
comprised of a peer group of entities from two distinct industries which
represent the Company's two primary lines of business (Climate Control and
Chemical), and (c) the American Stock Exchange Market Value Index ("AMEX MVI").
The table set forth below covers the period from year-end 2000 through year-end
2005.
21
FISCAL
YEAR ENDING
|
12/29/2000
|
12/31/2001
|
12/31/2002
|
12/31/2003
|
12/31/2004
|
12/30/2005
|
|
LSB
Industries, Inc.
|
100.00
|
106.67
|
114.87
|
261.74
|
326.15
|
252.31
|
||||||
|
PEER
GROUP
|
100.00
|
113.50
|
107.43
|
162.70
|
246.79
|
239.69
|
||||||
|
AMEX
MVI
|
100.00
|
95.39
|
91.58
|
124.66
|
142.75
|
157.43
|
Assumes
$100 invested at year-end 2000 in the Company, the Peer Group, and the AMEX
MVI,
and the investment of dividends, if any.
The
Peer
Group was developed for the Company by Hemscott Group (formerly CoreData) and
is
comprised of all companies that have specified Hemscott Group General Index
Groups codes, which the Company believes correspond to the Company's primary
lines of business. The Peer Group is comprised of (a) climate control companies
having a Hemscott Group code 634 (general building materials) and (b) chemical
companies having a Hemscott Group codes 112 (agricultural chemicals) and 113
(specialty chemicals), and is provided for comparison to the Company's two
primary lines of business, Climate Control and Chemical. The companies which
comprise the Peer Group are listed on Exhibit "A" to this Proxy
Statement.
The
Company has been advised that the cumulative total return of each component
company in the Peer Group has been weighted according to the respective
company's stock market capitalization. The
AMEX
MVI line is provided because the Company believes that those companies listed
in
the AMEX MVI most closely resemble the size and composition of the Company.
In
light of the Company's unique industry diversification and current market
capitalization, the Company believes that the Peer Group and AMEX MVI are
appropriate for comparison to the Company. The above Performance Graph shall
not
be deemed incorporated by reference by any general statement incorporating
by
reference this Proxy Statement into any filing under the Securities Act of
1933
or the Securities Exchange Act of 1934 (collectively, the "Acts"), except to
the
extent that the Company specifically incorporates this information by reference,
and shall not otherwise be deemed to be soliciting material or to be filed
under
such Acts.
22
PROPOSAL
2
RATIFICATION
OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The
Audit
Committee has appointed the firm of Ernst & Young LLP, Independent
Registered Public Accounting Firm ("Ernst & Young"), as the Company's
auditors for 2006. Ernst & Young has served as the Company's auditors for
more than five years, including the fiscal year most recently completed. If
the
stockholders do not ratify the appointment of Ernst & Young, the Audit
Committee will reconsider the appointment.
In
line
with past practices, it is expected that one or more representatives of Ernst
& Young will attend the Annual Meeting and will be available to respond to
appropriate questions or make a statement should they desire to do
so.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE APPOINTMENT
OF ERNST & YOUNG LLP.
OTHER
MATTERS
As
of the
date of this Proxy Statement, the Board of Directors knows of no other matters
which may come before the Annual Meeting. If any other business properly comes
before the meeting, the persons named in the Proxy Card will vote with respect
to that matter in accordance with their best judgment.
Pursuant
to the By-laws of the Company, only such business shall be conducted at the
Annual Meeting as shall have been brought before the meeting (a) by or at the
direction of the Board of Directors of the Company, or (b) by any stockholder
of
the Company who is entitled to vote at the Annual Meeting and who complies
with
the following notice requirements. No business may be properly brought before
the Annual Meeting by a stockholder unless the stockholder gives written notice
to the Secretary of the Company of the business to be presented at the Annual
Meeting not less than 50 days prior to the date of the Annual Meeting (or in the
event that less than 60 days notice, or public disclosure of the date of the
Annual Meeting, is given or made to stockholders, written notice by the
stockholder must be received by the Secretary of the Company not later than
the
close of business on the 10th day following the day on which notice of the
date
of the meeting was mailed or public disclosure was made). The written notice
must set forth: (a) a brief description of the business desired to be presented
before the Annual Meeting and reasons for conducting such business at the
meeting; (b) the name and address, as they appear on the Company's books, of
the
stockholder proposing such business; (c) the class and number of shares of
the
Company's voting stock beneficially owned by such stockholder; and (d) any
material interest of such stockholder in such business.
A
copy of
the Company's 2005 Annual Report accompanies this Proxy Statement, which Annual
Report includes the Company’s 2005 Form 10-K. Copies of exhibits to the
Form 10-K are available, but a reasonable fee per page will be charged to
the requesting stockholder. Stockholders may make requests in writing to
Director - Communications Department, c/o LSB Industries, Inc., 16 South
Pennsylvania Avenue, Post Office Box 754, Oklahoma City, OK 73101. Documents
filed by the Company pursuant to the Exchange Act may be reviewed and obtained
through the SEC's EDGAR system, which is publicly available through the SEC's
website, http://www.sec.gov.
LSB
INDUSTRIES, INC.
BY
ORDER
OF
THE
BOARD
OF DIRECTORS
David
M.
Shear
Secretary
June
7,
2006
Oklahoma
City, Oklahoma
23
Exhibit
"A"
|
AAON
INC
|
FLEXIBLE
SOLUTIONS INTL
|
OM
GROUP INC
|
||
|
ACETO
CORP
|
GRIFFON
CORP
|
OMNOVA
SOLUTIONS INC
|
||
|
ADA-ES
INC
|
H.B.
FULLER CO
|
PENFORD
CORP
|
||
|
AGRIUM
INC
|
IMPERIAL
INDUSTRIES INC
|
QUAKER
CHEMICAL CORP
|
||
|
AMCOL
INTERNATIONAL CORP
|
INNOSPEC
INC
|
RONSON
CORP
|
||
|
AMERICAN
STANDARD COS
|
INTERNAT
ALUMINUM CORP
|
RPM
INTERNATIONAL INC DE
|
||
|
AMERICAN
VANGUARD CORP
|
INTERNAT
FLAVORS & FRAG
|
SCOTTS
MIRACLE GROW CO
|
||
|
AMERON
INTERNAT CORP
|
ISONICS
CORPORATION
|
SENSIENT
TECHNOLOGIES CP
|
||
|
BALCHEM
CORP
|
KFX
INC
|
SHERWIN-WILLIAMS
CO
|
||
|
BRADY
CORPORATION CL A
|
KRONOS
WORLDWIDE INC
|
SIGMA-ALDRICH
CORP
|
||
|
BRASKEM
PFD CL A ADR
|
LAPOLLA
INDUSTRIES
|
SOCIEDAD
QUIMICA Y MINER
|
||
|
BUNGE
LTD
|
LESCO
INC
|
SURMODICS
INC
|
||
|
CABOT
CORP
|
LUBRIZOL
CORP
|
SYNGENTA
AD FOR NVS
|
||
|
CABOT
MICROELECTRONICS
|
LYONDELL
CHEMICAL CO
|
SYNTROLEUM
CORPORATION
|
||
|
CARBO
CERAMICS INC
|
MACDERMID
INC
|
TAT
TECHNOL LTD
|
||
|
CENTRAL
GARDEN&PET CL CM
|
MACE
SECURITY INTERNAT
|
TECUMSEH
PRODUCTS CL A
|
||
|
CFC
INTERNAT INC CL CM
|
MARTIN
MARIETTA MATERIAL
|
TECUMSEH
PRODUCTS CL B
|
||
|
CHEMTURA
CORPORATION
|
MESTEK
INC
|
TERRA
NITROGEN CO L.P.
|
||
|
CIBA
SPECIALTY CHEM HLDG
|
METHANEX
CORPORATION
|
TREX
CO INC
|
||
|
COMPASS
MINERALS INTL
|
MONSANTO
CO
|
U.S.
LIME & MINERALS INC
|
||
|
CONTINENTAL
MATERIALS CP
|
MOSAIC
CO
|
UAP
HOLDING CORP
|
||
|
CYANOTECH
CORPORATION
|
NCI
BUILDING SYSTEMS INC
|
USG
CORP
|
||
|
DREW
INDUSTRIES INC
|
NEVADA
CHEMICALS INC
|
VALSPAR
CORPORATION,THE
|
||
|
DYNAMOTIVE
ENERGY SYSTMS
|
NEWMARKET
CORP
|
VULCAN
MATERIALS CO
|
||
|
EDEN
BIOSCIENCE CORP
|
NORTHERN
TECHNOLOGY
|
W.R.
GRACE & CO
|
||
|
ELKCORP
|
OIL-DRI
CORP OF AMERICA
|
WD-40
CO
|
||
|
FERRO
CORP
|
WESTLAKE
CHEMICAL CORP
|
|||
24
LSB
INDUSTRIES, INC.
c/o
UMB
Bank, n. a.
P.O.
Box
419064
Kansas City, MO 64141
Kansas City, MO 64141
YOUR
VOTE IS IMPORTANT
Regardless
of whether you plan to attend the Annual Meeting of Stockholders, you can be
sure your shares are represented at the meeting by promptly returning your
proxy
in the enclosed envelope.
-------------------------------------------------------------------------------------------------
Please
fold and detach card at perforation before mailing.
LSB
INDUSTRIES, INC.
PROXY
FOR THE 2006 ANNUAL MEETING OF STOCKHOLDERS
THIS
PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF LSB INDUSTRIES, INC.
The
undersigned hereby appoints Jack E. Golsen and Tony M. Shelby, and each of
them,
the undersigned's proxy, with full power of substitution, to attend the annual
meeting of the shareholders of LSB Industries, Inc. (the "Company") on Thursday,
July 6, 2006, at 11:30 a.m., Central Daylight Time, at the Company's ofӿces
located at 16 South Pennsylvania Avenue, Oklahoma City, Oklahoma 73107, and
at
any adjournment of that meeting and to vote the undersigned's shares of the
Common Stock, Convertible Noncumulative Preferred Stock, 12% Series B Cumulative
Convertible Preferred Stock, and Series D 6% Cumulative Convertible Preferred
Stock, all of which vote as single class, as designated on the reverse side.
Please
sign exactly as your name appears below, date and return this Proxy Card
promptly, using the self-addressed, prepaid envelope enclosed for your
convenience. Please correct your address before returning this Proxy Card.
Dated:
____, 2006.
______________________________
Signature
Signature
______________________________
Signature
(if held jointly)
Persons
signing in a fiduciary capacity should indicate that fact and give their full
title. If a corporation, please sign in the full corporate name by the president
or other authorized officer. If a partnership, please sign in the partnership
name by an authorized person. If joint tenants, both persons should sign.
Please
fold and detach card at perforation before mailing
-------------------------------------------------------------------------------------------------
.
LSB
INDUSTRIES, INC. PROXY
The
persons named as proxies on the reverse side will vote the shares of stock
represented by this Proxy Card in accordance with the specifcations made in
Items 1 and 2. If the undersigned makes no specifcation, the persons named
as
proxies on the reverse side will vote the shares "FOR" Items 1 and 2.
The
Board of Directors unanimously recommends a vote "FOR" all nominees.
|
1.
|
Election
of Directors
|
Robert
C. Brown,
M.D. Barry
H.
Golsen David
R.
Goss John
A. Shelley
o FOR
all
nominees listed above oWITHHOLD
AUTHORITY
(except
as marked to the contrary below) to
vote for all
nominees listed above
(Instruction:
To withhold authority for any individual nominee, strike through the nominee’s
name above.)
The
Board of Directors unanimously recommends a vote "FOR" this item.
|
2.
|
The
ratification of the Audit Committee appointment of independent auditors,
Ernst & Young, LLP as the Company’s auditors for 2006.
|
o FOR oAGAINST oABSTAIN
|
3.
|
In their discretion, the proxies are authorized to vote upon such other business as may properly come before the meeting. |
(CONTINUED
ON REVERSE SIDE)
LSB
INDUSTRIES
2005
Annual Report
LSB
INDUSTRIES,
INC.
Is
a
manufacturing and marketing company. LSB’s core businesses manufacture and sell
climate control products and chemicals. LSB also provides machinery and related
chemical and industrial engineering services worldwide.
LSB’s
major business groups, consisting of multiple, separate subsidiaries, are
referred to as “Businesses.” LSB’s Businesses are market leaders in specific
segments of the climate control markets and industrial acids and other nitrogen
products.
LSB’s
corporate offices are in Oklahoma City, Oklahoma, U.S.A. The Company was
formed
in 1968 and is a Delaware corporation. In the U.S.A., LSB’s common stock is
traded on the American Stock Exchange and Series 2 Preferred stock is
traded over the counter.
THE
CLIMATE
CONTROL
BUSINESS
Manufactures
and sells a broad range of air conditioning and heating products including
water
source heat pumps, geothermal heat pumps, fan coils, custom air handlers,
and
modular chillers. These products are targeted to commercial and residential
new-building construction, renovation of existing buildings, and replacement
of
existing systems, and are marketed worldwide.
THE
CHEMICAL
BUSINESS
The
Chemical Business is engaged in the manufacturing and sales of chemical products
for the mining, industrial and agricultural markets from three plants in
Texas,
Arkansas and Alabama. The products include all concentrations of nitric acids,
high-grade specialty mixed and sulfuric acids, prilled ammonium nitrate,
liquid
nitrogen solutions, anhydrous ammonia and CO2.
ENGINEERED
PRODUCTS AND
SERVICES
In
addition to the company’s two core businesses, LSB markets precision industrial
equipment and designs, engineers, specifies, tools and furnishes world-class
industrial and chemical manufacturing facilities for international clients.
To
Our Shareholders:
We
are
pleased to report that LSB’s 2005 results were greatly improved over the prior
year. We are encouraged that the strategies we have employed, coupled with
certain favorable business conditions, have resulted in an improved bottom
line.
2005
total revenues increased to $397 million, up 9.1% over the prior year. Our
net income increased to $5.1 million, up from $1.4 million in 2004. Finally,
fully diluted earnings per share were $.19 as compared to a loss of $.07
in
2004.
Both
our
Climate Control and Chemical Businesses improved. This was particularly
encouraging because the improved Chemical results were achieved despite the
fact
that we were forced to curtail operations of our Cherokee, Alabama plant
twice
due to the events caused by Hurricanes Katrina and Rita.
In
addition to discussing 2005 results, in this letter we will review what our
basic company strategy has been for the past several years, and update you
on
what we have achieved with regard to that strategy. We would like to give
you
some insights into LSB, where we think LSB is going, and some of the factors
that affect the industries we serve and influence our business decisions.
We
do not
have a crystal ball. The world and the economy are constantly changing. Although
we have current expectations about the future, changing circumstances could
alter them. As our markets change and as market fundamentals change, we must
be
ready to quickly adapt to those changes.
CLIMATE
CONTROL BUSINESS
Our
Climate Control business designs, manufactures and markets a broad range
of high
quality air-conditioning, heating, and heat pump products used in commercial,
institutional, industrial, and residential climate control systems. ClimateMaster
is the
world’s leading manufacturer of water source heat pumps and geothermal heat
pumps and International
Environmental
is the
leading U.S. producer of hydronic fan coils. ClimateCraft
engineers and produces large custom air handling units and ClimaCool
produces
a line of modular water chillers used in central air-conditioning systems.
Our
products are used in many diverse building types for new construction,
renovation and replacement. We are not dependent on any individual construction
sector. Our five plants, totaling over 600,000 square feet, are located in
Oklahoma City.
2005
sales in the Climate Control Business were $156 million, up 11.3% from
2004. Segment operating income was $14.1 million, a 20% improvement over
the
prior year. Our incoming order level was particularly strong. Bookings were
30%
higher than 2004 and we ended the year with a record high backlog of $56.2
million. The increase in both our shipments and incoming order levels were
greater than the overall growth in commercial construction during 2005, as
reported by McGraw-Hill’s Construction Market Forecasting Service.
During
the first half of 2005 our results were impacted by steep material and freight
price increases incurred during 2004. We were able to pass many of those
increases through to our customers in the form of price increases, which
were
not fully effective until the second half of 2005. As these selling price
increases took effect during the second half, we realized margins that were
improved over the first half.
It
is
important to note that the improved results in the Climate Control Business
were
net of continued costs for certain new product lines and operations that
have
not yet achieved profitability, but which we believe are investments in the
future growth of this business.
Finally,
the 2005 results were adversely impacted by $.9 million of unusual, one-time
legal expenses related to an arbitration case which we ultimately won. We
expect
to be reimbursed for some, if not all, of those legal costs, but the amount
of
reimbursement has not yet been determined by the arbitrator.
As
we
have discussed in earlier letters and during quarterly conference calls,
the
basic strategy of this business has been to:
• Continue
to be a specialist and to dominate the niches our core products serve.
• Upgrade
and grow our core product lines.
• Emphasize
operational excellence.
• Emphasize
environmentally responsible and energy efficient products.
• Enter
into new business opportunities that we believe are complimentary to our
existing products and/or customer base, or which present a significant
opportunity for profitable growth.
What
have
we accomplished in our Climate Control Business?
• We
have
improved our market penetration in both our core products. During 2005 our
market share for both fan coils and water source heat pumps (including
geothermal heat pumps) increased to 44% and 34% respectively, according to
Air
Conditioning and Refrigeration Institute reported shipments in the United
States. We are clearly the U.S. market leader for both these products.
• We
have
introduced new products and increased sales.
• We
have
consistently improved our bottom line.
• We
introduced our award winning Tranquility 27™ geothermal heat pumps, which are
the most energy efficient products on the market today and use our
EarthPure®
non-ozone depleting, environmentally responsible refrigerant. In addition,
we
have converted much of our water source heat pump product line to EarthPure
refrigerant.
• We
entered the large custom air handler business and have grown ClimateCraft
from a
start-up to a forecast break-even rate of operation in 2006. We expect
substantial growth from this business in the future.
• We
have
entered the modular chiller business to capitalize on the large replacement
market for older chillers and to compliment our sales of hydronic fan coils.
Going
forward we expect to pursue the same basic strategy for our Climate Control
Business. Our key challenges for 2006 are to increase our production to keep
up
with our rising order levels, and to manage another round of material price
increases by adjusting our selling prices as the market allows, while continuing
to focus on overall cost reduction.
CHEMICAL
BUSINESS
Our
Chemical Business produces various nitrogen based products including all
concentrations of nitric acid used to produce chemical intermediates and
other
industrial products, sulfuric acid, industrial grade ammonium nitrate used
for
mining and construction, agricultural grade ammonium nitrate fertilizer and
UAN
(urea ammonium nitrate) fertilizer used for crops and pasture lands, anhydrous
ammonia, and CO2.
We
are
the leading marketer of concentrated nitric acid in the U.S., and we are
one of
only two remaining domestic manufacturers of agricultural grade ammonium
nitrate.
We
have
plants located in El Dorado, Arkansas, Baytown, Texas and Cherokee,
Alabama. The El Dorado plant uses anhydrous ammonia delivered via pipeline
as
its basic feedstock and produces two grades of ammonium nitrate as well as
nitric acid and sulfuric acid. The Baytown plant specializes in the production
of nitric acid which is sold pursuant to a long-term supply agreement. It
is one
of the largest and newest nitric acid plants in North America and is
consistently profitable. The Cherokee plant is our only plant that consumes
natural gas as a raw material feedstock to produce its own anhydrous ammonia,
some of which is upgraded to ammonium nitrate solution and urea, and some
of
which is sold to be used directly as ammonia for industrial applications
and for
use by power plants to abate emissions.
2005
sales in our Chemical Business were $233 million, up 7.9% from the prior
year.
Segment operating income was $7.7 million, an $8.6 million turnaround from
the $.9 million loss reported in 2004. Even with the overall improvement,
the
year was a combination of gains vs. offsetting forces. Baytown was unaffected
by
major hurricanes and continued to report steady results. Improvement at El
Dorado was primarily due to a more favorable balance between supply and demand
for its products in the marketplace and improved plant performance. However,
the
year was challenging for Cherokee, which was forced to curtail operations
twice
due to events caused by the two major hurricanes. The first shut-down was
from
September 23rd to October 21st,
caused
by the interruption in Cherokee’s supply of natural gas. From late-December to
mid-January production was again curtailed due to uneconomical natural gas
prices, which spiked as part of the hurricanes’ aftermath. Although a
significant percentage of Cherokee’s annual sales are to customers that accept
the changing cost of natural gas, customers in some cases suspended their
purchases and Cherokee’s sales declined in the fourth quarter. We are glad to
report that none of our plants sustained physical hurricane damage.
For
the
past several years our Chemical Business’ strategy has been to:
• Focus
our
efforts on non-seasonal customers who are willing to accept pricing arrangements
that reflect the fluctuating costs of our basic feedstocks, as opposed to
markets where products are typically sold on a spot market basis that does
not
always reflect the cost of raw materials.
• Take
advantage of the continuing industry consolidation that has reduced overall
production capacity of nitrogen products in the U.S.
• Improve
the efficiency of our plant operations.
• Operate
our plants with safety and environmental stewardship as high priorities.
What
have
we accomplished in the Chemical Business?
• Approximately
65% of the Chemical Business’ 2005 sales were pursuant to pricing arrangements
that provide for the pass-through of certain key costs including the cost
of raw
material feedstocks.
• Because
of the reduced domestic manufacturing capacity of agricultural grade ammonium
nitrate, certain geographic markets that were once uneconomical for us due
to
freight costs are now freight logical, and we have increased our production
accordingly.
• We
have
improved the overall productivity of our El Dorado, Arkansas plant operation
by
increasing uptime and throughput rates and reducing our overall energy
consumption.
• As
a
member of the American Chemistry Council, we are part of the Responsible
Care®
family
of companies. Responsible Care is a global chemical industry initiative in
the
areas of health, safety, security, and the environment. Our Baytown plant
is an
OSHA VPP (Voluntary Protection Program) Star site. This is OSHA’s highest safety
classification.
At
this
time we plan to continue to pursue the same basic strategy for our Chemical
Business. However, business conditions in the chemical industry are subject
to
rapid change, and we will keep a vigilant eye for new conditions that might
require us to adjust either our tactics or fundamental business strategy.
In
addition to the operating strategies discussed above, we have considered
various
strategic alternatives for our Chemical Business. We will continue to search
for
opportunities that allow us to realize the intrinsic value of this business.
FACTORS
AFFECTING THE FUTURE OF OUR BUSINESSES
As
the
global supply of oil and gas declines and their costs remain high or continue
to
increase, the importance of more energy efficient products and the use of
alternative forms of fuel and renewable energy become economic priorities.
With
the advance of global warming, the use of non-ozone depleting products and
clean
forms of energy become environmental imperatives. Although the Climate Control
and Chemical products we produce are seemingly disconnected, both address,
and
are affected by, these crucial issues.
With
the
increasing cost of energy, highly energy efficient products such as our
geothermal heat pumps and high efficiency water source heat pumps provide
viable
alternatives to less efficient forms of heating and cooling. The recently
enacted U.S. Energy Act offers tax credits and other incentives for the use
of
highly energy efficient products such as our geothermal systems. We believe
that
as the U.S. Energy Act is funded, it will further stimulate the sales of
our
geothermal products. The Montreal Protocol of 1987 bans the use of ozone
depleting refrigerants for use in new equipment after 2009, and requires
a phase
out of old refrigerants for replacement applications. We believe that as
the old
refrigerants become scarce, and as their costs increase, this will stimulate
the
replacement of old air-conditioning and heating equipment with new equipment
using non-ozone depleting refrigerants such as our EarthPure (HCFC-410A).
Finally, as the earth continues to warm, it is expected that the general
demand
for air-conditioning products will increase.
As
our
nation strives to reduce our dependence on foreign oil, there is an increasing
demand for the use of coal. The technology for the clean use of coal has
been
developed and is being implemented. Our industrial ammonium nitrate is the
blasting product of choice for surface coal mining. We believe that increased
coal mining will increase the demand for our products. Anhydrous ammonia,
a
product we produce at our Cherokee, Alabama plant, is used by coal operated
electric plants to abate emissions. We believe that as the production output
of
coal-fired plants continues or increases so will the demand for the anhydrous
ammonia we produce.
Our
Climate Control Business is affected by the construction level of commercial,
institutional, multi-family residential, and to a lesser extent single-family
residential buildings. The overall outlook for these markets is optimistic
for
the foreseeable future.
Our
Chemical Business is affected by the price of our two basic raw material
feedstocks, anhydrous ammonia and natural gas. Although a high percentage
of our
sales are to customers who have accepted pricing that fluctuates with the
costs
of ammonia or natural gas, if the products our customers sell become too
costly
their sales can be adversely affected. This happened with certain customers
of
our Cherokee plant in 2005.
CAPITAL
STRUCTURE AND LIQUIDITY
We
have
previously stated that it was our goal to improve our capital structure.
Since
that time we have repositioned our long term debt. In 2004, we entered into
a
new $50 million term loan due in 2009, which replaced a term loan that would
have been due in June 2005. Also, in 2005 we renewed our $50
million
working capital loan, extending it for four years on more favorable terms
with a
lower interest rate. During March of 2006 we completed an $18 million 7%
convertible debenture offering due in 2011. We will use substantially all
of the
net proceeds to repay our higher interest note debt with the balance, if
any,
for general corporate purposes. To date we have used the proceeds of that
offering to repurchase $7.0 million of ThermaClime’s 10.75% bonds that are due
in November 2007, and we are currently in the process of redeeming the remaining
$6.3 million of ThermaClime’s 10.75% notes held by third parties.
Our
strategy is to increase our liquidity as much as possible to facilitate
anticipated growth, as well as to provide insulation against any business
downturn that may occur.
FUTURE
DIRECTION
We
cannot
predict the future, however, we believe that the strategies we have employed
over the past several years are fundamentally sound at this time. We plan
to
continue in the same direction going forward. As management and shareholders,
we
have always resisted changing our course due to short-term market pressures
that
we do not believe are consistent with the long-term best interests of the
Company. The decisions we make about the future of the Company are influenced
by
our desire to achieve growth, improve profitability, and to build a fair
price
for our stock based on performance, not promises. When we make decisions,
we are
always thinking about long-term shareholder value.
We
appreciate the patience of our shareholders. We are grateful to the customers
and business partners who have supported us. We would like to thank the entire
LSB team for their hard work and loyalty, without which we could not have
achieved last year’s improved results.
Sincerely,
|
/s/:
Jack E. Golsen
|
/s/:
Barry H. Golsen
|
|
Jack
E. Golsen
|
Barry
H. Golsen
|
|
Board
Chairman and
|
Board
Vice-Chairman,
|
|
Chief
Executive Officer
|
President
and Chief Operating Officer
|
This
letter contains certain forward-looking statements, including, but not limited
to, future growth of our Climate Control Business; reimbursement for legal
cost
relating to an arbitration case; growth of our large custom air handling
business; going forward strategy for our Climate Control Business; strategy
for
our Chemical Business; search for opportunities to allow us to realize the
intrinsic value of the Chemical Business; the U.S. Energy Act, when funded,
will
stimulate the sales of our geothermal products; as old refrigerants become
scarce and as their costs increase, this will stimulate the replacement of
old
air-conditioning and testing equipment with new equipment using non-ozone
depleting refrigerants such as our EarthPure®;
demand for anhydrous ammonium nitrate we produce will increase the demand
for
coal increases; outlook for certain markets serviced by our Climate Control
Business is optimistic; our desire to achieve growth, improve profitability
and
to build a fair price for our stock based on performance; and long-term
shareholder value. In addition, the words “believe”, “expect”, “intent” and
similar expressions used in this letter identify forward-looking statements.
Please read “A Special Note Regarding Forward-Looking Statements” contained in
the Form 10-K for a discussion of a variety of factors which could cause
the
future outcome to differ materially from the forward-looking statement contained
in this letter.
LSB
INDUSTRIES
2005
Annual Report
10-K
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, 2005
or
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from __________ to __________
Commission
File Number: 1-7677
LSB
INDUSTRIES, INC.
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware
|
73-1015226
|
|
|
(State
of Incorporation)
|
(I.R.S.
Employer)Identification No.)
|
|
16
South Pennsylvania Avenue
|
||
|
Oklahoma
City, Oklahoma
|
73107
|
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant's
Telephone Number, Including Area Code: (405) 235-4546
Securities
Registered Pursuant to Section 12(b) of the Act:
|
Title
of Each Class
|
Name
of Each Exchange On Which Registered
|
|
|
Common
Stock, Par Value $.10
|
American
Stock Exchange
|
Securities
Registered Pursuant to Section 12(g) of the Act: Preferred Share Purchase Rights
and $3.25 Convertible Exchangeable Class C Preferred Stock, Series
2
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. o
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. o
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
o
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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). o
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, 2005 was approximately
$63
million. For purposes of this computation, shares of the Registrant's common
stock beneficially owned by each officer and director and Jayhawk Capital
Management, L.L.C. and its affiliates are deemed to be affiliates. Such
determination should not be deemed an admission that such officers, directors
and such other beneficial owners of our common stock are, in fact, affiliates
of
the Registrant. In addition, this computation does not include the 1,009 shares
of voting Convertible Non-Cumulative Preferred Stock (the "Non-Cumulative
Preferred Stock") held by non-affiliates of the Company. An active trading
market does not exist for the shares of Non-Cumulative Preferred
Stock.
As
of
March 20, 2006 the Registrant had 13,762,618 shares of common stock outstanding
(excluding 3,321,607 shares of common stock held as treasury
stock).
2
FORM
10-K
OF LSB INDUSTRIES, INC.
TABLE
OF
CONTENTS
|
|
Page
|
||
|
PART
I
|
|||
|
Item
1.
|
Business
|
5
|
|
|
Item
1A.
|
Risk
Factors
|
17
|
|
|
Item
1B.
|
Unresolved
Staff Comments
|
24
|
|
|
Item
2.
|
Properties
|
24
|
|
|
Item
3.
|
Legal
Proceedings
|
26
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
29
|
|
|
Item
4A.
|
Executive
Officers of the Registrant
|
29
|
|
|
PART
II
|
|||
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
31
|
|
|
Item
6.
|
Selected
Financial Data
|
36
|
|
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
38
|
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
61
|
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
63
|
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
63
|
|
|
Item
9A.
|
Controls
and Procedures
|
63
|
|
|
Item
9B.
|
Other
Information
|
64
|
|
|
PART
III
|
|||
|
Item
10.
|
Directors
and Executive Officers of the Registrant
|
68
|
|
3
|
Item
11.
|
Executive
Compensation
|
72
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
79
|
|
87
|
||
|
Item
13.
|
Certain
Relationships and Related Transactions
|
|
|
Item
14.
|
Principal
Accountant Fees and Services
|
88
|
|
PART
IV
|
||
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
90
|
4
PART
I
ITEM
1. BUSINESS
General
LSB
Industries, Inc. (the "Company", “Registrant”, "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 used in
commercial and residential new building construction, renovation
of
existing buildings and replacement of existing
systems.
|
|
·
|
Chemical
Business engaged in the manufacturing and selling of chemical products
produced from three plants in Texas, Arkansas and Alabama for the
industrial, mining and agricultural markets.
|
Certain
statements contained in this Part I may be deemed to be forward-looking
statements. See "Special Note Regarding Forward-Looking
Statements."
We
believe our Climate Control Business has developed leadership positions in
niche
markets by offering extensive product lines, customized products and improved
technologies. Under this focused strategy, we have developed what we believe
to
be the most extensive line of water source heat pumps and hydronic fan coils
in
the United States. Further, we were a pioneer in the use of geothermal
technology in the climate control industry and have used it to create what
we
believe to be the most energy efficient climate control systems commercially
available today. We employ highly flexible production capabilities that allow
us
to custom design units for new construction markets and for the retrofit and
replacement markets, and our products are currently installed in some of the
most recognizable commercial developments in the country, including Prudential
Tower, Rockefeller Plaza, Trump Tower, Waldorf Astoria 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 47,000 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 and Wynn resorts.
Our
Chemical Business has three chemical production facilities located in Baytown,
Texas (“Baytown Facility”), El Dorado, Arkansas (“El Dorado Facility”) and
Cherokee, Alabama (“Cherokee Facility”). Our Chemical Business is a supplier to
some of the world’s leading chemical and industrial companies, including Bayer
Corporation, Koch Nitrogen Company, E.I. DuPont de Nemours, Afton Chemical
(f/k/a Ethyl Corp) and Orica USA. By focusing on specific geographic areas,
we
believe that we have developed significant freight and
distribution
5
advantages
over many of our competitors and established leading regional market positions,
a key element in the success of this business. The primary raw material
feedstocks (anhydrous
ammonia and natural gas) of the Chemical Business are commodities, subject
to
significant price fluctuations and are purchased at prices in effect at time
of
purchase. The Baytown Facility consumes approximately 100,000 tons of purchased
anhydrous ammonia per year. Nearly all of the Baytown Facility’s production is
sold pursuant to a long-term contract that provides for a pass-through of
all
costs, including the anhydrous ammonia costs, plus a profit. The El Dorado
Facility purchases approximately 200,000 tons of anhydrous ammonia per year
and
produces and sells approximately 400,000 to 500,000 tons of nitrogen-based
products per year. The anhydrous ammonia is purchased pursuant to a supply
agreement whereby the El Dorado Facility purchases substantially all 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 much of the anhydrous ammonia
consumed in our geographical area is produced off shore and delivered to
the El
Dorado Facility 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. The Cherokee Facility normally consumes 4 to 6
million mm BTU’s of production natural gas annually and produces and sells
approximately 200,000 to 300,000 tons of nitrogen-based products per year.
Natural
gas is a primary raw material for anhydrous ammonia. Natural gas costs have
risen drastically since 2003 to a high of $15.00 per MCF during the later part
of 2005. As of March 22, 2006, the price of natural gas was approximately $7.00
per MCF. Due to the uncertainty of the sales prices of our products in relation
to the cost of anhydrous ammonia and natural gas, our Chemical Business has
pursued a strategy of developing customers that purchase substantial quantities
of products pursuant to sales agreements and/or formulas that provide for the
pass through of raw material costs, variable costs, and some fixed costs, plus
in most cases, a profit margin. These pricing arrangements help mitigate against
the commodity risk inherent in the raw material feedstocks of natural gas and
anhydrous ammonia. For 2005, approximately 67% of the Chemical Business’ sales
were made pursuant to pass-through sales agreements. The remaining sales are
primarily into agricultural markets at the price in effect at time of shipment.
It is our goal to continue developing pass-through agreements with our
customers. However, a customer of the Cherokee Facility that was purchasing
8,000 tons of urea-ammonium nitrate (“UAN”) per month under a pass-through
agreement temporarily suspended its obligations to purchase UAN from our
Cherokee Facility in October 2005 due to the disconnect between the high natural
gas costs and their selling price of products to their customers. In December
2005, this customer had agreed to resume taking delivery of a limited amount
of
product from the Cherokee Facility as “spot purchases” as market conditions and
the cost of natural gas permit. See Item 1A - Risk Factors and “Overview -
Chemical Business” under Item 7 for discussion as to the temporary suspension of
production at the Cherokee Facility due to the high price of natural gas. The
anhydrous ammonia and natural gas feedstock costs are decoupled from the sales
price of our agricultural products resulting in sales prices from time to time
in recent periods not being sufficient to recover our full cost to produce
the
product in this market. Therefore, our Chemical Business continues to
under-perform our expectations due, in part, to our inability to generate
sufficient non-seasonal sales volume to operate our manufacturing facilities
at
optimum levels. Our primary efforts to improve the results of our Chemical
Business include sales efforts to increase the non-seasonal sales volumes with
an emphasis on customers that will accept the commodity risk inherent with
natural gas and anhydrous ammonia.
6
Segment
Information and Foreign and Domestic Operations and Export Sales
Schedules
of the amounts of net sales, gross profit, operating income (loss) and
identifiable assets attributable to each of our lines of business and of the
amount of our export sales in the aggregate and by major geographic area for
each of the last three years appear in Note 20 of the Notes to Consolidated
Financial Statements included elsewhere in this report.
Climate
Control Business
General
Our
Climate Control Business manufactures and sells a broad range of standard and
custom designed water source heat pumps and hydronic fan coils as well as other
niche products for use in commercial and residential HVAC systems including
large custom air handlers and modular chiller systems. The construction of
commercial, institutional and residential buildings including multi and single
family homes, the renovation of existing buildings and the replacement of
existing systems drive the demand for our Climate Control products. Our Climate
Control commercial products are used in a wide variety of buildings, such as:
hotels, motels, office buildings, schools, universities, apartments,
condominiums, hospitals, nursing homes, extended care facilities, industrial
and
high tech manufacturing facilities, food and chemical processing facilities,
and
pharmaceutical manufacturing facilities. We target many of our products to
meet
increasingly stringent indoor air quality and energy efficiency standards.
The
following table summarizes net sales information relating to our products of
the
Climate Control Business:
|
2005
|
2004
|
2003
|
|
|
Percentage
of net sales of the Climate Control Business:
|
|||
|
Water
source heat pumps
|
54%
|
52%
|
51%
|
|
Hydronic
fan coils
|
34%
|
35%
|
40%
|
|
Other
HVAC products
|
12%
|
13%
|
9%
|
|
100%
|
100%
|
100%
|
|
|
Percentage
of consolidated net sales:
|
|||
|
Water
source heat pumps
|
21%
|
20%
|
19%
|
|
Hydronic
fan coils
|
13%
|
14%
|
15%
|
|
Other
HVAC products
|
5%
|
5%
|
4%
|
|
39%
|
39%
|
38%
|
Water
Source Heat Pumps
We
believe we are a leading provider of water source heat pumps to the commercial
construction and renovation markets in the United States. These highly efficient
heating and cooling products enable individual room climate control through
the
transfer of heat through a water pipe system which is connected to a centralized
cooling tower or heat injector. Water source heat pumps enjoy a broad range
of
commercial applications, particularly in medium to
7
large sized buildings with many small, individually controlled spaces. We believe the market for commercial water source heat pumps will continue to grow due to the relative efficiency and long life of such systems as compared to other air conditioning and heating systems, as well as to the emergence of the replacement market for those systems.
Our
Climate Control Business has also developed the use of geothermal water source
heat pumps in residential and commercial applications. Geothermal systems,
which
circulate water and antifreeze through an underground heat exchanger, are among
the most energy efficient systems available. We believe the longer life, lower
cost to operate, and relatively short payback periods of geothermal systems,
as
compared with air-to-air systems, will continue to increase demand for our
geothermal products. We specifically target new residential construction of
moderate and high-end multi and single-family homes.
Hydronic
Fan Coils
We
believe that our Climate Control Business is a leading provider of hydronic
fan
coils. Our Climate Control Business targets the commercial and institutional
markets. Hydronic fan coils use heated or chilled water, provided by a
centralized chiller or boiler through a water pipe system, to condition the
air
and allow individual room control. Hydronic fan coil systems are quieter and
have longer lives and lower maintenance costs than other comparable systems
used
where individual room control is required. Important components of our strategy
for competing in the commercial and institutional renovation and replacement
markets include the breadth of our product line coupled with customization
capability provided by a flexible manufacturing process. The lodging and
hospitality industry is a significant user of hydronic fan coils. Subsequent
to
the September 11, 2001 tragedy, our hydronic fan coil operation experienced
a
decline of major lodging and hospitality construction projects in several key
geographic markets. During 2005, this specific market continued to
improve.
Water
Source Heat Pump and Hydronic Fan Coil Market
We
estimate the annual United States market for water source heat pumps and
hydronic fan coils to be approximately $350 million. Levels of repair,
replacement, and new construction activity generally drive demand in these
markets. In aggregate, the United States market for water source heat pump
and
fan coil products is returning to historical levels. The previous decline in
the
total market in 2001 through 2003 was primarily a direct result of the slowdown
in construction and refurbishment related to the lodging and hospitality
industry and has been attributed to the events of September 11, 2001 and world
unrest.
Production
and Backlog
Most
of
our Climate Control production occurs on a specific order basis. We manufacture
the units 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. As of December 31, 2005 and 2004, the backlog of confirmed orders
for our Climate Control Business was approximately $56.2 million and $28.4
million, respectively. The increase in our backlog relates primarily to the
increase in demand for our water source heat pumps, large custom air handlers
and hydronic fan coils. Past experience
8
indicates that customers generally do not cancel orders after we receive them. As of the date of this report, our Climate Control Business had released the majority of the December 31, 2005 backlog to production. All of the December 31, 2005 backlog is expected to be filled during 2006.
In
response to a record order intake level of our heat pump products, we have
recently increased our unit output by over 25% through additional shifts and
overtime. In addition, throughout 2005 and into 2006 over $4
million will have been invested in fabrication equipment and plant-wide
process control systems. This investment is expected to further raise
capacity and reduce overtime.
Marketing
and Distribution
Distribution
Our
Climate Control Business sells its products to mechanical contractors, original
equipment manufacturers and distributors. Our sales to mechanical contractors
primarily occur through independent manufacturers' representatives, who also
represent complementary product lines not manufactured by us. Original equipment
manufacturers 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 original equipment manufacturers relating to our
products of the Climate Control Business:
|
2005
|
2004
|
2003
|
|
|
Net
sales to original equipment manufacturers as a percentage
of:
|
|||
|
Net
sales of the Climate Control Business
|
22%
|
21%
|
23%
|
|
Consolidated
net sales
|
9%
|
8%
|
9%
|
Market
Our
Climate Control Business depends primarily on the commercial construction
industry, including new construction and the remodeling and renovation of older
buildings, and on the residential construction industry for both new and
replacement markets relating to their geothermal products.
Raw
Materials
Numerous
domestic and foreign sources exist for the materials used by our Climate Control
Business, which materials include compressors, steel, electric motors, valves
and copper. Periodically, our Climate Control Business enters into fixed-price
copper contracts. We expect to obtain our requirements for raw materials in
2006, however, changes in market supply and demand could result in increased
costs. We believe the majority of cost increases, if any, will be passed to
our
customers in the form of higher prices and while we believe we will have
sufficient materials, a shortage of raw materials could impact production of
our
Climate Control products. We do not expect to have any difficulties in obtaining
any necessary materials for our Climate Control Business.
9
Competition
Our
Climate Control Business competes primarily with eight companies, some of whom
are also our customers. Some of our competitors have greater financial and
other
resources than we do. Our Climate Control Business manufactures a broader line
of water source heat pump and fan coil products than any other manufacturer
in
the United States, and we believe that we are competitive as to price, service,
warranty and product performance.
Continue
to Introduce New Products
Our
Climate Control Business will continue to launch new products and product
upgrades in an effort to maintain and increase our current market position
and
to establish a presence in new markets. One of our new products, the SureFlow®
system, is we believe, an effective solution to provide a long-lasting, quiet
and high quality fan coil system at an attractive price to our customers. In
addition, we recently began producing large custom air handlers. We believe
that
we can establish a strong presence within this considerable market.
Chemical
Business
General
Our
Chemical Business manufactures three principal product lines that are derived
from natural gas, anhydrous ammonia, and sulfur:
|
·
|
anhydrous
ammonia, fertilizer grade ammonium nitrate, UAN and urea for the
agricultural industry,
|
|
·
|
concentrated,
blended and regular nitric acid, metallurgical grade anhydrous ammonia
and
sulfuric acid for industrial applications
and
|
|
·
|
industrial
grade ammonium nitrate and solutions for the mining
industry.
|
As
discussed above, our Chemical Business' principal manufacturing facilities
are
the El Dorado Facility, the Cherokee Facility and the Baytown Facility.
The
following table summarizes net sales information relating to our products of
the
Chemical Business:
|
2005
|
2004
|
2003
|
|
|
Percentage
of net sales of the Chemical Business:
|
|||
|
Agricultural
products
|
35%
|
33%
|
37%
|
|
Industrial
acids and other chemical products
|
34%
|
38%
|
36%
|
|
Mining
products
|
31%
|
29%
|
27%
|
|
100%
|
100%
|
100%
|
|
|
Percentage
of consolidated net sales:
|
|||
|
Agricultural
products
|
21%
|
20%
|
22%
|
|
Industrial
acids and other chemical products
|
20%
|
22%
|
22%
|
|
Mining
products
|
18%
|
17%
|
17%
|
|
59%
|
59%
|
61%
|
10
Agricultural
Products
Our
Chemical Business produces agricultural grade ammonium nitrate, a nitrogen-based
fertilizer, at the El Dorado Facility and anhydrous ammonia, UAN and urea at
the
Cherokee Facility. The Cherokee Facility also has the ability to produce
agricultural grade ammonium nitrate. Ammonium nitrate and UAN are two of several
forms of nitrogen-based fertilizers which are derived from anhydrous ammonia.
Although, to some extent, the various forms of nitrogen-based fertilizers are
interchangeable, each has its own characteristics which produce agronomic
preferences among end users. Farmers decide which type of nitrogen-based
fertilizer to apply based on the crop planted, soil and weather conditions,
regional farming practices and relative nitrogen fertilizer prices. We sell
these agricultural products to farmers, ranchers, fertilizer dealers and
distributors located in the Central and Southeastern United States.
Our
Chemical Business' agricultural markets have historically been in relatively
close proximity to our El Dorado and Cherokee Facilities and include a high
concentration of pastureland and row crops which favor our products. We develop
our market position in these areas by emphasizing high quality products,
customer service and technical advice. Recently we have been expanding further
into the Southeastern and NorthCentral United States. Using a proprietary
prilling process, our El Dorado Facility produces a high performance ammonium
nitrate fertilizer that, because of its uniform size, is easier to apply than
many competing nitrogen-based fertilizer products. We believe that our "E-2"
brand ammonium nitrate fertilizer is recognized as a premium product within
our
primary market. In addition, our El Dorado Facility establishes long-term
relationships with end-users through its network of wholesale and retail
distribution centers and our Cherokee Facility sells directly to agricultural
co-op customers.
Industrial
Acids and Other Chemical Products
Our
Chemical Business manufactures and sells industrial acids and other chemical
products primarily to the polyurethane, paper, fibers and electronics
industries. We are a major supplier of concentrated nitric acid and mixed
nitrating acids, specialty products used in the manufacture of fibers, gaskets,
fuel additives, explosives, and other chemical products. In addition, we produce
and sell blended and regular nitric acid, metallurgical grade ammonia and
sulfuric acid. We compete on the basis of price and service, including on-time
reliability and distribution capabilities. We also provide inventory management
as part of the value-added services offered to our customers.
The
Baytown Facility is one of the two largest single train nitric acid
manufacturing units in the United States, with demonstrated capacity of 1,350
short tons per day. Subsidiaries within our Chemical Business entered into
a
series of agreements with Bayer Corporation ("Bayer") (collectively, the "Bayer
Agreement"). Under the Bayer Agreement, El Dorado Nitric Company ("EDNC"),
a
subsidiary within our Chemical Business, operates the Baytown Facility at
Bayer's Baytown, Texas operation. Under the terms of the Bayer Agreement, Bayer
will purchase from EDNC all of its requirements for nitric acid at its Baytown
operation for a term through at least May 2009. EDNC purchases from Bayer
certain of its requirements for materials, utilities and services for the
manufacture of nitric acid. Upon expiration of the initial ten-year term, the
Bayer Agreement may be renewed for up to six renewal terms of five years each;
however, prior to each renewal period, either party to the Bayer Agreement
may
opt against renewal.
11
Mining
Products
Our
Chemical Business manufactures industrial grade ammonium nitrate and 83%
ammonium nitrate solution for the mining industry. One of our subsidiaries,
El
Dorado Chemical Company ("EDC"), is a party to a long-term cost-plus supply
agreement. Under this supply agreement, EDC will supply Orica USA, Inc.
(“Orica”) with approximately 190,000 tons of industrial grade ammonium nitrate
per year for a term through at least March 2008, with provisions for renewal
thereafter. EDC and Orica have agreed in principal to a new five year agreement
beginning January 1, 2006, with the new agreement to provide for certain price
increases and an increase in the amount of product that Orica will take from
EDC
each year and renewal provision thereafter. This new agreement is subject to
finalization of a definitive agreement.
In
addition, another subsidiary within our Chemical Business is party to a
long-term cost-plus supply agreement under which it supplies a customer its
requirements for 83% ammonium nitrate solution for a term through at least
September 2006, with provisions for renewal thereafter. This customer has orally
advised us that they may be reducing the amount of product that they take from
our subsidiary.
Major
Customers
The
following summarizes net sales to major customers relating to our products
of
the Chemical Business:
|
2005
|
2004
|
2003
|
|
|
Net
sales to Orica as a percentage of:
|
|||
|
Net
sales of the Chemical Business
|
19%
|
17%
|
18%
|
|
Consolidated
net sales
|
11%
|
10%
|
11%
|
|
Net
sales to Bayer as a percentage of:
|
|||
|
Net
sales of the Chemical Business
|
15%
|
18%
|
19%
|
|
Consolidated
net sales
|
9%
|
11%
|
12%
|
Raw
Materials
Anhydrous
ammonia and natural gas represent the primary components in the production
of
most of the products of our Chemical Business. Natural gas costs have risen
dramatically from approximately $5.50 per MCF in 2003 to a high of $15.00 per
MCF during the later part of 2005. As of March 22, 2006, the price of natural
gas was approximately $7.00 per MCF. Natural gas is an integral raw material
in
the production of anhydrous ammonia. Prices of raw material feedstocks of
natural gas and anhydrous ammonia remain volatile, and we have pursued a
strategy of developing customers that purchase substantial quantities of
products pursuant to sales agreements and/or formulas that provide for the
pass-through of raw material costs, some variable costs, some fixed costs,
and
in most cases a profit margin. These pricing arrangements provide a hedge
against the commodity risk inherent in the raw material feedstocks of natural
gas and anhydrous ammonia. In addition, we hedge most sales commitments made
at
fixed sales prices.
The
recent hurricanes caused substantial damage to the natural gas pipelines from
the U.S. Gulf Coast to our
12
Under
an
agreement, as amended, with its principal supplier of anhydrous ammonia, EDC
will purchase substantially all of its anhydrous ammonia requirements using
a
market price-based formula plus transportation to the El Dorado Facility through
December 31, 2006. We believe that we could obtain anhydrous ammonia from other
sources in the event of a termination or interruption of service under the
above-referenced contract. Our Chemical Business natural gas feedstock
requirements are generally purchased at spot market price for delivery at our
Cherokee Facility. Periodically, our Chemical Business also enters into
fixed-price natural gas contracts for part of our requirements.
Seasonality
We
believe that the only seasonal products of our Chemical Business are fertilizer
and related chemical products sold to the agricultural industry. The selling
seasons for those products are primarily during the spring and fall planting
seasons, which typically extend from March through June and from September
through November in the geographical markets in which the majority of our
agricultural products are distributed. As a result, our Chemical Business
increases its inventory of ammonium nitrate and UAN prior to the beginning
of
each planting season. In addition, the amount and timing of sales to the
agricultural markets depend upon weather conditions and other circumstances
beyond our control.
Regulatory
Matters
Our
Chemical Business is subject to extensive federal, state and local environmental
laws, rules and regulations. See “Business - Environmental Matters" and "Legal
Proceedings".
As
a
result of growing concerns over ammonium nitrate, other nitrogen fertilizers
and
other potentially hazardous materials, there have been new and proposed federal,
state and industry requirements to place additional security controls over
the
distribution, transportation and handling of these products.
We
fully
support these initiatives and believe they will not materially affect the
viability of ammonium nitrate as a valued product to the agricultural
industry.
Competition
Our
Chemical Business competes with other chemical companies in our markets, many
of
whom have greater financial and other resources than the Company. We believe
that competition within the markets served by our Chemical Business is primarily
based upon price, location of production and distribution sites, service and
product performance.
13
Employees
As
of
December 31, 2005 we employed 1,267 persons. As of that date, our Climate
Control Business employed 833 persons, none of whom are represented by a union,
and our Chemical Business employed 373 persons, with 123 represented by unions
under agreements expiring in July through November of 2007.
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 pollutants or other substances 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. Our Chemical Business could be required to make significant additional
site or operational modifications involving substantial expenditures. We have
a
legal obligation to monitor certain discharge water outlets at our Chemical
Business facilities should we discontinue the operations of a facility. We
do
not believe that the annual costs of the required monitoring activities would
be
significant and as we currently have no plans to discontinue the use of the
facilities and the remaining life of either facility is indeterminable, an
asset
retirement liability has not been recognized. However, we will continue to
review this obligation and record a liability when a reasonable estimate of
the
fair value can be made. Currently, there is insufficient information to estimate
the fair value of the asset retirement obligation.
FASB
Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”
requires recognition of a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably
estimated. The Company has certain facilities that contain asbestos insulation
around certain piping and heated surfaces. The asbestos insulation is in
adequate condition to prevent leakage and can remain in place as long as the
facility is operated or remains assembled. The Company plans to maintain the
facilities in an adequate condition to prevent leakage through its standard
repair and maintenance activities. The Company has not recorded a liability
relating to the asbestos insulation, as management believes that it is not
possible to reasonably estimate a settlement date for asbestos insulation
removal because the facilities have an indeterminate life.
14
|
1.
|
Discharge
Water Matters
|
The
El
Dorado Facility generates process wastewater. The process water discharge and
storm-water run off are governed by a state National Pollutant Discharge
Elimination System (“NPDES”) water discharge permit issued by the Arkansas
Department of Environmental Quality (“ADEQ”), which permit is to be renewed
every five years. The ADEQ issued to EDC a new revised NPDES water discharge
permit in 2004, and EDC has until June 2007 to meet the compliance deadline
for
the more restrictive limits under the recently issued NPDES permit. In order
to
meet EDC’s effluent limits under the permit, EDC had planned to utilize a
pipeline to be built by the City of El Dorado, Arkansas (the
“City”).
The
City
council approved the joint pipeline, but construction of the pipeline by the
City is subject to the City receiving a permit from the ADEQ. The ADEQ has
not
issued the necessary permit to discharge wastewater into the pipeline and,
as a
result, this has caused a delay of unknown duration in construction of the
pipeline. This delay may impact our ability to meet our compliance schedule
under the NPDES permit. As a result, EDC has proposed to the ADEQ an extension
of its compliance deadlines under its NPDES permit but there are no assurances
that the ADEQ will grant such extension. If the City is not able to build its
pipeline or can build it in a timely manner, EDC intends to discharge its
wastewater through the City’s sewer system subject to obtaining a sewer
discharge permit from the City and EDC building a pipeline to the City’s sewer
system in a timely manner. The estimated remaining capital expenditures to
meet
the requirements of the NPDES permit ranges from $.5 million to $3.3 million
plus approximately $2 million for our pro-rata portion of pipeline engineering
and construction costs should the City build a pipeline.
In
addition, EDC has entered into a CAO that recognizes the presence of nitrate
contamination in the shallow groundwater at the El Dorado Facility. A new CAO
is
being completed to address the shallow groundwater contamination, which will
include an evaluation of the current conditions and remediation based upon
a
risk assessment. 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. There are no known users of this shallow groundwater
in the area, and preliminary risk assessments have not identified any public
health risk that would require remediation. During 2005, we spent $325,000
relating to the dredging of our neutralization pond to increase its efficiency.
At December 31, 2005 the estimated cost to complete the requested investigation
and risk assessment is approximately $33,000 which liability has been recorded.
This amount is not discounted to its present value. 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, it is reasonably possible that a change in estimate will occur in
the
near term.
|
2.
|
Air
Matters
|
Under
the
terms of a consent administrative order (“AirCAO”), which became effective in
February 2004 resolving certain air regulatory alleged violations associated
with EDC’s sulfuric acid plant and certain other alleged air emission
violations, EDC is required to implement additional air emission controls at
the
El Dorado Facility no later than six years from the effective date of the
AirCAO. The ultimate cost of any technology changes required cannot
presently be determined but is believed to cost between $1.5 million to $3 million of capital expenditures, depending on the technology changes as may be required.
15
presently be determined but is believed to cost between $1.5 million to $3 million of capital expenditures, depending on the technology changes as may be required.
|
3.
|
Other
Environmental Matters
|
In
April
2002, Slurry Explosive Corporation (“Slurry”), later renamed Chemex I Corp., a
subsidiary within our Chemical Business, entered into a Consent Administrative
Order (“Slurry Consent Order”) with the Kansas Department of Health and
Environment (“KDHE”), regarding Slurry’s Hallowell, Kansas manufacturing
facility (“Hallowell Facility”). The Slurry Consent Order addressed the release
of contaminants from the facility into the soils and groundwater and surface
water at the Hallowell Facility. There are no known users of the groundwater
in
the area. The adjacent strip pit is used for fishing. Under the terms of the
Slurry Consent Order, Slurry is required to, among other things, submit an
environmental assessment work plan to the KDHE for review and approval, and
agree with the KDHE as to any required corrective actions to be performed at
the
Hallowell Facility.
In
connection with the sale of substantially all of the operating assets of Slurry
and Universal Tech Corporation (“UTeC”) in December 2002, which was accounted
for as discontinued operations, both subsidiaries within our Chemical Business,
UTeC leased the Hallowell Facility to the buyer under a triple net long-term
lease agreement. However, Slurry retained the obligation to be responsible
for,
and perform the activities under, the Slurry Consent Order. In addition, certain
of our subsidiaries agreed to indemnify the buyer of such assets for these
environmental matters. Slurry placed prior owners Chevron of the Hallowell
Facility on notice of their responsibility for contribution towards the costs
to
investigate and remediate this site. Representatives of Chevron have agreed
to
pay one-half of the costs of certain interim remediation of the
site.
During
October 2005, representatives of Slurry and Chevron met with the KDHE and
proposed to remove the bulk of contaminated soil at the Hallowell site, which
was orally agreed to by the KDHE subject to approval of a written work plan
submitted to the KDHE. As a result of these meetings, we recorded provisions
totaling of $644,000 for our share of these estimated costs. At December 31,
2005, our liability (which is included in other current and noncurrent accrued
liabilities) in connection with this remediation matter is $1,458,000 and our
receivable (which is included in accounts receivable and other assets) from
Chevron for one-half of these costs is $730,000. 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. For 2005,
our share of these expenses are classified as discontinued operations in the
accompanying consolidated statement of income (there are no income tax benefits
related to these expenses). It is expected that this soil remediation will
occur
over the next two years.
Grand
Jury Investigation - Slurry - Hallowell Facility
The
U.S.
Bureau of Alcohol, Tobacco, Firearms and Explosives (“ATF”) previously conducted
an investigation at Slurry. In August 2003, we learned that a federal grand
jury
for the District of Kansas was investigating Slurry and certain of its former
employees relating to the alleged violations of explosive storage and related
regulations at Slurry’s Hallowell Facility. Active operations at the Hallowell
Facility were discontinued in February 2002 after its license to
possess
explosives was revoked by the ATF. In response to the Assistant U.S. Attorney’s
suggestion, our counsel sent a letter to the U.S. Attorney offering to plead
guilty to one count of a misdemeanor violation of explosive storage regulations
with no monetary fine or forfeiture. The U.S. Attorney has not yet responded
to
our counsel’s offer. As of December 31, 2005, no liability has been recorded for
any possible monetary fine or forfeiture because the decision from the U.S.
Attorney is currently unknown. In the meantime, the U.S. government has
continued to subpoena records for the grand jury and to examine witnesses in
connection with this matter.
16
ITEM
1A. RISK FACTORS
Risks
Related to Us and Our Business
Cost
and availability of raw materials could materially affect our profitability
and
liquidity.
Our
Chemical Business’ sales and profits are heavily affected by the costs and
availability of its primary raw materials. Anhydrous ammonia and natural gas,
which are purchased from unrelated third parties, represent the primary raw
material feedstocks in the production of most of the products of the Chemical
Business. The primary material utilized in anhydrous ammonia production is
natural gas, and fluctuations in the price of natural gas can have a significant
effect on the cost of anhydrous ammonia. During 2005, there were substantial
increases in the cost of anhydrous ammonia and natural gas, and in many
instances we were unable to increase our sales prices to cover all of the higher
anhydrous ammonia and natural gas costs incurred. Although our Chemical Business
has begun 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 by the Chemical Business that do not provide for these pass-throughs.
Thus, in the future, we may not be able to pass along to all of our customers
the full amount of increases in anhydrous ammonia and natural gas costs. Then,
as a result of the high cost of natural gas, our Chemical Business suspended
ammonia production at the Cherokee Facility on December 20, 2005, until on
or
about January 12, 2006, and a customer of our Cherokee Facility who was taking
approximately 8,000 tons of UAN per month temporarily suspended its obligations
under the contract due to the high prices of natural gas from October until
December 2005 when it agreed to resume taking a limited amount of product as
spot purchases as market conditions and the cost of natural gas permits. We
could from time to time, suspend production at this facility due to, among
other
things, continuing high cost of its primary raw material, natural gas.
Accordingly, our results of operations and financial condition have in the
past
been, and will in the future be, materially affected by cost increases of raw
materials, including anhydrous ammonia and natural gas.
In
addition, our Climate Control Business depends on raw materials such as copper
and steel, which have recently shown considerable price volatility. While we
periodically enter into fixed-price contracts on copper to hedge against price
increases, there can be no assurance that our Climate Control Business will
effectively manage against price fluctuations in copper and other raw materials
or that future price fluctuations in copper and other raw materials will not
have an adverse effect on our financial condition, liquidity and results of
operations.
17
In
recent years our Chemical Business has been unable to generate significant
positive cash flows.
Due,
in
part, to lower than optimum sales levels, margin problems and extensive capital
expenditures, our Chemical Business has not generated significant positive
cash
flows in recent years. Continuing significant cash flow expenditures by this
business could have a material adverse effect on our financial condition and
liquidity.
Our
Climate Control Business and its customers are sensitive to economic
cycles.
Our
Climate Control Business is affected by cyclical factors, such as interest
rates, inflation and economic downturns. Our Climate Control Business depends
on
sales to customers in the commercial construction and renovation industries,
which are particularly sensitive to these factors. A decline in the economic
activity in the United States has in the past, and could in the future, have
a
material adverse effect on our customers in the commercial construction and
renovation industries in which our Climate Control Business sells a substantial
amount of its products. Such a decline could result in a decrease in revenues
and profits, and an increase in bad debts, in our Climate Control
Business.
Weather
conditions adversely affect our Chemical Business.
The
agricultural products produced and sold by our Chemical Business have in the
past, and could continue in the future, to be materially affected by adverse
weather conditions outside of our control (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.
As
discussed under “Environmental Matters” of Item 1, our Chemical Business is
subject to numerous environmental laws and regulations. The manufacture and
distribution of chemical products are activities which entail environmental
risks and impose obligations under environmental laws and regulations, many
of
which provide for substantial fines and potential criminal sanctions for
violations. Our Chemical Business has in the past, and may in the future, be
subject to fines, penalties and sanctions for violations of environmental laws
and substantial expenditures for cleanup costs and other liabilities relating
to
the handling, manufacture, use, emission, discharge or disposal of pollutants
or
other substances at or from the Chemical Business’ facilities. Further, a number
of our Chemical Business’ facilities are dependent on environmental permits to
operate, the loss of which could have a material adverse effect on its
operations and our financial condition.
A
substantial portion of our sales is dependent upon a limited number of
customers.
During
2005, five customers of our Chemical Business accounted for 53% of its net
sales
and 31% of our consolidated sales, and during 2005, 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.
18
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.
Our
working capital requirements fluctuate because of the seasonal nature of our
Chemical Business’ agricultural products.
Because
of the seasonal nature of our Chemical Business’ agricultural products, our
working capital requirements are significantly higher at certain times of the
year due to increases in inventories of ammonium nitrate, UAN and other
agricultural products prior to the beginning of each planting season. If
additional working capital is required and not available under our revolving
credit facility, this could have a negative impact on our other operations,
including our Climate Control Business.
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 than we
have and are less highly leveraged than we are. 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.
We
are effectively controlled by the Golsen Group.
As
discussed under “Security Ownership of Certain Beneficial Owners” of Item 12,
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 (the “Golsen Group”)
beneficially owned as of March 20, 2006, an aggregate of 4,845,288 shares of
our
common stock or 31.9%, which includes 1,441,668 shares that the Golsen Group
has
the right to acquire upon the conversion of preferred stock, stock options
and a
promissory note. 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.
19
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. 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.
Our
warranty claims are not generally covered by our
insurance.
The
development, manufacture, sale and use of products by our Climate Control
Business involve a risk of warranty and product liability claims. Warranty
claims are not generally covered by our product liability insurance and there
may be types of product liability claims that are not covered by our product
liability insurance. A successful warranty or product liability claim not
covered by our insurance could have a material adverse effect on our business,
results of operations, financial condition and liquidity.
We
have not declared or paid dividends on our outstanding common stock in many
years and have a substantial amount of accrued and unpaid dividends on our
outstanding series of cumulative preferred stock.
We
have
not paid cash dividends on our outstanding common stock in many years, and
since
January 1, 1999, through December 31, 2005, we did not pay any accrued dividends
on our outstanding cumulative preferred stock. As of December 31, 2005, there
was approximately $14.5 million of accrued and unpaid dividends on our
outstanding cumulative preferred stock. We intend to retain most of our future
earnings, if any, to provide funds for our operations and/or expansion of our
businesses. However, on January 17, 2006, our Board of Directors declared
nominal dividends, payable March 15, 2006, to holders of record as of February
15, 2006, on certain outstanding series of our preferred stock, as follows:
$.10
per share on our outstanding $3.25 Convertible Exchangeable Class C, Series
2,
which has 623,550 shares outstanding, $.37 on our outstanding Series B 12%
Cumulative Convertible Preferred, which has 20,000 shares outstanding, and
$.31
a share on our outstanding Non-Cumulative Preferred, which has 871 shares
outstanding. These dividends are not for the full amount of the required
quarterly dividends pursuant to the terms of all of our outstanding series
of
preferred stock. As a result, the amount of accrued and unpaid dividends on
our
outstanding cumulative preferred stock increased to approximately $14.9 million
as of March 15, 2006. There are no assurances that we will in the future pay
any
additional quarterly dividends on any of our outstanding shares of preferred
stock. We do not anticipate paying cash dividends on our outstanding common
stock in the foreseeable future, and until all accrued and unpaid dividends
are
paid on our outstanding cumulative preferred stock, no dividends may be paid
on
our common stock. In the event of our liquidation, winding up or dissolution,
there can be no distributions on our common stock until all of the liquidation
preference and stated value amounts of our outstanding preferred stock and
all
accrued and unpaid dividends due on our outstanding cumulative preferred stock
are paid in
full. Further, not paying all of cumulative accrued dividends on our outstanding preferred stock could adversely affect the marketability of our common stock and our ability to raise additional equity capital.
20
full. Further, not paying all of cumulative accrued dividends on our outstanding preferred stock could adversely affect the marketability of our common stock and our ability to raise additional equity capital.
Terrorist
attacks and other acts of violence or war, including the military conflict
in
Iraq and natural disasters (such as hurricanes), 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 promise that there
will
be no further terrorist attacks and natural disasters in the United States
and
elsewhere. These attacks or natural disasters have contributed 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.
As a result of Hurricane Katrina, the natural gas pipeline to our Cherokee
Facility was damaged causing us to shutdown this facility for several weeks
in
September and October 2005. Although we resumed production at the Cherokee
Facility in October 2005, the damaged pipeline was not repaired, resulting,
in
part, in this facility operating at less than full capacity from October 2005,
until we suspended production at this facility on December 20, 2005, due to
high
cost of natural gas. We resumed production at the Cherokee Facility on or about
January 12, 2006. The effect of the damaged pipeline on this facility until
it
is repaired is unknown. 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.
Our
net loss carryovers are subject to various limitations and have not been
approved by the Internal Revenue Service.
Our
net
loss carryovers have resulted from certain losses, and we anticipate they may
be
used to reduce the federal income tax payments which we would otherwise be
required to make with respect to income, if any, generated in future years.
We
had available regular-tax net operating loss carryovers of approximately $67
million at December 31, 2005. The use of the net operating loss carryovers
is,
however, subject to certain limitations and will expire to the extent not
utilized by the years 2009 through 2021. In addition, the amount of these
carryovers has not been audited or approved by the Internal Revenue Service,
and, accordingly, we cannot promise that such carryovers will not be reduced
as
a result of audits in the future.
Recent
restatements and amendments to our 2004 audited financial statements and certain
matters related to our disclosure controls and procedures may present a risk
of
future restatements and could in turn lead to legal
exposure.
As
a
result of comments from the SEC, our 2004 Form 10-K and other changes we made
internally, we have recently restated and amended our 2004 audited financial
statements and filed a Form 10-K/A (Amendment No. 1) for year ended December
31,
2004. As a result of the
restatement and amendments to our 2004 audited financial statements and SEC comments, we also filed an amended Form 10-Q/A for each of the quarters ended March 31, 2005 and June 30, 2005
21
restatement and amendments to our 2004 audited financial statements and SEC comments, we also filed an amended Form 10-Q/A for each of the quarters ended March 31, 2005 and June 30, 2005
As
a
result of this restatement to our 2004 financial statements, we also revised
our
2004 Form 10-K and first two quarters 2005 Form 10-Qs to provide that our
disclosure controls and procedures were not effective as of December 31, 2004,
March 31, 2005 and June 30, 2005, in our Form 10-K/A and Forms 10-Q/A, as a
result of assessing that the change from the LIFO method to the FIFO method
of
accounting was not material resulting in the decision at the time of the change
not to disclose and not to restate the prior years financial statements. We
believe that during December 2005, we corrected the weakness to our disclosure
controls and procedures by, among other things, establishing a Disclosure
Committee to maintain oversight activities and to examine and reevaluate our
policies, procedures and criteria to determine materiality of items relative
to
our financial statements taken as a whole. Restatements by others have, in
some
cases, resulted in the filing of class action lawsuits against such companies
and their management. Any similar lawsuit against us could result in substantial
defense and/or liability costs and would likely consume a material amount of
management’s attention that might otherwise be applied to our business. Under
certain circumstances, these costs might not be covered by, or might exceed
the
limits of, our insurance coverage.
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) 61,239,342 shares
of
common stock and 3,398,541 shares of preferred stock as of December 31, 2005.
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
further adopted a preferred share purchase plan, which is designed to ensure
that all of our stockholders receive fair and equal treatment in the event
of a
proposed takeover or abusive tender offer.
The
foregoing provisions and agreements are designed to discourage a tender offer
or
proxy contest for control of us and could have the effect of making it more
difficult to remove incumbent management.
22
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 (1) the acquirer
owned at least 85% of the outstanding voting stock of such company prior to
commencement of the transaction, or (2) two-thirds of the stockholders, other
than the acquirer, vote to approve the business combination after approval
thereof by the board of directors, and (3) the stockholders decide to opt out
of
the statute.
We
are a holding company and depend, in large part, on receiving funds from our
subsidiaries to fund our indebtedness.
Because
we are a holding company and operations are conducted through our subsidiaries,
principally ThermaClime and its subsidiaries, our ability to make scheduled
payments of principal and interest on our indebtedness depend on operating
performance and cash flows of our subsidiaries and the ability of our
subsidiaries to make distributions and pay dividends to us. Under its loan
agreements, ThermaClime and its subsidiaries may only make distributions and
pay
dividends to us under limited circumstances and in limited amounts. If
ThermaClime is unable to make distributions or pay dividends to us, or the
amounts of such distributions or dividends are not sufficient for us to service
our debts, we may not be able to pay the principal or interest, or both, due
on
our indebtedness.
We
are highly leveraged, which could affect our ability to pay our
indebtedness.
We
have a
substantial amount of debt. At December 31, 2005, after giving effect to the
sale of $18 million in convertible senior subordinated debentures that we
completed in March 2006, and the application of the net proceeds thereof, our
aggregate consolidated debt was approximately $113.6 resulting in total debt
as
a percentage of total capitalization of 89.2%.
The
degree to which we are leveraged could have important consequences to us,
including the following:
|
·
|
our
ability to obtain additional financing in the future for refinancing
indebtedness, acquisitions, working capital, capital expenditures
or other
purposes may be impaired;
|
|
·
|
funds
available to us for our operations and general corporate purposes
or for
capital expenditures will be reduced because a substantial portion
of our
consolidated cash flow from operations could be dedicated to the
payment
of the principal and interest on our
indebtedness;
|
|
·
|
we
may be more highly leveraged than some of our competitors, which
may place
us at a competitive disadvantage;
|
|
·
|
the
agreements governing our long-term indebtedness, including indebtedness
under the debentures, and those of our subsidiaries (including
indebtedness under the debentures) and bank loans contain certain
restrictive financial and operating
covenants;
|
|
·
|
an
event of default, which is not cured or waived, under financial and
operating covenants contained in these debt instruments could occur
and
have a material adverse effect on us;
and
|
|
·
|
we
may be more vulnerable to a downturn in general economic
conditions.
|
23
Our
ability to make principal and interest payments, or to refinance indebtedness,
will depend on our future operating performance and cash flow, which are subject
to prevailing economic conditions and other factors affecting us, many of which
are beyond our control.
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.
At
March
20, 2006, we had outstanding $18 million in debentures and had outstanding
various series of preferred stock, all of which are convertible into an
aggregate of approximately 5.8 million shares of our common stock, subject
to
adjustment from time to time. In addition, we may, at our option, pay the
redemption price of the debentures in shares of common stock under certain
conditions, and we may also pay up to one-half of the debentures at maturity
in
our common stock under certain conditions. We also have outstanding warrants
and
options that are exercisable into approximately 2 million shares of our common
stock, subject to adjustment. The issuance or potential issuance of these shares
of common stock could adversely affect the prevailing market price of our common
stock and could impair our ability to raise capital through offerings of equity
or equity related securities. Future issuance of our common stock in connection
with our outstanding debentures, preferred stock and exercise of our outstanding
warrants and options will also significantly reduce the percentage ownership
of
our existing common stockholders.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
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 2005, 84% of the productive capacity of this
manufacturing facility was being utilized, based on two ten-hour shifts per
day
and a four-day week in one department and one ten-hour shift per day and a
four-day week in all other departments. See discussion under “Production and
Backlog” of Item 1.
Our
Climate Control Business conducts its fan coil manufacturing operations in
a
facility located in Oklahoma City, Oklahoma, consisting of approximately 265,000
square feet. We own this facility subject to a mortgage. For 2005, our Climate
Control Business was using 85% of the productive capacity, based on one
eight-hour shift per day and a five-day week.
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,
we plan to utilize additional space at some of our other facilities for
distribution purposes as the result of the record order intake level of our
heat
pump products as discussed under “Production and Backlog” in Item
1.
24
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)
in
a nitric acid plant at the Baytown Facility. The Company and/or its subsidiaries
own all of its manufacturing facilities except the Baytown Facility. The Baytown
Facility is being leased pursuant to a long-term lease with an unrelated third
party. As discussed in Note 9 of Notes to Consolidated Financial Statements,
the
El Dorado Facility and the Cherokee Facility (with certain exceptions) are
being
used to secure a $50 million term loan. For 2005, the following facilities
were
utilized based on continuous operation:
|
Percentage
of Capacity
|
|
|
El
Dorado Facility (1)
|
81%
|
|
Cherokee
Facility (2)
|
82%
|
|
Baytown
Facility (3)
|
72%
|
(1)
The
above 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. The 2005 nitric acid utilization
percentage is lower than normal due to the lost production resulting from the
mechanical failure of one of the El Dorado Facility’s four nitric acid plants.
This plant that normally produces 10,000 tons per month was down from October
2004 until June 2005. This plant was restored to normal production in June
2005.
(2)
The
above percentage of capacity for the Cherokee Facility relates to its ammonia
production capacity. If production is reduced as a result of lower product
requirements of certain customers as discussed under “Mining Products” of Item 1
and “Chemical Business” of Item 7 the utilization percentage in 2006 could be
lower than in 2005.The Cherokee Facility has substantial capacity for nitric
acid, ammonium nitrate and urea in excess of its ammonia capacity. See
discussion concerning the temporary shutdowns of the Cherokee Facility under
Item 1A.
(3)
Production projects were completed at the Baytown Facility during 2004 and
2005
which increased nameplate capacity by nearly 7%.
In
addition to the El Dorado and Cherokee Facilities, our Chemical Business
distributes its agricultural products through 17 wholesale and retail
distribution centers, with 14 of the centers located in Texas (11 of which
we
own and 3 of which we lease); 2 centers 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.
25
ITEM
3. LEGAL PROCEEDINGS
|
1.
|
Environmental
See “Business-Environmental Matters” for a discussion as
to:
|
|
·
|
A
proposal to the KDHE to remove contaminated soil at the Hallowell
site.
|
|
·
|
A
federal grand jury investigating Slurry and certain of its former
employees in connection with alleged violations of federal explosives
statutes at the Hallowell Facility.
|
|
2.
|
Climate
Control Business
|
Trison
Construction, Inc. (“Trison”), a subsidiary within our Climate Control Business,
is involved in a lawsuit brought against it by Trade Mechanical Construction,
Inc. (“Trade”). The lawsuit is styled Trade Mechanical Contractors, Inc., et al.
v. Trison Construction, Inc., and is pending in the District Court, State of
Oklahoma, Pontotoc County. Trison entered into a contract with Johnson Controls,
Inc. (“JCI”) to design, remove and install selected components on existing air
conditioning systems at a project in Oklahoma (“Project”). In connection with
the Project, Trison entered into a subcontract with Trade to provide certain
services for Trison relating to the Project and disputes arose over the
performance of the subcontract. During the first quarter of 2006, this lawsuit
was settled by Trison agreeing to pay $125,000 to Trade which was accrued at
December 31, 2005.
In
connection with the Project, JCI alleged that Trison’s work on the Project
contained certain defects and purported inadequacies and claimed that Trison
defaulted on its contract with JCI. JCI made demand under Trison’s performance
bond seeking recovery of costs alleged to have been required to correct and
complete Trison’s work under its contract with JCI. In June 2004, JCI filed for
arbitration with the American Arbitration Association claiming damages in the
amount of approximately $1,700,000. Trison denies that its work was defective
or
otherwise incomplete and filed a counterclaim against JCI in the arbitration.
On
January 16, 2006, the arbitrator issued an interim award in this matter, as
follows:
|
·
|
Denying
JCI’s claims for breach of contract in their
entirety;
|
|
·
|
Denying
JCI’s claims for breach of the performance bond and bad faith against
Trison’s bonding company;
|
|
·
|
Holding
that JCI’s claims for termination for default by Trison was not
sustainable and, therefore, Trison’s termination was a termination for
convenience as required under the subcontract between Trison and
JCI;
|
|
·
|
Holding
that JCI is not entitled to any damages from Trison or its bonding
company; and
|
|
·
|
Holding
that Trison and its bonding company are the prevailing parties and
under
the subcontract are entitled to recover from JCI all reasonable costs
and
expenses including attorney fees incurred in this proceeding, the
amount
of which is to be determined at a further
hearing.
|
JCI
has
reasserted a motion to disqualify the arbitrator based on alleged bias in the
arbitration proceedings and to set aside the interim award. JCI’s original
motion alleging arbitrator bias was denied by the American Arbitration
Association.
26
We
have
spent approximately $1.3 million in attorneys’ fees and expenses in connection
with this arbitration as of December 31, 2005. There are no assurances that
we
will recover the total amount of fees and expenses that we have incurred in
connection with this matter.
There
was
no accounting recognition for this interim award issued on January 16, 2006,
as
of December 31, 2005. When the final award is realized, it will be recorded
in
the financial statements at that time.
The
Company and one of our subsidiaries within the Climate Control Business,
ClimaCool Corp., have been sued, together with two unrelated companies, in
the
United States District Court for the Northern District of Illinois, Eastern
Division, in a case styled Multistack
LLC v. ClimaCool Corp., et al.,
alleging that we, ClimaCool and others infringed on a patent in connection
with
certain modular air chillers that ClimaCool purchased from a French air
conditioning company for resale in the United States. During the first quarter
of 2006, the plaintiff dismissed this lawsuit without prejudice.
|
3.
|
Chemical
Business
|
Cherokee
Nitrogen, Inc. (“Cherokee”), a subsidiary within our Chemical Business, has been
sued for an undisclosed amount of monies based on a claim that Cherokee breached
an agreement by overcharging the plaintiff, Nelson Brothers, LLC, (“Nelson”) for
ammonium nitrate as a result of inflated prices for natural gas used to
manufacture the ammonium nitrate. The suit is Nelson
Brothers, LLC v. Cherokee Nitrogen v. Dynegy Marketing,
and is
pending in Alabama state court in Colbert County. Cherokee has filed a
third-party complaint against Dynegy and a subsidiary (“Dynegy”) asserting that
Dynegy was the party responsible for fraudulently causing artificial natural
gas
prices to exist and seeking an undisclosed amount from Dynegy, including any
amounts which may be recovered by Nelson. Dynegy has filed a counterclaim
against Cherokee for $600,000 allegedly owed on account, which has been recorded
by Cherokee. Although there is no assurance, counsel for Cherokee has advised
us
that, at this time, they believe that Cherokee will recover monies from Dynegy
and the likelihood of Dynegy recovering from Cherokee is remote. Our counsel
also has advised us that they believe that the likelihood of Nelson recovering
monies from Cherokee over and above any monies which may be recovered from
Dynegy by Cherokee is remote.
Cherokee
has filed suit against Meecorp Capital Markets, LLC (“Meecorp”) and Lending
Solutions, Inc. in Alabama State Court, in Etowah County, Alabama, for recovery
of actual damages plus punitive damages, relating to a loan transaction. Meecorp
counterclaimed for the balance of an alleged commitment fee of $100,000, an
alleged equity kicker of $200,000 and $3,420,000 for loss of opportunity.
Cherokee is vigorously pursuing this matter, and counsel for Cherokee has
advised that they believe there is a substantial likelihood Cherokee will
recover from the defendants and that the likelihood of Meecorp recovering from
Cherokee is remote.
|
4.
|
Other
|
Zeller
Pension Plan
27
In
February 2000, the Company’s Board of Directors authorized management to proceed
with the sale of the automotive products
business, since the automotive products business was no longer a “core business”
of the Company. In May 2000, the Company sold substantially all of its assets
in
its automotive products business. After the authorization by the board, but
prior to the sale, the automotive products business purchased the assets and
assumed certain liabilities of Zeller Corporation (“Zeller”). The liabilities of
Zeller assumed by the automotive products business included Zeller’s pension
plan, which is not a multi-employer pension plan. In June 2003, the principal
owner (“Owner”) of the buyer of the automotive products business was contacted
by a representative of the Pension Benefit Guaranty Corporation (“PBGC”)
regarding the plan. The Owner has been informed by the PBGC of a possible
under-funding of the plan and a possible takeover of the plan by the PBGC.
The
Owner has notified the Company of these events. The Company has also been
contacted by the PBGC and has been advised that the PBGC considers the Company
to be potentially liable for the under-funding of the Zeller Plan in the event
that the plan is taken over by the PBGC and has alleged that the under-funding
is approximately $.6 million. The Company has been advised by ERISA counsel
that, based upon numerous representations made by the Company and the assumption
that the trier of fact determining the Company’s obligations with respect to the
plan would find that: we disposed, in May 4, 2000 of interest in the automotive
products business including the Zeller assets and business pursuant to a bona
fide purchase agreement under the terms of which the purchaser assumed all
obligations with respect to the operation, including funding of the Zeller
plan,
the purpose of the sale of the automotive products business did not include
an
attempt to evade liability for funding the Zeller plan, at the time we disposed
of our interest in the automotive products business, the Zeller plan was
adequately funded, on an ongoing basis and all required contributions had been
made, and the Zeller plan did not terminate at anytime that any member of the
Company’s controlled group of entities was a contribution sponsor to the Zeller
plan, that the possibility of an unfavorable outcome to us in a lawsuit if
the
PBGC attempts to hold us liable for the under-funding of the Zeller plan is
remote.
Asserting
Financing Fee
On
December 4, 2003, the Company and Southwest Securities, Inc. (“Southwest”)
entered into a letter agreement whereby the Company agreed to retain Southwest
to assist the Company in obtaining financing for the Company. Southwest’s right
to a fee under the Agreement is limited to a refinancing occurring during “a
period of sixty days, to be extended if a transaction is ongoing.” A financing
did not occur within sixty days of the date of the Agreement, nor was a funding
transaction “ongoing” at the end of that period. In September 2004, more than
ten months after the date of the Agreement between the Company and Southwest,
ThermaClime borrowed $50 million from Orix Capital Markets, LLC (“Orix”). It is
the Company’s position that the Orix financing transaction was not the result of
any efforts by Southwest, nor was it the culmination of any negotiations or
transaction commenced during the sixty-day term of the Agreement. Nonetheless,
Southwest has asserted that it is entitled to a fee of $1.7 million pursuant
to
the Agreement. The Company brought an action against Southwest in Oklahoma
state
court in a lawsuit styled LSB
Industries, Inc. v. Southwest Securities, Inc.
pending
in the Oklahoma District Court, Oklahoma County, for a declaratory judgment
that
the Company is not liable to Southwest under the Agreement as a result of the
Orix financing transaction. The Company intends to vigorously defend itself
against the claim by Southwest, and counsel handling this matter for the Company
has advised that the Company’s prospects for a favorable
outcome in this
matter appears likely. Our counsel has advised us that prospects for an adverse
result against us is remote, but that discovery is continuing and counsel’s
judgment may change depending upon the nature of additional evidence. Recently,
the parties attempted to mediate this matter but were unable to agree on a
settlement. No liability has been established relating to the fee asserted
by
Southwest as of December 31, 2005.
28
We
are
also involved in various other claims and legal actions which in the opinion
of
management, after consultation with legal counsel, if determined adversely
to
us, would not have a material effect on our business, financial condition or
results of operations.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of our shareholders during the fourth quarter
of 2005.
ITEM
4A. EXECUTIVE OFFICERS OF THE REGISTRANT
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. See information regarding
Mr.
Golsen under "Directors" in Item 10.
|
|
|
Barry
H. Golsen (1)
|
Vice
Chairman of the Board, President, and President of the Climate Control
Business. See information regarding Mr. Golsen under "Directors"
in Item
10.
|
|
|
David
R. Goss
|
Executive
Vice President of Operations and Director. See information regarding
Mr.
Goss under "Directors" in Item 10.
|
|
|
Tony
M. Shelby
|
Executive
Vice President of Finance and Director. See information regarding
Mr.
Shelby under "Directors" in Item 10.
|
|
|
Jim
D. Jones
|
Senior
Vice President, Corporate Controller and Treasurer. Mr. Jones, age
63, has
been Senior Vice President, Controller and Treasurer since July 2003,
and
has served as an officer of the Company since April 1977. Mr. Jones
is a
Certified Public Accountant and was with the accounting firm of Arthur
Young & Co., a predecessor to Ernst & Young LLP.
Mr.
Jones is a graduate of the University of Central
Oklahoma.
|
|
|
David
M. Shear (1)
|
Senior
Vice President and General Counsel. Mr. Shear, age 45, 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,
|
|
| 29
|
||
| Mr. Shear was an associate in the Boston law firm of Weiss, Angoff, Coltin, Koski and Wolf. Also see discussion under “Family Relationships” in Item 10. | ||
|
(1)
|
Barry
H. Golsen is the son of Jack E. Golsen and David M. Shear is married
to
the niece of Jack E. Golsen.
|
30
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market
Information
Our
Common Stock is listed for trading on the American Stock Exchange. The following
table shows, for the periods indicated, the high and low bid information for
our
Common Stock which reflects inter-dealer prices, without retail markup, markdown
or commission, and may not represent actual transactions.
|
Fiscal
Year Ended December 31,
|
|||||
|
2005
|
2004
|
||||
|
Quarter
|
High
|
Low
|
High
|
Low
|
|
|
First
|
$
7.85
|
$
5.98
|
$
8.63
|
$
6.00
|
|
|
Second
|
$
7.49
|
$
6.15
|
$
8.45
|
$
6.97
|
|
|
Third
|
$
7.30
|
$
6.10
|
$
9.49
|
$
6.95
|
|
|
Fourth
|
$
6.68
|
$
4.95
|
$
9.59
|
$
7.43
|
|
Stockholders
As
of
March 20, 2006 we had 776 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
Working Capital Revolver Loan and Senior Secured Loan agreements to which they
are parties.
Under
the
terms of the Working Capital Revolver Loan and Senior Secured Loan agreements,
ThermaClime cannot transfer funds to us in the form of cash dividends or other
distributions or advances, except for (a) the amount of income taxes that
ThermaClime would be required to pay if they were not consolidated with us,
(b)
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 under clause (a) above, provided
that certain other conditions are met, (c) the amount of direct and indirect
costs and expenses incurred by us on behalf of ThermaClime pursuant to a certain
services agreement and (d) amounts under a certain management agreement between
us and
ThermaClime, provided certain conditions are met. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations".
31
ThermaClime, provided certain conditions are met. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Holders
of our Common Stock are entitled to receive dividends only if and when declared
by our Board of Directors. No cash dividends may be paid on our Common Stock
until all required dividends are paid on the outstanding shares of our Preferred
Stock, or declared and amounts set apart for the current period, and, if
cumulative, prior periods.
As
of
December 31, 2005 we have issued and outstanding, 605,250 shares of $3.25
Convertible Exchangeable Class C Preferred Stock, Series 2 ("Series 2
Preferred"), 1,000,000 shares of Series D Cumulative Convertible Class C
Preferred Stock ("Series D Preferred"), 871 shares of a series of Convertible
Non Cumulative Preferred Stock ("Non Cumulative Preferred Stock") and 20,000
shares of Series B 12% Convertible, Cumulative Preferred Stock ("Series B
Preferred"). Each share of Preferred Stock is entitled to receive an annual
dividend, if and when declared by our Board of Directors, payable as follows:
(a) Series 2 Preferred at the annual rate of $3.25 a share payable quarterly
in
arrears on March 15, June 15, September 15 and December 15, which dividend
is
cumulative, (b) Series D Preferred at the rate of $.06 a share payable on
October 9, which dividend is cumulative but will be paid only after accrued
and
unpaid dividends are paid on the Series 2 Preferred, (c) Non Cumulative
Preferred Stock at the rate of $10.00 a share payable April 1, which are
non-cumulative and (d) Series B Preferred at the rate of $12.00 a share payable
January 1, which dividend is cumulative.
We
have
not paid cash dividends on our outstanding common stock in many years, and
since
January 1, 1999 through December 31, 2005, we did not pay any accrued dividends
on our outstanding cumulative preferred stock. As of December 31, 2005, there
was approximately $14.5 million of accrued and unpaid dividends on our
outstanding cumulative preferred stock. We intend to retain most of our future
earnings, if any, to provide funds for our operations and/or expansion of our
business. However, on January 17, 2006, our Board of Directors declared nominal
dividends, payable March 15, 2006, to holders of record as of February 15,
2006,
on certain outstanding series of our preferred stock. These dividends are not
for the full amount of the required quarterly dividends pursuant to the terms
of
all of our outstanding series of preferred stock. As a result, the amount of
accrued and unpaid dividends on our outstanding cumulative preferred stock
increased to $14.9 million as of March 15, 2006. There are no assurances that
we
will in the future pay any additional quarterly dividends on any of our
outstanding shares of preferred stock. We do not anticipate paying cash
dividends on our outstanding common stock in the foreseeable future, and until
all accrued and unpaid dividends are paid on our outstanding cumulative
preferred stock, no dividends may be paid on our common stock. See “Risk
Factors”.
No
dividends or other distributions, other than dividends payable in Common Stock,
shall be declared or paid, and no purchase, redemption or other acquisition
shall be made, by us in connection with any shares of Common Stock until all
cumulative and unpaid dividends on the Series 2 Preferred, Series D Preferred
and Series B Preferred shall have been paid. As of December 31, 2005 the
aggregate amount of unpaid dividends in arrears on our Series 2 Preferred,
Series D Preferred and Series B Preferred totaled approximately $12.8 million,
$.2 million and $1.4 million, respectively.
32
In
January 2006, our Board of Directors declared a dividend of $.10 a share on
the
Series 2 Preferred, a dividend of $.37 a share on the Series B Preferred and
a
dividend of $.31 a share on the Non Cumulative Preferred Stock, all payable
on
March 15, 2006 to shareholders of record on February 15, 2006. These dividends
were declared on a pro-rata basis.
Sale
of Unregistered Securities
On
March
14, 2006, the Company completed a private placement to six qualified
institutional buyers (“QIBs”), pursuant to which the Company sold $18 million
aggregate principal amount of its 7% Convertible Senior Subordinated Debentures
due 2011 (the “Debentures”) 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/or
Regulation D promulgated under the Act. The Debentures are eligible for resale
by the investors under Rule144A under
the
Act prior to registration of the Debentures. J. Giordano Securities Group acted
as the Company’s exclusive placement agent for this transaction and was paid an
aggregate of 6% of the aggregate gross proceeds in the financing. Aggregate
estimated offering expenses in connection with the transaction, including
discounts and commissions, were approximately $.4 million. In connection with
the closing, the Company entered into an indenture (the “Indenture”) with UMB
Bank, n.a., as trustee (the “Trustee”), governing the Debentures. The Trustee is
also the Company’s transfer agent. The Trustee receives customary compensation
from the Company for such services.
Jayhawk
Institutional Partners, L.P., who together with its affiliates, Kent C. McCarthy
and Jayhawk Capital Management, L.L.C., owned beneficially approximately 17.4%
our common stock (including shares issuable upon conversion of our preferred
stock and exercise of an outstanding warrant) prior to the closing of the
private placement, purchased $1 million principal amount of the Debentures.
See
“Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters”.
The
Debentures are convertible by holders in whole or in part into shares of the
Company’s common stock prior to their maturity on March 1, 2011. The
conversion rate of the Debentures for holders electing to convert all or any
portion of a debenture prior to September 1, 2006 will be 125 shares per $1,000
principal amount of debentures (representing a conversion price of $8.00 per
share). Holders of debentures electing to convert all or any portion of a
debenture on or after September 1, 2006 and before March 1, 2009 will obtain
the
following conversion rate per $1,000 principal amount of debentures during
the
dates indicated: September 1, 2006 to February 28, 2007, 141.25 shares
(representing a conversion price of approximately $7.08 per share); March 1,
2007 to August 31, 2007, 141.04 shares (representing a conversion price of
approximately $7.09 per share); September 1, 2007 to February 29, 2008, 137.27
shares (representing a conversion price of approximately $7.28 per share);
March
1, 2008 to August 31, 2008, 133.32 shares (representing a conversion price
of
approximately $7.50 per share); and September 1, 2008 to February 28, 2009,
129.23 shares (representing a conversion price of approximately $7.74 per
share). On March 1, 2009, the conversion rate returns to 125 shares per $1,000
principal amount of debentures (representing a conversion price of $8.00 per
share), until their maturity on March 1, 2011. The
conversion price will be adjusted to reflect dividends, stock splits, issuances
of rights to purchase shares of common stock and other events, as set forth
in
the Indenture.
33
The
Debentures may be redeemable beginning March 1, 2009, under certain conditions.
The redemption price is payable at our option in cash or, subject to certain
conditions, in shares of our common stock. At maturity, we may elect to pay
up
to one-half of the principal amount of the Debentures, plus accrued and unpaid
interest due thereon at maturity, in shares of our common stock under certain
conditions. If we pay the redemption price on any portion of the Debentures
at
maturity on our common stock, our common stock is to be valued for those
purposes at 95% of the weighted average of the closing sales price of our common
stock for the 20 consecutive trading days ending on the 5th
trading
day prior to the applicable redemption date or maturity date.
We
will
use all, or substantially all, of the net proceeds for the repayment or purchase
of our higher interest rate debt or debt of our subsidiaries, including our
subsidiary’s 10 3/4% debentures due 2007, and the remaining balance, if any, for
general corporate purposes. Pending such uses, the net proceeds of this offering
will be invested in investments with highly rated money market funds, U.S.
government securities, treasury bills and/or short-term commercial paper.
We
are
obligated to register the Debentures and the common stock issuable upon
conversion of the Debentures pursuant to the terms and conditions of a
Registration Rights Agreement entered into between us and each of the
OIBs.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
The
following table includes information relating to purchases of equity securities
by the Company and affiliated purchasers, as defined, for the three months
ended
December 31, 2005:
Common
Stock
|
Period |
(a) Total number of shares of common stock purchased |
(b) Average price paid per share of common stock |
(c) Total number of shares of common stock
purchased as part of
publicly announced plans
or programs
|
(d)
Maximum number (or approximate dollar value) of
shares of common
stock
that may yet be purchased
under the plans
or programs
|
|
October
1, 2005 -
October
31, 2005
|
-
|
$
|
-
|
-
|
-
|
|||
|
November
1, 2005 -
November
30, 2005
|
6,000
|
$
|
5.08
|
-
|
-
|
|||
|
December
1, 2005 -
December
31, 2005
|
215,900
|
$
|
5.10
|
-
|
-
|
|||
|
Total
|
221,900
|
$
|
5.10
|
-
|
-
|
34
During
the fourth quarter of 2005, the Golsen Group purchased 221,900 shares of our
common stock in the open market.
Preferred
Stock
|
Period |
(a) Total number of shares
of preferred stock purchased
|
(b) Average price paid per share
of preferred
stock
|
|
(c) Total number of shares of preferred stock
purchased as part of
publicly announced plans
or programs
|
(d)
Maximum number (or approximate dollar value) of
shares of preferred
stock
that may yet be purchased
under the plans
or programs
|
|
October
1, 2005 - October
31, 2005
|
-
|
$
|
-
|
-
|
-
|
|||
|
November
1, 2005 - November
30, 2005
|
-
|
$
|
-
|
-
|
-
|
|||
|
December
1, 2005 -December
31, 2005
|
3,300
|
$
|
44.30
|
-
|
-
|
|||
|
Total
|
3,300
|
$
|
44.30
|
-
|
-
|
During
the fourth quarter of 2005, we purchased 3,300 shares of Series 2 Preferred
in
the open market. These shares are being held as treasury stock.
35
ITEM
6. SELECTED FINANCIAL DATA
|
Years
ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||
|
(Dollars
in Thousands, except per share data)
|
|||||||||||||||||||
|
Selected
Statement of Operations Data:
|
|||||||||||||||||||
|
Net
sales (1)
|
$
|
396,722
|
$
|
363,608
|
$
|
316,661
|
$
|
283,239
|
$
|
314,254
|
|||||||||
|
Interest
expense (1) (2)
|
$
|
11,407
|
$
|
7,393
|
$
|
6,097
|
$
|
8,218
|
$
|
13,972
|
|||||||||
|
Income
from continuing operations before cumulative effect of accounting
changes
(1) (3)
|
$
|
5,746
|
$
|
1,906
|
$
|
2,913
|
$
|
2,723
|
$
|
7,326
|
|||||||||
|
Cumulative
effect of accounting changes
|
$
|
-
|
$
|
(536
|
)
|
$
|
-
|
$
|
860
|
$
|
-
|
||||||||
|
Net
income
|
$
|
5,102
|
$
|
1,370
|
$
|
2,913
|
$
|
122
|
$
|
8,553
|
|||||||||
|
Net
income (loss) applicable to common stock
|
$
|
2,819
|
$
|
(952
|
)
|
$
|
586
|
$
|
(2,205
|
)
|
$
|
6,286
|
|||||||
|
Income
(loss) per common share applicable to common stock:
|
|||||||||||||||||||
|
Basic:
|
|||||||||||||||||||
|
Income
(loss) from continuing operations before cumulative effect of accounting
changes
|
$
|
.26
|
$
|
(.03
|
)
|
$
|
.05
|
$
|
.04
|
$
|
.43
|
||||||||
|
Income
(loss) from discontinued operations, net
|
$
|
(.05
|
)
|
$
|
-
|
$
|
-
|
$
|
(.29
|
)
|
$
|
.10
|
|||||||
|
Cumulative
effect of accounting changes
|
$
|
-
|
$
|
(.04
|
)
|
$
|
-
|
$
|
.07
|
$
|
-
|
||||||||
|
Net
income (loss)
|
$
|
.21
|
$
|
(.07
|
)
|
$
|
.05
|
$
|
(.18
|
)
|
$
|
.53
|
|||||||
|
Diluted:
|
|||||||||||||||||||
|
Income
(loss) from continuing operations before cumulative effect of accounting
changes
|
$
|
.23
|
$
|
(.03
|
)
|
$
|
.04
|
$
|
.03
|
$
|
.41
|
||||||||
|
Income
(loss) from discontinued operations, net
|
$
|
(.04
|
)
|
$
|
-
|
$
|
-
|
$
|
(.27
|
)
|
$
|
.09
|
|||||||
|
Cumulative
effect of accounting changes
|
$
|
-
|
$
|
(.04
|
)
|
$
|
-
|
$
|
.07
|
$
|
-
|
||||||||
|
Net
income (loss)
|
$
|
.19
|
$
|
(.07
|
)
|
$
|
.04
|
$
|
(.17
|
)
|
$
|
.50
|
|||||||
|
(1)
|
Amounts
are shown excluding balances related to businesses disposed of.
|
|
(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)
|
Income
(loss) from continuing operations before cumulative effect of accounting
changes includes gains on sales of property and equipment of $6.6
million
for 2001 and gains on extinguishment of debt of $4.4 million, $1.5
million
and $2.6 million for 2004, 2002 and 2001,
respectively.
|
36
ITEM
6. SELECTED FINANCIAL DATA (CONTINUED)
|
Years
ended December 31,
|
|||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
|
|
(Dollars
in thousands, except per share data)
|
|||||
|
Selected
Balance Sheet Data:
|
|||||
|
Total
assets
|
$188,963
|
$167,568
|
$161,813
|
$166,276
|
$182,745
|
|
Redeemable
preferred stock
|
$
83
|
$
97
|
$
103
|
$ 111
|
$
123
|
|
Long-term
debt, including current portion (1)
|
$112,124
|
$106,507
|
$103,275
|
$113,361
|
$131,620
|
|
Stockholders'
equity (deficit)
|
$
13,456
|
$
8,398
|
$
6,184
|
$
1,204
|
$
(1,284)
|
|
Selected
other data:
|
|||||
|
Cash
dividends declared per common share
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
(1)
|
Amounts
are shown excluding balances related to businesses disposed of.
|
37
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) should be read in conjunction with a review
of the other Items included in this Form 10-K and our December 31, 2005
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
diversified holding company. Our wholly-owned subsidiary, ThermaClime, through
its subsidiaries, owns substantially all of our core businesses consisting
of
the:
|
·
|
Climate
Control Business engaged in the manufacturing and selling of a broad
range
of air conditioning and heating products consisting of water source
heat
pumps including geothermal heat pumps, hydronic fan coils, large
custom
air handlers and other products used in commercial and residential
new
building construction, renovation of existing buildings and replacement
of
existing systems.
|
|
·
|
Chemical
Business engaged in the manufacturing and selling of chemical products
produced from three plants in Texas, Arkansas and Alabama for the
industrial, mining and agricultural markets.
|
Climate
Control Business
Most
of
the products of the Climate Control Business are produced to customer orders
that are placed well in advance of required delivery dates. As a result, the
Climate Control Business carries significant backlogs that eliminate the
necessity to carry substantial inventories other than for firm customer orders.
The backlog of confirmed orders in our Climate Control Business has increased
to
approximately $56.2 million as of December 31, 2005 as compared to a backlog
of
approximately $28.4 million at December 31, 2004. The increase in our backlog
relates primarily to the increase in demand for our water source heat pumps,
large custom handlers and hydronic fan coils. We anticipate shipping this
backlog during 2006.
In
response to a record order intake level of our heat pump products, we have
recently increased our unit output by over 25% through additional shifts and
overtime. In addition, throughout 2005 and into 2006 over $4
million will have been invested in fabrication equipment and plant-wide
process control systems. This investment is expected to further raise
capacity and reduce overtime.
The
Climate Control Business has historically generated consistent annual profits
and positive cash flows and continues to do so. Management’s objectives for the
Climate Control Business include the continued emphasis on increasing the sales
and operating margins of all products and to continue to develop new
products.
38
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. In recent periods, the Climate Control Business'
profitability was affected by operating losses of certain new product lines
being developed over the past few years. In 2005, the emphasis has been to
increase the sales levels of these operations above the breakeven point. During
2005, the results for these new products did not improve significantly, although
we continued to see improvement in the long-term prospects for these new
products. From October 2005 through January 2006, our Climate Control Business
received approximately $10.7 million in new orders for these new
products.
Chemical
Business
The
Chemical Business has nitrogen production facilities in Baytown, Texas (“Baytown
Facility”), El Dorado, Arkansas (“El Dorado Facility”) and Cherokee, Alabama
(“Cherokee Facility”). The El Dorado and Baytown Facilities produce nitrogen
products from anhydrous ammonia that is delivered by pipeline. The Cherokee
Facility produces nitrogen products from natural gas that is delivered by
pipeline.
Anhydrous
ammonia and natural gas are commodities, subject to significant price
fluctuations, generally purchased at prices in effect at time of purchase.
Due
to the uncertainty of the sales prices of our products in relation to the cost
of anhydrous ammonia and natural gas, we have developed some customers that
purchase substantial quantities of products pursuant to sales agreements and/or
formulas that provide for the pass through of raw material costs, variable
costs, and certain fixed costs, plus in most cases, a profit margin. These
pricing arrangements help mitigate the commodity risk inherent in natural gas
and anhydrous ammonia. One of the customers who purchases a substantial amount
of product pursuant to these pricing arrangements from our Cherokee Facility
temporarily suspended their purchases in October 2005 due to the hurricane
induced high cost of natural gas and resumed taking a limited amount of product
in December 2005, as spot purchases and as long as market conditions and the
price of natural gas permit.
Although
anhydrous ammonia is produced from natural gas, the price does not necessarily
follow the spot price of natural gas in the United States because much of the
anhydrous ammonia consumed in our geographical area is produced off shore and
delivered by pipeline that originates in the Gulf of Mexico. Our cost is based
upon formulas indexed to published industry prices, primarily tied to import
prices.
The
production from our Baytown Facility is sold pursuant to a long-term supply
agreement that provides for the pass through of certain production costs
including anhydrous ammonia. This facility continues to generate consistent
operating profits.
The
El
Dorado Facility produces approximately 500,000 tons of product per year.
Approximately 51% of the El Dorado Facility’s products sold in 2005 were sold
pursuant to pricing arrangements that transfer the cost of anhydrous ammonia
to
the customer. The balance of the products sold was at the spot price in effect
at time of shipment. The El Dorado Facility’s results for 2005 are significantly
improved from 2004 despite the lost production of one of its four nitric acid
plants during the first two quarters of 2005. The improvement in 2005 is
primarily due to a more favorable balance between supply and demand in the
markets for nitrogen products produced at the El Dorado Facility resulting
in
improved margins.
39
The
Cherokee Facility produces nitrogen products from natural gas. As a result
of
the sudden climb in the market price of natural gas during 2005 and delivery
interruptions resulting from the hurricanes, the Cherokee Facility encountered
a
significant disruption in its operations. The Cherokee Facility suspended
production on September 23rd
due to
the inability to receive an adequate and reliable supply of natural gas from
its
natural gas pipeline. Due to damage to its delivery infrastructure caused by
Hurricane Katrina, the pipeline had declared force majeure. Although the
pipeline was still under force majeure, the Cherokee Facility was able to
purchase interruptible delivery natural gas. By October 21st,
the
Cherokee Facility resumed production.
During
November and December 2005, natural gas prices continued to climb to a high
of
approximately $15 per MCF and management announced in December that production
was being suspended again. In mid-January 2006, Cherokee resumed production
at
approximately two-thirds normal production rates, although gas prices continued
to be well above normal. The inability to receive natural gas and the high
natural gas costs resulting from both the hurricanes, the effect of the two
shut
downs and the loss of sales volume had a significant negative effect on the
facility’s results of operations for the third and fourth quarters of 2005 and
continued to affect the results for the first quarter of 2006. As of March
22,
2006, the price of natural gas decreased to approximately $7.00 per MCF. We
believe that the current market outlook justifies continuing production at
the
Cherokee Facility for the foreseeable future. However, we could from time to
time, suspend production at this facility due to, among other things, continuing
high cost of its primary raw material, natural gas. Accordingly, our results
of
operations and financial condition have in the past been, and will in the future
be, materially affected by cost increases of raw materials.
In
addition, the Cherokee Facility has a cost-plus contract to supply a customer
with its requirements for product each year through at least September 2006
which represented approximately 5.5% of our Chemical Business’s revenues during
2005. This customer has recently orally advised us that, although they have
not
made a final decision, they may be reducing the amount of product they purchase
each year from the Cherokee Facility.
Our
Baytown Facility was also closed from September 22, 2005 until October 3, 2005
as a precautionary measure due to Hurricane Rita. This facility did not sustain
any damage due to the hurricane and its net operating results were not
significantly impacted.
EDC
is a
party to a supply agreement with Orica USA, Inc. (“Orica”) to supply Orica
approximately 190,000 tons of ammonia nitrate per year through at least March
2008. During 2005, sales to Orica represented approximately 19% of our Chemical
Business’s revenues and approximately 11% of our consolidated revenues. EDC and
Orica have agreed in principal to enter into a new five-year agreement beginning
January 1, 2006, with such new agreement to provide for certain price increases
and an increase in the amount of product Orica will take from EDC each year.
This new agreement is subject to finalization of a definitive
agreement.
40
Liquidity
and Capital Resources
As
a
diversified holding company, cash requirements are primarily dependent upon
credit agreements and our ability to obtain funds from our ThermaClime and
non-ThermaClime subsidiaries.
During
March 2006, we completed a private placement of $18 million of our 7%
convertible senior subordinated debentures due 2011 to qualified institutional
buyers. These debentures are unsecured obligations, bear an interest rate of
7%
per annum and are convertible into our common stock at various conversion rates
prior to their maturity on March 1, 2011. We may redeem these debentures at
anytime on or after March 1, 2009 under certain conditions. The redemption
price
is payable at our option in cash or, subject to certain conditions, in shares
of
our common stock. At maturity, we may also elect to pay up to one-half of the
principal amount of the debentures, plus accrued and unpaid interest due thereon
at maturity, in shares of our common stock. If we pay the redemption price
on
any portion of the debentures at maturity in our common stock, our common stock
is to be valued for these purposes at 95% of the weighted average of the closing
sales price of our common stock for the 20 consecutive trading days ending
on
the 5th
trading
day prior to the applicable redemption date or maturity date. We intend to
use
all or a substantial portion of the net proceeds from the sale of the debentures
(which we estimate to be approximately $16.5 million after paying commissions
to
the placement agent and our expenses relating to the offering) to repay or
purchase our debt or debt of our subsidiaries, including our subsidiary’s $13.3
million senior unsecured debentures due 2007, and the balance, if any, for
general corporate purposes. Pending such uses, the net proceeds will be invested
in investments with highly rated money market funds, U.S. government securities,
treasury bills and/or short-term commercial paper.
Historically,
ThermaClime's primary cash needs have been for working capital and capital
expenditures. ThermaClime and its subsidiaries depend upon their Working Capital
Revolver Loan, internally generated cash flows, and secured equipment financing
in order to fund operations and pay obligations.
The
Working Capital Revolver Loan and the Senior Secured Loan have financial
covenants that are discussed below under “Loan Agreements - Terms and
Conditions”.
ThermaClime’s
ability to maintain an adequate amount of borrowing availability under its
Working Capital Revolver Loan depends on its ability to comply with the terms
and conditions of its loan agreements and its ability to generate cash flow
from
operations. ThermaClime is restricted under its credit agreements as to the
funds it may transfer to LSB and its non-ThermaClime affiliates and certain
ThermaClime subsidiaries. This limitation does not prohibit payment to LSB
of
amounts due under a Services Agreement, Management Agreement and a Tax Sharing
Agreement. As of December 31, 2005 ThermaClime had availability for additional
borrowing under its Working Capital Revolver Loan of $15.9 million.
Although
the Chemical Business’ results for 2005 are improved from 2004, the Chemical
Business in recent years prior to 2005 has not generated significant positive
cash flows due to lower than optimum sales volume levels, margin problems and
extensive capital expenditures.
41
As
evident in the above discussion of the Cherokee Facility, the ability to
generate a positive margin on Chemical sales is affected by the volatility
of
the raw material feedstocks as well as the necessity to produce at the optimum
production levels to fully absorb the fixed plant costs. The predominant
production costs of a process chemical plant, other than the raw material costs,
tend to be fixed costs.
Our
primary efforts to improve the results of the Chemical Business include sales
efforts to increase the non-seasonal sales volumes of the Cherokee and El Dorado
Facilities with an emphasis on customers that will accept the commodity risk
inherent with natural gas and anhydrous ammonia.
Beginning
in October 2004 and continuing into June 2005, the Chemical Business’ results
were adversely affected as a result of the loss of production due to a
mechanical failure of one of the four nitric acid plants at the El Dorado
Facility. The plant was restored to normal production in June 2005. We filed
a
property damage insurance claim for $3.8 million, net of a $1 million
deductible. In 2005, we recognized insurance recoveries of $2.7 million under
our replacement cost property insurance policy relating to this property damage
claim. The effect of this property insurance recovery to the accompanying
consolidated statement of income was $1.5 million for 2005 which is included
in
other income. The proceeds from property insurance recoveries are classified
as
cash inflows from investing activities in the accompanying consolidated
statement of cash flows. The Company used these proceeds for working capital
purposes. The insurers are contesting the remaining claim and we have instituted
litigation against the insurers in connection with this claim. Additional
recoveries, if any, upon final resolution will be recognized when realized.
In
addition, we filed a claim for recovery of the business interruption losses
related to this incident. Our business interruption insurance policy contains
a
forty-five day waiting period before covering losses resulting from business
interruptions. The claim is for $4.7 million, net of the forty-five day waiting
period. In November 2005, we realized insurance recoveries of $1.9 million
relating to this claim which is recorded as a reduction to cost of sales. The
proceeds from business interruption insurance recoveries are classified as
cash
inflows from operating activities in the accompanying consolidated statement
of
cash flows. The Company used the proceeds for general working capital purposes.
The negative impact on gross profit resulting from the lost production was
approximately $4.1 million in 2005 and approximately $1 million in 2004. As
of
March 20, 2006, additional business interruption insurance payments totaling
$554,000 were agreed to and paid by our insurers in 2006 which will be
recognized in the first quarter of 2006. We have instituted litigation for
the
remaining balance. Additional recoveries, if any, related to this business
interruption will be recognized when realized.
In
2005,
we received proceeds of $1.4 million from key individual life insurance policies
due to the untimely death of one of our executives in January 2005. The effect
from the life insurance proceeds to the accompanying statement of income was
$1.2 million for 2005 which is included in non-operating other income, net.
These proceeds (excluding a minimal amount relating to the cash surrender value
of the underlying policies) are classified as cash inflows from operating
activities in the accompanying statement of cash flows. The Company used the
proceeds for general working capital purposes.
42
Capital
Expenditures
Our
Chemical Business has historically required significant investment to fund
capital expenditures, while our Climate Control Business has been much less
capital intensive. We believe we have approximately $8.3 million of committed
capital expenditures for 2006 which includes $5.6 million for our Chemical
Business and $2.7 million for a Climate Control Business. The $8.3 million
includes $7.3 million relating to operations and $1 million for environmental
compliance. We believe that we can fund the projected capital expenditures
for
2006 from our working capital.
As
discussed under “Environmental Matters” in Item 1, the ADEQ issued to EDC a new
revised NPDES water discharge permit in 2004, and EDC has until June 2007 to
meet the compliance deadline for the more restrictive limits under the recently
issued NPDES permit. In order to meet EDC’s effluent limits under the permit,
EDC had planned to utilize a pipeline to be built by the City of El Dorado,
Arkansas (the “City”). The City council approved the joint pipeline, but
construction of the pipeline by the City is subject to the City receiving a
permit from the ADEQ. The ADEQ has not issued the necessary permit to discharge
wastewater into the pipeline and, as a result, this has caused a delay of
unknown duration in construction of the pipeline. This delay may impact our
ability to meet our compliance schedule under the NPDES permit. As a result,
EDC
has proposed to the ADEQ an extension of its compliance deadlines under its
NPDES permit but there are no assurances that the ADEQ will grant such
extension. If the City is not able to build its pipeline or can build it in
a
timely manner, EDC intends to discharge its wastewater through the City’s sewer
system subject to obtaining a sewer discharge permit from the City and EDC
building a pipeline to the City’s sewer system in a timely manner. The estimated
remaining capital expenditures to meet the requirements of the NPDES permit
ranges from $.5 million to $3.3 million plus approximately $2 million for our
pro-rata portion of pipeline engineering and construction costs should the
City
build a pipeline. In addition, certain additional capital expenditures will
be
required to bring the sulfuric acid plant's air emissions to lower limits.
The
ultimate cost is believed to be between $1.5 million and $3 million, to be
expended through February 2010, which began with minimal expenditures since
2004.
Other
capital expenditures are believed to be discretionary and are dependent upon
an
adequate amount of liquidity and/or obtaining acceptable funding. We have
carefully managed those expenditures to projects necessary to execute our
business plans and those for environmental and safety compliance.
Dividends
We
have
not paid cash dividends on our outstanding common stock in many years, and
since
January 1, 1999 through December 31, 2005, we did not pay any accrued dividends
on our outstanding cumulative preferred stock. As of December 31, 2005, there
was approximately $14.5 million of unpaid dividends on our outstanding
cumulative preferred stock. We intend to retain most of our future earnings,
if
any, to provide funds for our operations and/or expansion of our business.
However, on January 17, 2006, our Board of Directors declared a nominal
quarterly dividend, payable March 15, 2006, to holders of record as of February
15, 2006, on certain outstanding series of our preferred stock. This dividend
is
not for the full amount of the
required quarterly dividend pursuant to the terms of all of our outstanding series of preferred stock. As a result, the amount of unpaid dividends on our outstanding cumulative preferred stock increased to $14.9 million as of March 15, 2006. There are no assurances that we will in the future pay any additional quarterly dividends on any of our outstanding shares of preferred stock. We do not anticipate paying cash dividends on our outstanding common stock in the foreseeable future, and until all unpaid dividends are paid on our outstanding cumulative preferred stock, no dividends may be paid on our common stock.
43
required quarterly dividend pursuant to the terms of all of our outstanding series of preferred stock. As a result, the amount of unpaid dividends on our outstanding cumulative preferred stock increased to $14.9 million as of March 15, 2006. There are no assurances that we will in the future pay any additional quarterly dividends on any of our outstanding shares of preferred stock. We do not anticipate paying cash dividends on our outstanding common stock in the foreseeable future, and until all unpaid dividends are paid on our outstanding cumulative preferred stock, no dividends may be paid on our common stock.
Compliance
with Long-Term Debt Covenants
As
discussed below under “Loan Agreements - Terms and Conditions”, the Senior
Secured Loan and Working Capital Revolver Loan, as amended, of ThermaClime
and
its subsidiaries require, among other things, that ThermaClime meet certain
lender defined earnings before interest, income taxes, depreciation and
amortization ("EBITDA"), capital expenditure limitation amounts and achieve
minimum fixed charge coverage ratios quarterly, on a trailing twelve-month
basis. ThermaClime's forecasts for 2006 indicate that ThermaClime will be able
to meet all required covenant tests for all quarters and the year ending
December 2006.
Summary
Cash
flow
and liquidity will continue to be managed very carefully. We believe, with
the
infusion of new capital as a result of the recently completed debenture offering
and based upon current forecasts, that we will have adequate cash in 2006 from
internal cash flows and financing sources to enable us to satisfy our cash
requirements as they become due in 2006. Due to the volatility of the cost
for
major raw materials, we have historically experienced revisions to financial
forecasts on a frequent basis during the course of a year. As a result, actual
results may differ significantly from our forecast, which could have a material
impact on our liquidity and future operating results. In addition, our
subsidiary, ThermaClime, has its $13.3 million in outstanding 10 3/4% debentures
becoming due in 2007. We intend to use the proceeds of the recent debentures
offering to purchase or pay the 10 3/4% debentures.
Loan
Agreements - Terms and Conditions
Working
Capital Revolver Loan -
ThermaClime finances its working capital requirements through borrowings under
a
Working Capital Revolver Loan. Under the Working Capital Revolver Loan,
ThermaClime and its subsidiaries may borrow on a revolving basis up to $50
million based on specific percentages of eligible accounts receivable and
inventories. Effective February 28, 2005 the Working Capital Revolver Loan
was
amended which, among other things, extended the maturity date to April 2009
and
removed language considered as a subjective acceleration provision. As of
December 31, 2005, borrowings outstanding were $32 million and the net credit
available for additional borrowings was $15.9 million. The Working Capital
Revolver Loan requires that ThermaClime and its Climate Control Business meet
certain financial covenants and minimum EBITDA amounts. The EBITDA requirements
are measured quarterly on a trailing twelve-month basis. ThermaClime and its
Climate Control Business were in compliance with the required minimum EBITDA
amounts for the twelve-month period ended December 31, 2005. The trailing
twelve-month EBITDA requirements for 2006 ranges from $16.4 million to $20.6
million for ThermaClime and $10 million for the Climate Control
Business. The EBITDA requirements were set at amounts based upon our forecasts which are presently considered by management to be achievable. See discussion under “Liquidity and Capital Resources - Summary” as to the historical viability of our forecasts.
44
Business. The EBITDA requirements were set at amounts based upon our forecasts which are presently considered by management to be achievable. See discussion under “Liquidity and Capital Resources - Summary” as to the historical viability of our forecasts.
Senior
Secured Loan - In
September 2004, ThermaClime and certain of its subsidiaries (the “Borrowers”)
completed a $50 million term loan (“Senior Secured Loan”) with a certain lender
(the “Lender”). The Senior Secured Loan is to be repaid as follows:
|
·
|
quarterly
interest payments which began September 30,
2004;
|
|
·
|
quarterly
principal payments of $312,500 beginning September 30,
2007;
|
|
·
|
a
final payment of the remaining outstanding principal of $47.5 million
and
accrued interest on September 16,
2009.
|
The
Senior Secured Loan accrues interest at the applicable LIBOR rate, as defined,
plus an applicable LIBOR margin, as defined or, at the election of the
Borrowers, the alternative base rate, as defined, plus an applicable base rate
margin, as defined, with the annual interest rate not to exceed 11% or 11.5%
depending on the leverage ratio. At December 31, 2005 the annual interest rate
was 11.5%.
The
Borrowers are subject to numerous affirmative and negative covenants under
the
Senior Secured Loan agreement including, but not limited to, limitation on
the
incurrence of certain additional indebtedness and liens, limitations on mergers,
acquisitions, dissolution and sale of assets, and limitations on declaration
of
dividends and distributions to us, all with certain exceptions. The Borrowers
are also subject to a minimum fixed charge coverage ratio, measured quarterly
on
a trailing twelve-month basis. The Borrowers were in compliance with the
required minimum ratio for the twelve-month period ended December 31, 2005
and
the coverage ratio is considered to be achievable for 2006. The maturity date
of
the Senior Secured 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 Senior Secured Loan contain
cross-default provisions. If ThermaClime fails to meet the financial covenants
of the Senior Secured Loan, the lender may declare an event of default, making
the debt due on demand. If this should occur, there are no assurances that
we
would have funds available to pay such amount or that alternative borrowing
arrangements would be available. Accordingly, ThermaClime could be required
to
curtail operations and/or sell key assets. These actions could result in the
recognition of losses that may be material.
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. We had the following changes in
accounting estimates during 2005:
|
·
|
the
recognition of $644,000 of soil remediation costs classified as
discontinued operations as discussed under “Environmental Matters” of Item
1 and
|
|
·
|
the
recognition of $351,000 relating to a death benefit obligation classified
as a selling, general and administrative expense due to the change
in our
CEO’s estimated remaining service
period.
|
45
In
addition, the more significant areas of financial reporting impacted by
management's judgment, estimates and assumptions include the
following:
Receivables
and Credit Risk
- Our
sales to contractors and independent sales representatives are generally subject
to a mechanics lien in the Climate Control Business. Our other sales are
generally unsecured. Credit is extended to customers based on an evaluation
of
the customer's financial condition and other factors. Credit losses are provided
for in the 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, four customers account
for
approximately 25% of our total net receivables at December 31, 2005. We do
not
believe this concentration in these four customers represents a significant
credit risk due to the financial stability of these customers. At December
31,
2005 and 2004, our trade accounts receivable were net of allowance for doubtful
accounts of $2.7 million and $2.3 million, respectively.
Inventory
Valuations
-
Inventories are priced at the lower of cost or market, with cost being
determined using the first-in, first-out basis. Finished goods and
work-in-process inventories include material, labor and manufacturing overhead
costs. At December 31, 2005 and 2004, 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 $1.4 million and $1.3
million, 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 $1 million and $.9 million
at
December 31, 2005 and 2004, respectively.
Precious
Metals - Precious
metals are used as a catalyst in the Chemical Business manufacturing
processes. Precious metals are carried at cost, with cost being determined
using the first-in, first-out (“FIFO”) basis. As of December 31, 2005 and
2004, precious metals were $5 million and $5.6 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 2005, 2004 and 2003, the amounts expensed for precious
metals were approximately $3.5 million, $3.3 million and $3.3 million,
respectively, and are included in cost of sales. Periodically, during
major maintenance or capital projects we may be able to perform procedures
to
recover precious metals (previously expensed) which have accumulated within
the
manufacturing equipment. For 2005, 2004 and 2003, we recognized recoveries
of precious metals at historical FIFO costs of approximately $2.1 million,
$.2
million and $1.9 million, respectively, which are reductions to cost of sales.
Impairment
of Long-Lived Assets including Goodwill
-
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, 2005 we had no long-lived assets that met the criteria presented in SFAS 144 to be classified as assets held for sale. We have considered impairment of our long-lived assets and related goodwill. We obtained third party appraisals of the fair values associated with the Cherokee Facility and made estimates of fair values for others. The timing of impairments cannot be predicted with reasonable certainty and are primarily dependent on market conditions outside our control. Should sales prices drop 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." During 2005, 2004 and 2003, based on estimates obtained from external sources and internal estimates based on inquiry and other techniques, we recognized impairments relating to certain non-core equipment of $120,000, $375,000 and $300,000, respectively, relating to Corporate assets and $117,000, $362,000 and $200,000, respectively, relating to certain capital spare parts and idle assets in our Chemical Business. These impairments are included in other expense in the consolidated statements of income.
46
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, 2005 we had no long-lived assets that met the criteria presented in SFAS 144 to be classified as assets held for sale. We have considered impairment of our long-lived assets and related goodwill. We obtained third party appraisals of the fair values associated with the Cherokee Facility and made estimates of fair values for others. The timing of impairments cannot be predicted with reasonable certainty and are primarily dependent on market conditions outside our control. Should sales prices drop 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." During 2005, 2004 and 2003, based on estimates obtained from external sources and internal estimates based on inquiry and other techniques, we recognized impairments relating to certain non-core equipment of $120,000, $375,000 and $300,000, respectively, relating to Corporate assets and $117,000, $362,000 and $200,000, respectively, relating to certain capital spare parts and idle assets in our Chemical Business. 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 insurance
coverage, which management considers to be adequate. Our accrued insurance
liabilities are based on estimates of the self-insured portions of the 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, 2005 and 2004, our claims liabilities are $1.4 million and $1.4
million, respectively and are included in accrued liabilities.
Product
Warranty
- Our
Climate Control Business sells equipment for which we provide warranties
covering defects in materials and workmanship. Generally the warranty coverage
for manufactured equipment is limited to 18 months from the date of shipment
or
12 months from the date of start-up, whichever is shorter, and to 90 days for
spare parts. In some cases, the customer may purchase an extended warranty.
Our
accounting policy and methodology for warranty arrangements is to periodically
measure and recognize the expense and liability for such warranty obligations
using a percentage of net sales, based on historical warranty costs. It is
possible that future warranty costs could exceed our estimates. At December
31,
2005 and 2004, our accrued product warranty obligations were $2.3 million and
$2
million, respectively and are included in accrued and other noncurrent
liabilities in the consolidated balance sheets.
Accrued
Plant Turnaround Costs
- We
accrue in advance the cost expected to be incurred in the next planned major
maintenance activities (“Turnarounds”) of our Chemical Business. Turnaround
costs are accrued on a straight-line basis over the scheduled period between
Turnarounds, which generally ranges from 12 to 24 months. At December 31, 2005
and 2004, accrued and other noncurrent liabilities include $1.4 million and
$1.5
million, respectively, relating to Turnarounds.
47
The
Financial Accounting Standards Board (“FASB”) is currently working on a project
to clarify guidance on the accounting for Turnarounds. In March 2006, FASB
decided to
issue
guidance in the form of a FASB Staff Position (“FSP”) to eliminate the
accrue-in-advance method of accounting for Turnarounds and to
address
transition guidance at a future FASB meeting and directed their staff (“Staff”)
to research the practicability of retrospective application. The Staff’s
immediate
plans are to provide FASB with a recommendation on transition guidance after
researching the practicability of accounting for the adoption of the provisions
in the FSP as a change in accounting principle with retrospective application
as
described in Statement of Financial Accounting Standards No. 154-Accounting
Changes and Error Corrections. As discussed above, we are using the
accrue-in-advance method for Turnarounds that FASB may eliminate in the near
future. If the FSP was effective as of December 31, 2005, the pro forma effect
on our consolidated balance sheet would be a decrease in accrued and other
noncurrent liabilities and an increase in stockholders’ equity of $1,405,000.
Depending on the transition guidance provided, our preliminary analysis of
the
pro form effect on our consolidation statements of income would be (a) an
increase in net income of $1,405,000 as a cumulative effect of accounting change
for 2005 or (b) an increase (decrease) in net income of $(112,000), $(1,161,000)
and $792,000 for 2005, 2004 and 2003, respectively, and an increase in
stockholders’ equity of $1,886,000 at December 31, 2002.
Executive
Benefit Agreements - We
have
entered into benefit agreements with certain key executives. Costs associated
with these individual benefit agreements are accrued when they become probable
over the estimated remaining service period. Total costs accrued equal the
present value of specified payments to be made after benefits become payable.
In
1992, we entered into individual benefit agreements with certain key executives
(“1992 Agreements”) that provide for annual benefit payments for life (in
addition to salary). As of December 31, 2005 and 2004, the liability for
these benefits under the 1992 Agreements is $938,000 and $960,000, respectively,
which is included in accrued liabilities and other noncurrent liabilities in
the
accompanying consolidated balance sheets (See “Other Plans” under Item
11).
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
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. As
discussed under “Other Plans” in Item 11, on May 12, 2005 we entered into a
death benefit agreement with our CEO. As of December 31, 2005, the liability
for
death benefits is $869,000 (none at December 31, 2004) which is included in
accrued and other noncurrent liabilities. The increase in the liability relates
to the untimely death of one of our executives in January 2005 and the change
in
accounting estimate for CEO’s remaining service period as discussed
above.
Environmental
and Regulatory Compliance - The Chemical Business is subject to
specific federal and state regulatory and environmental compliance laws and
guidelines. We have developed policies and procedures related to environmental
and regulatory compliance. We must continually monitor whether we have
maintained compliance with such laws and regulations and the operating
implications, if any, and amount of penalties, fines and assessments that may
result from noncompliance. At December 31, 2005, liabilities totaling $1,491,000
have been accrued relating to a new consent administrative order (“CAO”) and the
Slurry Consent Order. These liabilities are based on current estimates that
may
be revised in the near term based on results of
our investigation, risk assessment and remediation pursuant to the new CAO and Slurry Consent Order. In addition, we will be required to make capital expenditures as it relates to the NPDES permit and Air CAO.
48
our investigation, risk assessment and remediation pursuant to the new CAO and Slurry Consent Order. In addition, we will be required to make capital expenditures as it relates to the NPDES permit and Air CAO.
Asset
Retirement Obligations - We have a legal obligation to monitor certain
discharge water outlets at our Chemical Business facilities should we
discontinue the operations of a facility. We do not believe that the annual
costs of the required monitoring activities would be significant and as we
currently have no plans to discontinue the use of the facilities and the
remaining life of either facility is indeterminable, an asset retirement
liability has not been recognized. However, we will continue to review this
obligation and record a liability when a reasonable estimate of the fair value
can be made. Currently, there is insufficient information to estimate the fair
value of the asset retirement obligation.
Deferred
Income Taxes -
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes, and the amounts used for income tax purposes. Valuation allowances
are
provided against deferred tax assets when it is more likely than not that some
portion or all of the deferred tax asset will not be realized. We are able
to
realize deferred tax assets up to an amount equal to the future reversals of
existing taxable temporary differences. The taxable temporary differences will
turn around in the loss carry forward period as the differences reverse. Other
differences will turn around as the assets are realized or liabilities are
paid
in the normal course of business. At December 31, 2005 and 2004, our deferred
tax assets were net of a valuation allowance of $26.1 million and $27.9 million,
respectively. (See Note 10 of Notes to Consolidated Financial
Statements).
Contingencies
- We
accrue for contingent losses when such losses are probable and reasonably
estimable. In addition, we recognize contingent gains when such gains are
realized. We are a party to various litigation and other contingencies, the
ultimate outcome of which is not presently known. Should the ultimate outcome
of
these contingencies be adverse, such outcome could create an event of default
under ThermaClime's Working Capital Revolver Loan and the Senior Secured Loan
and could adversely impact our liquidity and capital resources.
Revenue
Recognition
- We
recognize revenue for substantially all of our operations at the time title
to
the goods transfers to the buyer and there remains no significant future
performance obligations by us. If revenue relates to construction contracts,
we
recognize revenue 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.
Recognition
of Insurance Recoveries -
If our
insurance claim relates to a recovery of losses, we recognize the recovery
when
it is probable and reasonably estimable. If our insurance claim relates to
a
contingent gain, we recognize the recovery when it is realized.
Management's
judgment and estimates in these areas are based on information available from
internal and external resources at that time. Actual results could differ
materially from these estimates and judgments, as additional information becomes
known.
49
Results
of Operations
The
following Results of Operations should be read in conjunction with our
Consolidated Financial Statements for the years ended December 31, 2005, 2004
and 2003 and accompanying notes and the discussions above under “Overview” And
“Liquidity and Capital Resources.”
The
following table contains certain information about our continuing operations
in
different industry segments for each of the three years ended December
31:
|
2005
|
2004
|
2003
|
|
|
(In
thousands)
|
|||
|
Net
sales:
|
|||
|
Climate
Control
|
$156,466
|
$140,638
|
$119,032
|
|
Chemical
|
233,447
|
216,264
|
193,168
|
|
Other
|
6,809
|
6,706
|
4,461
|
|
$396,722
|
$363,608
|
$316,661
|
|
|
Gross
profit:
|
|||
|
Climate
Control
|
$47,315
|
$42,049
|
$36,139
|
|
Chemical
|
16,426
|
8,917
|
12,281
|
|
Other
|
2,330
|
2,145
|
1,491
|
|
$66,071
|
$53,111
|
$49,911
|
|
|
Operating
income (loss):
|
|||
|
Climate
Control
|
$14,097
|
$11,707
|
$11,519
|
|
Chemical
|
7,703
|
(877)
|
3,043
|
|
General
corporate expense and other business operations, net
|
(6,835)
|
(7,586)
|
(6,560)
|
|
14,965
|
3,244
|
8,002
|
|
|
Interest
expense
|
(11,407)
|
(7,393)
|
(6,097)
|
|
Provision
for loss on notes receivable-Climate Control
|
-
|
(1,447)
|
-
|
|
Gains
on extinguishment of debt
|
-
|
4,400
|
258
|
|
Non-operating
income (expense), net:
|
|||
|
Chemical
|
362
|
2,463
|
511
|
|
Corporate
and other business operations
|
1,199
|
(29)
|
220
|
|
Provision
for income taxes
|
(118)
|
-
|
-
|
|
Equity
in earnings of affiliate - Climate Control
|
745
|
668
|
19
|
|
Income
from continuing operations before cumulative effect of accounting
change
|
$5,746
|
$1,906
|
$2,913
|
50
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Net
Sales
Our
Climate Control Business’ net sales for 2005 were $156.5 million compared to
$140.6 million for 2004, an 11.3% increase. Net sales of our heat pump products
increased $11.3 million, or 15.4%, primarily as a result of stronger customer
demand, a 7% increase in overall average unit sales prices due to the increase
in our raw material costs as discussed below, and change in product mix.
Net
sales of our hydronic fan coils increased $4.8 million, or 9.9%, primarily
due
to a 6% increase in overall average unit sales prices due to the increase
in our
raw material costs as well as an improvement in product mix. Net sales of
our
other HVAC products decreased $.3 million. For 2004, net sales of other HVAC
products includes $3.8 million as a result of consolidating MultiClima’s
operating results in the second quarter of 2004 as required under FIN 46.
Effective July 1, 2004, we were no longer required to consolidate MultiClima’s
operating results. Excluding the effect of MultiClima, sales of other HVAC
products increased $3.5 million which includes an increase in sales of $1.1
million relating to our modular chiller systems, $.9 million relating to
our
large custom air handlers, $.9 million as a result of an increase in
construction projects and $.7 million relating to a new product line with
increasing demand.
Our
Chemical Business’ net sales for 2005 were $233.4 million compared to $216.3
million for 2004 or a 7.9% increase. This overall increase of $17.1 million
reflects, in part, higher sales prices resulting from the increased cost
of a
raw material feedstocks (anhydrous ammonia and natural gas) as discussed
below.
Sales prices increased overall by 13% but overall volume of tons sold decreased
5%. The volume of tons sold at the Baytown Facility were down 14% due to
lower
demand for nitric acid by Bayer resulting from the shutdown of one of North
America’s consuming locations. The decrease in volume also includes a decrease
of 4% due primarily to the suspension of production at the Cherokee Facility
as
discussed above under “Overview-Chemical Business.” The increase in net sales
includes an increase of $10.5 million relating to our mining products, an
increase of $8.5 million relating to our agricultural products, offset, in
part,
by a decrease of $1.8 million relating to our industrial acid and other chemical
products.
Net
sales
classified as “Other” consists of sales of industrial machinery and related
components. Net sales for 2005 were $6.8 million compared to $6.7 million
for
2004 or an increase of $.1 million.
Gross
Profit
Gross
profit by industry segment represents net sales less cost of sales.
Our
Climate Control Business’ gross profit was $47.3 million or 30.2% as a
percentage of net sales for 2005 compared to $42 million or 29.9% for 2004.
The
net increase in gross profit of $5.3 million resulted primarily by the increase
in sales of our heat pump and hydronic fan coil products as discussed above.
This increase in gross profit was partially offset by a change in
product/customer mix and our inability to fully pass on to our customers
in the
form of product price increases the increase in the raw material cost of
copper.
The spot market increases through the twelve months of 2005 for copper were
approximately 40%. In addition, a decrease of $.8 million relates to MultiClima
in the second quarter of 2004 as discussed above.
51
Our
Chemical Business’ gross profit was $16.4 million or 7 % as a percentage of net
sales for 2005 compared to $8.9 million or 4.1% for 2004. The net increase
in
gross profit of $7.5 million is due primarily to improved margins on certain
agricultural and industrial acid products and cost recoveries during 2005
of
$2.1 million of production catalyst (precious metals) used in our manufacturing
processes compared to $.2 million during 2004. The increase in gross profit
was
offset, in part, by our inability to fully pass on to our customers the 25%
increase in costs of anhydrous ammonia during the spring and fall planting
seasons incurred by the El Dorado Facility, the 34% increase in costs of
natural
gas sustained by our Cherokee Facility and the suspension of production at
the
Cherokee Facility as discussed above under “Overview-Chemical Business”. The
Cherokee Facility also incurred an increase of $2.2 million of electricity
costs
primarily as the result of increased rates charged by their utility company.
In
addition in 2004, net settlements of $1.5 million (which increased gross
profit)
were reached with insurance carriers relating to a vendor’s faulty repair work
to a chemical plant boiler.
As
discussed under “Liquidity and Capital Resources”, beginning in October 2004 and
continuing into June 2005, the Chemical Business’ results were adversely
affected as a result of the loss of production due to a mechanical failure
of
one of the four nitric acid plants at the El Dorado Facility. The plant was
restored to normal production in June 2005. We recognized insurance recoveries
of $1.9 million under our business interruption insurance policy relating
to
this claim for 2005 which is recorded as a reduction to cost of sales. The
negative impact on gross profit resulting from the lost production was
approximately $4.1 million in 2005 and approximately $1 million in
2004.
Gross
profit classified as “Other” (see discussion above) was $2.3 million or 34.2% as
a percentage of net sales for 2005 compared to $2.1 million or 32% for 2004
or
an increase of $.2 million.
Operating
Income (Loss)
Our
chief
operating decision makers use operating income (loss) by industry segment
for
purposes of making decisions which include resource allocations and performance
evaluations. Operating income (loss) by industry segment represents gross
profit
by industry segment less selling, general and administrative expenses
(“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.
Operating
Income - Climate Control: Our
Climate Control Business’ operating income was $14.1 million for 2005 compared
to $11.7 million for 2004. The net increase in operating income of $2.4 million
resulted primarily by selling, general and administrative expenses of $1.4
million relating to MultiClima in the second quarter of 2004 and the net
increase in gross profit of $5.3 million as discussed above. This increase
in
operating income was partially offset by increased shipping and handling
costs
of $1 million as a result of increased sales volume and rising fuel costs,
increased professional fees of $.9 million primarily relating to litigation
and
related arbitrations between one of our subsidiaries, Trison, and a customer
(also see discussions
52
under “Climate Control Business” of Item 3), increased commissions of $.8 million due to increased sales volume, increased personnel costs of $.6 million due primarily to increased group health insurance costs and increased provision for losses on accounts receivable of $.5 million due primarily to lower than usual incidence in 2004 and the increased sales volumes in 2005.
Operating
Income (Loss) - Chemical:
Our
Chemical Business’ operating income was $7.7 million for 2005 compared to an
operating loss of $.9 million for 2004. The net increase in operating income
of
$8.6 million included the net increase in gross profit of $7.6 million as
discussed above and gains of $1.6 million from replacement cost property
insurance recoveries which includes the $1.5 million as discussed above under
“Liquidity and Capital Resources” and a decrease in personnel costs of $.3
million as a result of a reduction in personnel at the El Dorado Facility.
This
increase was partially offset by an increase in handling costs of $1 million
due
primarily to higher railcar lease and maintenance costs as the result of
increasing the number of railcars used to support our agricultural business.
General
Corporate Expense and Other Business Operations, Net: Our
general corporate expense and other business operations, net were $6.8 million
for 2005 compared to $7.6 million for 2004. The net decrease of $.8 million
relates primarily to an increase in gains of $.7 million in from the sales
of
corporate assets, a decrease in professional fees of $.3 million which includes
costs incurred during 2004 relating to a proposed unregistered offering of
Senior Secured Notes which was terminated, a decrease of $.3 million of
provisions for impairments on corporate assets and a decrease of approximately
$.6 million due to other individually immaterial items. This decrease was
partially offset by an increase in personnel costs of $1.1 million which
includes the recognition of death benefit obligations (see discussion above
under “Critical Accounting Policies and Estimates”), an increase in group health
insurance costs and net premium costs associated with key individual life
insurance policies including policies associated with a death benefit agreement
entered into with our CEO during the second quarter of 2005 (also see discussion
under “Other Plans” of Item 11).
Interest
Expense
Interest
expense was $11.4 million for 2005 compared to $7.4 million for 2004. The
increase of $4 million relates primarily to interest expense incurred on
the $50
million term loan that was completed in September 2004 as discussed under
“Loan
Agreements - Terms and Conditions.” A portion of the proceeds of the Senior
Secured Loan was used to repay the outstanding balance under a former financing
agreement (“Financing Agreement”). There was no interest expense recognition on
the Financing Agreement indebtedness from May 2002 through September 2004
since
that transaction was accounted for as a voluntary debt restructuring in 2002.
This increase was partially offset due to the repurchase of $5 million of
the
Senior Unsecured Notes in September 2004.
Provision
for Loss on Notes Receivable
Based
on
our assessment of the liquidity and results of operations of MultiClima and
its
parent company, we concluded that the outstanding notes receivable were not
recoverable. As a result, effective July 1, 2004 we forgave and canceled
the
loan agreements in exchange for
53
extending the Option’s expiration date from June 15, 2005 to June 15, 2008 with an estimated value of zero. We recognized a provision for loss of $1.4 million for 2004.
Gain
on Extinguishment of Debt
As
a
result of the repayment in September 2004 of the Financing Agreement prior
to
the maturity date of June 30, 2005, we recognized the remaining unearned
interest of $4.4 million as a gain on extinguishment of debt
(also
see Note 9 of Notes to Consolidated Financial Statements).
Non-Operating
Other Income, net
Our
non-operating other income, net was $1.6 million for 2005 compared to $2.4
million for 2004, a decrease of $.8 million. In 2005, we received net proceeds
from key individual life insurance policies of $1.2 million. In addition,
we
recognized gains of $.2 million from the sales of certain current assets
(primarily precious metals) in 2005 compared to gains of $2.3 million in
2004.
Loss
from Discontinued Operations
In
December 2002, in connection with the sale of substantially all of the operating
assets of Slurry and UTeC which was accounted for as discontinued operations,
UTeC leased the Hallowell Facility to the buyer under a triple net long-term
lease agreement. However, Slurry retained the obligation to be responsible
for,
and perform the activities under, the Slurry Consent Order. In addition,
certain
of our subsidiaries agreed to indemnify the buyer of such assets for these
environmental matters. Slurry placed prior owners Chevron of the Hallowell
Facility on notice of their responsibility for contribution towards the costs
to
investigate and remediate this site. Representatives of a prior owner agreed
to
pay one-half of the costs of the investigation and remediation on an interim,
non-binding basis.
During
October 2005, representatives of Slurry and a prior owner met with the KDHE
and
proposed to remove the bulk of contaminated soil at the Hallowell site, which
was orally agreed to by the KDHE subject to approval of a written work plan
submitted to the KDHE. As a result of these meetings, provisions totaling
of $.6
million were recorded for our share of these costs for 2005. There are no
income
tax benefits related to these expenses.
Cumulative
Effect of Accounting Change
Effective
March 31, 2004 we included in our condensed consolidated balance sheet the
consolidated assets and liabilities of the parent company of MultiClima as
required under FIN 46 (also
see
Note 2 of Notes to Consolidated Financial Statements).
As a
result, we recorded a cumulative effect of accounting change of $.5 million
primarily relating to the elimination of embedded profit included in the
cost of
inventory which was purchased from MultiClima by certain of our
subsidiaries.
54
Year
Ended December 31, 2004 compared to Year Ended December 31,
2003
Net
Sales
Our
Climate Control Business’ net sales for 2004 were $140.6 million compared to
$119 million for 2003, an 18.2% increase. Net sales of our heat pump products
increased $13.1 million, or 21.6%, primarily as a result of an 18% increase
in
the number of units sold in the non-OEM commercial and residential markets,
a 3%
increase in overall average unit sales prices due to price increases related
to
raw material costs and product mix, and higher customer order levels. Net
sales
of our hydronic fan coils increased $1.3 million, or 2.8%, primarily due
to a 2%
increase in overall average unit sales prices due to product price increases
related to raw material cost increases and product mix, as well as an increase
in unit volume related to market recovery since the September 11, 2001 tragedy.
Net sales of our other HVAC products increased $7.2 million. As previously
discussed, for 2004, net sales of other HVAC products includes $3.8 million
as a
result of consolidating MultiClima’s operating results in the second quarter of
2004 as required under FIN 46. Excluding the effect of MultiClima, sales
of
other HVAC products increased $3.4 million which includes an increase in
sales
of $1.7 million relating to our large custom air handlers and $.7 million
relating to a new product line as a result of improved customer order intake
and
$.7 million relating to an increase in construction projects.
Our
Chemical Business’ net sales for 2004 were $216.3 million compared to $193.2
million for 2003 or a 12% increase. This overall increase of $23.1 million
reflects, in part, higher sales prices resulting from the increased cost
of a
raw material feedstocks (anhydrous ammonia and natural gas) as discussed
below.
Sales prices increased overall by 9% while volume of tons sold increased
4%. The
increase in volume includes an increase of 13% at the Cherokee Facility due
primarily to an increase in demand for UAN partially offset by the suspension
of
production of agricultural grade ammonium nitrate and an increase of 7% at
the
Baytown Facility as a result of the increase in demand for nitric acid. The
increase in net sales includes an increase of $11.8 million relating to our
industrial acid and other chemical products, an increase of $9.9 million
relating to our mining products and an increase of $1.4 million relating
to our
agricultural products.
Net
sales
classified as “Other” consists of sales of industrial machinery and related
components. Net sales for 2004 were $6.7 million compared to $4.5 million
for
2003 or an increase of $2.2 million.
Gross
Profit
Gross
profit by industry segment represents net sales less cost of sales.
Our
Climate Control Business’ gross profit was $42 million or 29.9% as a percentage
of net sales for 2004 compared to $36.1 million or 30.4% for 2003. The net
increase in gross profit of $5.9 million resulted primarily by the increase
in
sales of our heat pump products and construction projects as discussed above.
In
addition, an increase of $.8 million relates to MultiClima in the second
quarter
of 2004 as discussed above. This increase in gross profit was partially offset
by our inability to fully pass on to our customers the increases in raw material
costs of steel and copper, estimated to be 75% and 40%, respectively, through
2004.
55
Our
Chemical Business’ gross profit was $8.9 million or 4.1 % as a percentage of net
sales for 2004 compared to $12.3 million or 6.4% for 2003. The net decrease
in
gross profit of $3.4 million is due primarily to the negative impact of the
lost
production at the El Dorado Facility as a result of the mechanical failure
discussed above in “Liquidity and Capital Resources”, our inability to fully
pass on to our customers the 15% increase in costs of anhydrous ammonia incurred
by the El Dorado Facility and the 10% increase in costs of natural gas sustained
by our Cherokee Facility. In addition, cost recoveries of $1.9 million during
2003 were recognized for the recoveries of production catalyst (precious
metals)
used in the manufacturing processes compared to $.2 million during 2004.
This
increase was offset, in part, by net settlements of $1.5 million (which
increased gross profit) that were reached with insurance carriers relating
to a
vendor’s faulty repair work to a chemical plant boiler in 2004.
Gross
profit classified as “Other” (see discussion above) was $2.1 million or 32% as a
percentage of net sales for 2004 compared to $1.5 million or 33.4% for 2003
or
an increase of $.6 million.
Operating
Income (Loss)
See
discussion above for definition of operating income (loss) by industry
segment.
Operating
Income - Climate Control: Our
Climate Control Business’ operating income was $11.7 million for 2004 compared
to $11.5 million for 2003. The net increase in operating income of $.2 million
resulted primarily by the net increase in gross profit of $5.9 million as
discussed above. This increase in operating income was partially offset by
the
increase in personnel costs of $1.5 million due primarily to the increase
in
personnel associated with higher volume and the related support required
and
increased group health insurance costs, increased shipping and handling costs
of
$1.4 million as a result of increased sales volumes and rising fuel costs,
increased warranty costs of $.3 million due to increased sales volume, increased
advertising cost of $.3 million as a result of our focus on increasing market
share and increased commission of $.3 million due to the increase in sales
volume and selling, general and administrative expenses of $1.4 million relating
to MultiClima in the second quarter of 2004.
Operating
Income (Loss) - Chemical:
Our
Chemical Business’ operating loss was $.9 million for 2004 compared to operating
income of $3 million for 2003. The net decrease of $3.9 million relates
primarily to the net decrease in gross profit of $3.4 million as discussed
above.
General
Corporate Expense and Other Business Operations, Net: Our
general corporate expense and other business operations, net were $7.6 million
for 2004 compared to $6.6 million for 2003. The net increase of $1 million
relates primarily to professional fees of $.9 million incurred during 2004
relating to a proposed unregistered offering of Senior Secured Notes which
was
terminated and an increase in personnel costs of $.4 million relating to
the
increase in personnel and increases in group health insurance costs partially
offset by the increase in gross profit of $.6 million classified as “Other” as
discussed above.
56
Interest
Expense
Interest
expense was $7.4 million for 2004 compared to $6.1 million for 2003. The
increase of $1.3 million relates primarily to interest expense incurred on
the
$50 million term loan that was completed in September 2004 as discussed above.
This increase was partially offset due to the repurchase of $5 million of
the
Senior Unsecured Notes in September 2004.
Provision
for Loss on Notes Receivable
See
previous discussion under “Provision for Loss on Notes
Receivables”.
Gain
on Extinguishment of Debt
See
previous discussion under “Gain on Extinguishment of Debt”.
Non-Operating
Other Income, net
Our
non-operating other income, net was $2.4 million for 2004 compared to $.7
million for 2003, an increase of $1.7 million. In 2004, we recognized gains
of
$2.3 million from the sales of certain current assets (primarily precious
metals) compared to gains of $.5 million in 2003.
Equity
in Earnings of Affiliate
Our
equity in earnings of affiliate was $668,000 in 2004 compared to $19,000
in
2003. The increase is the result of the renegotiation of a sales contract
with a
customer of the joint venture.
Cash
Flow From 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
2005,
net cash provided by continuing operating activities was $11 million, including
net income plus depreciation and amortization less other non-cash adjustments
offset by cash used by changes in assets and liabilities.
Accounts
receivable increased $8.7 million including:
| · |
a
net increase of $5.3 million relating to the Chemical Business
as the
result of increased sales from the El Dorado and Cherokee Facilities
due
to higher sales prices and increased volumes sold in December 2005
compared to December 2004. In December 2004, one of the four nitric
plants
at the El Dorado Facility was down as discussed under “Liquidity and
Capital Resources.” This increase was partially offset by a decrease in
the number of days EDNC’s receivables were outstanding and a
57
decrease
in their volumes sold in December 2005 compared to December 2004
due to a
lower demand for nitric acid.
|
| · |
an
increase of $3.6 million relating to the Climate Control Business
due
primarily to increased sales of hydronic fan coils, heat pumps
and large
custom air handlers.
|
Inventories
increased $8.9 million including:
| · |
an
increase of $6.3 million relating to the Chemical Business primarily
as
the result of higher costs of our raw material feedstocks and increased
volumes on hand at the El Dorado and Cherokee Facilities. The increase
in
volumes on hand is due, in part, to one of the four nitric plants
at the
El Dorado Facility being down during the fourth quarter of 2004
as
discussed under “Liquidity and Capital
Resources.”
|
| · |
an
increase of $2 million relating to the Climate Control Business
due
primarily to an increase in raw materials on hand to supply the
increase
in production of our heat pump products as the result of the increase
backlog as discussed under “Production and Backlog” of Item
1.
|
| · |
an
increase of $.6 million of industrial machinery and components
primarily
as the result of expanding our product lines.
|
Supplies,
prepaid items and other decreased $.8 million including:
| · |
a
decrease of prepaid insurance of $1 million as the result of changes
in
our insurance programs, policy periods and payment methods
and
|
| · |
a
decrease of precious metals of $.6 million primarily due to the
sale of
excess metals on hand offset, in part, by an increase in maintenance
and
repair supplies relating to the Chemical
Business.
|
Accounts
payable increased $4 million primarily due to the increase in production
and the
purchases of additional production equipment in our Climate Control
Business.
Customer
deposits decreased $1.5 million primarily due to the decrease in the amount
of
prepaid sales of our agricultural products in the Chemical Business offset,
in
part, by a deposit received as a down payment on an order of large custom
air
handlers in the Climate Control Business.
The
change in deferred rent expense of $6 million is due to the rent expense
recognized on a straight-line basis exceeding the scheduled lease payments
for
2005.
The
increase in other accrued and noncurrent liabilities of $2.5 million includes
an
increase of death benefit obligations of $.9 million which primarily relates
to
the untimely death of one of our executives in January 2005 and the change
in
accounting estimate for our CEO’s remaining service period as discussed above
under “Critical Accounting Policies and Estimates” and an increase in accrued
payroll and related benefits and commissions of $.7 million primarily relating
to the Climate Control Business.
58
Cash
Flow from Investing Activities
Net
cash
used by investing activities was $10.6 million for 2005 which included $15.3
million for capital expenditures of which $10.8 million is for the benefit
of
our Chemical Business. A portion of these expenditures relating to the Chemical
Business are the result of the mechanical failure of the acid plant discussed
above under “Liquidity and Capital Resources.” In addition, the $.5 million used
for other assets included the purchase of two interest rate cap contracts
as
discussed under “Interest Rate Risk” of Item 7A.
Cash
provided by investing activities included $2.9 million of proceeds from property
insurance recoveries and $2.4 million of proceeds from sales of property
and
equipment.
Cash
Flow from Financing Activities
Net
cash
provided by financing activities was $3.3 million. Net cash provided by
financing activities primarily consisted of proceeds from short-term financing
and drafts payable of $5.1 million, a net increase in revolving debt facilities
of $4.2 million and other long-term borrowings of $3.6 million partially
offset
by payments on short-term financing and drafts payable of $6 million, payments
on other long-term debt of $3.3 million and the purchase of 13,300 shares
of our
Series 2 Preferred for $.6 million.
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.
Aggregate
Contractual Obligations
Our
aggregate contractual obligations as of December 31, 2005 are summarized
in the
following table. See discussion in "Liquidity and Capital Resources" and
Notes 9
and 11 of Notes to Consolidated Financial Statements.
59
Payments
Due in the Year Ending December 31,
|
Contractual
Obligations
|
Total
|
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
|
(in
thousands)
|
||||||||||||||||||||||||||||
|
Long-term
debt:
|
||||||||||||||||||||||||||||
|
Working
Capital Revolver Loan
|
$
|
31,975
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
31,975
|
$
|
-
|
$
|
-
|
||||||||||||||
|
Senior
Unsecured Notes due 2007
|
13,300
|
-
|
13,300
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Senior
Secured Loan due 2009
|
50,000
|
-
|
625
|
1,250
|
48,125
|
-
|
-
|
|||||||||||||||||||||
|
Capital
leases
|
1,200
|
488
|
336
|
365
|
11
|
-
|
-
|
|||||||||||||||||||||
|
Other
|
15,649
|
2,860
|
5,224
|
2,640
|
942
|
999
|
2,984
|
|||||||||||||||||||||
|
Total
long-term debt
|
112,124
|
3,348
|
19,485
|
4,255
|
81,053
|
999
|
2,984
|
|||||||||||||||||||||
|
Interest
payments on long-term debt (1)
|
36,198
|
10,933
|
10,456
|
8,677
|
5,185
|
256
|
691
|
|||||||||||||||||||||
|
Capital
expenditures (2)
|
8,300
|
8,300
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Operating
leases:
|
||||||||||||||||||||||||||||
|
Baytown
lease
|
33,457
|
8,175
|
9,227
|
11,173
|
4,882
|
-
|
-
|
|||||||||||||||||||||
|
Other
operating leases
|
10,889
|
2,702
|
1,883
|
1,237
|
876
|
687
|
3,504
|
|||||||||||||||||||||
|
Exchange-traded
futures contracts
|
821
|
821
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Purchase
obligations
|
4,553
|
976
|
976
|
976
|
976
|
649
|
-
|
|||||||||||||||||||||
|
Other
long-term liabilities
|
5,687
|
-
|
1,758
|
722
|
548
|
347
|
2,312
|
|||||||||||||||||||||
|
Total
|
$
|
212,029
|
$
|
35,255
|
$
|
43,785
|
$
|
27,040
|
$
|
93,520
|
$
|
2,938
|
$
|
9,491
|
||||||||||||||
|
(1)
|
The
estimated interest payments relating to variable interest rate
debt are
based on the effective interest rates at December 31, 2005. In
addition,
we used the balance of the Working Capital Revolver Loan at December
31,
2005 as the average outstanding balance of the Working Capital
Revolver
Loan through maturity.
|
|
|
(2)
|
Capital
expenditures include only non-discretionary amounts in our 2006
capital
expenditure budget. These amounts do not include, as discussed
in
“Environmental Matters” under Item 1, an estimated $.5 to $3.3 million as
required under a NPDES permit effective June 2007 based on current
assumptions; an estimated $2 million for our pro-rata portion of
pipeline
engineering and construction costs if EDC uses the City of El Dorado’s
proposed pipeline; and an estimated $1.5 to $3 million over the
next five
years relating to the Air CAO.
|
60
Availability
of Company's Loss Carry-Overs
For
a
discussion on our net operating loss carry-overs, see Note 10 of Notes to
Consolidated Financial Statements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
Our
results of operations and operating cash flows are impacted by changes in
market
interest rates and changes in market prices of copper, steel, anhydrous ammonia
and natural gas.
Forward
Sales Commitments Risk
Periodically
our Climate Control and Chemical Businesses enter into forward sales commitments
of products for deliveries in future periods. As a result, we could be exposed
to embedded losses should our product costs exceed the firm sales prices.
At
December 31, 2005, there were 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.
Periodically, our Climate Control Business enters into exchange-traded futures
for copper and our Chemical Business enters into exchange-traded futures
for
natural gas, which contracts are generally accounted for on a mark-to-market
basis in accordance with SFAS No. 133. At December 31, 2005 our purchase
commitments under these contracts were for 600,000 pounds of copper through
December 2006 at a weighted average cost of $1.37 per pound ($821,000) and
a
weighted average market value of $1.98 per pound ($1,187,000).
Interest
Rate Risk
Our
interest rate risk exposure results from our debt portfolio which is impacted
by
short-term rates, primarily prime rate-based borrowings from commercial banks,
and long-term rates, primarily fixed-rate notes, some of which prohibit
prepayment or require substantial prepayment penalties.
We
purchased two interest rate cap contracts for a cost of $590,000 in March
2005
to help minimize our interest rate risk exposure relating to the Working
Capital
Revolver Loan. These contracts set a maximum three-month LIBOR base rate
of
4.59% on $30 million. These contracts mature on March 29, 2009. These contracts
are free-standing derivatives and are accounted for on a mark-to-market basis
in
accordance with SFAS No.133. At December 31, 2005 the market value of these
contracts was $429,000.
The
following table presents principal amounts and related weighted-average interest
rates by maturity date for our interest rate sensitive financial instruments
as
of December 31, 2005.
61
|
YEARS
ENDING DECEMBER 31,
|
|||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||
|
2006
|
2007
|
2008
|
2009
|
2010
|
THEREAFTER
|
TOTAL
|
|||||||||
Expected
maturities of long-term
debt:
|
Variable
rate debt
|
$
|
565
|
$
|
1,732
|
$
|
1,627
|
$
|
80,350
|
$
|
272
|
$
|
651
|
$
|
85,197
|
|||||||||||||
|
Weighted
average
|
|||||||||||||||||||||||||||
|
interest
rate (1)
|
9.56
|
%
|
9.58
|
%
|
9.59
|
%
|
9.55
|
%
|
7.18
|
%
|
7.18
|
%
|
9.51
|
%
|
|||||||||||||
|
Fixed
rate debt (2)
|
$
|
2,783
|
$
|
17,753
|
$
|
2,628
|
$
|
703
|
$
|
727
|
$
|
2,333
|
$
|
26,927
|
|||||||||||||
|
Weighted
average
|
|||||||||||||||||||||||||||
|
interest
rate (2)
|
9.36
|
%
|
8.99
|
%
|
7.08
|
%
|
6.69
|
%
|
6.50
|
%
|
6.35
|
%
|
8.49
|
%
|
| (1) |
Interest
rate is based on the aggregate amount of debt outstanding as of
December
31, 2005. On ThermaClime's Working Capital Revolver Loan, the interest
rate is based on the lender's prime rate plus .75% per annum, or
at its
option, LIBOR plus 2% per annum.
|
| (2) |
The
fixed rate debt and weighted average interest rate are based on
the
aggregate amount of debt outstanding as of December 31,
2005.
|
62
|
December
31, 2005
|
December
31, 2004
|
|||||||||
|
Estimated
Fair Value
|
Carrying
Value
|
Estimated
Fair Value
|
Carrying
Value
|
|||||||
|
(in
thousands)
|
||||||||||
|
Variable
Rate:
|
||||||||||||
|
Senior
Secured Loan (1)
|
$
|
48,695
|
$
|
50,000
|
$
|
50,000
|
$
|
50,000
|
||||
|
Bank
debt and equipment financing
|
35,197
|
35,197
|
31,740
|
31,740
|
||||||||
|
Fixed
Rate:
|
||||||||||||
|
Bank
debt and equipment financing
|
13,574
|
13,627
|
12,574
|
11,467
|
||||||||
|
Senior
Unsecured Notes due 2007 (2)
|
6,118
|
13,300
|
6,071
|
13,300
|
||||||||
|
$
|
103,584
|
$
|
112,124
|
$
|
100,385
|
$
|
106,507
|
(1)
The
Senior Secured Loan has a variable interest rate not to exceed 11% or 11.5%
depending on ThermaClime’s leverage ratio.
(2)
The
estimated fair value was based on market quotations; however, there has been
a
low volume of trading activity. In March 2006, we purchased approximately
$6
million of these Notes at carrying value.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
As
noted
on the cover of this Form 10-K, we are not an “accelerated filer.” Due to the
definitions, certain areas contained within the disclosure controls and
procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934,
as amended (the “Exchange Act”), overlap with the definition of internal control
over financial reporting (as defined in Rule 13a-15(f) of the Exchange
Act).
It
is our
goal to maintain disclosure controls and procedures that are designed to
ensure
that information required to be disclosed in our periodic reports filed with
the
SEC is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC and that such information is
accumulated and communicated to our management. Based on our most recent
evaluation, which was completed as of the end of the period covered by this
Annual Report on Form 10-K, we have evaluated, with the participation of
our
Chief Executive Officer and Chief Financial Officer, the effectiveness of
our
disclosure controls and
62
procedures.
Although during the evaluation we noted several significant deficeiencies
in our
disclosure controls and procedures, our disclosure controls and procedures
are
effective as of December 31, 2005.
In
our
10-K/A (Amendment No. 1) for the year ended December 31, 2004, we reported
that
our disclosure controls and procedures as of December 31, 2004, were not
effective as a result of a material weakness identified resulting in incorrectly
assessing the materiality of a change from LIFO and FIFO method of accounting
of
certain inventory to net income. This weakness was remediated during the
quarter
ended December 31, 2005, by formalizing our Disclosure Committee, which reports
to our CEO and CFO, and adopting a charter for the Committee.
Except
for formalizing our Disclosure Committee, there were no other significant
changes to our internal control over financial reporting during the quarter
ended December 31, 2005.
ITEM
9B. OTHER INFORMATION
None.
64
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
niche
markets by offering extensive product lines, customized products
and
improved technologies,
|
|
·
|
we
have developed the most extensive line of water source heat pumps
and
hydronic fan coils in the United States,
|
|
·
|
we
have used geothermal technology in the climate control industry
to create
the most energy efficient climate control systems commercially
available
today,
|
|
·
|
we
are a leading provider of water source heat pumps to the commercial
construction and renovation markets in the United
States,
|
|
·
|
the
market for commercial water source heat pumps will continue to
grow due to
the relative efficiency and long life of such systems as compared
to other
air conditioning and heating systems, as well as to the emergence
of the
replacement market for those systems,
|
|
·
|
the
longer life, lower cost to operate, and relatively short payback
periods
of geothermal systems, as compared with air-to-air systems, will
continue
to increase demand for our geothermal products,
|
|
·
|
our
Climate Control Business is a leading provider of hydronic fan
coils,
|
|
·
|
the
majority of raw material cost increases, if any, will be passed
to our
customers in the form of higher prices and while we believe we
will have
sufficient materials, a shortage of raw materials could impact
production
of our Climate Control products,
|
|
·
|
our
Climate Control Business will continue to launch new products and
product
upgrades in an effort to maintain and increase our current market
position
and to establish a presence in new markets,
|
|
·
|
one
of our new products, the SureFlow® system, is an effective solution to
provide a long-lasting, quiet and high quality fan coil system
at an
attractive price to our customers,
|
|
·
|
we
can establish a strong presence within the large custom air handlers
market,
|
|
·
|
our
investment in fabrication equipment and plant-wide process control
systems
will raise capacity and reduce overtime relating to the Climate
Control
Business,
|
|
·
|
we
have developed significant freight and distribution advantages
over many
of our competitors and established leading regional market positions
in
our Chemical Business
|
|
·
|
the
current market outlook justifies continuing production at the Cherokee
Facility for the foreseeable future; however, we could from time
to time,
suspend production at this facility due to, among other things,
continuing
high cost of its primary raw material, natural gas,
|
|
·
|
the
soil remediation at the former Hallowell facility will occur over
the next
two years,
|
|
·
|
our
performance has been and will continue to be dependent upon the
efforts of
our principal executive officers and our future success will depend
in
large part on our continued ability to attract and retain highly
skilled
and qualified personnel,
65
|
|
·
|
with
the infusion of new capital as a result of the recently completed
debenture offering and based upon current forecasts, that we will
have
adequate cash in 2006 from internal cash flows and financing sources
to
enable us to satisfy our cash requirements as they become due in
2006,
|
|
·
|
our
net loss carryovers may be used to reduce the federal income tax
payments
which we would otherwise be required to make with respect to income,
if
any, generated in future years,
|
|
·
|
retain
most of our future earnings, if any, to provide funds for our operations
and/or expansion of our businesses,
|
|
·
|
use
all or a substantial portion of the net proceeds from the sale
of the
debentures (which we estimate to be approximately $16.5 million
after
paying commissions to the placement agent and our expenses relating
to the
offering) to repay or purchase our debt or debt of our subsidiaries,
including our subsidiary’s $13.3 million senior unsecured debentures due
2007, and the balance, if any, for general corporate purposes and
pending
such uses, the net proceeds to be invested in investments with
highly
rated money market funds, U.S. government securities, treasury
bills
and/or short-term commercial paper,
|
|
·
|
our
ability to make principal and interest payments, or to refinance
indebtedness, depends on our future operating performance and cash
flow,
which are subject to prevailing economic conditions and other factors
affecting us, many of which are beyond our control,
|
|
·
|
four
customers account for approximately 25% of our total net receivables
at
December 31, 2005 which we do not believe this concentration represents
a
significant credit risk due to the financial stability of these
customers,
|
|
·
|
during
December 2005, we corrected the weakness to our disclosure controls
and
procedures by, among other things, establishing a Disclosure Committee
to
maintain oversight activities and to examine and reevaluate our
policies,
procedures and criteria to determine materiality of items relative
to our
financial statements taken as a whole,
|
|
·
|
the
"E-2" brand ammonium nitrate fertilizer is recognized as a premium
product,
|
|
·
|
the
agricultural products are the only seasonal products,
|
|
·
|
competition
within the Chemical and Climate Control Businesses is primarily
based on
price, location of production and distribution sites, service,
warranty
and product performance,
|
|
·
|
the
backlog of confirmed orders for Climate Control products at December
31,
2005 will be filled during 2006,
|
|
·
|
we
expect to obtain our requirements for raw materials in 2006,
|
|
·
|
the
amount of committed capital expenditures, for 2006,
|
|
·
|
amounts
to be spent relating to compliance with federal, state and local
environmental laws at the El Dorado Facility including matters
relating to
the sulfuric acid plant,
|
|
·
|
liquidity
and availability of funds,
|
|
·
|
anticipated
financial performance,
|
|
·
|
adequate
resources to meet our obligations as they come due,
|
|
·
|
ability
to make planned capital improvements,
|
|
·
|
amount
of and ability to obtain financing for the Discharge Water disposal
project,
|
|
·
|
new
and proposed requirements to place additional security controls
over
ammonium nitrate and other nitrogen fertilizers will not materially
affect
the viability of ammonium nitrate as a valued product,
|
|
·
|
we
could obtain anhydrous ammonia from other sources in the event
of a
termination or interruption of service under our existing purchase
agreement,
66
|
|
·
|
under
the terms of an agreement with a supplier, EDC purchasing substantially
all of its anhydrous ammonia requirements through December 31,
2006,
|
|
·
|
under
the terms of an agreement with a customer, EDC supplying this customer
with approximately 190,000 tons of industrial grade ammonium nitrate
per
year through at least March 2008,
|
|
·
|
under
the terms of an agreement, Bayer purchasing from EDNC all of its
requirements for nitric acid at its Baytown operation through at
least May
2009,
|
|
·
|
ThermaClime's
forecasts for 2006 for ThermaClime's operating results meeting
all
required covenant tests for all quarters and the year ending in
2006,
|
|
·
|
the
amount of capital expenditures required under the Discharge Water
permit,
and
|
|
·
|
the
amount of additional expenditures relating to the Air
CAO.
|
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,
|
·
|
decline
in general economic conditions, both domestic and
foreign,
|
|
·
|
material
reduction in revenues,
|
|
·
|
material
increase in interest rates,
|
|
·
|
ability
to collect in a timely manner a material amount of
receivables,
|
|
·
|
increased
competitive pressures,
|
|
·
|
changes
in federal, state and local laws and regulations, especially environmental
regulations, or in interpretation of such, pending,
|
|
·
|
additional
releases (particularly air emissions) into the
environment,
|
|
·
|
material
increases in equipment, maintenance, operating or labor costs not
presently anticipated by us,
|
|
·
|
the
requirement to use internally generated funds for purposes not
presently
anticipated,
|
|
·
|
the
inability to secure additional financing for planned capital
expenditures,
|
|
·
|
the
cost for the purchase of anhydrous ammonia and natural
gas,
|
|
·
|
changes
in competition,
|
|
·
|
the
loss of any significant customer,
|
|
·
|
changes
in operating strategy or development plans,
|
|
·
|
inability
to fund the working capital and expansion of our
businesses,
|
|
·
|
adverse
results in any of our pending litigation,
|
|
·
|
inability
to obtain necessary raw materials,
|
|
·
|
other
factors described in "Management's Discussion and Analysis of Financial
Condition and Results of Operation" contained in this report,
and
|
|
·
|
other
factors described in “Risk
Factors”.
|
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.
67
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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.
The
By-laws of the Company further provide that only persons nominated by or
at the
direction of: (a) the Board of Directors of the Company, or (b) any stockholder
of the Company entitled to vote for the election of the directors that complies
with certain notice procedures, shall be eligible for election as a director
of
the Company. Any stockholder desiring to nominate any person as a director
of
the Company must give written notice to the Secretary of the Company at the
Company's principal executive office not less than 50 days prior to the date
of
the meeting of stockholders to elect directors; except, if less than 60 day's
notice or prior disclosure of the date of such meeting is given to the
stockholders, then written notice by the stockholder must be received by
the
Secretary of the Company not later than the close of business on the 10th
day
following the day on which such notice of the date of the meeting was mailed
or
such public disclosure was made. In addition, if the stockholder proposes
to
nominate any person, the stockholder's written notice to the Company must
provide all information relating to the person whom the stockholder desires
to
nominate that is required to be disclosed in solicitation of proxies pursuant
to
Regulation 14A under the Securities Exchange Act of 1934, as
amended.
Series
2 Preferred
The
terms of the $3.25 Convertible Exchangeable Class C Preferred Stock, Series
2
("Series 2 Preferred") provide that whenever dividends on the Series 2 Preferred
are in arrears and unpaid in an amount equal to at least six quarterly
dividends: (a) the number of members of the Board of Directors of the Company
shall be increased by two effective as of the time of election of such
directors; (b) the Company shall, upon the written request of the record
holder
of 10% of the shares of Series 2 Preferred, call a special meeting of the
Preferred Stockholders for the purpose of electing such two additional
directors; and (c) the Preferred Stockholders have the exclusive right to
vote
for and elect such two additional directors. In March 2002, the holders of
the
Company's Series 2 Preferred elected Dr. Allen Ford and Mr. Grant Donovan
to
serve as members of the Company's Board of Directors pursuant to the terms
of
the Series 2 Preferred.
The
terms
of the Series 2 Preferred provide that the right of the holders of the Series
2
Preferred 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 Series 2 Preferred have been declared and set
apart
for payment. Also, pursuant to the terms of the Series 2 Preferred, the term
of
office for such directors will terminate immediately upon the
termination
of the right of the Series 2 Preferred holders to vote for such directors,
subject to the requirements of Delaware law. The Series 2 Preferred holders
have
the right to remove without cause at any time and replace either of the
two
directors that the Series 2 Preferred holders have
elected.
68
Directors
Information regarding the Company’s directors is as follows:
|
Raymond
B. Ackerman,
age 83. Mr. Ackerman first became a director in 1993. His term
will expire
in 2008. From 1972 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 Commerce and Industry Hall
of Fame
in 1993.
|
|
|
Robert
C. Brown, M.D.,
age 75. Dr. Brown first became a director in 1969. His term will
expire in
2006. Dr. Brown has practiced medicine for many years and is Vice
President and Treasurer of Plaza Medical Group, P.C. and President
and CEO
of ClaimLogic L.L.C. Dr. Brown is a graduate of Tufts University
and
received his medical degree 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.
|
|
|
Charles
A. Burtch,
age 70. Mr. Burtch first became a director in 1999. His term will
expire
in 2007. 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.
|
|
|
Barry
H. Golsen, J.D.,
age 55. Mr. Golsen first became a director in 1981. His term will
expire
in 2006. 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 has both his undergraduate
and law
degrees from the University of Oklahoma.
|
|
|
Jack
E. Golsen,
age 77. Mr. Golsen first became a director in 1969. His term will
expire
in 2007. 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. 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 in biochemistry.
|
|
|
David
R. Goss,
age 65. Mr. Goss first became a director in 1971. His term will
expire in
2006. 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
79. Mr. Ille first became a director in 1971. His term will expire
in
2008. Mr. Ille served as President and Chief Executive Officer
of United
Founders Life from 1966 to
69
|
|
|
Horace
G. Rhodes,
age 78. Mr. Rhodes first became a director in 1996. His term will
expire
in 2007. 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
64. Mr. Shelby first became a director in 1971. His term will expire
in
2008. Mr. Shelby, a certified public accountant, is our Executive
Vice
President of Finance and Chief Financial Officer, a position he
has held
for more than five years. Prior to becoming our Executive Vice
President
of Finance and Chief Financial Officer, he served as Chief Financial
Officer of a subsidiary of the Company and was with the accounting
firm of
Arthur Young & Co., a predecessor to Ernst & Young LLP. Mr. Shelby
is a graduate of Oklahoma City University.
|
|
|
John
A. Shelley,
age 55. Mr. Shelley first became a director in 2005. His term will
expire
in 2006. 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.
|
|
|
Donald
W. Munson, age
73. Mr. Munson first became a director in 1997. His term will expire
in
2008. From 1988, until his retirement in 1992, Mr. Munson served
as
President and Chief Operating Officer of Lennox Industries. Prior
to 1998,
he served as Executive Vice President of Lennox Industries' Division
Operations, President of Lennox Canada and Managing Director of
Lennox
Industries' European Operations. Prior to joining Lennox Industries,
Mr.
Munson served 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.
|
|
|
Continuing
Directors elected by the holders of Series 2
Preferred:
|
|
|
Grant
J. Donovan,
age 49. Mr. Donovan first became a director in 2002. Mr. Donovan
is
President and founder of Galehead, Inc., a company specializing
on the
collections of accounts receivable in the international maritime
trade
business. Prior to forming Galehead, Inc., Mr. Donovan was a partner
in a
real estate development firm specializing in revitalizing functionally
70
|
|
|
Dr.
N. Allen Ford,
age 63. Dr. Ford first became a director in 2002. Dr. Ford joined
the
University of Kansas in 1976 where his teaching and research duties
focus
mainly on taxation. At the University of Kansas, Professor Ford
has won
several teaching awards and is the Larry D. Horner/KPMG Peat Marwick
Distinguished Professor of Accounting. Dr. Ford teaches the following
courses in taxation: individual, corporate, partnership, S corporation,
gift and estate tax. He is active in professional organizations
such as
the American Taxation Association and the American Accounting Association.
He received his Ph.D. in Accounting from the University of
Arkansas.
|
|
Family
Relationships
Jack E.
Golsen is the father of Barry H. Golsen and the brother-in-law of Robert
C.
Brown, M.D. Robert C. Brown, M.D. 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, M.D.
Executive
Officers
See
information regarding the Company’s executive officers under Item
4A.
Audit
Committee
The
Company has a separately-designated standing audit committee established
in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934,
as
amended (the "Exchange Act"). The members of the Audit Committee are Messrs.
Bernard Ille (Chairman), Charles Burtch, Horace Rhodes, and Ray Ackerman.
The
Board has determined that each member of the Audit Committee is independent,
as
defined in the listing standards of the American Stock Exchange ("AMEX")
as of
the Company's fiscal year end. During 2005, the Audit Committee had seven
meetings.
Audit
Committee Financial Expert
While
the Board of Directors endorses the
effectiveness of our Audit
Committee, its membership does not presently include a director that qualifies
for designation as an "Audit Committee Financial Expert." However, each of
the
current members of the Audit Committee is
able to
read and understand fundamental
financial statements and at least one of its members is "financially
sophisticated" as defined by applicable AMEX rules. The Board of Directors
believes that the background 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 would not be impaired by the absence
of an "Audit Committee Financial Expert."
Section
16(a) Beneficial Ownership Reporting Compliance
Based
solely on a review of copies of the Forms 3, 4 and 5 and amendments thereto
furnished to the Company with respect to 2005, or written representations
that
no such reports were required to be filed with the Securities and Exchange
Commission, the Company believes that during 2005 all directors and officers
of
the Company and beneficial owners of more than 10% of any class of equity
securities of the Company registered pursuant to Section 12 of the Exchange
Act
filed their required Forms 3, 4, or 5, as required by Section 16(a) of the
Exchange Act of 1934, as amended, on a timely basis, except for Kent McCarthy
and his affiliates inadvertently filed one late Form 5 to report one
transaction; Dr. Ford inadvertently filed one late Form 5 to report one
transaction; and Mr. Goss
filed an amended Form 4 to report two gifts.
71
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 all
of our subsidiary companies have adopted a Statement of Policy Concerning
Business Conduct applicable to our employees. This policy was amended in
May
2005. Our
Amended Statement of Policy Concerning Business Conduct and the Code of Ethics
is available on our website at http://www.lsb-okc.com. We will post any
amendments to these documents, as well as any waivers that are required to
be
disclosed pursuant to the rules of either the Securities and Exchange Commission
or the AMEX, on our website.
Item
11. EXECUTIVE COMPENSATION
The
following table shows the aggregate compensation which we and our subsidiaries
paid or accrued to our Chief Executive Officer and each of our other four
most
highly-paid executive officers (which includes our Vice Chairman of the Board
of
Directors who also serves as President of the Company and its Climate Control
Business) (together, the “named executive officers”). The table includes
compensation for services rendered during 2005, plus any compensation paid
during 2005 for services rendered in a prior year, less any amount relating
to
those services previously included in the summary compensation table for
a prior
year.
Summary
Compensation Table
|
Annual
Compensation
|
|
Name
and Position
|
Year
|
Salary
($)
(1)
|
Bonus
($)
(2)
|
All
Other Compensation ($)
|
|
Jack
E. Golsen,
Chairman
of the Board of Directors and Chief Executive Officer
|
2005
2004
2003
|
477,400
495,762
477,400
|
-
-
-
|
-
61,133
23,000
|
(3) (3)
|
||||
|
Barry
H. Golsen,
Vice
Chairman of the Board of Directors, President, and President of
the
Climate Control Business
|
2005
2004
2003
|
411,600
339,162
326,600
|
35,000
85,000
85,000
|
-
-
-
|
|||||
|
David
R. Goss,
Executive
Vice President of Operations
|
2005
2004
2003
|
260,500
239,366
209,577
|
-
30,000
-
|
-
-
-
|
|||||
|
Tony
M. Shelby,
Executive
Vice President of Finance and Chief Financial Officer
|
2005
2004
2003
|
240,000
249,231
214,108
|
35,000
30,000
-
|
-
-
-
|
|||||
|
David
M. Shear,
Senior
Vice President and General Counsel
|
2005
2004
2003
|
212,558
212,885
184,077
|
30,000
30,000
-
|
-
-
-
|
72
(1)
We
pay the executive officers on a bi-weekly basis. For 2004, there were 27
bi-weekly payments compared to 26 in 2005 and 2003.
(2)
Bonuses are paid for services rendered in the prior year.
(3)
Life
insurance premiums paid by the Company under a $3 million split dollar
endorsement life insurance policy purchased in 1996 by the Company on the
life
of Mr. Golsen (the "Split Dollar Policy"). The Split Dollar Policy was replaced
in 2005. Mr. Golsen has no obligation to repay the Company any amounts paid
by
the Company under the Split Dollar Policy. In 2005, the Company purchased
and
now owns three whole life insurance policies on Mr. Golsen's life, which
policies were purchased in connection with the Death Benefit Agreement between
the Company and Mr. Golsen. See "Other Plans" under this Item 11 for a
description of the Death Benefit Agreement.
Option
Grants in 2005
The
Company did not grant stock options to any of the named executive officers
during 2005.
Aggregated
Option Exercises in 2005 and Year-End Option Values
The
following table sets forth information concerning the number and year-end
value
of stock options held by each of the named executive officers during 2005.
|
Shares
Acquired on
|
Value
|
Number
of Securities Underlying Unexercised Options at FY End
(1)
|
Value
of Unexercised
In-the-Money
Options at Fiscal Year End
(1)
(2)
|
|
Name
|
Exercise
|
Realized
|
Exercisable/Unexercisable
|
Exercisable/Unexercisable
|
|
Jack
E. Golsen
|
-
|
-
|
176,500
/ -
|
$
|
864,850
/ $ -
|
|||||
|
Barry
H. Golsen
|
-
|
-
|
75,000
/ -
|
$
|
335,538/
$ -
|
|||||
|
David
R. Goss
|
-
|
-
|
200,000
/ -
|
$
|
709,675
/ $ -
|
|||||
|
Tony
M. Shelby
|
-
|
-
|
200,000
/ -
|
$
|
709,675
/ $ -
|
|||||
|
David
M. Shear
|
-
|
-
|
164,544
/ -
|
$
|
597,066
/ $ -
|
(1)
The
stock options granted under the Company's stock option plans became exercisable
20% after one year from date of grant, an additional 20% after two years,
an
additional 30% after three years, and the remaining 30% after four
years.
(2)
The
values are based on the difference between (a) the price of the Company's
Common
Stock on the AMEX at the close of trading on December 30, 2005 of $6.15 per
share and (b) the exercise price of the option. The actual value realized
by a
named executive officer on the exercise of these options depends on the market
value of the Company's Common Stock on the date of exercise.
Other
Plans The
Board
of Directors has adopted an LSB Industries, Inc., Employee Savings Plan (the
"401(k) Plan") for the employees (including executive officers) of the Company
and its
subsidiaries, excluding
employees covered under union agreements and certain other employees.
The 401(k)
Plan is funded by employee contributions, and the Company and its subsidiaries
make no contributions to the 401(k) Plan (with limited matching exceptions
at
three subsidiary locations). The amount that an employee may contribute
to the
401(k) Plan equals a certain percentage of the employee's compensation,
with the
percentage based on the employee'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 employee's
compensation each pay period, in accordance with the employee's instructions,
and pays the amount into the 401(k) Plan for the employee's benefit.
The salary
and bonus set forth in the Summary Compensation Table above includes
any amounts
contributed during the 2005, 2004, and 2003 fiscal years pursuant to
the 401(k)
Plan by the named executive officers of the Company.
73
On
May
12, 2005, the Company entered into a certain death benefit agreement (“2005
Agreement”) with Jack E. Golsen. This agreement replaces certain existing
benefits that were payable to Mr. Golsen under a split dollar insurance policy
purchased by the Company on Mr. Golsen's life in 1996 and a second policy
purchased in 2002, each of which were replaced in 2005. 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 new life insurance policies on Mr.
Golsen's life that have been purchased and are owned by the Company. The
new
life insurance policies owned by the Company provide a stated death benefit
of
$7 million. The Company is obligated to keep in existence no less than $2.5
million of the stated death benefit.
During
1981, the Company entered into individual death benefit agreements (the "1981
Agreements") with certain key employees. Under the 1981 Agreements, the
designated beneficiary of an employee will receive a monthly benefit for
a
period of ten years if the employee 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 employee at anytime prior
to
the employee's death. The Company has purchased life insurance on the life
of
each employee 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 employee. The following table
sets
forth the amounts of annual benefits payable to the designated beneficiary
or
beneficiaries of the executive officers named in the Summary Compensation
Table
under the 1981 Agreements.
|
Name
of Individual
|
Amount
of Annual Payment
|
|
Jack
E. Golsen
|
$
|
175,000
|
||
|
Barry
H. Golsen
|
$
|
30,000
|
||
|
David
R. Goss
|
$
|
35,000
|
||
|
Tony
M. Shelby
|
$
|
35,000
|
||
|
David
M. Shear
|
$
|
N/A
|
74
During
1992, the Company entered into a non-qualified arrangement with certain key
employees of the Company and its subsidiaries 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"). Under the 1992 Agreements,
the
employee is eligible to receive a designated benefit (“Benefit”) as set forth in
the 1992 Agreements. If prior to attaining the age 65, the employee dies
while
in the employment of the Company or a subsidiary of the Company, the designated
beneficiary of the employee 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 employee at any time and for any reason
prior
to the death of the employee. The Company has purchased insurance on the
life of
each employee covered under the 1992 Agreements where the Company is the
owner
and sole beneficiary of the 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 employee
becomes
incapacitated prior to retirement or prior to reaching age 65, the employee
may
request the Company to cash-in any life insurance on the life of such employee
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 executive officers named
in
the Summary Compensation Table under the 1992 Agreements.
|
Name
of Individual
|
Amount
of Annual
Benefit
|
Amount
of Annual Death Benefit
|
|
Barry
H. Golsen
|
$
|
17,480
|
$
|
11,596
|
||||
|
David
R. Goss
|
$
|
17,403
|
$
|
-
|
||||
|
Tony
M. Shelby
|
$
|
15,605
|
$
|
16,486
|
||||
|
David
M. Shear
|
$
|
17,822
|
$
|
7,957
|
Compensation
of Directors
In 2005,
we compensated our non-employee directors for their services as directors
on our
Board. Certain non-employee directors also served on the Board of Directors
of
our subsidiary, ThermaClime, without additional compensation. Our non-employee
directors also received compensation for each meeting of the Board of Directors
attended during 2005. The aggregate compensation paid in 2005 to our Directors
for Board-related services was $218,660.
Mr.
Ackerman received additional compensation for his services on the Audit and
Public Relations and Marketing Committees. Dr. Brown received additional
compensation for his services on the Benefits and Programs Committee and
as a
medical director for the Company's employee medical plan. Mr. Burtch received
additional compensation for his services on the Audit Committee. Mr. Ille
received additional compensation for his services on the Audit, Public Relations
and Marketing, and Executive Salary Review Committees. Mr. Munson received
additional compensation for consulting services in connection with developing
our European business. Mr. Rhodes received additional compensation for his
services on the Audit and Executive Salary Review Committees.
75
The following table shows the compensation of our non-employee directors during 2005:
|
Committee
and
Consulting Services |
Director
Services |
|||
|
Mr.
Ackerman
|
$
|
20,000
|
$
|
12,500
|
|
Dr.
Brown
|
$
|
20,000
|
$
|
12,500
|
|
Mr.
Burtch
|
$
|
20,000
|
$
|
12,000
|
|
Mr.
Donovan
|
$
|
-
|
$
|
12,500
|
|
Dr.
Ford
|
$
|
-
|
$
|
12,000
|
|
Mr.
Ille
|
$
|
20,000
|
$
|
12,000
|
|
Mr.
Munson
|
$
|
15,160
|
$
|
11,500
|
|
Mr.
Rhodes
|
$
|
20,000
|
$
|
12,500
|
|
Mr.
Shelley
|
$
|
-
|
$
|
6,000
|
Employment
Contracts and Termination of Employment and Change in Control
Arrangements
(a)
Termination of Employment and Change in Control
Agreements
We have
entered into severance agreements with each of Jack E. Golsen, Barry H. Golsen,
Tony M. Shelby, David R. Goss, David M. Shear, and certain other
officers.
Each
severance agreement provides (among other things) that if, within 24 months
after the occurrence of a change in control (as defined) of the Company,
the
Company terminates the officer's employment other than for cause (as defined),
or the officer terminates his employment for good reason (as defined), the
Company must pay the officer an amount equal to 2.9 times the officer's base
amount (as defined). The phrase "base amount" means the average annual gross
compensation paid by the Company to the officer and includable in the officer's
gross income during the most recent five year period immediately preceding
the
change in control. If the officer has been employed by the Company for less
than
five years, the base amount is calculated with respect to the most recent
number
of taxable years ending before the change in control that the officer worked
for
the Company.
The
severance agreements provide that a "change in control" means a change in
control of the Company of a nature that would require the filing of a Form
8-K
with the Securities and Exchange Commission and, in any event, would mean
when:
(a) 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 (i) any person, firm,
corporation, entity, or group which, as of the date of the severance agreement,
has that ownership, or (ii) 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
76
above-described
persons, entities, or estates; (b) 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 (c) 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: (a)
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; (b) the conviction of a felony; (c) the embezzlement
by
the officer of Company assets resulting in substantial personal enrichment
of
the officer at the expense of the Company; or (d) 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: (a) the conviction of Mr. Golsen of a felony
involving moral turpitude after all appeals have been completed; or (b) 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 (i) 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 (ii) 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 (a) 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; (b) the relocation of the officer; (c) any
purported termination by the Company of the officer's employment with the
Company otherwise than as permitted by the severance agreement; or (d) 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 of no change in control had occurred.
Except
for the severance agreement with Jack E. Golsen, each severance agreement
runs
until the earlier of: (a) three years after the date of the severance agreement,
or (b) the officer's normal retirement date from the Company; however, beginning
on the first anniversary of the severance agreement and on each annual
anniversary thereafter, the term of the severance agreement automatically
extends for an additional one-year period, unless the Company gives notice
otherwise at least 60 days prior to the anniversary date. The severance
agreement with Jack E. Golsen is effective for a period of three years from
the
date of the severance agreement; except that, commencing on the date one
year
after the date of such severance agreement and on
each annual 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.
77
(b)
Employment Agreement We
have
an employment agreement with Jack E. Golsen, the Chairman of the Board and
Chief
Executive Officer of the Company, which requires the Company to employ Mr.
Golsen as an executive officer of the Company. The current term of the
employment agreement will expire March 21, 2008; however, pursuant to an
amendment to the employment agreement approved by the Board of Directors,
the
term will be automatically renewed for up to three additional three-year
periods. 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.
Under
the terms of such employment agreement, Mr. Golsen (a) shall be paid an annual
base salary at his 1995 base rate, as adjusted from time to time by the
Executive Salary Review Committee, but such shall never be adjusted to an
amount
less than Mr. Golsen's 1995 base salary, (b) shall be paid an annual bonus
in an
amount as determined by the Executive Salary Review Committee, and (c) shall
receive from the Company certain other fringe benefits. The
employment agreement was amended in 2005 to reflect the termination of a
split
dollar life insurance policy on Mr. Golsen's life and the new Death Benefit
Agreement, as discussed above
under “Other Plans.”
The
employment agreement provides that Mr. Golsen's employment may not be
terminated, except (a) upon conviction of a felony involving moral turpitude
after all appeals have been exhausted, (b) 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, and (c) Mr. Golsen's death. However,
no such
termination under (a) or (b) above 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 (a) or (b) above.
If
Mr.
Golsen's employment is terminated in breach of the employment agreement,
then he
shall, in addition to his other rights and remedies, receive and the Company
shall pay to Mr. Golsen (a) in a lump sum 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 (b) 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) 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.
78
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.
Compensation
Committee Interlocks and Insider Participation
Our
Executive Salary Review Committee has the authority to set the compensation
of
all our officers. This Committee generally considers and approves the
recommendations of the Chief Executive Officer. The Chief Executive Officer
does
not make a recommendation regarding his own salary. The members of the Executive
Salary Review Committee are the following non-employee directors: Bernard
G.
Ille and Horace G. Rhodes. Neither Mr. Ille nor Mr. Rhodes is, or ever has
been,
an officer or employee of the Company or any of its subsidiaries. During
2005,
the Executive Salary Review Committee had two meetings.
See
"Compensation of Directors" for information concerning compensation paid
to each
non-employee director of the Company during 2005 for services as a director
to
the Company.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDERS MATTERS
The
following table sets forth the information as of December 31, 2005, 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)
|
975,704
|
$
|
2.64
|
295,000
|
||
|
Equity
compensation plans not approved by stockholders (2)
|
915,600
|
$
|
2.08
|
-
|
||
|
Total
|
1,891,304
|
$
|
2.37
|
295,000
|
(1)
Stockholder
Approved Plans
Our
equity compensation plans which are approved by our stockholders are the
following:
| · |
1993
Stock Option and Incentive Plan (the "1993 Plan"). As of December
31,
2005, 376,500 shares are issuable under outstanding options granted
under
the 1993 Plan, and no additional shares are available for future
issuance.
79
|
| · |
1998
Stock Option Plan (the "1998 Plan"). As of December 31, 2005, 509,204
shares are issuable under outstanding options granted under the
1998 Plan,
and no additional shares are available for future
issuance.
|
| · |
Outside
Directors Stock Option Plan (the "Outside Directors Plan"). As
of December
31, 2005, 90,000 shares are issuable under outstanding options
granted
under the Outside Directors Plan and 295,000 additional shares
are
available for future issuance. The Outside Directors Plan authorizes
the
Company to grant options to purchase common stock to each member
of our
Board of Directors who is not an officer or employee of the Company
or its
subsidiaries. These options become fully exercisable after six
months and
one day from the date of grant and lapse at the end of ten years.
The
exercise price of options granted under the Outside Directors Plan
is
equal to the market value of our common stock at the date of grant.
|
The
1993
Plan and 1998 Plan each authorize the Company to grant options to purchase
common stock to our employees. All outstanding options granted to employees
under these plans have a term of ten years and become exercisable as to 20%
of
the underlying shares after one year from date of grant, 40% after two years,
70% after three years, and 100% after four years. However effective December
31,
2005, our Board of Directors approved the acceleration of the vesting schedule
of 61,500 shares of stock options under the 1998 Plan which would otherwise
have
been fully vested on November 17, 2009, to avoid the recognition of compensation
expense in our future financial statements relating to these stock options.
As a
result, all outstanding options under the 1998 Plan were exercisable at December
31, 2005. Based on FASB Interpretation No. 44 “(FIN 44”), because this
modification to the vesting schedule did not
renew or
increase the life of these stock options, a remeasurement of the stock options
was not required and no stock-based compensation was recognized in
2005.
The
exercise price of outstanding options granted under these plans is equal
to the
market value of our common stock at the date of grant. However, with respect
to
participants who own 10% or more of our common stock at the date of grant,
the
options have a term of five years, and the exercise price is 110% of the
market
value at the date of grant.
(2)
Non-Stockholder
Approved Plans
From
time to time, our Board of Directors has approved the grants of certain
nonqualified stock options as the Board has determined to be in our best
interest to compensate directors, officers, or employees for service to the
Company. Unless otherwise indicated below, (a) the price of each such option
is
equal to the market value of our common stock at the date of grant, (b) the
options become exercisable as to 20% of the underlying shares after one year
from the date of grant, 40% after two years, 70% after three years, and 100%
after four years, and (c) each option expires ten years from the grant date.
However effective December 31, 2005, our Board of Directors approved the
acceleration of the vesting schedule of (x) 30,000 shares of options that
were
granted on April 22, 1998 which otherwise would have been fully vested on
April
22, 2008, and (y) 15,000 shares of options that were granted on November
7, 2002
which otherwise would have been fully vested on November 7, 2006, to avoid
the
recognition of compensation expense in our future financial statements relating
to these stock options. As a result, all outstanding options under these
plans
were exercisable at December 31, 2005. Based on FIN 44 as discussed above,
no
stock-based compensation was recognized in 2005.
80
Our
equity compensation plans, which have not been approved by the stockholders,
are
the following:
| · |
Effective
December 1, 2002, we granted nonqualified options to purchase up
to an
aggregate 112,000 shares of common stock to former employees of
two former
subsidiaries. These options were part of the employees' severance
compensation arising from the sale of the former subsidiaries'
assets.
Each recipient of a grant received options for the same number
of shares
and having the same exercise price as under the recipient's vested
incentive stock options which expired upon the sale. Each nonqualified
option was exercisable as of the date of grant and has a term of
ten years
from the original date of grant. As of December 31, 2005, 7,000
shares are
issuable under the following options: 3,000 have an exercise price
of
$4.188 per share and expire April 22, 2008 and 4,000 have an exercise
price of $2.73 per share and expire November 21, 2011.
|
| · |
On
November 7, 2002, we granted to an employee of the Company a nonqualified
stock option to acquire 50,000 shares of common stock in consideration
of
services rendered to the Company. As of December 31, 2005, 30,000
shares
are issuable at an exercise price of $2.62 per
share.
|
| · |
On
November 29, 2001, we granted to employees of the Company nonqualified
stock options to acquire 102,500 shares of common stock in consideration
of services to the Company. As of December 31, 2005, 74,500 shares
are
issuable at an exercise price of $2.73 per
share.
|
| · |
On
July 20, 2000, we granted nonqualified options to a former employee
of the
Company to acquire 185,000 shares of common stock in consideration
of
services to the Company. The following are the exercise prices
per share
for these options: 5,000 shares at $5.362; 80,000 shares at $4.538;
60,000
shares at $1.375; and 40,000 shares at $1.25. These options were
for the
same number of shares and the same exercise prices as under the
stock
options held by the former employee prior to leaving the Company.
These
options were fully vested at the date of grant and expire, as to
100,000
shares, nine years from the date of grant and as to the remaining
85,000
shares, seven years from the date of grant.
|
| · |
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, 2005, 516,500 shares are
issuable.
|
| · |
On
April 22, 1998, we granted to certain employees and to each member
of our
Board of Directors who was not an officer or employee of the Company
or
its subsidiaries nonqualified stock options to acquire shares of
common
stock at an exercise price of $4.1875 per share in consideration
of
services to the Company. As of December 31, 2005 102,600 shares
are
issuable under outstanding options under these
agreements.
|
Security
Ownership of Certain Beneficial Owners
The
following table sets forth certain information as of March 20, 2006, regarding
the ownership of our voting Common Stock and voting Preferred Stock by (a)
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
March 20, 2006.
81
|
Name
and Address
of
Beneficial
Owner
|
Title
of
Class
|
Amounts
of
Shares
Beneficially
owned
(1)
|
Percent
of
Class+
|
|
Jack
E. Golsen and
members
of his family (2)
|
Common
Voting
Preferred
|
4,845,288
1,020,000
|
(3
(4
|
)
)
|
(5
(6
|
)
)
|
(6)
|
31.9
99.9
|
%
%
|
|||
|
Kent
C. McCarthy & affiliates (7)
|
Common
|
2,770,793
|
(7
|
)
|
18.1
|
%
|
||||||
|
Paul
J. Denby (8)
|
Common
|
1,143,752
|
(8
|
)
|
8.2
|
%
|
||||||
|
James
W. Sight (9)
|
Common
|
875,521
|
(9
|
)
|
6.3
|
%
|
||||||
+
Because
of the requirements of the Securities and Exchange Commission 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 March
20, 2006 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 and the following members of his family: wife, Sylvia
H.
Golsen; son, Barry H. Golsen (a Director, Vice Chairman of the Board of
Directors, President of the Company and its Climate Control Business); son,
Steven J. Golsen (Executive officer of several subsidiaries of the Company);
and
daughter, Linda F. Rappaport. The address of Jack E. Golsen, Sylvia H. Golsen,
Barry H. Golsen, and Linda F. Rappaport is 16 South Pennsylvania Avenue,
Oklahoma City, Oklahoma 73107; and Steven J. Golsen's address is 7300 SW
44th
Street, Oklahoma City, Oklahoma 73179.
(3)
Includes (a) the following shares over which Jack E. Golsen ("J. Golsen")
has
the sole voting and dispositive power: (i) 25,000 shares that he owns of
record,
(ii) 4,000 shares that he has the right to acquire upon conversion of a
promissory note, (iii) 133,333 shares that he has the right to acquire upon
the
conversion of 4,000 shares of the Company's Series B 12% Cumulative Convertible
Preferred Stock (the "Series B Preferred") owned of record by a trust, of
which
he is the sole trustee, (iv) 119,929 shares owned of record by a trust, of
which
he is the sole trustee, and (v) 176,500 shares that he has the right to acquire
within the next 60 days under the Company's stock option plans; (b) 838,747
shares owned of record by a trust, of which Sylvia H. Golsen is the sole
trustee, over which she and her husband, J. Golsen share voting and dispositive
power; (c) 302,889 shares over which Barry H. ("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 75,000 shares that he has the right to acquire within the
next 60
days under the Company's stock option plans; (d) 240,165 shares over
which
Steven J. Golsen ("S. Golsen") has the sole voting and dispositive power
and
55,000 shares that he has the right to acquire within the next 60 days
under the
Company's stock option plans; (e) 178,606 shares held in trust for the
grandchildren and great grandchild of J. Golsen and Sylvia H. Golsen
of which B.
Golsen, S. Golsen and Linda F. Rappaport ("L. Rappaport") jointly share
voting
and dispositive power; (f) 82,552 shares owned of record by L. Rappaport
over
which she has sole voting and dispositive power; (g) 1,527,099 shares
owned of
record by SBL Corporation ("SBL"), 39,177 shares that SBL has the right
to
acquire upon conversion of 9,050 shares of the Company's non-voting $3.25
Convertible Exchangeable Class C Preferred Stock, Series 2 (the "Series
2
Preferred"), 400,000 shares that SBL has the right to acquire upon conversion
of
12,000 shares of Series B Preferred owned of record by SBL, and 250,000
shares
that SBL has to right to acquire upon conversion of 1,000,000 shares
of the
Company's Series D 6% cumulative, convertible Class C preferred stock
("Series D
Preferred") owned of record by SBL and (h) 88,100 shares owned of record
by
Golsen Petroleum Corporation ("GPC"), which is a wholly-owned subsidiary
of SBL,
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 175,325 shares that
GPC has the
right to acquire upon conversion of 40,500 shares of Series 2 Preferred
owned of
record by GPC.
82
Each
share of Series D Preferred has, among other things, .875 votes and the right
to
vote as a single class with the Series B Preferred and the Common Stock;
cumulative dividends at the rate of 6% per annum; and is convertible into
the
Common Stock on the basis of four shares of Series D Preferred into one share
of
Common Stock. Dividends on the Series D Preferred will be paid only after
accrued and unpaid dividends are paid on the Series 2 Preferred. As of the
March
20, 2006, the amount of the accrued and unpaid dividends on the Series D
Preferred was $240,000. SBL is wholly-owned by Sylvia H. Golsen (40% owner),
B.
Golsen (20% owner), S. Golsen (20% owner), and L. Rappaport (20% owner) and,
as
a result, SBL, J. Golsen, Sylvia H. Golsen, B. Golsen, S. Golsen, and L.
Rappaport share the voting and dispositive power of the shares beneficially
owned by SBL. SBL's address is 16 South Pennsylvania Avenue, Oklahoma City,
Oklahoma 73107.
(4)
Includes: (a) 4,000 shares of Series B Preferred owned of record by a trust,
of
which J. Golsen is the sole trustee, over which he has the sole voting and
dispositive power; (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, Sylvia H. Golsen, B. Golsen,
S.
Golsen, and L. Rappaport share the voting and dispositive power and (d)
1,000,000 shares of Series D Preferred owned of record by SBL.
(5)
Does
not include 70,200 shares of Common Stock that L. Rappaport's husband owns
of
record and 185,000 shares which he has the right to acquire within the next
60
days under the Company's stock option plans, all of which L. Rappaport disclaims
beneficial ownership. Does not include 256,120 shares of Common Stock owned
of
record by certain trusts for the benefit of B. Golsen, S. Golsen, and L.
Rappaport over which B. Golsen, S. Golsen and L. Rappaport have no voting
or
dispositive power. Heidi Brown Shear, an officer of the Company and the niece
of
J. Golsen, is the Trustee of each of these trusts.
83
(6)
J.
Golsen disclaims beneficial ownership of the shares that B. Golsen, S. Golsen,
and L. Rappaport each have the sole voting and investment power over as noted
in
footnote (3) above. B. Golsen, S. Golsen, and L. Rappaport disclaim beneficial
ownership of the shares that J. Golsen has the sole voting and investment
power
over as noted in footnotes (3) and (4) and the shares owned of record by
Sylvia
H. Golsen. Sylvia H. Golsen disclaims beneficial ownership of the shares
that J.
Golsen has the sole voting and dispositive power over as noted in footnotes
(3)
and (4) above.
(7)
Kent
C. McCarthy, manager of Jayhawk Capital Management, L.L.C. ("Jayhawk"), a
Delaware limited liability company and investment advisor, is deemed to
beneficially own 2,770,793 shares of the Company's Common Stock (which includes
1,547,293 shares of Common Stock receivable upon conversion of 328,550 shares
of
Series 2 Preferred, 112,500 shares of Common Stock that may be acquired upon
exercise of warrants, and 125,000 shares of Common Stock that may be acquired
upon conversion of $1 million principal amount of our 7% Convertible Senior
Subordinated Debenture due 2011 (the “2006 Debentures”)). This number of shares
includes the shares Mr. McCarthy personally owns, as well as the shares he
controls as manager and sole member of Jayhawk. As manager and sole member
of
Jayhawk, Mr. McCarthy has sole voting and dispositive power over the Common
Stock beneficially owned by Jayhawk. Jayhawk is deemed to have beneficial
ownership of 2,496,763 shares of the Company's Common Stock (which includes
1,444,263 shares of Common Stock receivable upon conversion of 304,750 shares
of
Series 2 Preferred, 112,500 shares of Common Stock that may be acquired upon
exercise of warrants and 125,000 shares of Common Stock that may be acquired
upon conversion of $1 million principal amount of our 2006 Debentures), all
of
which shares are held in portfolios of (a) Jayhawk Institutional Partners,
L.P.
("Jayhawk Institutional"), a Delaware limited partnership, (1,905,854 shares
of
Common Stock which includes 853,354 shares of Common Stock receivable upon
conversion of 168,250 shares of Series 2 Preferred, 112,500 shares of Common
Stock that may be acquired upon exercise of warrants and 125,000 shares of
Common Stock that may be acquired upon conversion of $1 million principal
amount
of our 2006 Debentures), and (b) Jayhawk Investments, L.P.( "Jayhawk
Investments"), a Delaware limited partnership, (590,909 shares of Common
Stock
receivable upon conversion of 136,500 shares of Series 2 Preferred). The
foregoing beneficial ownership is based on a conversion rate of 125 shares
per
$1,000 principal amount of 2006 Debentures. Such beneficial ownership is
subject
to change based upon the terms of our 2006 Debentures, which provide that
(a) at
any time prior to September 1, 2006 and on or after March 1, 2009, the
conversion rate is 125 shares per $1,000 principal amount of 2006 Debentures,
and (b) during the period from September 1, 2006 to February 28, 2009, the
conversion rate declines every six months, starting at 141.25 shares and
ending
at 129.23 shares per $1,000 principal amount of 2006 Debentures. Jayhawk
is the
general partner and manager of Jayhawk Institutional and Jayhawk Investments
and, as such, has sole voting and dispositive power over these shares. Mr.
McCarthy disclaims beneficial ownership of all such shares other than his
personal holdings. Mr. McCarthy's address is 8201 Mission Road, Suite 110,
Prairie Village, Kansas 66208. See "Certain Relationships and Related
Transactions."
(8)
Paul
J. Denby advised the Company that he has voting and dispositive power over
1,143,752 shares of Common Stock (which includes 180,952 shares of Common
Stock
receivable upon conversion of 41,800 shares of Series 2 Preferred). This
number
of shares includes 49,329 shares
beneficially owned by Mr.
Denby's spouse over which Mr. Denby shares voting and dispositive power.
Mr.
Denby's address is 4613 Redwood Court, Irving, Texas
75038.
84
(9)
James
W. Sight has sole voting and dispositive power over 875,521 shares of Common
Stock (which includes 153,368 shares of Common Stock receivable upon conversion
of 35,428 shares of Series 2 Preferred). Mr. Sight's address is 8500 College
Boulevard, Overland Park, Kansas 66210.
Security
Ownership of Management
The
following table sets forth certain information obtained from the directors
of
the Company and the directors and executive officers of the Company as a
group
as to their beneficial ownership of our voting Common Stock and voting Preferred
Stock as of March 20, 2006.
|
Name
of
Beneficial
Owner
|
Title
of Class
|
Amount
of
Shares
Beneficially
Owned (1)
|
Percent
of Class+
|
|
Raymond
B. Ackerman
|
Common
|
21,000
|
(2)
|
*
|
||||
|
Robert
C. Brown, M.D.
|
Common
|
208,329
|
(3)
|
1.5
|
%
|
|||
|
Charles
A. Burtch
|
Common
|
15,000
|
(4)
|
*
|
||||
|
Grant
J. Donovan
|
Common
|
42,951
|
(5)
|
*
|
||||
|
Dr.
N. Allen Ford
|
Common
|
1,432
|
(6)
|
*
|
||||
|
Barry
H. Golsen
|
Common
Voting
Preferred
|
3,170,062
1,016,000
|
(7)
(7)
|
21.4
99.5
|
%
%
|
|||
|
Jack
E. Golsen
|
Common
Voting
Preferred
|
3,910,543
1,020,000
|
(8)
(8)
|
25.9
99.9
|
%
%
|
|
David
R. Goss
|
Common
|
311,872
|
(9)
|
2.2
|
%
|
|||
|
Bernard
G. Ille
|
Common
|
45,000
|
(10)
|
*
|
||||
|
Donald
W. Munson
|
Common
|
16,432
|
(11)
|
*
|
||||
|
Horace
G. Rhodes
|
Common
|
20,000
|
(12)
|
*
|
||||
|
David
M. Shear
|
Common
|
173,000
|
(13)
|
1.2
|
%
|
|||
|
Tony
M. Shelby
|
Common
|
359,629
|
(14)
|
2.6
|
%
|
|||
|
Directors
and Executive Officers as a group number (14 persons)
|
Common
Voting
Preferred
|
5,908,153
1,020,000
|
(15)
|
36.9
99.9
|
%
%
|
*
Less
than 1%.
+
See
footnote + to the table under "Security Ownership of Certain Beneficial Owners."
(1)
The
Company based the information, with respect to beneficial ownership, on
information furnished by each director or officer, contained in filings made
with the Securities and Exchange
Commission, or contained in
the Company's records. As of March 20, 2006, John A. Shelley did not
beneficially own any of our voting Common Stock or voting Preferred
Stock.
85
(2)
This
amount includes the following shares over which Mr. Ackerman shares voting
and
dispositive power: (a) 2,000 shares held by Mr. Ackerman's trust, and (b)
4,000
shares held by the trust of Mr. Ackerman's wife. The remaining 15,000 shares
of
Common Stock included herein are shares that Mr. Ackerman may acquire pursuant
to currently exercisable non-qualified stock options granted to him by the
Company.
(3)
The
amount shown includes 15,000 shares of Common Stock that Dr. Brown may acquire
pursuant to currently exercisable non-qualified stock options granted to
him by
the Company. The shares, with respect to which Dr. Brown shares the voting
and
dispositive power, consists of 122,516 shares owned by Dr. Brown's wife,
50,727
shares owned by Robert C. Brown, M.D., Inc., a corporation wholly-owned by
Dr.
Brown, and 20,086 shares held by the Robert C. Brown M.D., Inc. Employee
Profit
Sharing Plan, of which Dr. Brown serves as the trustee. The amount shown
does
not include 19,914 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 sole voting and dispositive power over these shares, which may
be
acquired by Mr. Burtch pursuant to currently exercisable non-qualified stock
options granted to him by the Company.
(5)
The
amount includes (a) 42,451 shares of common stock, including 30,251 shares
that
Mr. Donovan has the right to acquire upon conversion of 6,988 shares of Series
2
Preferred, over which Mr. Donovan has the sole voting and dispositive power,
and
(b) 500 shares owned of record by Mr. Donovan's wife, voting and dispositive
power of which are shared by Mr. Donovan and his wife.
(6)
The
amount includes (a) 1,000 shares of common stock which Dr. Ford has sole
voting
and dispositive power, and (b) 432 shares that Dr. Ford’s wife has the right to
acquire upon conversion of 100 shares of Series 2 Preferred.
(7)
See
footnotes (3), (4), and (6) 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.
(8)
See
footnotes (3), (4), and (6) 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.
(9)
Mr.
Goss has the sole voting and dispositive power over these shares, which include
200,000 shares that Mr. Goss has the right to acquire within 60 days pursuant
to
options granted under the Company's stock option plans.
(10)
The
amount includes (a) 25,000 shares of common stock, including 15,000 shares
that
Mr. Ille may purchase pursuant to currently exercisable non-qualified stock
options, over which Mr.
Ille has the sole voting and
dispositive power, and (b) 20,000 shares owned of record by Mr. Ille's
wife,
voting and dispositive power of which are shared by Mr. Ille and his
wife.
86
(11)
Mr.
Munson has the sole voting and dispositive power over these shares, which
include (a) 432 shares of Common Stock that Mr. Munson has the right to acquire
upon conversion of 100 shares of Series 2 Preferred and (b) 15,000 shares
that
Mr. Munson may purchase pursuant to currently exercisable non-qualified stock
options.
(12)
Mr.
Rhodes has sole voting and dispositive power over these shares, which include
15,000 shares that may be acquired by Mr. Rhodes pursuant to currently
exercisable non-qualified stock options granted to him by the
Company.
(13)
Mr.
Shear has the sole voting and dispositive power over these shares, which
include
164,544 shares that Mr. Shear has the right to acquire within 60 days pursuant
to options granted under the Company's stock option plans. This amount does
not
include, and Mr. Shear disclaims beneficial ownership of, the shares
beneficially owned by Mr. Shear's wife, which consist of 12,240 shares over
which she has the sole voting and dispositive power, 24,760 shares that she
has
the right to acquire within 60 days pursuant to options granted under the
Company's stock option plans, and 281,708 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 200,000 shares that Mr. Shelby has the right to acquire within 60
days
pursuant to options granted under the Company's stock option plans and 15,151
shares that Mr. Shelby has the right to acquire upon conversion of 3,500
shares
of Series 2 Preferred.
(15)
The
amount shown includes 1,085,044 shares of Common Stock that executive officers,
directors, or entities controlled by executive officers and directors of
the
Company have the right to acquire within 60 days.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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. Under such agreement, Northwest is paid $2,000 a month to perform
all such examinations. Dr. Robert C. Brown (a director of the Company) is
Vice
President and Treasurer of Plaza Medical Group, P.C.
Prime
and John A. Shelley
In
August 1996, Prime made a loan to John A. Shelley (elected a director of
the
Company during 2005 Annual Meeting) in the principal sum of $50,000, bearing
an
annual rate of interest of 9%, payable on demand. The loan was evidenced
by a
demand promissory note and was made as part of his severance package as
President when the Company sold Equity Bank. The note was fully reserved
by the
Company. The Company has never demanded repayment of the principal or any
accrued interest under the note. The Company wrote off the note in 2005 prior
to
the 2005 Annual Meeting.
87
Jayhawk During
March 2006, Jayhawk Institutional, who together with its affiliate, Kent
C.
McCarthy and Jayhawk, owned beneficially approximately 17.4% of our common
stock
(which includes shares that may be issued upon conversion of outstanding
preferred stock and exercise of an outstanding warrant), purchased $1 million
principal amount of our 2006 Debentures from us in connection with our private
placement of $18 million of the 2006 Debentures. See “Security Ownership of
Certain Beneficial Owners and Management Related Stockholders Matters - Security
Ownership of Certain Beneficial Owners” and ”Sale of Unregistered Securities”
under Item 5.
Effective
March 25, 2003, the Company completed a private placement to Jayhawk
Institutional of 450,000 shares of its common stock and a five-year warrant
to
purchase up to 112,500 share of its common stock at an exercise price of
$3.49
per share, subject to anti-dilution adjustments under certain conditions.
The
total price paid by Jayhawk Institutional to the Company for the shares of
common stock and the warrant was $1,570,500. Jayhawk has certain registration
rights.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees
Paid to Independent Registered Public Accounting Firm
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, 2005 and 2004, 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 Securities and Exchange
Commission for those fiscal years were approximately $679,500 and $613,500,
respectively.
Audit-Related
Fees
Ernst
& Young LLP billed the Company $231,300 and $139,800 during 2005 and 2004,
respectively, for audit-related services, which included benefit plan audit
and
accounting consultations which included assistance with the SEC comment letters
and related restatements during 2005.
Tax
Fees
Ernst
& Young LLP billed $112,943 and $101,209 during 2005 and 2004, respectively,
for tax services to the Company, which 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, 2005 and 2004.
88
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, 2005 and
2004
is compatible with maintaining its independence.
Audit
Committee's Pre-Approval Policies and Procedures All
audit
and non-audit services that may be provided by our principal accountant,
Ernst
& Young LLP to the Company require pre-approval by the Audit Committee.
Further, Ernst & Young LLP shall not provide those services to the Company
specifically prohibited by the Securities and Exchange Commission, including
bookkeeping or other services related to the accounting records or financial
statements of the audit client; financial information systems design and
implementation; appraisal or valuation services, fairness opinion, or
contribution-in-kind reports; actuarial services; internal audit outsourcing
services; management functions; human resources; broker-dealer, investment
adviser, or investment banking services; legal services and expert services
unrelated to the audit; and any other service that the Public Company Accounting
Oversight Board determines, by regulation, is impermissible.
89
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
(1) Financial Statements
The
following consolidated financial statements of the Company appear immediately
following this Part IV:
|
Pages
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Balance Sheets at December 31, 2005 and 2004
|
F-3
to F-4
|
|
|
Consolidated
Statements of Income for each of the three years in the period
ended
December 31, 2005
|
F-5
|
|
|
Consolidated
Statements of Stockholders' Equity for each of the three years
in the
period ended December 31, 2005
|
F-6
|
|
|
Consolidated
Statements of Cash Flows for each of the three years in the period
ended
December 31, 2005
|
F-7
to F-8
|
|
|
Notes
to Consolidated Financial Statements
|
F-9
to F-64
|
|
|
Quarterly
Financial Data (Unaudited)
|
F-65
to F-67
|
(a)
(2) Financial Statement Schedules
The
Company has included the following schedules in this report:
|
I
-
Condensed Financial Information of Registrant
|
F-68
to F-71
|
|
| II - Valuation and Qualifying Accounts | F-72 to F-73 |
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.
90
(a)(3)
Exhibits
|
3.1
|
Restated
Certificate of Incorporation, the Certificate of Designation dated
February 17, 1989 and certificate of Elimination dated April 30,
1993
which the Company hereby incorporates by reference from Exhibit
4.1 to the
Company's Registration Statement, No. 33-61640; Certificate of
Designation
for the Company's $3.25 Convertible Exchangeable Class C Preferred
Stock,
Series 2, which the Company hereby incorporates by reference from
Exhibit
4.6 to the Company's Registration Statement, No.
33-61640.
|
|
3.2
|
Certificate
of Designations of LSB Industries, Inc., relating to the issuance
of a new
series of Class C Preferred Stock, which the Company hereby incorporates
by reference form Exhibit 10.3 to the Company's Form 10-Q for the
fiscal
quarter ended September 30, 2001.
|
|
3.3
|
Bylaws,
as amended, which the Company hereby incorporates by reference
from
Exhibit 3(ii) to the Company's Form 10-Q for the quarter ended
June 30,
1998. See SEC file number 001-07677
|
|
4.1
|
Specimen
Certificate for the Company's Non-cumulative Preferred Stock, having
a par
value of $100 per share.
|
|
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
Certificate for the Company's Series 2 Preferred, which the Company
hereby
incorporates by reference from Exhibit 4.5 to the Company's Registration
Statement No. 33-61640.
|
|
4.4
|
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.
|
|
4.5
|
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.
|
|
4.6
|
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.
|
|
4.7
|
Indenture,
dated as of November 26, 1997 by and among ThermaClime, Inc., the
Subsidiary Guarantors and Bank One, NA, as trustee, which the Company
hereby incorporates by reference from Exhibit 4.1 to the Company's
Form
8-K, dated November 26, 1997. See SEC file number 001-07677
|
|
91
|
|
|
4.8
|
First
Supplemental Indenture, dated February 8, 1999 by and among ThermaClime,
Inc., the Guarantors, and Bank One N.A., which the Company hereby
incorporates by reference from Exhibit 4.19 to the Company's Form
10-K for
the year ended December 31, 1998. See SEC file number
001-07677
|
|
4.9
|
Fifth
Supplemental Indenture, dated May 24, 2002 among the Company, the
Guarantors, and Bank One, N.A, which the Company hereby incorporates
by
reference from Exhibit 4.3 to the Company's Form 8-K, dated May
24,
2002.
|
|
4.10
|
Form
of 10 3/4% Series B Senior Notes due 2007 which the Company hereby
incorporates by reference from Exhibit 4.3 to the ThermaClime Registration
Statement, No. 333-44905.
|
|
4.11
|
Loan
and Security Agreement, dated April 13, 2001 by and among LSB Industries,
Inc., ThermaClime and each of its Subsidiaries that are Signatories,
the
Lenders that are Signatories and Foothill Capital Corporation,
which the
Company hereby incorporates by reference from Exhibit 10.51 to
ThermaClime, Inc.'s amendment No. 1 to Form 10-K for the fiscal
year ended
December 31, 2000. See SEC file number 001-07677
|
|
4.12
|
Second
Amendment to Loan and Security Agreement, dated May 24, 2002 by
and among
the Company, LSB, certain subsidiaries of the Company, Foothill
Capital
Corporation and Congress Financial Corporation (Southwest), which
the
Company hereby incorporates by reference from Exhibit 4.1 to the
Company's
Form 8-K, dated May 24, 2002. Omitted are exhibits and schedules
attached
thereto. The Agreement contains a list of such exhibits and schedules,
which the Company agrees to file with the Commission supplementally
upon
the Commission's request.
|
|
4.13
|
Third
Amendment, dated as of November 18, 2002 to the Loan and Security
Agreement dated as of April 13, 2001 as amended by the First Amendment
dated as of August 3, 2001 and the second Amendment dated as of
May 24,
2002 by and among LSB Industries, Inc., ThermaClime, Inc., and
certain
subsidiaries of ThermaClime, Congress Financial Corporation (Southwest)
and Foothill Capital Corporation 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, 2002.
|
|
4.14
|
Fourth
Amendment, dated as of March 3, 2003 to the Loan and Security Agreement
dated as of April 13, 2001 as amended by the First, Second, and
Third
Amendments, by and among LSB Industries, Inc., ThermaClime, Inc.,
and
certain subsidiaries of ThermaClime, Inc., Congress Financial Corporation
(Southwest) and Foothill Capital Corporation, which the Company
hereby
incorporates by reference from Exhibit 4.18 to the Company's Form
10-K for
the fiscal year ended December 31, 2002.
|
|
4.15
|
Fifth
Amendment, dated as of December 31, 2003 to the Loan and Security
Agreement dated as of April 13, 2001 as amended by the First, Second,
Third and Fourth Amendments, by and among LSB Industries, Inc.,
ThermaClime, Inc., and certain subsidiaries of ThermaClime, Inc.,
Congress
Financial Corporation (Southwest) and Wells Fargo Foothill, Inc.,
which
the Company hereby incorporates by reference from Exhibit 4.15
to the
Company’s Form 10-K for the fiscal year ended December 31, 2004.
|
|
92
|
|
|
4.16
|
Waiver
and Consent, dated March 25, 2004 to the Loan and Security Agreement,
dated as of April 13, 2001 (as amended to date), by and among LSB
Industries, Inc., ThermaClime, Inc., and certain subsidiaries of
ThermaClime, Inc. and Wells Fargo Foothill, Inc. which the Company
hereby
incorporates by reference from Exhibit 4.16 to the Company’s Form 10-K for
the fiscal year ended December 31, 2004.
|
|
4.17
|
Sixth
Amendment, dated as of June 29, 2004 to the Loan and Security Agreement
dated as of April 13, 2001 as amended, by and among LSB Industries,
Inc.,
ThermaClime, Inc. and certain subsidiaries of ThermaClime, Inc.,
Congress
Financial Corporation (Southwest) and Wells Fargo Foothill, Inc.,
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,
2004.
|
|
4.18
|
Seventh
Amendment, dated as of September 15, 2004 to the Loan and Security
Agreement dated as of April 13, 2001 as amended, by and among LSB
Industries, Inc., ThermaClime, Inc. and certain subsidiaries of
ThermaClime, Inc., Congress Financial Corporation (Southwest) 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, 2004.
|
|
4.19
|
Eighth
Amendment to Loan and Security Agreement, dated February 28, 2005,
between
LSB Industries, Inc., ThermaClime, Inc., the subsidiaries of ThermaClime,
Inc. that are signatories thereto, and Wells Fargo Foothill, Inc.,
as
arranger and administrative agent for various lenders, which the
Company
hereby incorporates by reference from Exhibit 10.1 to the Company’s Form
8-K, dated February 28, 2005.
|
|
4.20
|
Ninth
amendment to Loan and Security Agreement, dated February 22, 2006,
between
LSB Industries, Inc., ThermaClime, Inc., the subsidiaries of ThermaClime,
Inc. that are signatories thereto, and Wells Fargo Foothill, Inc.,
as
arranger and administrative agent for various lenders.
|
|
4.21
|
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.
|
|
4.22
|
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.
|
|
93
|
|
|
4.23
|
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.
|
|
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.
|
|
10.3
|
The
Company's 1993 Stock Option and Incentive Plan.
|
|
10.4
|
First
Amendment to Non-Qualified Stock Option Agreement, dated March
2, 1994 and
Second Amendment to Stock Option Agreement, dated April 3, 1995
each
between the Company and Jack E. Golsen, which the Company hereby
incorporates by reference from Exhibit 10.1 to the Company's Form
10-Q for
the fiscal quarter ended March 31, 1995. See SEC file number
001-07677.
|
|
10.5
|
Non-Qualified
Stock Option Agreement, dated April 22, 1998 between the Company
and
Robert C. Brown, M.D., which the Company hereby incorporates by
reference
from Exhibit 10.43 to the Company’s Form 10-K for the fiscal year ended
December 31, 1998. The Company entered into substantially identical
agreements with Bernard G. Ille, Raymond B. Ackerman, Horace G.
Rhodes,
and Donald W. Munson. The Company will provide copies of these
agreements
to the Commission upon request. See SEC file number
001-07677.
|
|
10.6
|
The
Company's 1998 Stock Option and Incentive Plan, which the Company
hereby
incorporates by reference from Exhibit 10.44 to the Company's Form
10-K
for the year ended December 31, 1998. See SEC file number
001-07677.
|
|
10.7
|
LSB
Industries, Inc. 1998 Stock Option and Incentive Plan, which the
Company
hereby incorporates by reference from Exhibit "B" to the LSB Proxy
Statement, dated May 24, 1999 for Annual Meeting of Stockholders.
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 LSB Proxy
Statement, dated May 24, 1999 for 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.
|
|
94
|
|
|
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), Stephen J. Golsen
(35,000
shares), David R. Goss (35,000 shares), Tony M. Shelby (35,000
shares),
David M. Shear (35,000 shares) and five other employees (165,000
shares),
copies of which will be provided to the Commission upon
request.
|
|
10.13
|
Severance
Agreement, dated January 17, 1989 between the Company and Jack
E. Golsen.
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.
|
|
10.14
|
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.
|
|
10.15
|
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.
|
|
10.16
|
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.
|
|
95
|
|
|
10.17
|
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.
|
|
10.18
|
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.
|
|
10.19
|
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.
|
|
10.20
|
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.
|
|
10.21
|
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.
|
|
96
|
|
|
10.22
|
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.
|
|
10.23
|
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.
|
|
10.24
|
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.
|
|
10.25
|
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.
|
|
10.26
|
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.
|
|
10.27
|
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.
|
|
10.28
|
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.
|
|
10.29
|
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.
|
|
10.30
|
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 A
REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES
AND
EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
|
|
97
|
|
| SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH REQUEST. | |
|
10.31
|
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 A
REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES
AND
EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES
AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH
REQUEST.
|
|
10.32
|
Ammonium
Nitrate Sales Agreement between Nelson Brothers, L.L.C. and Cherokee
Nitrogen Company, which the Company hereby incorporates by reference
from
Exhibit 99.3 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 A
REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES
AND
EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES
AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH
REQUEST.
|
|
10.33
|
Agreement,
dated August 1, 2004, between El Dorado Chemical Company and Paper,
Allied-Industrial, Chemical and Energy Workers International Union
AFL-CIO
and its Local 5-434, which the Company hereby incorporates by reference
from Exhibit 10.36 to the Company’s Form 10-K for the fiscal year ended
December 31, 2004.
|
|
10.34
|
Agreement,
dated October 17, 2004, 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 10.37 to the Company’s Form 10-K for the fiscal year ended
December 31, 2004.
|
|
10.35
|
Agreement,
dated November 12, 2004, between The United Steelworkers of America
International Union, AFL-CIO, CLC, Cherokee Local No. 417-G and
Cherokee
Nitrogen Division of El Dorado Chemical Company, which the Company
hereby
incorporates by reference from Exhibit 10.38 to the Company’s Form 10-K
for the fiscal year ended December 31, 2004.
|
|
10.36
|
Warrant,
dated May 24, 2002 granted by the Company to a Lender for the right
to
purchase up to 132,508 shares of the Company's common stock at
an exercise
price of $0.10 per share, which the Company hereby incorporates
by
reference from Exhibit 99.1 to the Company's Form 8-K, dated May
24, 2002.
Four substantially similar Warrants, dated May 24, 2002 for the
purchase
of an aggregate additional 463,077 shares at an exercise price
of $0.10
were issued. Copies of these Warrants will be provided to the Commission
upon request.
|
|
98
|
|
|
10.37
|
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 herewith, and the Registrant agrees to furnish supplementally
a
copy of the omitted schedules and exhibits to the commission upon
request.
|
|
10.38
|
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 A
REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES
AND
EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE OMITTED
INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
SECURITIES
AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH
REQUEST.
|
|
10.39
|
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.
|
|
10.40
|
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.
|
|
10.41
|
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.
|
|
10.42
|
First
Amendment to Anhydrous Ammonia Sales Agreement, dated effective
August 29,
2005 between Koch Nitrogen Company and El Dorado Chemical Company.
CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT
OF A
REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES
AND
EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT. THE
OMITTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECRETARY
OF THE
SECURITIES AND EXCHANGE COMMISSION FOR PURPOSES OF SUCH
REQUEST.
|
|
99
|
|
|
10.43 |
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. |
|
10.44
|
Debt
Forgiveness Agreement, effective July 1, 2004, by and between Companie
Financiere du Taraois, a French corporation and LSB Holding, Inc.,
an
Oklahoma corporation 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, 2004.
|
|
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.
|
100
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
31, 2006
|
Jack
E. Golsen
Chairman
of the Board and
Chief
Executive Officer
(Principal
Executive Officer)
|
||||
|
|
|||||
|
Dated:
|
By:
|
/s/
Tony M. Shelby
|
|||
|
March
31, 2006
|
Tony
M. Shelby
Executive
Vice President of Finance and
Chief
Financial Officer
(Principal
Financial Officer)
|
||||
|
|
|||||
|
Dated:
|
By:
|
/s/
Jim D. Jones
|
|||
|
March
31, 2006
|
Jim
D. Jones
Senior
Vice President, Corporate Controller and Treasurer
(Principal
Accounting Officer)
|
||||
|
|
|||||
101
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
31, 2006
|
Jack
E. Golsen, Director
|
|
Dated:
|
By:
/s/ Tony M. Shelby
|
| March 31, 2006 |
Tony
M. Shelby, Director
|
|
Dated:
|
By:
/s/ David R. Goss
|
| March 31, 2006 |
David
R. Goss, Director
|
|
Dated:
|
By:
/s/ Barry H. Golsen
|
|
March
31, 2006
|
Barry
H. Golsen, Director
|
|
Dated:
|
By:
/s/ Robert C. Brown MD
|
|
March
31, 2006
|
Robert
C. Brown MD, Director
|
|
Dated:
|
By:
/s/ Bernard G. Ille
|
|
March
31, 2006
|
Bernard
G. Ille, Director
|
|
Dated:
|
By:
/s/ Raymond B. Ackerman
|
| March 31, 2006 |
Raymond
B. Ackerman, Director
|
|
Dated:
|
By:
/s/ Horace G. Rhodes
|
| March 31, 2006 |
Horace
G. Rhodes, Director
|
|
Dated:
|
By:
/s/ Donald W. Munson
|
|
March
31, 2006
|
Donald
W. Munson, Director
|
|
Dated:
|
By:
/s/ Charles A. Burtch
|
| March 31, 2006 |
Charles
A. Burtch, Director
|
|
Dated:
|
By:
/s/ John A. Shelley
|
|
March
31, 2006
|
John
A. Shelley, Director
|
|
Dated:
|
By:
/s/ Grant J. Donovan
|
| March 31, 2006 |
Grant
J. Donovan, Director
|
|
Dated:
|
By:
/s/ Dr. N. Allen Ford
|
|
March
31, 2006
|
Dr.
N. Allen Ford, Director
|
102
LSB
Industries, Inc.
Consolidated
Financial Statements
for
Inclusion in Form 10-K
Years
ended December 31, 2005, 2004 and 2003
CONTENTS
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Financial Statements
|
|
|
Consolidated
Balance Sheets
|
F-3
|
|
Consolidated
Statements of Income
|
F-5
|
|
Consolidated
Statements of Stockholders' Equity
|
F-6
|
|
Consolidated
Statements of Cash Flows
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-9
|
F-1
Report
of
Independent Registered
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, 2005 and 2004, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in
the
period ended December 31, 2005. 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. We were not engaged to perform
an
audit of the Company’s internal control over financial reporting.
Our
audit included consideration of internal control over financial reporting as
a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An
audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and 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, 2005 and 2004, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31,
2005 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.
As
discussed in Note 2 to the consolidated financial statements, effective March
31, 2004 the Company adopted FASB Interpretation No. 46, Consolidation of
Variable Interest Entities.
ERNST
& YOUNG LLP
Oklahoma
City, Oklahoma
March
30,
2006
F-2
LSB
Industries, Inc.
Consolidated
Balance Sheets
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
(In
Thousands)
|
|||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
|
$
|
4,653
|
$
|
1,020
|
|||
|
Restricted
cash
|
177
|
158
|
|||||
|
Accounts
receivable, net
|
49,437
|
42,541
|
|||||
|
Inventories
|
37,271
|
28,657
|
|||||
|
Supplies,
prepaid items and other:
|
|||||||
|
Deferred
rent expense
|
-
|
938
|
|||||
|
Prepaid
insurance
|
3,453
|
4,498
|
|||||
|
Precious
metals
|
4,987
|
5,616
|
|||||
|
Other
|
4,432
|
3,736
|
|||||
|
Total
supplies, prepaid items and other
|
12,872
|
14,788
|
|||||
|
Total
current assets
|
104,410
|
87,164
|
|||||
|
Property,
plant and equipment, net
|
74,082
|
70,219
|
|||||
|
Other
assets:
|
|||||||
|
Debt
issuance and other debt-related costs, net
|
2,573
|
2,517
|
|||||
|
Investment
in affiliate
|
3,368
|
3,111
|
|||||
|
Goodwill
|
1,724
|
1,724
|
|||||
|
Other,
net
|
2,806
|
2,833
|
|||||
|
Total
other assets
|
10,471
|
10,185
|
|||||
|
$
|
188,963
|
$
|
167,568
|
||||
(Continued
on following page)
F-3
LSB
Industries, Inc.
Consolidated
Balance Sheets (continued)
|
December
31,
|
||||||||
|
2005
|
2004
|
|||||||
|
Liabilities
and Stockholders' Equity
|
(In
Thousands)
|
|||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
31,687
|
$
|
27,698
|
||||
|
Short-term
financing and drafts payable
|
2,790
|
3,707
|
||||||
|
Accrued
liabilities
|
23,219
|
17,080
|
||||||
|
Current
portion of long-term debt
|
3,348
|
4,833
|
||||||
|
Total
current liabilities
|
61,044
|
53,318
|
||||||
|
Long-term
debt
|
108,776
|
101,674
|
||||||
|
Other
noncurrent liabilities
|
5,687
|
4,178
|
||||||
|
Commitments
and contingencies (Note 11)
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Series
B 12% cumulative, convertible preferred stock, $100 par value; 20,000
shares issued and outstanding; aggregate liquidation preference of
$3,440,000 in 2005 ($3,200,000 in 2004)
|
2,000
|
2,000
|
||||||
|
Series
2 $3.25 convertible, exchangeable Class C preferred stock, $50
stated value; 623,550 shares issued; aggregate liquidation preference
of
$43,963,000 in 2005 ($42,234,000 in 2004)
|
31,177
|
31,177
|
||||||
|
Series
D 6% cumulative, convertible Class C preferred stock, no par value;
1,000,000 shares issued; aggregate liquidation preference of $1,240,000
in
2005 ($1,180,000 in 2004)
|
1,000
|
1,000
|
||||||
|
Common
stock, $.10 par value; 75,000,000 shares authorized, 17,082,265 shares
issued (16,400,985 in 2004)
|
1,708
|
1,640
|
||||||
|
Capital
in excess of par value
|
57,547
|
57,352
|
||||||
|
Accumulated
other comprehensive loss
|
(990
|
)
|
(1,280
|
)
|
||||
|
Accumulated
deficit
|
(61,738
|
)
|
(66,840
|
)
|
||||
|
30,704
|
25,049
|
|||||||
|
Less
treasury stock, at cost:
|
||||||||
|
Series
2 preferred, 18,300 shares (5,000 in 2004)
|
797
|
200
|
||||||
|
Common
stock, 3,321,607 shares
|
16,451
|
16,451
|
||||||
|
Total
stockholders' equity
|
13,456
|
8,398
|
||||||
|
$
|
188,963
|
$
|
167,568
|
|||||
See
accompanying notes.
F-4
LSB
Industries, Inc.
Consolidated
Statements of Income
|
Year
ended December 31,
|
|||||||||||
|
2005
|
2004
|
2003
|
|||||||||
|
(In
Thousands, Except Per Share Amounts)
|
|||||||||||
|
Net
sales
|
$
|
396,722
|
$
|
363,608
|
$
|
316,661
|
|||||
|
Cost
of sales
|
330,651
|
310,497
|
266,750
|
||||||||
|
Gross
profit
|
66,071
|
53,111
|
49,911
|
||||||||
|
Selling,
general and administrative expense
|
53,456
|
49,430
|
41,884
|
||||||||
|
Other
expense (Note 19)
|
332
|
1,111
|
755
|
||||||||
|
Other
income (Note 19)
|
(2,682
|
)
|
(674
|
)
|
(730
|
)
|
|||||
|
Operating
income
|
14,965
|
3,244
|
8,002
|
||||||||
|
Interest
expense (Note 9)
|
11,407
|
7,393
|
6,097
|
||||||||
|
Provision
for loss on notes receivable (Note 2)
|
-
|
1,447
|
-
|
||||||||
|
Gains
on extinguishment of debt (Note 9)
|
-
|
(4,400
|
)
|
(258
|
)
|
||||||
|
Non-operating
other income, net (Note 19)
|
(1,561
|
)
|
(2,434
|
)
|
(731
|
)
|
|||||
|
Income
from continuing operations before provision for income taxes,
equity in earnings of affiliate and cumulative effect of accounting
change
|
5,119
|
1,238
|
2,894
|
||||||||
|
Provision
for income taxes
|
(118
|
)
|
-
|
-
|
|||||||
|
Equity
in earnings of affiliate (Note 7)
|
745
|
668
|
19
|
||||||||
|
Income
from continuing operations before cumulative effect of accounting
change
|
5,746
|
1,906
|
2,913
|
||||||||
|
Net
loss from discontinued operations (Note 11)
|
(644
|
)
|
-
|
-
|
|||||||
|
Cumulative
effect of accounting change (Note 2)
|
-
|
(536
|
)
|
-
|
|||||||
|
Net
income
|
5,102
|
1,370
|
2,913
|
||||||||
|
Preferred
stock dividend requirements
|
(2,283
|
)
|
(2,322
|
)
|
(2,327
|
)
|
|||||
|
Net
income (loss) applicable to common stock
|
$
|
2,819
|
$
|
(952
|
)
|
$
|
586
|
||||
|
Income
(loss) per common share:
|
|||||||||||
|
Basic:
|
|||||||||||
|
Income
(loss) from continuing operations before cumulative effect
of accounting change
|
$
|
.26
|
$
|
(.03
|
)
|
$
|
.05
|
||||
|
Loss
from discontinued operations, net
|
(.05
|
)
|
-
|
-
|
|||||||
|
Cumulative
effect of accounting change
|
-
|
(.04
|
)
|
-
|
|||||||
|
Net
income (loss)
|
$
|
.21
|
$
|
(.07
|
)
|
$
|
.05
|
||||
|
Diluted:
|
|||||||||||
|
Income
(loss) from continuing operations before cumulative effect
of accounting change
|
$
|
.23
|
$
|
(.03
|
)
|
$
|
.04
|
||||
|
Loss
from discontinued operations, net
|
(.04
|
)
|
-
|
-
|
|||||||
|
Cumulative
effect of accounting change
|
-
|
(.04
|
)
|
-
|
|||||||
|
Net
income (loss)
|
$
|
.19
|
$
|
(.07
|
)
|
$
|
.04
|
||||
See
accompanying notes.
F-5
LSB
Industries, Inc.
Consolidated
Statements of Stockholders' Equity
|
Common
Stock
Shares
|
Non-
Redeemable
Preferred
Stock
|
Common
Stock
Par
Value
|
Capital
in
Excess
of
Par
Value
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Accumulated
Deficit
|
Treasury
Stock
-
Preferred
|
Treasury
Stock
-
Common
|
Total
|
|
(In
Thousands)
|
|
Balance
at December 31, 2002
|
15,236
|
$
|
34,427
|
$
|
1,524
|
$
|
54,503
|
$
|
(1,859
|
)
|
$
|
(71,123
|
)
|
$
|
(200
|
)
|
$
|
(16,068
|
)
|
$
|
1,204
|
|||||||
|
Net
income
|
2,913
|
2,913
|
||||||||||||||||||||||||||
|
Amortization
of cash flow hedge (Note 2)
|
289
|
289
|
||||||||||||||||||||||||||
|
Total
comprehensive income
|
3,202
|
|||||||||||||||||||||||||||
|
Issuance
of 450,000 shares of common
stock (Note 13) |
450
|
45
|
1,526
|
1,571
|
||||||||||||||||||||||||
|
Exercise
of stock options
|
131
|
13
|
186
|
199
|
||||||||||||||||||||||||
|
Conversion
of 83 shares of redeemable preferred stock to common stock
|
3
|
8
|
8
|
|||||||||||||||||||||||||
|
Balance
at December 31, 2003
|
15,820
|
34,427
|
1,582
|
56,223
|
(1,570
|
)
|
(68,210
|
)
|
(200
|
)
|
(16,068
|
)
|
6,184
|
|||||||||||||||
|
Net
income
|
1,370
|
1,370
|
||||||||||||||||||||||||||
|
Amortization
of cash flow hedge (Note 2)
|
290
|
290
|
||||||||||||||||||||||||||
|
Total
comprehensive income
|
1,660
|
|||||||||||||||||||||||||||
|
Exercise
of stock options
|
579
|
58
|
1,145
|
(383
|
)
|
820
|
||||||||||||||||||||||
|
Acquisition
of 5,000 shares of non-redeemable preferred stock (Note
13)
|
(250
|
)
|
(21
|
)
|
(271
|
)
|
||||||||||||||||||||||
|
Conversion
of 57 shares of redeemable preferred stock to common stock
|
2
|
5
|
5
|
|||||||||||||||||||||||||
|
Balance
at December 31, 2004
|
16,401
|
34,177
|
1,640
|
57,352
|
(1,280
|
)
|
(66,840
|
)
|
(200
|
)
|
(16,451
|
)
|
8,398
|
|||||||||||||||
|
Net
income
|
5,102
|
5,102
|
||||||||||||||||||||||||||
|
Amortization
of cash flow hedge (Note 2)
|
290
|
290
|
||||||||||||||||||||||||||
|
Total
comprehensive income
|
5392
|
|||||||||||||||||||||||||||
|
Exercise
of warrants (Notes 9 and 13)
|
586
|
59
|
(59
|
)
|
-
|
|||||||||||||||||||||||
|
Exercise
of stock options
|
89
|
8
|
240
|
248
|
||||||||||||||||||||||||
|
Acquisition
of 13,300 shares of non-redeemable preferred stock (Note
13)
|
(597
|
)
|
(597
|
)
|
||||||||||||||||||||||||
|
Conversion
of 156 shares of redeemable preferred stock to common stock
|
6
|
1
|
14
|
15
|
||||||||||||||||||||||||
|
Balance
at December 31, 2005
|
17,082
|
$
|
34,177
|
$
|
1,708
|
$
|
57,547
|
$
|
(990
|
)
|
$
|
(61,738
|
)
|
$
|
(797
|
)
|
$
|
(16,451
|
)
|
$
|
13,456
|
See
accompanying notes.
F-6
LSB
Industries, Inc.
Consolidated
Statements of Cash Flows
|
Year
ended December 31,
|
|
2005
|
2004
|
2003
|
|
(In
Thousands)
|
||||||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Net
income
|
$
|
5,102
|
$
|
1,370
|
$
|
2,913
|
||||||
|
Adjustments
to reconcile net income to net cash provided by continuing operating
activities:
|
||||||||||||
|
Loss
from discontinued operations, net
|
644
|
-
|
-
|
|||||||||
|
Cumulative effect of accounting change
|
-
|
536
|
-
|
|||||||||
|
Gains
on extinguishment of debt
|
-
|
(4,400
|
)
|
(258
|
)
|
|||||||
|
Losses (gains) on sales of property and equipment
|
(714
|
)
|
(340
|
)
|
4
|
|||||||
|
Gains on property insurance recoveries
|
(1,618
|
)
|
-
|
-
|
||||||||
|
Realization and reversal of provision for losses on firm sales commitments
|
-
|
(106
|
)
|
(589
|
)
|
|||||||
|
Depreciation
of property, plant and equipment
|
10,875
|
10,194
|
10,312
|
|||||||||
|
Amortization
|
1,151
|
1,101
|
904
|
|||||||||
|
Provision
for losses on accounts receivable
|
810
|
211
|
1,031
|
|||||||||
|
Provision
for (realization and reversal of) losses on inventory
|
239
|
548
|
(436
|
)
|
||||||||
|
Provision
for loss on notes receivable
|
-
|
1,447
|
-
|
|||||||||
|
Provision
for impairment on long-lived assets
|
237
|
737
|
500
|
|||||||||
|
Net
loss of variable interest entity
|
-
|
575
|
-
|
|||||||||
|
Other
|
(36
|
)
|
121
|
(14
|
)
|
|||||||
|
Cash
provided (used) by changes in assets and liabilities (net
of effects of discontinued operations):
|
||||||||||||
|
Accounts
receivable
|
(8,664
|
)
|
(6,554
|
)
|
(1,871
|
)
|
||||||
|
Inventories
|
(8,888
|
)
|
(1,763
|
)
|
671
|
|||||||
|
Other
supplies and prepaid items
|
798
|
(1,447
|
)
|
(1,226
|
)
|
|||||||
|
Accounts
payable
|
3,990
|
5,688
|
(1,968
|
)
|
||||||||
|
Customer
deposits
|
(1,494
|
)
|
(1,155
|
)
|
1,107
|
|||||||
|
Deferred
rent expense
|
6,047
|
(4,704
|
)
|
631
|
||||||||
|
Other
accrued and noncurrent liabilities
|
2,496
|
(959
|
)
|
1,265
|
||||||||
|
Net
cash provided by continuing operating activities
|
10,975
|
1,100
|
12,976
|
|||||||||
|
Cash
flows from investing activities
|
||||||||||||
|
Capital
expenditures
|
(15,315
|
)
|
(9,600
|
)
|
(7,177
|
)
|
||||||
|
Proceeds
from property insurance recoveries
|
2,888
|
-
|
-
|
|||||||||
|
Proceeds
from sales of property and equipment
|
2,355
|
262
|
84
|
|||||||||
|
Proceeds
from (payment of) restricted cash
|
(19
|
)
|
(158
|
)
|
1,838
|
|||||||
|
Other
assets
|
(483
|
)
|
(530
|
)
|
598
|
|||||||
|
Net
cash used by investing activities
|
(10,574
|
)
|
(10,026
|
)
|
(4,657
|
)
|
||||||
(Continued
on following page)
F-7
LSB
Industries, Inc.
Consolidated
Statements of Cash Flows
(continued)
|
Year
ended December 31,
|
|
2005
|
2004
|
2003
|
|
(In
Thousands)
|
|||||||||||
|
Cash
flows from financing activities
|
|||||||||||
|
Proceeds
from revolving debt facilities
|
$
|
363,671
|
$
|
330,680
|
$
|
281,461
|
|||||
|
Payments
on revolving debt facilities, including fees
|
(359,451
|
)
|
(327,103
|
)
|
(284,885
|
)
|
|||||
|
Proceeds
from Senior Secured Loan, net of fees
|
-
|
47,708
|
-
|
||||||||
|
Payments
on Financing Agreement
|
-
|
(38,531
|
)
|
(3,375
|
)
|
||||||
|
Acquisition
of 10 3/4% Senior Unsecured Notes
|
-
|
(5,000
|
)
|
-
|
|||||||
|
Proceeds
from other long-term and other debt, net of fees
|
3,584
|
2,666
|
1,890
|
||||||||
|
Payments
on other long-term and other debt
|
(3,267
|
)
|
(4,886
|
)
|
(4,282
|
)
|
|||||
|
Proceeds
from short-term financing and drafts payable
|
5,061
|
5,774
|
5,276
|
||||||||
|
Payments
on short-term financing and drafts payable
|
(5,978
|
)
|
(5,100
|
)
|
(5,076
|
)
|
|||||
|
Net
proceeds from issuance of common stock and warrants
|
248
|
820
|
1,770
|
||||||||
|
Acquisition
of non-redeemable preferred stock
|
(597
|
)
|
(271
|
)
|
-
|
||||||
|
Net
cash provided (used) by financing activities
|
3,271
|
6,757
|
(7,221
|
)
|
|||||||
|
Cash
flows of discontinued operations:
|
|||||||||||
|
Operating
cash flows
|
(39
|
)
|
-
|
-
|
|||||||
|
Net
increase (decrease) in cash
|
3,633
|
(2,169
|
)
|
1,098
|
|||||||
|
Cash
at beginning of year
|
1,020
|
3,189
|
2,091
|
||||||||
|
Cash
at end of year
|
$
|
4,653
|
$
|
1,020
|
$
|
3,189
|
|||||
Supplemental
cash flow information:
|
Cash
payment (receipts) for:
|
|||||||||||
|
Interest
on long-term debt and other
|
$
|
10,291
|
$
|
6,294
|
$
|
5,691
|
|||||
|
Income
taxes, net of refunds
|
$
|
-
|
$
|
-
|
$
|
(43
|
)
|
||||
|
Noncash
investing and financing activities:
|
|||||||||||
|
Receivable
from sale of property and equipment
|
$
|
-
|
$
|
202
|
$
|
-
|
|||||
|
Debt
issuance costs
|
$
|
-
|
$
|
2,315
|
$
|
-
|
|||||
|
Mark-to-market
provision on interest rate caps
|
$
|
(162
|
)
|
$
|
-
|
$
|
-
|
||||
|
Long-term
and other debt issued for property, plant and
equipment
|
$
|
1,036
|
$
|
-
|
$
|
639
|
|||||
|
Long-term
debt extinguished in exchange for the extinguishment of a note
receivable
|
$
|
-
|
$
|
-
|
$
|
(1,276
|
)
|
See
accompanying notes.
F-8
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
1.
Basis of Presentation
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of LSB
Industries, Inc. (the "Company", "We", "Us", or "Our") and its subsidiaries.
We
are a diversified holding company which is engaged, through our subsidiaries,
in
the manufacture and sale of a broad range of air handling and heat pump products
(the "Climate Control Business") and the manufacture and sale of chemical
products (the "Chemical Business"). See Note 20 - Segment Information. Entities
that are 20% to 50% owned and for which we have significant influence are
accounted for on the equity method. See Note 7 - Investment in Affiliate. All
material intercompany accounts and transactions have been
eliminated.
Based
on
internal reviews of our accounting policies and financial presentation, we
have
made a classification change relating to receivables for insurance recoveries
involving group health and workers’ compensation. At December 31, 2004, we had
receivables for insurance recoveries of $653,000 which were included in accrued
insurance liabilities. In 2005, we have reclassified this 2004 balance to
accounts receivable which resulted in an increase to accounts receivable and
accrued liabilities of $653,000 in our 2004 consolidated balance sheet. The
effect of this classification change on our consolidated statement of cash
flows
for 2004 was an increase in cash used by the change in accounts receivable
and
an increase in cash provided by the change in accrued liabilities of $653,000,
the net result of which did not affect net cash provided by operating
activities. In addition, this classification change did not affect our
consolidated statements of income for 2004.
2.
Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. (See Note
3
- Changes in Accounting Estimates).
Accounts
Receivable and Credit Risk
Sales
to
contractors and independent sales representatives are generally subject to
a
mechanics 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
F-9
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
2.
Summary of Significant Accounting Policies (continued)
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,
four customers account for approximately 25% of our total net receivables at
December 31, 2005. We do not believe this concentration in these four customers
represents a significant credit risk due to the financial stability of these
customers. (See Note 4 - Accounts Receivable).
Inventories
Inventories
are priced at the lower of cost or market, with cost being determined using
the
first-in, first-out basis (See Note 5 - Inventories). Finished goods and
work-in-process inventories include material, labor, and manufacturing overhead
costs. At December 31, 2005 and 2004, 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 $1,395,000 and
$1,277,000, 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 $1,028,000 and $908,000 at
December 31, 2005 and 2004, 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 first-in, first-out (“FIFO”) basis. As of December 31, 2005 and
2004, precious metals were $4,987,000 and $5,616,000, respectively, and are
included in supplies, prepaid items and other in the accompanying 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 2005, 2004 and 2003, the amounts expensed for precious metals
were approximately $3,535,000, $3,332,000 and $3,265,000, respectively, and
are
included in cost of sales in the accompanying consolidated statements of
income. Periodically, during major maintenance or capital projects, we may
be able to perform procedures to recover precious metals (previously expensed)
which have accumulated within the manufacturing equipment. For 2005, 2004
and 2003, we recognized recoveries of precious metals at historical FIFO costs
of approximately $2,050,000, $189,000 and $1,885,000, respectively, which are
reductions to cost of sales.
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 (See Note 6 -
Property, Plant and Equipment). Maintenance, repairs and minor renewals are
charged to operations while major renewals and improvements are capitalized
in
property, plant and equipment.
F-10
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
2.
Summary of Significant Accounting Policies (continued)
Goodwill
As
of
December 31, 2005 and 2004, 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. Goodwill is reviewed for
impairment at least annually in accordance with SFAS 142.
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, 2005 we had no long-lived assets that met the
criteria presented in 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.
Based
on
these estimates, we recognized the following impairments which are included
in
other expense in the accompanying consolidated statements of income (in
thousands):
|
Year
ended December 31,
|
|
2005
|
2004
|
2003
|
|
Chemical
Business assets
|
$
|
117
|
$
|
362
|
$
|
200
|
|||||
|
Corporate
assets
|
120
|
375
|
300
|
||||||||
|
$
|
237
|
$
|
737
|
$
|
500
|
Debt
Issuance and Other Debt-Related Costs, net
Debt
issuance and other debt-related costs are amortized over the term of the
associated debt instrument using the straight-line method except for the cost
of
interest caps (discussed below). Such costs, which are included in supplies,
prepaid items and other and other assets in the accompanying consolidated
balance sheets, were $2,583,000 and $2,690,000, net of accumulated amortization
of $2,991,000 and $2,231,000 as of December 31, 2005 and 2004, respectively.
In
2004,
our wholly-owned subsidiary ThermaClime, Inc. (“ThermaClime”) incurred debt
issuance costs of $2,464,000 including the cost of an interest rate cap relating
to the Senior
F-11
LSB
Industries, Inc.
Notes
to
Consolidated Financial
Statements (continued)
2.
Summary of Significant Accounting Policies (continued)
Secured
Loan (See Note 9 (A)). This interest rate cap is being amortized over the term
of the Senior Secured Loan using the effective interest rate method. In 2005,
we
purchased two interest rate cap contracts for a cost of $590,000. These
contracts are free-standing derivatives and are accounted for on a
mark-to-market basis in accordance with SFAS No.133. See discussion below under
“Derivatives, Hedges and Financial Instruments.”
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 insurance coverage, which
management considers to be adequate. Our accrued insurance liabilities are
based
on estimates of the self-insured portions of the 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, 2005 and
2004, our claims liabilities are $1,426,000 and $1,351,000, respectively, which
are included in accrued liabilities as shown in Note 8-Accrued
Liabilities.
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 warranty coverage for 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. In most cases, equipment is required to be returned to the factory
or its’ 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
do not make any 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 an extended
warranty. The above discussion is generally applicable, but variations do occur
depending upon specific contractual obligations, to certain system components
and local laws.
Our
accounting policy and methodology for warranty arrangements is to periodically
measure and recognize the expense and liability for such warranty obligations
using a percentage of net sales, based upon our historical warranty costs.
It is
possible that future warranty costs could exceed our estimates.
F-12
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
2.
Summary of Significant Accounting Policies (continued)
The
carrying amounts of the product warranty obligation, which are included in
accrued liabilities and other noncurrent liabilities in the accompanying
consolidated balance sheets, are as follows:
|
Description
|
Balance
at Beginning of Year
|
Additions-
Charged to Costs and Expenses
|
Deductions-
Costs Incurred
|
Balance
at End
of
Year
|
|
Product
warranty:
|
(In
Thousands)
|
|
2005
|
$
|
1,999
|
$
|
1,830
|
$
|
1,527
|
$
|
2,302
|
||||||||
|
2004
|
$
|
1,693
|
$
|
1,736
|
$
|
1,430
|
$
|
1,999
|
Accrued
Plant Turnaround Costs
We
accrue
in advance the costs expected to be incurred in the next planned major
maintenance activities (“Turnarounds”) of our Chemical Business. As of December
31, 2005 and 2004, accrued Turnarounds were $1,405,000 and $1,517,000,
respectively, which are included in accrued liabilities and other noncurrent
liabilities in the accompanying consolidated balance sheets.
The
Financial Accounting Standards Board (“FASB”) is currently working on a project
to clarify guidance on the accounting for Turnarounds. In March 2006, FASB
decided to
issue
guidance in the form of a FASB Staff Position (“FSP”) to eliminate the
accrue-in-advance method of accounting for Turnarounds and to
address
transition guidance at a future FASB meeting and directed their staff (“Staff”)
to research the practicability of retrospective application. The Staff’s
immediate
plans are to provide FASB with a recommendation on transition guidance after
researching the practicability of accounting for the adoption of the provisions
in the FSP as a change in accounting principle with retrospective application
as
described in Statement of Financial Accounting Standards (“SFAS”) 154-Accounting
Changes and Error Corrections. As discussed above, we are using the
accrue-in-advance method for Turnarounds that FASB may eliminate in the near
future. If the FSP was effective as of December 31, 2005, the pro forma effect
on our consolidated balance sheet would be a decrease in accrued and other
noncurrent liabilities and an increase in stockholders’ equity of $1,405,000.
Depending on the transition guidance provided, our preliminary analysis of
the
pro forma effect on our consolidated statements of income would be (a) an
increase in net income of $1,405,000 as a cumulative effect of accounting change
for 2005 or (b) an increase (decrease) in net income of $(112,000), $(1,161,000)
and $792,000 for 2005, 2004 and 2003, respectively, and an increase in
stockholders’ equity of $1,886,000 at December 31, 2002.
Executive
Benefit Agreements
We
have
entered into benefit agreements with certain key executives. Costs associated
with these individual benefit agreements are accrued when they become probable
over the estimated
F-13
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
2.
Summary of Significant Accounting Policies (continued)
remaining
service period. Total costs accrued equal the present value of specified
payments to be made after benefits become payable. (See Note 3 - Changes in
Accounting Estimates and Note 15 - Executive Benefit Agreements and Employee
Savings Plans).
Deferred
Income Taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes,
and
the amounts used for income tax purposes. Valuation allowances are provided
against deferred tax assets when it is more likely than not that some portion
or
all of the deferred tax asset will not be realized. We are able to realize
deferred tax assets up to an amount equal to the future reversals of existing
taxable temporary differences. The taxable temporary differences will turn
around in the loss carry forward period as the differences reverse. Other
differences will turn around as the assets are realized or liabilities are
paid
in the normal course of business. At December 31, 2005 and 2004, our deferred
tax assets were net of a valuation allowance of $26.1 million and $27.9 million,
respectively. (See Note 10 - Income Taxes).
Contingencies
We
accrue
for contingent losses when such losses are probable and reasonably estimable.
In
addition, we recognize contingent gains when such gains are realized. Our
Chemical Business is subject to specific federal and state regulatory and
environmental compliance laws and guidelines. We have developed policies and
procedures related to environmental and regulatory compliance. We must
continually monitor whether we have maintained compliance with such laws and
regulations and the operating implications, if any, and amount of penalties,
fines and assessments that may result from noncompliance. At December 31, 2005
a
liability of $33,000 has been accrued relating to a new Consent Administrative
Order (“CAO”) covering the El Dorado Facility and $1,458,000 relating to the CAO
covering our former Hallowell Facility. These liabilities are based on current
estimates that may be revised in the near term based on results of our
investigation, risk assessment and remediation pursuant to these CAOs. See
Note
11 - Commitments and Contingencies.
Stock
Options
At
December 31, 2005, we have several Qualified and Non-Qualified Stock Option
Plans, which are described more fully in Note 13 - Stockholders' Equity. We
account for those plans under the recognition and measurement principles of
APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. See discussion below under “Recently Issued and Other
Significant Accounting Pronouncements.” Stock-based compensation cost is not
usually reflected in results of operations, as the majority of all options
granted under those plans had an exercise price equal to the market value of
the
underlying common stock on the date of grant. As discussed in Note 13 -
Stockholders’ Equity, effective December 31, 2005, our Board of Directors
approved the acceleration of the vesting schedule of both qualified and
non-qualified
F-14
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
2.
Summary of Significant Accounting Policies (continued)
stock
options that were unvested at December 31, 2005. Based on FASB Interpretation
No. 44 (“FIN 44”), since this modification to the vesting schedule did
not
renew or
increase the life of these stock options, a remeasurement of the stock options
was not required and no stock-based compensation was recognized.
The
following table illustrates the effect on net income (loss) applicable to common
stock and net income (loss) per share if we had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
to stock-based compensation. The fair value for these options was estimated
at
the date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 2005 (there were no stock options granted
in
2004 or 2003): risk-free interest rates of 4.64%; a dividend yield of 0;
volatility factors of the expected market price of our common stock of .75;
and
a weighted average expected life of the options of 7.36 years.
For
purposes of pro forma disclosures, the estimated fair value of the qualified
and
non-qualified stock options were amortized to expense over the options' vesting
period. As discussed above, since our Board of Directors approved the
acceleration of the vesting schedule of both qualified and non-qualified stock
options that were unvested at December 31, 2005, the remaining portion
(unvested) of the pro forma stock-based compensation expense prior to the
acceleration is included in the 2005 deduction amount below.
|
Year
ended December 31,
|
|
2005
|
2004
|
2003
|
|
(In
Thousands)
|
|
Net
income (loss) applicable to common stock, as reported
|
$
|
2,819
|
$
|
(952
|
)
|
$
|
586
|
||||
|
Less
total stock-based compensation expense determined
under fair value based method for all
awards, net of related tax effects
|
(530
|
)
|
(235
|
)
|
(380
|
)
|
|||||
|
Pro
forma net income (loss) applicable to common stock
|
$
|
2,289
|
$
|
(1,187
|
)
|
$
|
206
|
||||
|
Net
income (loss) per share:
|
|||||||||||
|
Basic-as
reported
|
$
|
.21
|
$
|
(.07
|
)
|
$
|
.05
|
||||
|
Basic-pro
forma
|
$
|
.17
|
$
|
(.09
|
)
|
$
|
.02
|
||||
|
Diluted-as
reported
|
$
|
.19
|
$
|
(.07
|
)
|
$
|
.04
|
||||
|
Diluted-pro
forma
|
$
|
.15
|
$
|
(.09
|
)
|
$
|
.01
|
F-15
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
2.
Summary of Significant Accounting Policies (continued)
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. If revenue relates to construction contracts,
we
recognize revenue 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.
Recognition
of Insurance Recoveries
If
our
insurance claim relates to a recovery of 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 (See Note 4
-
Accounts Receivable and Note 18 - Property and Business Interruption Insurance
Recoveries).
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.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses include costs associated with the sales,
marketing and administrative functions. Such costs include personnel costs,
including benefits, advertising costs, commissions expenses, office and
occupancy costs associated with the sales, marketing and administrative
functions. Selling, general and administrative expenses also include 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
2005,
2004 and 2003, shipping costs of $10,564,000, $8,567,000 and $8,740,000,
respectively, are included in net sales as these costs relate to amounts billed
to our customers and handling costs of $4,177,000, $3,208,000 and $2,994,000,
respectively, are included in selling, general and administrative expense for
the Chemical Business. For the Climate Control Business, shipping and handling
costs of $6,396,000, $5,416,000 and $4,043,000 are included in selling, general
and administrative expense for 2005, 2004 and 2003, respectively.
F-16
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
2.
Summary of Significant Accounting Policies (continued)
Advertising
Costs
Costs
in
connection with advertising and promotion of our products are expensed as
incurred. Such costs amounted to $1,402,000 in 2005, $1,023,000 in 2004 and
$692,000 in 2003.
Derivatives,
Hedges and Financial Instruments
We
account for derivatives in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No.133 requires the
recognition of derivatives in the balance sheet and the measurement of these
instruments at fair value. Changes in fair value of derivatives are recorded
in
results of operations unless the normal purchase or sale exceptions apply or
hedge accounting is elected.
In
1997,
we entered into an interest rate forward agreement to effectively fix the
interest rate of a long-term lease commitment (not for trading purposes). In
1999, we executed a long-term lease agreement (initial lease term of ten years)
and terminated the forward agreement at a net cost of $2.8 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 No. 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, 2005 and 2004, accumulated
other comprehensive loss consisted of the remaining deferred cost of $990,000
and $1,280,000, respectively. The amounts amortized were $290,000, $290,000
and
$289,000 for 2005, 2004 and 2003, respectively, and are included in selling,
general and administrative expenses. There were no income tax benefits related
to these expenses. For 2006, we currently expect approximately $290,000 to
be
amortized to operations.
In
March
2005, we purchased two interest rate cap contracts for a cost of $590,000.
These
contracts are free-standing derivatives and are accounted for on a
mark-to-market basis in accordance with SFAS No.133. At December 31, 2005,
the
market value of these contracts was $429,000 and is included in other assets
in
the accompanying consolidated balance sheet. The change in the value of these
contracts is included in interest expense.
Raw
materials for use in our manufacturing processes include copper used by our
Climate Control Business and natural gas used by our Chemical Business. As
part
of our raw material price risk management, we periodically enter into
exchange-traded futures contracts for these materials, which contracts are
generally accounted for on a mark-to-market basis in accordance with SFAS No.
133. At December 31, 2005 the unrealized gains on these contracts were $367,000
(minimal at December 31, 2004) and are included in supplies, prepaid items
and
other in the accompanying consolidated balance sheets, as the term of these
contracts are for periods of twelve months or less. For 2005, 2004 and 2003,
gains on such contracts of $931,000, $189,000 and $367,000, respectively, are
included in cost of sales. See Note 11 - Commitments and Contingencies.
F-17
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
2.
Summary of Significant Accounting Policies (continued)
Income
(Loss) per Share
Net
income (loss) applicable to common stock is computed by adjusting net income
(loss) by the amount of preferred stock dividends. Basic income (loss) per
common share is based upon net income (loss) applicable to common stock and
the
weighted average number of common shares outstanding during each year. Diluted
income (loss) per share, if applicable, is based on the weighted average number
of common shares and dilutive common equivalent shares outstanding, if any,
and
the assumed conversion of dilutive convertible securities outstanding, if any.
See Note 12 - Redeemable Preferred Stock, Note 13 - Stockholders' Equity, and
Note 14 - Non-Redeemable Preferred Stock for a full description of securities
which may have a dilutive effect in future years.
F-18
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
2.
Summary of Significant Accounting Policies (continued)
The
following table sets forth the computation of basic and diluted net income
(loss) per share:
(Dollars
in thousands, except per share amounts)
|
2005
|
2004
|
2003
|
|
Numerator:
|
|||||||||||
|
Net
income
|
$
|
5,102
|
$
|
1,370
|
$
|
2,913
|
|||||
|
Preferred
stock dividend requirements
|
(2,283
|
)
|
(2,322
|
)
|
(2,327
|
)
|
|||||
|
Numerator
for basic and diluted net income (loss) per share - net income (loss)
applicable to common stock
|
$
|
2,819
|
$
|
(952
|
)
|
$
|
586
|
||||
|
Denominator:
|
|||||||||||
|
Denominator
for basic net income (loss) per share
- weighted average shares
|
13,617,418
|
12,888,136
|
12,352,613
|
||||||||
|
Effect
of dilutive securities:
|
|||||||||||
|
Employee
stock options
|
1,195,320
|
-
|
1,293,262
|
||||||||
|
Warrants
|
51,583
|
-
|
604,286
|
||||||||
|
Convertible
preferred stock
|
38,390
|
-
|
44,375
|
||||||||
|
Convertible
note payable
|
4,000
|
-
|
4,000
|
||||||||
|
Dilutive
potential common shares
|
1,289,293
|
-
|
1,945,923
|
||||||||
|
Denominator
for dilutive net income (loss) per share
- adjusted weighted average shares and
assumed conversions
|
14,906,711
|
12,888,136
|
14,298,536
|
||||||||
|
Basic
net income (loss) per share
|
$
|
.21
|
$
|
(.07
|
)
|
$
|
.05
|
||||
|
Diluted
net income (loss) per share
|
$
|
.19
|
$
|
(.07
|
)
|
$
|
.04
|
The
following shares of securities were not included in the computation of diluted
net income (loss) per share as their effect would have been
antidilutive:
|
2005
|
2004
|
2003
|
|
Employee
stock options
|
-
|
2,063,829
|
249,625
|
||||||||
|
Warrants
|
-
|
708,085
|
-
|
||||||||
|
Convertible
preferred stock
|
3,546,402
|
3,634,599
|
3,597,931
|
||||||||
|
Convertible
note payable
|
-
|
4,000
|
-
|
||||||||
|
3,546,402
|
6,410,513
|
3,847,556
|
F-19
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
2.
Summary of Significant Accounting Policies (continued)
Recently
Issued and Other Significant Accounting Pronouncements
In
September 2005, the Emerging Issues Task Force (“EITF”) reached a consensus and
issued EITF Issue No. 04-13, “Accounting for Purchases and Sales of Inventory
with the Same Counterparty” in which inventory purchase and sale transactions
with the same counterparty that are entered into in contemplation of one another
should be combined for purposes of applying APB Opinion No. 29, “Accounting for
Nonmonetary Transactions.” The EITF also concluded that exchanges of
inventory should be recognized at carryover basis except for changes of finished
goods for either raw materials or work in progress, which would be recognized
at
fair value. This consensus should be applied in the first interim or
annual reporting period beginning after March 15, 2006 to new arrangements
and
previous arrangements that were modified or renegotiated after the effective
date. We do not expect the impact of this new standard to have a material
effect on our consolidated financial statements.
In
June
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections,”
which replaces APB Opinion No. 20, “Accounting Changes” and SFAS 3, “Reporting
Accounting Changes in Interim Financial Statements.” SFAS 154 applies to
all voluntary changes in accounting principle and requires retrospective
application to prior periods’ financial statements of changes in accounting
principle unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. Adoption of SFAS 154 is
required for accounting changes and error corrections made in fiscal years
beginning after December 15, 2005. We will adopt SFAS 154 effective
January 1, 2006. We do not expect the impact of this new standard to have
a material effect on our consolidated financial statements.
In
March
2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for
Conditional Asset Retirement Obligations,” in which an entity is required to
recognize a liability for the fair value of an asset retirement obligation
(“ARO”) that is conditional on a future event if the liability’s fair value can
be reasonably estimated. The fair value of a liability for the conditional
ARO should be recognized when incurred. Uncertainty surrounding the timing
and
method of settlement of a conditional ARO should be factored into the
measurement of the liability when sufficient information exists. However,
in some cases, there is insufficient information to estimate the fair value
of
an ARO. In these cases, the liability should be initially recognized in the
period in which sufficient information is available for an entity to make a
reasonable estimate of the liability’s fair value. FIN 47 requires both
recognition of a cumulative change in accounting principle and disclosure of
the
liability on a pro forma basis for transition purposes. FIN 47 is
effective no later than the end of fiscal years ending after December 15, 2005.
The Company adopted the provisions of FIN 47 on December 31, 2005 and the
adoption has not had a material affect on the Company’s financial statements. We
have identified other AROs related to our Chemical Business that have not been
recorded because we determined that these assets have indefinite
lives.
In
November 2004, FASB issued SFAS 151, Inventory Costs, an amendment of APB No.
43, Chapter 4. The standard requires that abnormal amounts of idle capacity
and
spoilage costs be
F-20
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
2.
Summary of Significant Accounting Policies (continued)
excluded
from the cost of inventory and expensed when incurred. The standard is effective
for fiscal periods beginning after June 15, 2005. We will adopt SFAS 151
effective January 1, 2006.
The
adoption of this new standard has the potential to create material impacts
on
our financial statements should we incur reductions in production similar to
those discussed in Note 18 - Property and Business Interruption Insurance
Recoveries.
In
December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an
amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS 153
requires exchanges of productive assets to be accounted for at fair value,
rather than at carryover basis, unless (1) neither the asset received nor the
asset surrendered has a fair value that is determinable within reasonable limits
or (2) the transactions lack commercial substance. SFAS 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June
15,
2005. We will adopt SFAS 153 effective January 1, 2006 and we do not expect
the
adoption of this new standard to have a material effect on our consolidated
financial statements.
In
December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment,
which is a revision of SFAS 123, Accounting for Stock-Based Compensation. SFAS
123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and amends SFAS 95, Statement of Cash Flows. Generally, the approach in SFAS
123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative.
As
allowed by the Securities and Exchange Commission, SFAS 123(R) must be adopted
at the beginning of the next fiscal year that begins after June 15, 2005. We
will adopt SFAS 123(R) effective January 1, 2006. As discussed in Note 13 -
Stockholders’ Equity, effective December
31, 2005, our Board of Directors approved the acceleration of the vesting
schedule of both qualified and non-qualified stock options that were unvested
at
December 31, 2005. As a result, all outstanding stock options were fully vested
at December 31, 2005 to avoid the recognition of compensation expense in our
future financial statements relating to these stock options. In addition, no
cumulative effect of accounting change adjustment will be required on our
consolidated financial statements in January 2006 when we adopt SFAS 123(R).
Based on FIN 44, since this modification to the vesting schedule did
not
renew or
increase the life of these stock options, a remeasurement of the stock options
was not required and no stock-based compensation was recognized in
2005.
In
January 2003, the FASB issued Interpretation No. 46 ("FIN 46") "Consolidation
of
Variable Interest Entities." FIN 46 addresses the consolidation of variable
interest entities which meet certain characteristics. In December 2003, the
FASB
revised FIN 46 that included changes to the effective dates depending on the
characteristics of the variable interest entities and the date of involvement.
F-21
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
2.
Summary of Significant Accounting Policies (continued)
Prior
to
2003, we, through our subsidiaries, entered into loan agreements where we loaned
funds to the parent company of MultiClima, S.A. ("MultiClima") a French
manufacturer of HVAC equipment, whose product line was compatible with our
Climate Control Business. Under the loan agreements, one of our subsidiaries
obtained the option (“Option”) to exchange its rights under the loan agreements
for 100% of the borrower's outstanding common stock. This subsidiary also
obtained a security interest in the stock of MultiClima to secure its loans.
Based on our assessment of the parent company and MultiClima in relation to
FIN
46, as revised, we were required to consolidate this entity effective March
31,
2004. Prior to consolidating this entity, the outstanding notes receivable
balance, net of reserve, was $2,558,000.
As
a
result of consolidating the consolidated assets and liabilities of the parent
company of MultiClima, at March 31, 2004 we recorded a cumulative effect of
accounting change of $536,000 which is included in the accompanying consolidated
statement of income. The cumulative effect of the accounting change primarily
relates to the elimination of embedded profit included in the cost of inventory
which was purchased from MultiClima by certain of our subsidiaries.
For
the
three months ended June 30, 2004, the parent company of MultiClima had a
consolidated net loss of $575,000 (after all material intercompany transactions
were eliminated). Based on our assessment of the parent company and MultiClima’s
historical and forecasted liquidity and results of operations during 2004,
we
concluded that the outstanding notes receivable were not collectable. As a
result, effective July 1, 2004, we forgave and canceled the loan agreements
in
exchange for extending the Option’s expiration date from June 15, 2005 to June
15, 2008. We recognized a provision for loss of $1,447,000 for the three months
ended September 30, 2004. As a result of the cancellation and the estimation
of
the value of this Option at zero, we no longer had a variable interest in this
entity and were no longer required to consolidate this entity.
3.
Changes in Accounting Estimates
As
discussed in Note 11 - Commitments and Contingencies and Note 15 - Executive
Benefit Agreements and Employee Savings Plans, during 2005, we had the following
changes in accounting estimates:
| · |
the
recognition of $644,000 of soil remediation costs classified as
discontinued operations and
|
| · |
the
recognition of $351,000 relating to a death benefit obligation classified
as a selling, general and administrative
expense.
|
The
effect of these changes in accounting estimates decreased net income by $995,000
(basis and diluted net income per share by $.07) for 2005.
F-22
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
4.
Accounts Receivable
|
December
31,
|
|
2005
|
2004
|
|
(In
Thousands)
|
|
Trade
receivables
|
$
|
51,096
|
$
|
41,578
|
|||
|
Insurance
claims
|
236
|
2,440
|
|||||
|
Other
|
785
|
855
|
|||||
|
52,117
|
44,873
|
||||||
|
Allowance
for doubtful accounts
|
(2,680
|
)
|
(2,332
|
)
|
|||
|
$
|
49,437
|
$
|
42,541
|
5.
Inventories
|
Finished
Goods
|
Work-in-Process
|
Raw
Materials
|
Total
|
|
(In
Thousands)
|
|||||||||||||
|
December
31, 2005:
|
|||||||||||||
|
Climate
Control products
|
$
|
5,367
|
$
|
2,601
|
$
|
8,637
|
$
|
16,605
|
|||||
|
Chemical
products
|
16,326
|
-
|
2,691
|
19,017
|
|||||||||
|
Industrial
machinery and components
|
1,829
|
-
|
-
|
1,829
|
|||||||||
|
23,522
|
2,601
|
11,328
|
37,451
|
||||||||||
|
Less
amount not expected to be realized within one year
|
180
|
-
|
-
|
180
|
|||||||||
|
$
|
23,342
|
$
|
2,601
|
$
|
11,328
|
$
|
37,271
|
||||||
|
December
31, 2004 total
|
$
|
17,323
|
$
|
2,364
|
$
|
9,113
|
$
|
28,800
|
|||||
|
Less
amount not expected to be realized within one year
|
143
|
-
|
-
|
143
|
|||||||||
|
$
|
17,180
|
$
|
2,364
|
$
|
9,113
|
$
|
28,657
|
||||||
6.
Property, Plant and Equipment
|
December 31,
|
|||||||||||||
|
Useful
lives in
years |
2005 |
2004 |
|||||||||||
|
(In
Thousands)
|
|||||||||||||
|
Machinery,
equipment and automotive
|
3-25
|
$
|
133,192
|
$
|
125,949
|
||||||||
|
Buildings
and improvements
|
3-30
|
22,806
|
21,505
|
||||||||||
|
Furniture,
fixtures and store equipment
|
3-10
|
6,818
|
6,085
|
||||||||||
|
Assets
under capital leases
|
3-12
|
1,688
|
674
|
||||||||||
|
Construction
in progress
|
N/A
|
5,034
|
5,018
|
||||||||||
|
Capital
spare parts
|
N/A
|
2,156
|
1,742
|
||||||||||
|
Land
|
N/A
|
2,152
|
2,252
|
||||||||||
|
173,846
|
163,225
|
||||||||||||
|
Less
accumulated depreciation
|
99,764
|
93,006
|
|||||||||||
|
$
|
74,082
|
$
|
70,219
|
||||||||||
F-23
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
6.
Property, Plant and Equipment (continued)
Machinery,
equipment and automotive primarily includes the categories of property and
equipment and estimated useful lives as follows: chemical processing plants
and
plant infrastructure (15-25 years); production, fabrication, and assembly
equipment (7-15 years); certain processing plant components (3-10 years); and
trucks, automobiles, trailers, and other rolling stock (3-7) years. At December
31, 2005 and 2004, assets under capital lease consist of $1,593,000 and $674,000
of machinery, equipment and automotive, respectively, and $95,000 of furniture,
fixtures and store equipment at December 31, 2005. Accumulated depreciation
for
assets under capital leases were $326,000 and $238,000 at December 31, 2005
and
2004, respectively.
7.
Investment in Affiliate (Unaudited)
One
of
our subsidiaries has a 50% equity interest in Cepolk Limited Partnership, an
energy conservation joint venture, which is accounted for on the equity method.
At December 31, 2005 and 2004, our investment was $3,368,000 and $3,111,000,
respectively. For 2005, 2004 and 2003, distributions received from this
affiliate were $488,000, $250,000 and $60,000, respectively.
Summarized
financial information of the joint venture is as follows (in
thousands):
|
December
31,
|
|
2005
|
2004
|
|
Current
assets
|
$
|
2,610
|
$
|
2,577
|
||
|
Noncurrent
assets
|
$
|
8,327
|
$
|
9,333
|
||
|
Current
liabilities
|
$
|
1,699
|
$
|
1,815
|
||
|
Noncurrent
liabilities
|
$
|
5,872
|
$
|
7,019
|
||
|
Partners’
capital
|
$
|
3,366
|
$
|
3,076
|
|
Year
ended December 31,
|
|
2005
|
2004
|
2003
|
|
Total
revenues
|
$
|
4,360
|
$
|
4,311
|
$
|
3,311
|
||
|
Operating
income
|
$
|
2,189
|
$
|
2,166
|
$
|
959
|
||
|
Net
income
|
$
|
1,491
|
$
|
1,336
|
$
|
37
|
F-24
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
8.
Accrued Liabilities
|
December
31,
|
|||
|
2005
|
2004
|
||
|
(In
Thousands)
|
||||||
|
Deferred
rent expense
|
$
|
5,109
|
$
|
-
|
||
|
Accrued
payroll and benefits
|
3,519
|
3,117
|
||||
|
Customer
deposits
|
1,927
|
3,421
|
||||
|
Accrued
property taxes
|
1,902
|
1,848
|
||||
|
Accrued
insurance
|
1,426
|
1,351
|
||||
|
Accrued
commissions
|
1,406
|
1,117
|
||||
|
Current
portion of accrued warranty
|
1,282
|
1,147
|
||||
|
Current
portion of plant turnaround costs
|
1,249
|
1,182
|
||||
|
Other
|
5,399
|
3,897
|
||||
|
$
|
23,219
|
$
|
17,080
|
|||
9.
Long-Term Debt
|
December
31,
|
|||
|
2005
|
2004
|
||
|
(In
Thousands)
|
|
Senior
Secured Loan due 2009 (A)
|
$
|
50,000
|
$
|
50,000
|
||
|
Secured
revolving credit facility - ThermaClime (B)
|
31,975
|
27,489
|
||||
|
10-3/4%
Senior Unsecured Notes due 2007 (C)
|
13,300
|
13,300
|
|
Other,
with interest at rates of 2% to 14.13%, most of which is secured
by machinery, equipment and real estate (D)
|
16,849
|
15,718
|
||||
|
112,124
|
106,507
|
|||||
|
Less
current portion of long-term debt
|
3,348
|
4,833
|
||||
|
Long-term
debt due after one year
|
$
|
108,776
|
$
|
101,674
|
(A)
In
September 2004, ThermaClime and certain of its subsidiaries (the “Borrowers”)
completed a $50 million term loan (“Senior Secured Loan”) with a certain lender
(the “Lender”). The Senior Secured Loan is to be repaid as follows:
| · |
quarterly
interest payments which began September 30,
2004;
|
| · |
quarterly
principal payments of $312,500 beginning September 30,
2007;
|
| · |
a
final payment of the remaining outstanding principal of $47.5 million
and
accrued interest on September 16,
2009.
|
The
Senior Secured Loan accrues interest at the applicable LIBOR rate, as defined,
plus an applicable LIBOR margin, as defined or, at the election of the
Borrowers, the alternative base rate, as defined, plus an applicable base rate
margin, as defined, with the annual interest rate not to exceed 11% or 11.5%
depending on the leverage ratio. At December 31, 2005 the effective interest
rate was 11.5%.
F-25
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
9.
Long-Term Debt (continued)
The
Borrowers are subject to numerous covenants under the Senior Secured Loan
agreement including, but not limited to, limitation on the incurrence of certain
additional indebtedness and liens, limitations on mergers, acquisitions,
dissolution and sale of assets, and limitations on declaration of dividends
and
distributions to us, all with certain exceptions. The Borrowers are also subject
to a minimum fixed charge coverage ratio, measured quarterly on a trailing
twelve-month basis. The Borrowers’ fixed charge coverage ratio exceeded the
required ratio for the twelve-month period ended December 31, 2005. The maturity
date of the Senior Secured Loan can be accelerated by the Lender upon the
occurrence of a continuing event of default, as defined.
The
Senior Secured Loan agreement includes a prepayment fee equal to 2% of the
principal amount should the Borrowers elect to prepay any principal amount
prior
to September 15, 2006. This fee is reduced to 1% during the subsequent
twelve-month period and 0% thereafter.
The
Senior Secured Loan is secured by (a) a first lien on (i) certain real property
and equipment located at the El Dorado, Arkansas plant (“El Dorado Facility”),
(ii) certain real property and equipment located at the Cherokee, Alabama plant
(“Cherokee Facility”), (iii) certain equipment of the Climate Control Business,
and (iv) the equity stock of certain of ThermaClime’s subsidiaries, and (b) a
second lien on the assets upon which ThermaClime’s Working Capital Revolver
lender has a first lien. The carrying value of the pledged assets is
approximately $151.3 million at December 31, 2005. The Senior Secured Loan
is
guaranteed by the Company and is also secured with the stock of
ThermaClime.
The
proceeds of the Senior Secured Loan were used as follows:
| · |
repaid
the outstanding principal balance due 2005 under the Financing Agreement
discussed below, plus accrued interest, of $36.8
million;
|
| · |
repurchased
a portion of ThermaClime’s 10 3/4% Senior Unsecured Notes due 2007
(discussed in (C) below), held by the Lender, plus accrued interest,
of
$5.2 million;
|
| · |
paid
certain fees and expenses of $2.4 million including the cost of an
interest cap which sets a maximum annual interest rate of 11% or
11.5%
depending on the leverage ratio;
|
| · |
repaid
the outstanding principal balance of a term loan of $.4
million;
|
| · |
paid
down the Working Capital Revolver Loan with the remaining
balance.
|
Due
to
the repayment of the Loans (discussed below) prior to the maturity date of
June
30, 2005 with the proceeds of the Senior Secured Loan and since the Lender
is
not an affiliate of the lenders of the Loans, we recognized a gain on
extinguishment of debt of $4.4 million in 2004.
In
May
2002, ThermaClime entered into a financing agreement (“Financing Agreement”)
with certain lenders in order to fund the repurchase of a portion of the Senior
Unsecured Notes at a substantial discount to the face value. Based upon certain
criteria, including but
F-26
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
9.
Long-Term Debt (continued)
not
limited to, unfavorable changes in ThermaClime's financial condition since
the
Senior
Unsecured
Notes were originally sold and the high interest rates on the loans (the
“Loans”) under the Financing Agreement, the Financing Agreement transaction was
accounted for as a debt restructuring. As a result, we were required to
recognize all of the interest payments associated with the Loans in long-term
debt. Subsequent interest payments on the Loans were charged against the debt
balance. Therefore no interest expense on the Financing Agreement indebtedness
was recognized from May 2002 through September 2004 in the accompanying
consolidated statements of income.
As
required by the lenders of the Loans, as a condition precedent to the completion
of the lenders and the transactions contemplated by the Financing Agreement,
we
granted to the lenders warrants to purchase 595,585 shares of our common stock
subject to certain anti-dilution adjustments. The estimated fair value of the
warrants at the grant date ($1,983,000) was accounted for as debt issuance
costs. The exercise price of the warrants was $0.10 per share and contained
a
provision for cashless exercise. The warrants provided for certain demand
registration rights and piggyback registration rights. In March 2005, the
lenders of the Loans exercised the warrants, under the cashless exercise
provision, to purchase 586,140 shares of our common stock.
|
(B)
|
In
April 2001, ThermaClime and its subsidiaries ("the Borrowers") entered
into 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. Effective February 28, 2005, the Working Capital Revolver
Loan was amended which, among other things, extended the maturity
date to
April 2009 and removed a subjective acceleration clause. The Working
Capital Revolver Loan, as amended, accrues interest at a base rate
(generally equivalent to the prime rate) plus .75% or LIBOR plus
2%
(formerly base rate plus 2% or LIBOR plus 4.50%). The effective rate
at
December 31, 2005 was 6.92%. Interest is paid monthly. The facility
provides for up to $8.5 million of letters of credit. All letters
of
credit outstanding reduce availability under the facility.
Amounts available for additional borrowing under the Working Capital
Revolver Loan at December 31, 2005 were $15.9 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% (formerly 2.75%) per annum
of
the undrawn amount of all outstanding letters of credit, an unused
line
fee equal to .5% per annum for the excess amount available under
the
facility not drawn and various other audit, appraisal and valuation
charges.
|
In
March
2005, we purchased two interest rate cap contracts which set a maximum
three-month LIBOR base rate of 4.59% on $30 million and mature on March 29,
2009. See “Derivatives, Hedges and Financial Instruments” under Note 2 - Summary
of Significant Accounting Policies.
The
lender may, upon an event of default, as defined, terminate the Working Capital
Revolver Loan and make the balance outstanding due and payable in full. The
Working
F-27
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
9.
Long-Term Debt (continued)
Capital
Revolver Loan is secured by receivables, inventories and intangibles of all
the
ThermaClime
entities other than DSN Corporation and El Dorado Nitric Company and its
subsidiaries ("EDNC") and a second lien on certain real property and equipment.
EDNC is neither a borrower nor guarantor of the Working Capital Revolver Loan.
The carrying value of the pledged assets is approximately $133.6 million at
December 31, 2005.
A
prepayment premium equal to 3% of the facility is due to the lender should
the
borrowers elect to prepay the facility prior to April 13, 2006. This premium
is
reduced to 2% during the second twelve-month period and to 1% during the third
twelve-month period and 0% thereafter.
The
Working Capital Revolver Loan, as amended, requires ThermaClime to maintain
quarterly earnings before interest, taxes, depreciation and amortization
("EBITDA"), as defined, for ThermaClime and its Climate Control Business on
a
trailing twelve-month basis. ThermaClime and its Climate Control Business's
EBITDA for the twelve-month period ended December 31, 2005 was in excess of
the
required amounts. The trailing twelve-months EBITDA requirements for 2006 range
from $16.4 million to $20.6 million for ThermaClime and is fixed at $10 million
for the Climate Control Business. The Working Capital Revolver Loan also
requires ThermaClime to achieve an annual fixed charge coverage ratio and limits
capital expenditures, as defined, measured quarterly on a trailing twelve-month
basis. The Working Capital Revolver Loan also contains covenants that, among
other things, limit the Borrowers' ability to: (a) incur additional
indebtedness, (b) incur liens, (c) make restricted payments or loans to
affiliates who are not Borrowers, (d) engage in mergers, consolidations or
other
forms of recapitalization, (e) dispose of assets, or (f) repurchase
ThermaClime's 10-3/4% Senior Unsecured Notes. 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.
(C)
In
1997, ThermaClime completed the sale of its 10-3/4% Senior Unsecured Notes
due
2007 (the "Notes"). The Notes bear interest at an annual rate of 10-3/4% payable
semiannually in arrears on June 1 and December 1 of each year. The Notes are
senior unsecured obligations of ThermaClime and rank equal in right of payment
to all existing and future senior unsecured indebtedness of ThermaClime and
its
subsidiaries. The Notes are effectively subordinated to all existing and future
secured indebtedness of ThermaClime.
In
May
2002, ThermaClime and the trustee under the Indenture (as defined below), with
the consent of the holders of at least 66-2/3% of the aggregate principal amount
of the outstanding Notes (the "Holders"), entered into a Fifth Supplemental
Indenture, dated May
24,
2002 (the "Supplement"), to the Indenture dated November 27, 1997 as amended
(the "Indenture"), which governs ThermaClime's Notes. The Supplement amends
the
Indenture by, among other things, (a) deleting most of the restrictive
covenants, (b) deleting the requirements upon a change of control of ThermaClime
or sale of all or substantially all of the assets of ThermaClime, (c) specifying
ThermaClime's subsidiaries which are guarantors of the Notes and deleting the
requirement that certain future subsidiaries of
F-28
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
9.
Long-Term Debt (continued)
ThermaClime
be guarantors, (d) deleting certain events from the definition of "Event of
Default,"
and (e) providing for conforming changes to the Indenture and the promissory
note executed by ThermaClime pursuant to the terms of the
Indenture.
The
Notes
are subject to redemption at the option of ThermaClime, in whole or in part,
at
the redemption prices set forth in the Indenture, plus accrued and unpaid
interest thereon, plus liquidated damages, if any, to the applicable redemption
date.
ThermaClime
owns substantially all of the companies comprising our Climate Control and
Chemical Businesses. ThermaClime is a holding company with no significant assets
or operations other than its investments in its subsidiaries, and each of its
subsidiaries is wholly-owned, directly or indirectly, by ThermaClime.
ThermaClime's payment obligations under the Notes are fully, unconditionally
and
joint and severally guaranteed by all of the existing subsidiaries of
ThermaClime, except for EDNC (“Non-Guarantor Subsidiaries”).
Set
forth
below is consolidating financial information of ThermaClime's Guarantor
Subsidiaries, the Non-Guarantor Subsidiaries, and ThermaClime.
F-29
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
9.
Long-Term Debt (continued)
|
ThermaClime,
Inc.
Condensed
Consolidating Balance Sheet
As
of December 31, 2005
(In
Thousands)
|
|
Combined Guarantor Subsidiaries |
Consolidated
Non-Guarantor Subsidiaries
|
ThermaClime,
Inc. (Parent)
|
Eliminations
|
Consolidated |
|
Assets
|
|||||||||||||||||||
|
Current
assets:
|
|||||||||||||||||||
|
Cash
|
$
|
201
|
$
|
-
|
$
|
1,833
|
$
|
2,034
|
|||||||||||
|
Accounts
receivable, net
|
44,467
|
3,617
|
209
|
48,293
|
|||||||||||||||
|
Inventories
|
35,419
|
203
|
-
|
35,622
|
|||||||||||||||
|
Supplies,
prepaid items and other
|
6,027
|
32
|
3,795
|
9,854
|
|||||||||||||||
|
Deferred
income taxes
|
-
|
-
|
5,478
|
5,478
|
|||||||||||||||
|
Total
current assets
|
86,114
|
3,852
|
11,315
|
101,281
|
|||||||||||||||
|
Property,
plant and equipment, net
|
63,084
|
2,951
|
59
|
66,094
|
|||||||||||||||
|
Investment
in and advances to affiliates
|
-
|
-
|
104,097
|
$
|
(104,097
|
)
|
-
|
||||||||||||
|
Receivable
from Parent
|
23,321
|
17,698
|
-
|
(41,019
|
)
|
-
|
|||||||||||||
|
Other
assets, net
|
5,909
|
20
|
2,673
|
8,602
|
|||||||||||||||
|
$
|
178,428
|
$
|
24,521
|
$
|
118,144
|
$
|
(145,116
|
)
|
$
|
175,977
|
|||||||||
|
Liabilities
and Stockholders' Equity
|
|||||||||||||||||||
|
Current
liabilities:
|
|||||||||||||||||||
|
Accounts
payable
|
$
|
26,410
|
$
|
2,017
|
$
|
588
|
$
|
29,015
|
|||||||||||
|
Short-term
financing
|
6
|
-
|
2,645
|
2,651
|
|||||||||||||||
|
Accrued
liabilities
|
11,661
|
7,708
|
1,873
|
21,242
|
|||||||||||||||
|
Due
to LSB and affiliates, net
|
-
|
-
|
1,872
|
1,872
|
|||||||||||||||
|
Current
portion of long-term debt
|
376
|
353
|
-
|
729
|
|||||||||||||||
|
Total
current liabilities
|
38,453
|
10,078
|
6,978
|
55,509
|
|||||||||||||||
|
Long-term
debt
|
6,194
|
500
|
91,808
|
98,502
|
|||||||||||||||
|
Deferred
income taxes
|
-
|
-
|
4,234
|
4,234
|
|||||||||||||||
|
Other
non-current liabilities
|
3,275
|
323
|
-
|
3,598
|
|||||||||||||||
|
Stockholders'
equity:
|
|||||||||||||||||||
|
Common
stock
|
66
|
1
|
1
|
$
|
(67
|
)
|
1
|
||||||||||||
|
Capital
in excess of par value
|
166,212
|
-
|
13,067
|
(166,212
|
)
|
13,067
|
|||||||||||||
|
Accumulated
other comprehensive loss
|
-
|
(990
|
)
|
-
|
(990
|
)
|
|||||||||||||
|
Due
from LSB and affiliates
|
-
|
-
|
(2,558
|
)
|
(2,558
|
)
|
|||||||||||||
|
Retained
earnings (deficit)
|
(35,772
|
)
|
14,609
|
4,614
|
21,163
|
4,614
|
|||||||||||||
|
Total
stockholders' equity
|
130,506
|
13,620
|
15,124
|
(145,116
|
)
|
14,134
|
|||||||||||||
|
$
|
178,428
|
$
|
24,521
|
$
|
118,144
|
$
|
(145,116
|
)
|
$
|
175,977
|
F-30
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
9.
Long-Term Debt (continued)
ThermaClime,
Inc.
Condensed
Consolidating Balance Sheet
As
of
December 31, 2004
(In
Thousands)
|
Combined Guarantor Subsidiaries |
Consolidated
Non-Guarantor Subsidiaries
|
ThermaClime,
Inc. (Parent)
|
Eliminations |
Consolidated |
|
Assets
|
|||||||||||||||||||
|
Current
assets:
|
|||||||||||||||||||
|
Cash
|
$
|
174
|
$
|
-
|
$
|
676
|
$
|
850
|
|||||||||||
|
Restricted
cash
|
-
|
-
|
158
|
158
|
|||||||||||||||
|
Accounts
receivable, net
|
36,075
|
4,716
|
17
|
40,808
|
|||||||||||||||
|
Inventories
|
27,345
|
195
|
-
|
27,540
|
|||||||||||||||
|
Supplies,
prepaid items and other
|
4,349
|
887
|
4,467
|
9,703
|
|||||||||||||||
|
Deferred
rent expense
|
-
|
938
|
-
|
938
|
|||||||||||||||
|
Deferred
income taxes
|
-
|
-
|
4,675
|
4,675
|
|||||||||||||||
|
Total
current assets
|
67,943
|
6,736
|
9,993
|
84,672
|
|||||||||||||||
|
Property,
plant and equipment, net
|
62,482
|
2,393
|
32
|
64,907
|
|||||||||||||||
|
Investment
in and advances to affiliates
|
-
|
-
|
96,127
|
$
|
(96,127
|
)
|
-
|
||||||||||||
|
Receivable
from Parent
|
39,163
|
8,364
|
-
|
(47,527
|
)
|
-
|
|||||||||||||
|
Other
assets, net
|
5,271
|
25
|
2,783
|
8,079
|
|||||||||||||||
|
$
|
174,859
|
$
|
17,518
|
$
|
108,935
|
$
|
(143,654
|
)
|
$
|
157,658
|
|||||||||
|
Liabilities
and Stockholders' Equity
|
|||||||||||||||||||
|
Current
liabilities:
|
|||||||||||||||||||
|
Accounts
payable
|
$
|
22,560
|
$
|
2,663
|
$
|
390
|
$
|
25,613
|
|||||||||||
|
Short-term
financing
|
-
|
-
|
3,513
|
3,513
|
|||||||||||||||
|
Accrued
liabilities
|
11,592
|
2,279
|
1,178
|
15,049
|
|||||||||||||||
|
Due
to LSB and affiliates, net
|
-
|
-
|
1,480
|
1,480
|
|||||||||||||||
|
Current
portion of long-term debt
|
444
|
353
|
-
|
797
|
|||||||||||||||
|
Total
current liabilities
|
34,596
|
5,295
|
6,561
|
46,452
|
|||||||||||||||
|
Long-term
debt
|
6,353
|
853
|
87,538
|
94,744
|
|||||||||||||||
|
Deferred
income taxes
|
-
|
-
|
1,735
|
1,735
|
|||||||||||||||
|
Other
non-current liabilities
|
2,449
|
457
|
-
|
2,906
|
|||||||||||||||
|
Stockholders'
equity:
|
|||||||||||||||||||
|
Common
stock
|
66
|
1
|
1
|
$
|
(67
|
)
|
1
|
||||||||||||
|
Capital
in excess of par value
|
166,212
|
-
|
13,052
|
(166,212
|
)
|
13,052
|
|||||||||||||
|
Accumulated
other comprehensive loss
|
-
|
(1,280
|
)
|
-
|
(1,280
|
)
|
|||||||||||||
|
Due
from LSB and affiliates
|
-
|
-
|
(2,558
|
)
|
(2,558
|
)
|
|||||||||||||
|
Retained
earnings (deficit)
|
(34,817
|
)
|
12,192
|
2,606
|
22,625
|
2,606
|
|||||||||||||
|
Total
stockholders' equity
|
131,461
|
10,913
|
13,101
|
(143,654
|
)
|
11,821
|
|||||||||||||
|
$
|
174,859
|
$
|
17,518
|
$
|
108,935
|
$
|
(143,654
|
)
|
$
|
157,658
|
F-31
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
9.
Long-Term Debt (continued)
|
ThermaClime,
Inc.
Condensed
Consolidating Statement of Operations
Year
ended December 31, 2005 and 2004
(In
Thousands)
|
|
Combined Guarantor Subsidiaries |
Consolidated
Non-Guarantor Subsidiaries
|
ThermaClime, Inc. (Parent) |
Eliminations |
Consolidated |
2005
|
Net
sales
|
$
|
347,076
|
$
|
42,837
|
$
|
389,913
|
|||||||||||||
|
Cost
of sales
|
292,561
|
38,599
|
$
|
374
|
331,534
|
||||||||||||||
|
Gross
profit (loss)
|
54,515
|
4,238
|
(374
|
)
|
58,379
|
||||||||||||||
|
Selling,
general and administrative
|
44,039
|
405
|
2,177
|
$
|
(7
|
)
|
46,614
|
||||||||||||
|
Other
expense (income), net
|
(1,720
|
)
|
68
|
(12
|
)
|
7
|
(1,657
|
)
|
|||||||||||
|
Operating
income (loss)
|
12,196
|
3,765
|
(2,539
|
)
|
-
|
13,422
|
|||||||||||||
|
Interest
expense
|
10,482
|
44
|
10,019
|
(10,182
|
)
|
10,363
|
|||||||||||||
|
Non-operating
other expense (income), net
|
3,338
|
(241
|
)
|
(13,913
|
)
|
10,182
|
(634
|
)
|
|||||||||||
|
Income
(loss) from continuing operations before equity in earnings (losses)
of
subsidiaries and affiliate and income taxes
|
(1,624 |
) |
3,962 |
1,355 |
- |
3,693 |
|||||||||||||
|
Equity
in losses of subsidiaries
|
-
|
-
|
1,462
|
(1,462
|
)
|
-
|
|||||||||||||
|
Equity
in earnings of affiliate
|
745
|
-
|
-
|
745
|
|||||||||||||||
|
Benefit
(provision) for income taxes
|
343
|
(1,545
|
)
|
(809
|
)
|
(2,011
|
)
|
||||||||||||
|
Income
(loss) from continuing operations
|
(536
|
)
|
2,417
|
2,008
|
(1,462
|
)
|
2,427
|
||||||||||||
|
Net
loss from discontinued operations
|
(419
|
)
|
-
|
-
|
(419
|
)
|
|||||||||||||
|
Net
income (loss)
|
$
|
(955
|
)
|
$
|
2,417
|
$
|
2,008
|
$
|
(1,462
|
)
|
$
|
2,008
|
2004
|
Net
sales
|
$
|
307,501
|
$
|
45,609
|
$
|
353,110
|
|||||||||||||
|
Cost
of sales
|
265,237
|
41,508
|
$
|
669
|
307,414
|
||||||||||||||
|
Gross
profit (loss)
|
42,264
|
4,101
|
(669
|
)
|
45,696
|
||||||||||||||
|
Selling,
general and administrative
|
38,711
|
412
|
2,475
|
$
|
(7
|
)
|
41,591
|
||||||||||||
|
Other
expense (income), net
|
476
|
108
|
(272
|
)
|
7
|
319
|
|||||||||||||
|
Operating
income (loss)
|
3,077
|
3,581
|
(2,872
|
)
|
-
|
3,786
|
|||||||||||||
|
Interest
expense
|
10,742
|
34
|
5,970
|
(10,373
|
)
|
6,373
|
|||||||||||||
|
Gain
extinguishment of debt
|
-
|
-
|
(4,400
|
)
|
(4,400
|
)
|
|||||||||||||
|
Non-operating
other income, net
|
(239
|
)
|
(18
|
)
|
(10,379
|
)
|
10,373
|
(263
|
)
|
||||||||||
|
Income
(loss) from operations before equity
in earnings (losses) of subsidiaries and
affiliate and income taxes
|
(7,426
|
)
|
3,565
|
5,937
|
-
|
2,076
|
|||||||||||||
|
Equity
in losses of subsidiaries
|
-
|
-
|
(1,947
|
)
|
1,947
|
-
|
|||||||||||||
|
Equity
in earnings of affiliate
|
668
|
-
|
-
|
668
|
|||||||||||||||
|
Benefit
(provision) for income taxes
|
2,636
|
(1,390
|
)
|
(2,571
|
)
|
(1,325
|
)
|
||||||||||||
|
Net
income (loss)
|
$
|
(4,122
|
)
|
$
|
2,175
|
$
|
1,419
|
$
|
1,947
|
$
|
1,419
|
F-32
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
9.
Long-Term Debt (continued)
|
ThermaClime,
Inc.
Condensed
Consolidating Statement of Operations
Year
ended December 31, 2003
(In
Thousands)
|
|
Combined
Guarantor Subsidiaries
|
Consolidated
Non-Guarantor
Subsidiaries
|
ThermaClime,
Inc. (Parent)
|
Eliminations
|
Consolidated
|
|
Net
sales
|
$
|
269,253
|
$
|
42,947
|
$
|
312,200
|
|||||||||||||
|
Cost
of sales
|
228,927
|
38,829
|
$
|
717
|
$
|
(5
|
)
|
268,468
|
|||||||||||
|
Gross
profit (loss)
|
40,326
|
4,118
|
(717
|
)
|
5
|
43,732
|
|||||||||||||
|
Selling,
general and administrative
|
34,280
|
437
|
2,171
|
(7
|
)
|
36,881
|
|||||||||||||
|
Other
expense (income), net
|
18
|
87
|
(101
|
)
|
12
|
16
|
|||||||||||||
|
Operating
income (loss)
|
6,028
|
3,594
|
(2,787
|
)
|
-
|
6,835
|
|||||||||||||
|
Interest
expense
|
10,993
|
39
|
5,226
|
(10,454
|
)
|
5,804
|
|||||||||||||
|
Non-operating
other income, net
|
-
|
(9
|
)
|
(11,805
|
)
|
10,454
|
(1,360
|
)
|
|||||||||||
|
Income
(loss) from operations before equity
in earnings (losses) of subsidiaries and
affiliate and income taxes
|
(4,965
|
)
|
3,564
|
3,792
|
-
|
2,391
|
|||||||||||||
|
Equity
in losses of subsidiaries
|
-
|
-
|
(843
|
)
|
843
|
-
|
|||||||||||||
|
Equity
in earnings of affiliate
|
19
|
-
|
-
|
19
|
|||||||||||||||
|
Benefit
(provision) for income taxes
|
1,929
|
(1,390
|
)
|
(1,489
|
)
|
(950
|
)
|
||||||||||||
|
Net
income (loss)
|
$
|
(3,017
|
)
|
$
|
2,174
|
$
|
1,460
|
$
|
843
|
$
|
1,460
|
F-33
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
9.
Long-Term Debt (continued)
|
ThermaClime,
Inc.
Condensed
Consolidating Statement of Cash Flows
Year
ended December 31, 2005
(In
Thousands)
|
|
Combined Guarantor Subsidiaries |
Consolidated
Non-Guarantor Subsidiaries
|
ThermaClime,
Inc. (Parent)
|
Eliminations |
Consolidated |
|
Cash
flows provided (used) by continuing operating activities
|
$
|
(8,182
|
)
|
$
|
10,614
|
$
|
4,684
|
$
|
7,116
|
||||||||||
|
Cash
flows from investing activities:
|
|||||||||||||||||||
|
Capital
expenditures
|
(10,603
|
)
|
(926
|
)
|
(47
|
)
|
(11,576
|
)
|
|||||||||||
|
Proceeds
from property insurance recoveries
|
2,888
|
-
|
-
|
2,888
|
|||||||||||||||
|
Proceeds
from sales of property and equipment
|
124
|
-
|
-
|
124
|
|||||||||||||||
|
Proceeds
from of restricted cash
|
-
|
-
|
158
|
158
|
|||||||||||||||
|
Other
assets
|
(61
|
)
|
(1
|
)
|
(473
|
)
|
(535
|
)
|
|||||||||||
|
Net
cash used by investing activities
|
(7,652
|
)
|
(927
|
)
|
(362
|
)
|
(8,941
|
)
|
|||||||||||
|
Cash
flows from financing activities:
|
|||||||||||||||||||
|
Proceeds
from revolving debt
|
245
|
-
|
363,424
|
363,669
|
|||||||||||||||
|
Payments
on revolving debt
|
(28
|
)
|
-
|
(359,380
|
)
|
(359,408
|
)
|
||||||||||||
|
Payments
on long-term debt
|
(278
|
)
|
(353
|
)
|
-
|
(631
|
)
|
||||||||||||
|
Proceeds
from short-term financing
|
129
|
-
|
4,537
|
4,666
|
|||||||||||||||
|
Payments
on short-term financing
|
(122
|
)
|
-
|
(5,406
|
)
|
(5,528
|
)
|
||||||||||||
|
Net
change in due to/from LSB and affiliates
|
-
|
-
|
280
|
280
|
|||||||||||||||
|
Advances
to/from affiliates
|
15,954
|
(9,334
|
)
|
(6,620
|
)
|
-
|
|||||||||||||
|
Net
cash provided (used) by financing activities
|
15,900
|
(9,687
|
)
|
(3,165
|
)
|
3,048
|
|||||||||||||
|
Cash
flows of discontinued operations:
|
|||||||||||||||||||
|
Operating
cash flows
|
(39
|
)
|
-
|
-
|
(39
|
)
|
|||||||||||||
|
Net
increase in cash from all activities
|
27
|
-
|
1,157
|
1,184
|
|||||||||||||||
|
Cash
at the beginning of year
|
174
|
-
|
676
|
850
|
|||||||||||||||
|
Cash
at the end of year
|
$
|
201
|
$
|
-
|
$
|
1,833
|
$
|
2,034
|
|||||||||||
F-34
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
9.
Long-Term Debt (continued)
|
ThermaClime,
Inc.
Condensed
Consolidating Statement of Cash Flows
Year
ended December 31, 2004
(In
Thousands)
|
|
Combined
Guarantor Subsidiaries
|
Consolidated
Non-
Guarantor Subsidiaries
|
ThermaClime,
Inc. (Parent)
|
Eliminations
|
Consolidated
|
|
Cash
flows provided (used) by operating activities
|
$
|
(587
|
)
|
$
|
(3,739
|
)
|
$
|
3,549
|
$
|
(777
|
)
|
||||||||
|
Cash
flows from investing activities:
|
|||||||||||||||||||
|
Capital
expenditures
|
(8,183
|
)
|
(742
|
)
|
(3
|
)
|
(8,928
|
)
|
|||||||||||
|
Proceeds
from sales of property and equipment
|
862
|
-
|
862
|
||||||||||||||||
|
Payment
of restricted cash
|
-
|
-
|
(158
|
)
|
(158
|
)
|
|||||||||||||
|
Other
assets
|
(418
|
)
|
4
|
(156
|
)
|
(570
|
)
|
||||||||||||
|
Net
cash used by investing activities
|
(7,739
|
)
|
(738
|
)
|
(317
|
)
|
(8,794
|
)
|
|||||||||||
|
Cash
flows from financing activities:
|
|||||||||||||||||||
|
Proceeds
from revolving debt
|
1,791
|
-
|
328,890
|
330,681
|
|||||||||||||||
|
Payments
on revolving debt
|
-
|
-
|
(327,219
|
)
|
(327,219
|
)
|
|||||||||||||
|
Payments
on Financing Agreement
|
-
|
-
|
(38,531
|
)
|
(38,531
|
)
|
|||||||||||||
|
Payments
on long-term debt
|
(909
|
)
|
(353
|
)
|
(601
|
)
|
(1,863
|
)
|
|||||||||||
|
Acquisition
of 10 ¾% Senior Unsecured Notes
|
-
|
-
|
(5,000
|
)
|
(5,000
|
)
|
|||||||||||||
|
Proceeds
from Senior Secured Loan, net of fees
|
-
|
-
|
47,708
|
47,708
|
|||||||||||||||
|
Proceeds
from short-term financing
|
-
|
-
|
5,302
|
5,302
|
|||||||||||||||
|
Payments
on short-term financing
|
-
|
-
|
(4,805
|
)
|
(4,805
|
)
|
|||||||||||||
|
Net
change in due to/from LSB and affiliates
|
-
|
-
|
1,228
|
1,228
|
|||||||||||||||
|
Advances
to/from affiliates
|
7,410
|
4,830
|
(12,240
|
)
|
-
|
||||||||||||||
|
Net
cash provided (used) by financing activities
|
8,292
|
4,477
|
(5,268
|
)
|
7,501
|
||||||||||||||
|
Net
decrease in cash from all activities
|
(34
|
)
|
-
|
(2,036
|
)
|
(2,070
|
)
|
||||||||||||
|
Cash
at the beginning of year
|
208
|
-
|
2,712
|
2,920
|
|||||||||||||||
|
Cash
at the end of year
|
$
|
174
|
$
|
-
|
$
|
676
|
$
|
850
|
F-35
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
9.
Long-Term Debt (continued)
|
ThermaClime,
Inc.
Condensed
Consolidating Statement of Cash Flows
Year
ended December 31, 2003
(In
Thousands)
|
|
Combined
Guarantor Subsidiaries
|
Consolidated
Non-
Guarantor Subsidiaries
|
ThermaClime,
Inc. (Parent)
|
Eliminations
|
Consolidated
|
|
Cash
flows provided by operating activities
|
$
|
3,435
|
$
|
3,524
|
$
|
5,228
|
$
|
12,187
|
||||||||||||||||||||||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||||||||||||||||||||||||
|
Capital
expenditures
|
(6,988
|
)
|
(162
|
)
|
(91
|
)
|
(7,241
|
)
|
||||||||||||||||||||||||||||||
|
Proceeds
from sales of property and equipment
|
81
|
-
|
-
|
81
|
||||||||||||||||||||||||||||||||||
|
Proceeds
from restricted cash held in escrow
|
-
|
-
|
1,838
|
1,838
|
||||||||||||||||||||||||||||||||||
|
Other
assets
|
48
|
-
|
50
|
98
|
||||||||||||||||||||||||||||||||||
|
Net
cash provided (used) by investing activities
|
(6,859
|
)
|
(162
|
)
|
1,797
|
(5,224
|
)
|
|||||||||||||||||||||||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||||||||||||||||||||||||
|
Proceeds
from revolving debt
|
353
|
-
|
277,760
|
278,113
|
||||||||||||||||||||||||||||||||||
|
Payments
on revolving debt
|
-
|
-
|
(281,295
|
)
|
(281,295
|
)
|
||||||||||||||||||||||||||||||||
|
Payments
on Financing Agreement
|
-
|
-
|
(3,375
|
)
|
(3,375
|
)
|
||||||||||||||||||||||||||||||||
|
Payments
on long-term debt
|
(694
|
)
|
(353
|
)
|
(198
|
)
|
(1,245
|
)
|
||||||||||||||||||||||||||||||
|
Long-term
and other borrowings, net of fees
|
-
|
-
|
800
|
800
|
||||||||||||||||||||||||||||||||||
|
Proceeds
from short-term financing
|
-
|
-
|
5,071
|
5,071
|
||||||||||||||||||||||||||||||||||
|
Payments
on short-term financing
|
-
|
-
|
(4,848
|
)
|
(4,848
|
)
|
||||||||||||||||||||||||||||||||
|
Net
change in due to/from LSB and affiliates
|
-
|
-
|
1,376
|
1,376
|
||||||||||||||||||||||||||||||||||
|
Advances
to/from affiliates
|
3,563
|
(3,009
|
)
|
(554
|
)
|
-
|
||||||||||||||||||||||||||||||||
|
Net
cash provided (used) by financing activities
|
3,222
|
(3,362
|
)
|
(5,263
|
)
|
(5,403
|
)
|
|||||||||||||||||||||||||||||||
|
Net
increase (decrease) in cash from all activities
|
(202
|
)
|
-
|
1,762
|
1,560
|
|||||||||||||||||||||||||||||||||
|
Cash
at the beginning of year
|
410
|
-
|
950
|
1,360
|
||||||||||||||||||||||||||||||||||
|
Cash
at the end of year
|
$
|
208
|
$
|
-
|
$
|
2,712
|
$
|
2,920
|
||||||||||||||||||||||||||||||
F-36
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
9.
Long-Term Debt (continued)
(D)
Amounts include capital lease obligations of $1,200,000 and $341,000 at December
31, 2005 and 2004, respectively. See Note 11 - Commitments and
Contingencies.
Maturities
of long-term debt for each of the five years after December 31, 2005 are as
follows (in thousands):
|
2006
|
$
|
3,348
|
|||
|
2007
|
19,485
|
||||
|
2008
|
4,255
|
||||
|
2009
|
81,053
|
||||
|
2010
|
999
|
||||
|
Thereafter
|
2,984
|
||||
|
$
|
112,124
|
On
March
14, 2006 we sold $18 million aggregate principal amount of our 7% Convertible
Senior Subordinated Debentures due 2011. See Note 21 - Subsequent
Events.
10.
Income Taxes
Temporary
differences and carryforwards which gave rise to deferred tax assets and
liabilities at December 31, 2005 and 2004 include:
|
2005
|
2004
|
|
(In
Thousands)
|
|
Deferred
tax assets
|
||||||
|
Amounts
not deductible for tax purposes:
|
||||||
|
Allowance
for doubtful accounts
|
$
|
1,461
|
$
|
1,367
|
||
|
Asset
impairment
|
781
|
837
|
||||
|
Inventory
reserves
|
945
|
749
|
||||
|
Deferred
compensation
|
1,510
|
780
|
||||
|
Other
accrued liabilities
|
1,600
|
1,484
|
||||
|
Other
|
-
|
397
|
||||
|
Capitalization
of certain costs as inventory for tax purposes
|
1,434
|
1,151
|
||||
|
Net
operating loss carryforwards
|
26,129
|
27,983
|
||||
|
Alternative
minimum tax credit carryforwards
|
793
|
793
|
||||
|
Total
deferred tax assets
|
34,653
|
35,541
|
||||
|
Less
valuation allowance on deferred tax assets
|
26,146
|
27,928
|
||||
|
Net
deferred tax assets
|
$
|
8,507
|
$
|
7,613
|
||
|
Deferred
tax liabilities
|
||||||
|
Accelerated
depreciation used for tax purposes
|
$
|
8,042
|
$
|
7,031
|
||
|
Excess
of book gain over tax gain resulting from sale of land
|
391
|
434
|
||||
|
Other
|
74
|
148
|
||||
|
Total
deferred tax liabilities
|
$
|
8,507
|
$
|
7,613
|
F-37
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
10.
Income Taxes (continued)
We
are
able to realize deferred tax assets up to an amount equal to the future
reversals of existing taxable temporary differences. The taxable temporary
differences will turn around in the loss carryforward period as the differences
reverse. Other differences will turn around as the assets are disposed in the
normal course of business.
The
differences between the amount of the provision for income taxes (consisting
solely of federal alternative minimum tax) and the amount which would result
from the application of the federal statutory rate to “Income from continuing
operations before provision for income taxes and cumulative effect of accounting
change” for each of the three years in the period ended December 31, 2005 are
detailed below:
|
2005
|
2004
|
2003
|
|
(In
Thousands)
|
|
Provision
for income taxes at federal statutory rate
|
$
|
2,097
|
$
|
434
|
$
|
1,311
|
|||||
|
Changes
in the valuation allowance related to deferred tax assets, net of
rate
differential
|
(1,782
|
)
|
(123
|
)
|
(581
|
)
|
|||||
|
Effect
of discontinued operations and other on valuation
allowance
|
(249
|
)
|
(350
|
)
|
(792
|
)
|
|||||
|
Federal
alternative minimum tax
|
118
|
-
|
-
|
||||||||
|
Permanent
differences
|
(66
|
)
|
39
|
62
|
|||||||
|
Provision
for income taxes
|
$
|
118
|
$
|
-
|
$
|
-
|
At
December 31, 2005 we have regular-tax net operating loss (“NOL”) carryforwards
of approximately $67 million ($47.8 million alternative minimum tax NOLs) that
begin expiring in 2009.
11.
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. Leased assets meeting capital lease criteria have been
capitalized and the present value of the related lease payments are included
in
long-term debt (See Notes 6 and 9). Future minimum payments on leases, including
the Nitric Acid Plant lease (“Baytown Lease”) discussed below, with initial or
remaining terms of one year or more at December 31, 2005, are as follows (in
thousands):
F-38
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
11.
Commitments and Contingencies (continued)
|
Operating
Leases
|
|||||||
|
Capital
Leases
|
Baytown
Lease
|
Others
|
Total
|
||||
|
2006
|
$
|
566
|
$
|
8,175
|
$
|
2,702
|
$
|
11,443
|
|||||||
|
2007
|
383
|
9,227
|
1,883
|
11,493
|
|||||||||||
|
2008
|
382
|
11,173
|
1,237
|
12,792
|
|||||||||||
|
2009
|
11
|
4,882
|
876
|
5,769
|
|||||||||||
|
2010
|
-
|
-
|
687
|
687
|
|||||||||||
|
Thereafter
|
-
|
-
|
3,504
|
3,504
|
|||||||||||
|
Total
minimum lease payments
|
1,342
|
$
|
33,457
|
$
|
10,889
|
$
|
45,688
|
||||||||
|
Less
amounts representing interest
|
142
|
||||||||||||||
|
Present
value of minimum lease payments
included in long-term debt
|
$
|
1,200
|
Rent
expense under all operating lease agreements, including month-to-month leases,
was $12,205,000 in 2005, $12,313,000 in 2004 and $12,022,000 in 2003. Renewal
options are available
under certain of the lease agreements for various periods at approximately
the
existing annual rental amounts.
Nitric
Acid Plant
Our
wholly owned subsidiary, EDNC operates a nitric acid plant (the "Baytown Plant")
at a Baytown, Texas chemical facility in accordance with a series of agreements
with Bayer Corporation ("Bayer") (collectively, the "Bayer Agreement"). Under
the terms of the Bayer Agreement, EDNC is leasing the Baytown Plant pursuant
to
a leveraged lease (the “Baytown Lease”) from an unrelated third party with an
initial lease term of ten years. Upon expiration of the initial ten-year term,
the Bayer Agreement may be renewed for up to six renewal terms of five years
each; however, prior to each renewal period, either party to the Bayer Agreement
may opt against renewal. The total amount of future minimum payments due under
the Baytown Lease is being charged to rent expense on the straight-line method
over the initial ten-year term of the lease. The difference between rent expense
recorded and the amount paid is credited or charged to deferred rent expense
which is included in supplies, prepaid items and other and accrued liabilities
in the accompanying consolidated balance sheets. The Company and its
subsidiaries have not provided a residual value guarantee on the value of the
equipment related to the Baytown Lease and Bayer has the unilateral right to
determine if the fixed-price purchase option is exercised in 2009. If Bayer
decides to exercise the purchase option, they must also fund it. EDNC's ability
to perform on its lease commitments is contingent upon Bayer's performance
under
the Bayer Agreement. One of our subsidiaries has guaranteed the performance
of
EDNC's obligations under the Bayer Agreement.
F-39
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
11.
Commitments and Contingencies (continued)
Purchase
and Sales Commitments
Under
an
agreement, as amended, with its principal supplier of anhydrous ammonia, the
El
Dorado Chemical Company (“EDC”) will purchase substantially all of its anhydrous
ammonia requirements using a market price-based formula plus transportation
to
the El Dorado Facility through December 31, 2006.
In
1995,
one of our subsidiaries entered into a product supply agreement with a third
party whereby the subsidiary is required to make monthly facility fee and other
payments which aggregate $81,300. In return for this payment, the subsidiary
is
entitled to certain quantities of compressed oxygen produced by the third party.
Except in circumstances as defined by the agreement, the monthly payment is
payable regardless of the quantity of compressed oxygen used by the subsidiary.
The term of this agreement is for fifteen years; however, the subsidiary can
currently terminate the agreement without cause at a cost of approximately
$4.5
million. Based on the subsidiary'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
$1,035,000, $988,000, and $960,000 in 2005, 2004, and 2003,
respectively.
At
December 31, 2005 our Climate Control Business had purchase commitments under
exchange-traded futures for 600,000 pounds of copper through December 2006
at a
weighted average cost of $1.37 per pound and a weighted average market value
of
$1.98 per pound.
At
December 31, 2005, we also had standby letters of credit outstanding of $2.1
million of which $1.3 million related to our Climate Control Business.
At
December 31, 2005, we had deposits from customers of $1.9 million for forward
sales commitments including $1.1 million with firm sales prices of large custom
air handlers for deliveries in 2007 relating to our Climate Control Business.
Effective
October 1, 2001, our subsidiary, Cherokee Nitrogen Holding, Inc. ("CNH") entered
into a long term 83% ammonium nitrate solution supply agreement with a third
party ("Solution Agreement").
Under the Solution Agreement, CNH will supply to the third party its
requirements of 83% ammonium nitrate solution from CNH's Cherokee Facility
for a
term through at least September 2006 on a cost-plus basis. This customer has
orally advised us that they may be reducing the amount of product that they
take
from our subsidiary.
On
November 1, 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, EDC will supply from the El Dorado Facility approximately
190,000 tons of industrial grade ammonium nitrate per year, which is
approximately 90% of the plant's manufacturing capacity for that product, for
a
term through at least March 2008. EDC and this customer have agreed in principal
to a new five year agreement beginning January 1, 2006, with the new agreement
to
F-40
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
11.
Commitments and Contingencies (continued)
provide
for certain price increases and an increase in the amount of product that this
customer will take from EDC each year and renewal provision thereafter. This
new
agreement is subject to finalization of a definitive agreement.
Employment
and Severance Agreements
We
have
employment and severance agreements with several of our officers. The agreements
provide for annual base salaries, bonuses and other benefits commonly found
in
such agreements. In the event of termination of employment due to a change
in
control (as defined in the agreements), the agreements provide for payments
aggregating $7.8 million at December 31, 2005.
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 pollutants or other substances 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. Our Chemical Business could be required to make significant additional
site or operational modifications involving substantial expenditures. We have
a
legal obligation to monitor certain discharge water outlets at our Chemical
Business facilities should we discontinue the operations of a facility. We
do
not believe that the annual costs of the required monitoring activities would
be
significant and as we currently have no plans to discontinue the use of the
facilities and the remaining life of either facility is indeterminable, an
asset
retirement liability has not been recognized. However, we will continue to
review this obligation and record a liability when a reasonable estimate of
the
fair value can be made. Currently, there is insufficient information to estimate
the fair value of the asset retirement obligation.
F-41
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
11.
Commitments and Contingencies (continued)
FASB
Interpretation No. 47, “Accounting
for Conditional Asset Retirement Obligations”
requires
recognition of a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
The
Company has certain facilities that contain asbestos insulation around certain
piping and heated surfaces. The asbestos insulation is in adequate condition
to
prevent leakage and can remain in place as long as the facility is operated
or
remains assembled. The Company plans to maintain the facilities in an adequate
condition to prevent leakage through its standard repair and maintenance
activities. The Company has not recorded a liability relating to the asbestos
insulation, as management believes that it is not possible to reasonably
estimate a settlement date for asbestos insulation removal because the
facilities have an indeterminate life.
1. Discharge
Water Matters
The
El
Dorado Facility generates process wastewater. The process water discharge and
storm-water run off are governed by a state National Pollutant Discharge
Elimination System (“NPDES”) water discharge permit issued by the Arkansas
Department of Environmental Quality (“ADEQ”), which permit is to be renewed
every five years. The ADEQ issued to EDC a new revised NPDES water discharge
permit in 2004, and EDC has until June 2007 to meet the compliance deadline
for
the more restrictive limits under the recently issued NPDES permit. In order
to
meet EDC’s effluent limits under the permit, EDC had planned to utilize a
pipeline to be built by the City of El Dorado, Arkansas (the “City”).
The
City
council approved the joint pipeline, but construction of the pipeline by the
City is subject to the City receiving a permit from the ADEQ. The ADEQ has
not
issued the necessary permit to discharge wastewater into the pipeline and,
as a
result, this has caused a delay of unknown duration in construction of the
pipeline. This delay may impact our ability to meet our compliance schedule
under the NPDES permit. As a result, EDC has proposed to the ADEQ an extension
of its compliance deadlines under its NPDES permit but there are no assurances
that the ADEQ will grant such extension. If the City is not able to build its
pipeline or can build it in a timely manner, EDC intends to discharge its
wastewater through the City’s sewer system subject to obtaining a sewer
discharge permit from the City and EDC building a pipeline to the City’s sewer
system in a timely manner. The estimated remaining capital expenditures to
meet
the requirements of the NPDES permit ranges from $.5 million to $3.3 million
plus approximately $2 million for our pro-rata portion of pipeline engineering
and construction costs should the City build a pipeline.
In
addition, EDC has entered into a CAO that recognizes the presence of nitrate
contamination in the shallow groundwater at the El Dorado Facility. A new CAO
is
being completed to address the shallow groundwater contamination, which will
include an evaluation of the current conditions and remediation based upon
a
risk assessment. 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. There are no known users of this shallow
F-42
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
11.
Commitments and Contingencies (continued)
groundwater
in the area, and preliminary risk assessments have not identified any public
health risk that would require remediation. During 2005, we spent $325,000
relating to the dredging of our neutralization pond to increase its efficiency.
At December 31, 2005 the estimated cost to complete the requested investigation
and risk assessment is approximately $33,000 which liability has been recorded.
This amount is not discounted to its present value. 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, it is reasonably possible that a change in estimate will occur in
the
near term.
2. Air
Matters
Under
the
terms of a consent administrative order (“AirCAO”), which became effective in
February 2004 resolving certain air regulatory alleged violations associated
with EDC’s sulfuric acid plant and certain other alleged air emission
violations, EDC is required to implement additional air emission controls at
the
El Dorado Facility no later than six years from the effective date of the
AirCAO. The ultimate cost of any technology changes required cannot presently
be
determined but is believed to cost between $1.5 million to $3 million of capital
expenditures, depending on the technology changes as may be required.
3. Other
Environmental Matters
In
April
2002, Slurry Explosive Corporation (“Slurry”), later renamed Chemex I Corp., a
subsidiary within our Chemical Business, entered into a Consent Administrative
Order (“Slurry Consent Order”) with the Kansas Department of Health and
Environment (“KDHE”), regarding Slurry’s Hallowell, Kansas manufacturing
facility (“Hallowell Facility”). The Slurry Consent Order addressed the release
of contaminants from the facility into the soils and groundwater and surface
water at the Hallowell Facility. There are no known users of the groundwater
in
the area. The adjacent strip pit is used for fishing. Under the terms of the
Slurry Consent Order, Slurry is required to, among other things, submit an
environmental assessment work plan to the KDHE for review and approval, and
agree with the KDHE as to any required corrective actions to be performed at
the
Hallowell Facility.
In
connection with the sale of substantially all of the operating assets of Slurry
and Universal Tech Corporation (“UTeC”) in December 2002, which was accounted
for as discontinued operations, both subsidiaries within our Chemical Business,
UTeC leased the Hallowell Facility to the buyer under a triple net long-term
lease agreement. However, Slurry retained the obligation to be responsible
for,
and perform the activities under, the Slurry Consent Order. In addition, certain
of our subsidiaries agreed to indemnify the buyer of such assets for these
environmental matters. Slurry placed prior owners (“Chevron”) of the Hallowell
Facility on notice of their responsibility for contribution towards the costs
to
investigate and remediate this site. Representatives of Chevron have agreed
to
pay one-half of the costs of certain interim remediation of the
site.
F-43
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
11.
Commitments and Contingencies (continued)
During
2005, representatives of Slurry and Chevron met with the KDHE and proposed
to
remove the bulk of contaminated soil at the Hallowell site, which was orally
agreed to by the KDHE subject to approval of a written work plan submitted
to
the KDHE. As a result of these meetings, we recorded provisions totaling
$644,000 for our share of these estimated costs. At December 31, 2005, our
liability (which is included in other current and noncurrent accrued
liabilities) in connection with this remediation matter is $1,458,000 and our
receivable (which is included in accounts receivable and other assets) from
Chevron for one-half of these costs is $730,000. 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. For 2005, our
share
of these expenses are classified as discontinued operations (in accordance
with
SFAS 144) in the accompanying consolidated statement of income (there are no
income tax benefits related to these expenses).
It
is
expected that this soil remediation will occur over the next two
years.
Grand
Jury Investigation - Slurry - Hallowell Facility
The
U.S.
Bureau of Alcohol, Tobacco, Firearms and Explosives (“ATF”) previously conducted
an investigation at Slurry. In August 2003, we learned that a federal grand
jury
for the District of Kansas was investigating Slurry and certain of its former
employees relating to the alleged violations of explosive storage and related
regulations at Slurry’s Hallowell Facility. Active operations at the Hallowell
Facility were discontinued in February 2002 after its license to possess
explosives was revoked by the ATF. In response to the Assistant U.S. Attorney’s
suggestion, our counsel sent a letter to the U.S. Attorney offering to plead
guilty to one count of a misdemeanor violation of explosive storage regulations
with no monetary fine or forfeiture. The U.S. Attorney has not yet responded
to
our counsel’s offer. As of December 31, 2005, no liability has been recorded for
any possible monetary fine or forfeiture because the decision from the U.S.
Attorney is currently unknown. In the meantime, the U.S. government has
continued to subpoena records for the grand jury and to examine witnesses in
connection with this matter.
B.
Other Pending, Threatened or Settled Litigation
1. Climate
Control Business
Trison
Construction, Inc. (“Trison”), a subsidiary within our Climate Control Business,
is involved in a lawsuit brought against it by Trade Mechanical Construction,
Inc. (“Trade”). The lawsuit is styled Trade Mechanical Contractors, Inc., et al.
v. Trison Construction, Inc., and is pending in the District Court, State of
Oklahoma, Pontotoc County. Trison entered into a contract with Johnson Controls,
Inc. (“JCI”) to design, remove and install selected components on existing air
conditioning systems at a project in Oklahoma (“Project”). In connection with
the Project, Trison entered into a subcontract with Trade to provide certain
services for Trison relating to the Project and disputes arose over the
performance of the subcontract. During the
F-44
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
11.
Commitments and Contingencies (continued)
first
quarter of 2006, this lawsuit was settled by Trison agreeing to pay $125,000
to
Trade which was accrued at December 31, 2005.
In
connection with the Project, JCI alleged that Trison’s work on the Project
contained certain defects and purported inadequacies and claimed that Trison
defaulted on its contract with JCI. JCI made demand under Trison’s performance
bond seeking recovery of costs alleged to have been required to correct and
complete Trison’s work under its contract with JCI. In June 2004, JCI filed for
arbitration with the American Arbitration Association claiming damages in the
amount of approximately $1,700,000. Trison denies that its work was defective
or
otherwise incomplete and filed a counterclaim against JCI in the arbitration.
On
January 16, 2006, the arbitrator issued an interim award in this matter, as
follows:
| · |
Denying
JCI’s claims for breach of contract in their
entirety;
|
| · |
Denying
JCI’s claims for breach of the performance bond and bad faith against
Trison’s bonding company;
|
| · |
Holding
that JCI’s claims for termination for default by Trison was not
sustainable and, therefore, Trison’s termination was a termination for
convenience as required under the subcontract between Trison and
JCI;
|
| · |
Holding
that JCI is not entitled to any damages from Trison or its bonding
company; and
|
| · |
Holding
that Trison and its bonding company are the prevailing parties and
under
the subcontract are entitled to recover from JCI all reasonable costs
and
expenses including attorney fees incurred in this proceeding, the
amount
of which is to be determined at a further
hearing.
|
JCI
has
reasserted a motion to disqualify the arbitrator based on alleged bias in the
arbitration proceedings and to set aside the interim award. JCI’s original
motion alleging arbitrator bias was denied by the American Arbitration
Association.
We
have
spent approximately $1.3 million in attorneys’ fees and expenses in connection
with this arbitration as of December 31, 2005. There are no assurances that
we
will recover the total amount of fees and expenses that we have incurred in
connection with this matter.
There
was
no accounting recognition for this interim award issued on January 16, 2006,
as
of December 31, 2005. When the final award is realized, it will be recorded
in
the financial statements at that time.
The
Company and one of our subsidiaries within the Climate Control Business,
ClimaCool Corp., have been sued, together with two unrelated companies, in
the
United States District Court for the Northern District of Illinois, Eastern
Division, in a case styled Multistack
LLC v. ClimaCool Corp., et al.,
alleging that we, ClimaCool and others infringed on a patent in connection
with
certain modular air chillers that ClimaCool purchased from a French air
F-45
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
11.
Commitments and Contingencies (continued)
conditioning
company for resale in the United States. During the first quarter of 2006,
the
plaintiff dismissed this lawsuit without prejudice.
2.
Chemical Business
Cherokee
Nitrogen, Inc. (“Cherokee”), a subsidiary within our Chemical Business, has been
sued for an undisclosed amount of monies based on a claim that Cherokee breached
an agreement by overcharging the plaintiff, Nelson Brothers, LLC, (“Nelson”) for
ammonium nitrate as a result of inflated prices for natural gas used to
manufacture the ammonium nitrate. The suit is Nelson
Brothers, LLC v. Cherokee Nitrogen v. Dynegy Marketing,
and is
pending in Alabama state court in Colbert County. Cherokee has filed a
third-party complaint against Dynegy and a subsidiary (“Dynegy”) asserting that
Dynegy was the party responsible for fraudulently causing artificial natural
gas
prices to exist and seeking an undisclosed amount from Dynegy, including any
amounts which may be recovered by Nelson. Dynegy has filed a counterclaim
against Cherokee for $600,000 allegedly owed on account, which has been recorded
by Cherokee. Although there is no assurance, counsel for Cherokee has advised
us
that, at this time, they believe that Cherokee will recover monies from Dynegy
and the likelihood of Dynegy recovering from Cherokee is remote. Our counsel
also has advised us that they believe that the likelihood of Nelson recovering
monies from Cherokee over and above any monies which may be recovered from
Dynegy by Cherokee is remote.
Cherokee
has filed suit against Meecorp Capital Markets, LLC (“Meecorp”) and Lending
Solutions, Inc. in Alabama State Court, in Etowah County, Alabama, for recovery
of actual damages plus punitive damages, relating to a loan transaction. Meecorp
counterclaimed for the balance of an alleged commitment fee of $100,000, an
alleged equity kicker of $200,000 and $3,420,000 for loss of opportunity.
Cherokee is vigorously pursuing this matter, and counsel for Cherokee has
advised that they believe there is a substantial likelihood Cherokee will
recover from the defendants and that the likelihood of Meecorp recovering from
Cherokee is remote.
3. Other
Zeller
Pension Plan
In
February 2000, the Company’s Board of Directors authorized management to proceed
with the sale of the automotive products
business, since the automotive products business was no longer a “core business”
of the Company. In May 2000, the Company sold substantially all of its assets
in
its automotive products business. After the authorization by the board, but
prior to the sale, the automotive products business purchased the assets and
assumed certain liabilities of Zeller Corporation (“Zeller”). The liabilities of
Zeller assumed by the automotive products business included Zeller’s pension
plan, which is not a multi-employer pension plan. In June 2003, the principal
owner (“Owner”) of the buyer of the automotive products business was contacted
by a representative of the Pension Benefit Guaranty Corporation (“PBGC”)
regarding the plan. The Owner has been informed by the PBGC of a possible
under-funding of the plan and
F-46
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
11.
Commitments and Contingencies (continued)
a
possible takeover of the plan by the PBGC. The Owner has notified the Company
of
these events. The Company has also been contacted by the PBGC and has been
advised that the PBGC considers the Company to be potentially liable for the
under-funding of the Zeller Plan in the event that the plan is taken over by
the
PBGC and has alleged that the under-funding is approximately $.6 million. The
Company has been advised by ERISA counsel that, based upon numerous
representations made by the Company and the assumption that the trier of fact
determining the Company’s obligations with respect to the plan would find that:
we disposed, in May
4,
2000 of interest in the automotive products business including the Zeller assets
and business pursuant to a bona fide purchase agreement under the terms of
which
the purchaser assumed all obligations with respect to the operation, including
funding of the Zeller plan, the purpose of the sale of the automotive products
business did not include an attempt to evade liability for funding the Zeller
plan, at the time we disposed of our interest in the automotive products
business, the Zeller plan was adequately funded, on an ongoing basis and all
required contributions had been made, and the Zeller plan did not terminate
at
anytime that any member of the Company’s controlled group of entities was a
contribution sponsor to the Zeller plan, that the possibility of an unfavorable
outcome to us in a lawsuit if the PBGC attempts to hold us liable for the
under-funding of the Zeller plan is remote.
Asserting
Financing Fee
On
December 4, 2003, the Company and Southwest Securities, Inc. (“Southwest”)
entered into a letter agreement whereby the Company agreed to retain Southwest
to assist the Company in obtaining financing for the Company. Southwest’s right
to a fee under the Agreement is limited to a refinancing occurring during “a
period of sixty days, to be extended if a transaction is ongoing.” A financing
did not occur within sixty days of the date of the Agreement, nor was a funding
transaction “ongoing” at the end of that period. In September 2004, more than
ten months after the date of the Agreement between the Company and Southwest,
ThermaClime borrowed $50 million from Orix Capital Markets, LLC (“Orix”). It is
the Company’s position that the Orix financing transaction was not the result of
any efforts by Southwest, nor was it the culmination of any negotiations or
transaction commenced during the sixty-day term of the Agreement. Nonetheless,
Southwest has asserted that it is entitled to a fee of $1.7 million pursuant
to
the Agreement. The Company brought an action against Southwest in Oklahoma
state
court in a lawsuit styled LSB
Industries, Inc. v. Southwest Securities, Inc.
pending
in the Oklahoma District Court, Oklahoma County, for a declaratory judgment
that
the Company is not liable to Southwest under the Agreement as a result of the
Orix financing transaction. The Company intends to vigorously defend itself
against the claim by Southwest, and counsel handling this matter for the Company
has advised that the Company’s prospects for a favorable outcome in this matter
appears likely. Our counsel has advised us that prospects for an adverse result
against us is remote, but that discovery is continuing and counsel’s judgment
may change depending upon the nature of additional evidence. Recently, the
parties attempted to mediate this matter but were unable to agree on a
settlement. No liability has been established relating to the fee asserted
by
Southwest as of December 31, 2005.
F-47
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
11.
Commitments and Contingencies (continued)
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.
12.
Redeemable Preferred Stock
At
December 31, 2005 and 2004, we had 871 shares and 1,027 shares, respectively,
outstanding of noncumulative redeemable preferred stock. Each share of
redeemable preferred stock, $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 redeemable preferred stock is redeemable at par at the option
of
the holder or the Company. The redeemable preferred stock provides for a
noncumulative annual dividend of 10%, payable when and as declared. The
redeemable preferred stock is classified as accrued liabilities in the
accompanying consolidated balance sheets.
13.
Stockholders' Equity
Qualified
Stock Option Plans
At
December 31, 2005 we have a 1993 Stock Option and Incentive Plan (“1993 Plan”)
and a 1998
Stock Option Plan (“1998 Plan”). The 1993 Plan has expired, and accordingly, no
additional options may be granted from this plan. Options granted prior to
the
expiration of this plan continue to remain valid thereafter in accordance with
their terms. Under the 1998 Plan, we are authorized to grant options to purchase
up to 1,000,000 shares of our common stock to our key employees; however, no
options are available to be granted as of December 31, 2005. At December 31,
2005, there were 376,500 options outstanding related to the 1993 Plan and
509,204 options outstanding relating to the 1998 Plan. Under the plans, these
options become exercisable 20% after one year from date of grant, 40% after
two
years, 70% after three years, 100% after four years and lapse at the end of
ten
years. However effective December 31, 2005 our Board of Directors approved
the
acceleration of the vesting schedule of 61,500 shares of qualified stock options
which would have been fully vested on November 17, 2009 to avoid the recognition
of compensation expense in our future financial statements relating to these
stock options. As a result, all outstanding qualified stock options were
exercisable at December 31, 2005. Based on FIN 44, since this modification
to
the vesting schedule did not
renew or
increase the life of these stock options, a remeasurement of the stock options
was not required and no stock-based compensation was recognized in 2005.
The
exercise price of options granted under these plans was equal to the market
value of our common stock at the date of grant. For participants who own 10%
or
more of our common stock at the date of grant, the exercise price is 110% of
the
market value at the date of grant and the options lapse after five years from
the date of grant.
F-48
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
13.
Stockholders' Equity (continued)
Activity
in our qualified stock option plans during each of the three years in the period
ended December 31, 2005 is as follows:
|
2005
|
2004
|
2003
|
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
|
Outstanding
at beginning of year
|
921,204
|
$
|
2.65
|
1,283,800
|
$
|
2.37
|
1,424,600
|
$
|
2.34
|
|||||||||||||||||||||||||||
|
Granted
|
61,500
|
$
|
5.10
|
-
|
$
|
-
|
-
|
$
|
-
|
|||||||||||||||||||||||||||
|
Exercised
|
(80,500
|
)
|
$
|
2.83
|
(346,596
|
)
|
$
|
1.59
|
(127,800
|
)
|
$
|
1.53
|
||||||||||||||||||||||||
|
Canceled,
forfeited or expired
|
(16,500
|
)
|
$
|
3.79
|
(16,000
|
)
|
$
|
2.72
|
(13,000
|
)
|
$
|
7.21
|
||||||||||||||||||||||||
|
Outstanding
at end of year
|
885,704
|
$
|
2.78
|
921,204
|
$
|
2.65
|
1,283,800
|
$
|
2.37
|
|||||||||||||||||||||||||||
|
Exercisable
at end of year
|
885,704
|
$
|
2.78
|
863,454
|
$
|
2.65
|
1,168,300
|
$
|
2.33
|
|||||||||||||||||||||||||||
|
Weighted
average fair value of options
granted during year
|
$ |
3.78 |
N/A |
N/A |
||||||||||||||||||||||||||||||||
The
following table summarizes information about qualified stock options outstanding
and exercisable at December 31, 2005:
|
Stock
Options Outstanding and Exercisable
|
|
Exercise
Prices
|
Shares
Outstanding and Exercisable
|
Weighted
Average Remaining Contractual Life in Years
|
Weighted
Average Exercise Price
|
|
$
|
1.25
|
366,204
|
3.58
|
$
|
1.25
|
|||||||
|
$
|
2.73
|
-
|
$
|
3.00
|
155,000
|
5.35
|
$
|
2.76
|
||||
|
$
|
4.13
|
280,000
|
.92
|
$
|
4.13
|
|||||||
|
$
|
4.88
|
-
|
$
|
5.10
|
84,500
|
7.35
|
$
|
5.04
|
||||
|
$
|
1.25
|
-
|
$
|
5.10
|
885,704
|
3.41
|
$
|
2.78
|
Non-Qualified
Stock Option Plans
Our
Board
of Directors approved the grants of non-qualified stock options to our outside
directors, our President and certain key employees, as shown below. The option
prices are generally based on the market value of our common stock at the dates
of grants. These options have vesting terms and lives specific to each grant
but
generally vest over 48 months and expire ten years from the grant date. However,
effective December 31, 2005, our Board of Directors
F-49
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
13.
Stockholders' Equity (continued)
approved
the acceleration of the vesting schedule of 30,000 shares of non-qualified
stock
options which would have been fully vested on April 22, 2008 and 15,000 shares
of non-qualified stock options which would have been fully vested on November
7,
2006 to avoid the recognition of compensation expense in our future financial
statements relating to these stock options. As a result, all outstanding
non-qualified stock options were exercisable at December 31, 2005. Based on
FIN
44, since this modification to the vesting schedule did not
renew or
increase the life of these stock options, a remeasurement of the stock options
was not required and no stock-based compensation was recognized in
2005.
We
have
an Outside Directors Stock Option Plan (the "Outside Director Plan"). The
Outside Director Plan authorizes the grant of non-qualified stock options to
each member of our Board of Directors
who is not an officer or employee of the Company or its subsidiaries. The
maximum number of options that may be issued under the Outside Director Plan
is
400,000 of which 295,000 are available to be granted at December 31, 2005.
At
December 31, 2005, there are 90,000 options outstanding related to the Outside
Director Plan.
Activity
in our non-qualified stock option plans during each of the three years in the
period ended December 31, 2005 is as follows:
|
2005
|
2004
|
2003
|
|
Shares |
Weighted
Average Exercise Price |
Shares |
Weighted
Average Exercise Price |
Shares |
Weighted
Average Exercise Price |
|
Outstanding
at beginning of year
|
1,014,000
|
$
|
2.01
|
1,254,000
|
$
|
2.17
|
1,351,000
|
$
|
2.32
|
||||||
|
Granted
|
-
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
-
|
||||||
|
Exercised
|
(8,400
|
)
|
$
|
2.44
|
(235,000
|
)
|
$
|
2.81
|
(3,000
|
)
|
$
|
1.25
|
|||
|
Surrendered,
forfeited, or expired
|
-
|
$
|
-
|
(5,000
|
)
|
$
|
4.19
|
(94,000
|
)
|
$
|
4.39
|
||||
|
Outstanding
at end of year
|
1,005,600
|
$
|
2.00
|
1,014,000
|
$
|
2.01
|
1,254,000
|
$
|
2.17
|
||||||
|
Exercisable
at end of year
|
1,005,600
|
$
|
2.00
|
913,250
|
$
|
1.87
|
1,102,500
|
$
|
2.03
|
||||||
F-50
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
13.
Stockholders' Equity (continued)
The
following table summarizes information about non-qualified stock options
outstanding and exercisable at December 31, 2005:
|
Stock
Options Outstanding and Exercisable
|
|
Exercise Prices |
Shares Outstanding |
Weighted
Average Remaining Contractual Life in Years
|
Weighted
Average Exercise Price
|
|
$
|
1.25
|
-
|
$
|
1.38
|
706,500
|
3.58
|
$
|
1.26
|
||||||
|
$
|
2.62
|
-
|
$
|
2.73
|
108,500
|
6.19
|
$
|
2.70
|
||||||
|
$
|
4.19
|
105,600
|
2.27
|
$
|
4.19
|
|||||||||
|
$
|
4.54
|
-
|
$
|
5.36
|
85,000
|
1.58
|
$
|
4.59
|
||||||
|
$
|
1.25
|
-
|
$
|
5.36
|
1,005,600
|
3.56
|
$
|
2.00
|
Preferred
Share Purchase Rights
We
have
adopted a preferred share rights plan (the "Rights Plan"), which became
effective as of February 27, 1999. The Rights Plan replaced and renewed a rights
plan that was terminating as of that date. Under the Rights Plan, we declared
a
dividend distribution of one Renewed Preferred Share Purchase Right (the
"Renewed Preferred Right") for each outstanding share of our common stock
outstanding as of February 27, 1999 and all further issuances of our common
stock would carry the rights. The Rights Plan has a term of ten years from
its
effective date. The Renewed Preferred Rights are designed to ensure that all
of
our stockholders receive fair and equal treatment in the event of a proposed
takeover or abusive tender offer.
The
Renewed Preferred Rights are generally exercisable when a person or group (other
than Jack E. Golsen, our Chairman and Chief Executive Officer (“CEO”), and his
affiliates, our company or any of our subsidiaries, our employee savings plans
and certain other limited excluded persons or entities, as set forth in the
Rights Plan) acquire beneficial ownership of 20% or more of our common stock
(such a person or group will be referred to as the "Acquirer"). Each Renewed
Preferred Right (excluding Renewed Preferred Rights owned by the Acquirer)
entitles stockholders to buy one one-hundredth (1/100) of a share of a new
series of participating preferred stock at an exercise price of $20. Following
the acquisition by the Acquirer of beneficial ownership of 20% or more of our
common stock, and prior to the acquisition of 50% or more of our common stock
by
the Acquirer, our Board of Directors may exchange all or a portion of the
Renewed Preferred Rights (other than Renewed Preferred Rights owned by the
Acquirer) for our common stock at the rate of one share of common stock per
Renewed Preferred Right. Following acquisition by the Acquirer of 20% or more
of
our common stock, each Renewed Preferred Right (other than the Renewed Preferred
Rights owned by the Acquirer) will entitle its holder to purchase a number
of
our common shares having a market value of two times the Renewed Preferred
Right's exercise price in lieu of the new preferred stock. Thus, only as an
F-51
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
13.
Stockholders' Equity (continued)
example,
if our common shares at such time were trading at $10 per share and the exercise
price
of
the
Renewed Preferred Right is $20, each Renewed Preferred Right would thereafter
be
exercisable at $20 for four of our common shares.
If
after
the Renewed Preferred Share Rights are triggered, we are acquired, or we sell
50% or more of our assets or earning power, each Renewed Preferred Right (other
than the Renewed Preferred Rights owned by the Acquirer) will entitle its holder
to purchase a number of the acquiring company's common shares having a market
value at the time of two times the Renewed Preferred Right's exercise price,
except if the transaction is consummated with a person or group who acquired
our
common shares pursuant to a Permitted Offer, the price for all of our common
shares paid to all of our common shareholders is not less than the price per
share of our common stock pursuant to the Permitted Offer and the form of
consideration offered in the transaction is the same as the form of
consideration paid pursuant to the Permitted Offer. As defined in the Rights
Plan, a "Permitted Offer" is an offer for all of our common shares at a price
and on terms that a majority of our Board, who are not officers, or the person
or group who could trigger the exerciseability of the Renewed Preferred Rights,
deems adequate and in our best interest and that of our shareholders. Thus,
only
as an example, if our common shares were trading at $10 per share and the
exercise price of a Renewed Preferred Right is $20, each Renewed Preferred
Right
would thereafter be exercisable at $20 for four shares of the
Acquirer.
Prior
to
the acquisition by the Acquirer of beneficial ownership of 20% or more of our
stock, our Board of Directors may redeem the Renewed Preferred Rights for $.01
per Renewed Preferred Right.
In
March
2003, we sold for $1,570,500 in cash 450,000 shares of common stock and a
warrant (exercisable at $3.49 per share until March 2008) to purchase 112,500
shares of common stock. The proceeds were used to reduce debt.
In
May
2002, we issued warrants to purchase 595,585 shares of our common stock
exercisable at $.10 per share until May 2012. In March 2005, the holders
exercised the warrants, under a cashless exercise provision, to purchase 586,140
shares of our common stock (See Note 9 (A)).
As
of
December 31, 2005, we have reserved 5.9 million shares of common stock issuable
upon potential conversion of preferred stocks, stock options and
warrants.
14.
Non-Redeemable Preferred Stock
The
20,000 shares of Series B cumulative, convertible preferred stock, $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 entitles the holder to one vote per share.
The Series B preferred stock provides for annual cumulative dividends of 12%
from date of issue, payable when and as declared. At December 31, 2005, $1.4
million of dividends ($72 per share) on the Series B preferred stock were in
arrears.
F-52
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
14.
Non-Redeemable Preferred Stock (continued)
The
Class
C preferred stock, designated as a $3.25 convertible exchangeable Class C
preferred stock, Series 2, has no par value ("Series 2 Preferred"). The Series
2
Preferred has a liquidation preference of $50.00 per share plus accrued and
unpaid dividends and is 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 4.3 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 will have special conversion rights for a 45-day period. The
Series 2 Preferred is redeemable at our option, in whole or in part, at $50.00
per share, plus accrued and unpaid dividends to the redemption date. Dividends
on the Series 2 Preferred are cumulative and payable quarterly in arrears.
At
December 31, 2005, $12.8 million of dividends ($21.125 per share) on the Series
2 Preferred were in arrears.
The
Series 2 Preferred also is exchangeable in whole, but not in part, at our option
on any dividend payment date for 6.50% Convertible Subordinated Debentures
due
2018 (the "Debentures") at the rate of $50.00 principal amount of Debentures
for
each share of Series 2 Preferred. Interest on the Debentures, if issued, will
be
payable semiannually in arrears. The Debentures will, if issued, contain
conversion and optional redemption provisions similar to those of the Series
2
Preferred and will be subject to a mandatory annual sinking fund redemption
of
5% of the amount of Debentures initially issued, commencing on the June 15
following their issuance.
During
2005, we purchased 13,300 shares of Series 2 Preferred in the open market for
$597,000 (average cost of $44.90 per share). These shares are being held as
treasury stock. During 2004, we purchased 5,000 shares of Series 2 Preferred
in
the open market for $271,000 ($54.12 per share). These shares were canceled
by
the Company.
The
1,000,000 shares of Class C preferred stock, designated as Series D 6%
cumulative, convertible Class C preferred stock (“Series D Preferred”), have no
par value and are convertible, in whole or in part, into 250,000 shares of
our
common stock (1 share of common stock for 4 shares of preferred stock) at any
time at the option of the holder. Dividends on the Series D Preferred are
cumulative and payable annually in arrears at the rate of 6% per annum of the
liquidation preference of $1.00 per share but will be paid only after accrued
and unpaid dividends are paid on the Series 2 Preferred. At December 31, 2005,
$240,000 of dividends ($.24 per share) on the Series D Preferred were in
arrears. Each holder of the Series D Preferred shall be entitled to .875 votes
per share.
At
December 31, 2005, we are authorized to issue an additional 3,791 shares of
$100
par value preferred stock and an additional 3,394,750 shares of no par value
preferred stock. Upon issuance, our Board of Directors will determine the
specific terms and conditions of such preferred stock.
F-53
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
15.
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, 2005, the monthly installments specified in the 1981 Agreements
total $34,000 and the aggregate undiscounted death benefits are $4.1 million.
The benefits under the 1981 Agreements are forfeited if the respective
executive's employment is terminated for any reason prior to death. The 1981
Agreements may be terminated by the Company at any time and for any reason
prior
to the death of the employee.
In
1992,
we entered into individual benefit agreements with certain key executives (“1992
Agreements”) that provide for annual benefit payments for life (in addition to
salary) ranging from $16,000 to $18,000 payable in monthly installments when
the
employee reaches age 65. As of December 31, 2005 and 2004, the liability
for benefits under the 1992 Agreements is $938,000 and $960,000, respectively,
which is included in accrued liabilities and other noncurrent liabilities in
the
accompanying consolidated balance sheets. The liability reflects the present
value of the remaining estimated payments at discount rates of 5.57% and 5.68%
as of December 31, 2005 and 2004, respectively. Future estimated
undiscounted payments aggregate to $2.1 million as of December 31, 2005. For
2005, 2004 and 2003, charges to selling, general and administrative expenses
for
these benefits were $110,000, $171,000 and $230,000, respectively. As part
of
the 1992 Agreements, should the executive die prior 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 is in addition to
any
amount payable under the 1981 agreement should that executive have both a 1981
and 1992 agreement. At December 31, 2005, the aggregate undiscounted death
benefit payments specified in the 1992 Agreements are $780,000. 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.
On
May
12, 2005 we entered into a death benefit agreement (“2005 Agreement”) with our
CEO. The Death Benefit Agreement provides that, upon our CEO’s death, we will
pay to our CEO’s designated beneficiary, a lump-sum payment of $2.5 million to
be funded from the net proceeds received by us under certain life insurance
policies on our CEO’s life that are owned by us. We are obligated to keep in
existence life insurance policies with a total face amount of no less than
$2.5
million of the stated death benefit. As of December 31, 2005, the life insurance
policies owned by us on the life of our CEO have a total face amount of $7
million. The benefit under the 2005 Agreement is not contingent upon continued
employment and may be amended at any time by written agreement executed by
the
CEO and the Company.
As
of
December 31, 2005, the liability for death benefits under the 1981, 1992 and
2005 Agreements is $869,000 (none at December 31, 2004) which is included in
accrued and other noncurrent liabilities. We accrue for such liabilities when
they become probable and discount the
F-54
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
15.
Executive Benefit Agreements and Employee Savings Plans
(continued)
liabilities
to their present value. The increase in the liability relates to the untimely
death of one of our executives in January 2005 (the net proceeds from the
related life insurance policies are included in non-operating other income
as
shown in Note 19 - Other Expense, Other Income and Non-Operating Other Income,
net) and the change in accounting estimate for our CEO’s remaining service
period (See Note 3 - Changes in Accounting Estimates).
To
assist
us in funding the benefit agreements discussed above, we purchased life
insurance contracts on various individuals in which we are the beneficiary.
As
of December 31, 2005, the total face amount of these policies is $22 million
of
which $2.5 million of the proceeds is required to be paid 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 $632,000 and 635,000, net of borrowings of $1,939,000 and $2,444,000 at
December 31, 2005 and 2004, respectively. Increases in cash surrender values
of
$574,000, $465,000 and $300,000 are netted against the premiums paid for life
insurance policies of $1,037,000, $678,000 and $717,000 in 2005, 2004 and 2003,
respectively, and are included in selling, general and administrative
expenses.
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 union employees and EDNC employees which amounts were not material for
each of the three years ended December 31, 2005.
16.
Fair Value of Financial Instruments
The
following discussion of fair values is not indicative of the overall fair value
of our assets and liabilities since the provisions of SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments," do not apply to all assets,
including intangibles.
As
of
December 31, 2005 and 2004, due to their short-term nature, the carrying values
of cash, restricted cash, accounts receivable, accounts payable, short-term
financing and drafts payable, and accrued liabilities approximated their
estimated fair values. Carrying values for variable rate borrowings are believed
to approximate their fair value. Fair values for fixed rate borrowings, other
than the Notes, are estimated using a discounted cash flow analysis that applies
interest rates currently being offered on borrowings of similar amounts and
terms to those currently outstanding while also taking into consideration our
current credit worthiness. The fair value for the Notes was based on market
quotations; however, there has been a low volume of trading activity. In
addition, in March 2006, we purchased approximately $6 million of the Notes
at
carrying value.
F-55
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
16.
Fair Value of Financial Instruments (continued)
|
December
31, 2005
|
December
31, 2004
|
|
Estimated
Fair Value
|
Carrying
Value
|
Estimated
Fair Value
|
CarryingValue
|
|
(In
thousands)
|
||||||||||||
|
Variable
Rate:
|
||||||||||||
|
Senior
Secured Loan (1)
|
$
|
48,695
|
$
|
50,000
|
$
|
50,000
|
$
|
50,000
|
||||
|
Bank
debt and equipment financing
|
35,197
|
35,197
|
31,740
|
31,740
|
||||||||
|
Fixed
Rate:
|
||||||||||||
|
Bank
debt and equipment financing
|
13,574
|
13,627
|
12,574
|
11,467
|
||||||||
|
Senior
Unsecured Notes due 2007
|
6,118
|
13,300
|
6,071
|
13,300
|
||||||||
|
$
|
103,584
|
$
|
112,124
|
$
|
100,385
|
$
|
106,507
|
|||||
(1)
The
Senior Secured Loan has a variable interest rate not to exceed 11% or 11.5%
depending on ThermaClime’s leverage ratio.
17.
Inventory Write-Down
During
2005, 2004 and 2003, our Climate Control Business wrote down the carrying value
of certain slow-moving inventory items by $121,000, $363,000 and $222,000,
respectively. During 2005 and 2004, our Chemical Business wrote down the
carrying value of certain nitrogen-based inventories by $118,000 and $714,000,
respectively. These costs are included in cost of sales in the accompanying
consolidated statements of income.
18.
Property and Business Interruption Insurance Recoveries
Beginning
in October 2004 and continuing into June 2005, the Chemical Business’ results
were adversely affected as a result of the loss of production due to a
mechanical failure of one of the four nitric acid plants at the El Dorado
Facility. The plant was restored to normal production in June 2005. We filed
a
property damage insurance claim for $3.8 million, net of a $1 million
deductible. In 2005, we recognized insurance recoveries of $2.7 million under
our replacement cost insurance policy relating to this property damage claim.
The effect of this property insurance recovery to the accompanying consolidated
statement of income was $1.5 million for 2005 which is included in other income.
The insurers are contesting the remaining claim and we have instituted
litigation against the insurers in connection with this claim. Additional
recoveries upon final resolution will be recognized when realized.
In
addition, we filed a claim for recovery of the business interruption losses
related to this incident. Our business interruption insurance policy contains
a
forty-five day waiting period before covering losses resulting from business
interruptions. The claim is for $4.7 million, net of the forty-five day waiting
period. In 2005, we realized insurance recoveries of $1.9 million relating
to
this claim which is recorded as a reduction to cost of sales. As of March 20,
2006, additional business interruption insurance payments totaling $554,000
were
agreed to and paid by our insurers in 2006 which will be recognized in the
first
quarter of 2006. We have instituted litigation for the remaining balance.
Additional recoveries, if any, related to this business interruption will be
recognized when realized.
F-56
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
18.
Property and Business Interruption Insurance Recoveries
(continued)
Beginning
in 2001 through 2003, we incurred business interruptions as the result of a
sulfuric acid plant at the El Dorado Facility experiencing several mechanical
problems with a boiler that had been repaired by one of our vendors. As a
result, other equipment was also damaged at the plant. During 2004, net
settlements of $1.5 million were reached with the vendor’s insurance carrier and
our insurance carriers. These settlements are classified as a reduction of
cost
of sales in 2004.
19.
Other Expense, Other Income and Non-Operating Other Income,
net
|
Year
ended December 31
|
|
2005
|
2004
|
2003
|
|
(In
thousands)
|
|||||||||||
|
Other
expense:
|
|||||||||||
|
Impairments
of long-lived assets
|
$
|
237
|
$
|
737
|
$
|
500
|
|||||
|
Other
(1)
|
95
|
374
|
255
|
||||||||
|
Total
other expense
|
$
|
332
|
$
|
1,111
|
$
|
755
|
|||||
|
Other
income:
|
|||||||||||
|
Property
insurance recoveries in excess of losses incurred
|
$
|
1,618
|
$
|
-
|
$
|
-
|
|||||
|
Gains
on the sale of property and equipment, net
|
714
|
340
|
-
|
||||||||
|
Rental
income
|
142
|
128
|
228
|
||||||||
|
Other
(1)
|
208
|
206
|
502
|
||||||||
|
Total
other income
|
$
|
2,682
|
$
|
674
|
$
|
730
|
Non-operating
other income, net:
|
Net
proceeds from certain key individual life insurance
policies (Note 15)
|
$
|
1,162
|
$
|
-
|
$
|
-
|
|||||
|
Gains
on sale of certain current assets, primarily precious
metals
|
237
|
2,335
|
502
|
||||||||
|
Miscellaneous
income (1)
|
311
|
258
|
564
|
||||||||
|
Miscellaneous
expense (1)
|
(149
|
)
|
(159
|
)
|
(335
|
)
|
|||||
|
Total
non-operating other income, net
|
$
|
1,561
|
$
|
2,434
|
$
|
731
|
(1)
Amounts represent numerous unrelated transactions, none of which are
individually significant requiring separate disclosure.
20.
Segment Information
Factors
Used by Management to Identify the Enterprise's Reportable Segments and
Measurement of Segment Income or Loss and Segment Assets
We
have
two continuing 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
F-57
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
20.
Segment Information (continued)
distribute
distinct products with different production processes.
We
evaluate performance and allocate resources based on operating income or loss.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
Description
of Each Reportable Segment
Climate
Control
This
business segment manufactures and sells, primarily from its various facilities
in Oklahoma City, a variety of water source heat pumps, hydronic fan coils
and
other heating, ventilation, and air conditioning (“HVAC”) products for use in
commercial and residential air conditioning and heating systems including large
custom air handlers and modular chillers systems. Our various facilities in
Oklahoma City comprise substantially all of the Climate Control segment's
operations. Sales to customers of this segment primarily include original
equipment manufacturers, contractors and independent sales representatives
located throughout the world.
Chemical
This
segment manufactures and sells fertilizer grade ammonium nitrate, urea ammonium
nitrate, urea and anhydrous ammonia for agricultural applications, concentrated,
blended and regular nitric acid, metallurgical grade anhydrous ammonia and
sulfuric acid for industrial applications and industrial grade ammonium nitrate
and solutions for the mining industry. Our primary manufacturing facilities
are
located in El Dorado, Arkansas, Baytown, Texas and Cherokee, Alabama. Sales
to
customers of this segment primarily include farmers, ranchers, fertilizer
dealers and distributors located in the Central and Southeastern United States,
explosive manufacturers in the United States and industrial users of acids
throughout the United States and parts of Canada.
The
Chemical Business is subject to various federal, state and local environmental
regulations. Although we have designed policies and procedures to help reduce
or
minimize the likelihood of significant chemical accidents and/or environmental
contamination, there can be no assurances that we will not sustain a significant
future operating loss related thereto.
As
of
December 31, 2005, our Chemical Business employed 373 persons, with 123
represented by unions under agreements expiring in July through November of
2007.
F-58
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
20.
Segment Information (continued)
Information
about our continuing operations in different industry segments for each of
the
three years in the period ended December 31, is detailed below.
|
2005
|
2004
|
2003
|
|
(In
Thousands)
|
|||||||||||
|
Net
sales:
|
|||||||||||
|
Climate
Control:
|
|||||||||||
|
Water
source heat pumps
|
$
|
84,895
|
$
|
73,557
|
$
|
60,473
|
|||||
|
Hydronic
fan coils
|
53,564
|
48,760
|
47,423
|
||||||||
|
Other
HVAC products
|
18,007
|
18,321
|
11,136
|
||||||||
|
Total
Climate Control
|
156,466
|
140,638
|
119,032
|
||||||||
|
Chemical:
|
|||||||||||
|
Agricultural
products
|
80,638
|
72,154
|
70,729
|
||||||||
|
Industrial
acids and other chemical products
|
80,228
|
82,040
|
70,219
|
||||||||
|
Mining
products
|
72,581
|
62,070
|
52,220
|
||||||||
|
Total
Chemical
|
233,447
|
216,264
|
193,168
|
||||||||
|
Other
|
6,809
|
6,706
|
4,461
|
||||||||
|
$
|
396,722
|
$
|
363,608
|
$
|
316,661
|
||||||
|
Gross
profit:
|
|||||||||||
|
Climate
Control
|
$
|
47,315
|
$
|
42,049
|
$
|
36,139
|
|||||
|
Chemical
|
16,426
|
8,917
|
12,281
|
||||||||
|
Other
|
2,330
|
2,145
|
1,491
|
||||||||
|
$
|
66,071
|
$
|
53,111
|
$
|
49,911
|
||||||
|
Operating
income (loss):
|
|||||||||||
|
Climate
Control
|
$
|
14,097
|
$
|
11,707
|
$
|
11,519
|
|||||
|
Chemical
|
7,703
|
(877
|
)
|
3,043
|
|||||||
|
General
corporate expenses and other business
operations,
net (1)
|
(6,835
|
)
|
(7,586
|
)
|
(6,560
|
)
|
|||||
|
14,965
|
3,244
|
8,002
|
|||||||||
|
Interest
expense
|
(11,407
|
)
|
(7,393
|
)
|
(6,097
|
)
|
|||||
|
Gains
on extinguishment of debt
|
-
|
4,400
|
258
|
||||||||
|
Provision
for loss on notes receivable-Climate Control
|
-
|
(1,447
|
)
|
-
|
|||||||
|
Non-operating
income (expense), net:
|
|||||||||||
|
Chemical
|
362
|
2,463
|
511
|
||||||||
|
Corporate
and other business operations
|
1,199
|
(29
|
)
|
220
|
|||||||
|
Provision
for income taxes
|
(118
|
)
|
-
|
-
|
|||||||
|
Equity
in earnings of affiliate - Climate Control
|
745
|
668
|
19
|
||||||||
|
Income
from continuing operations before cumulative
effect of accounting change
|
$
|
5,746
|
$
|
1,906
|
$
|
2,913
|
|||||
F-59
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
20.
Segment Information (continued)
(1)
General corporate expenses and other business operations, net consist of the
following:
|
2005
|
2004
|
2003
|
|
(In
Thousands)
|
|||||||||||
|
Gross
profit-Other
|
$
|
2,330
|
$
|
2,145
|
$
|
1,491
|
|||||
|
Selling,
general and administrative:
|
|||||||||||
|
Personnel
costs
|
(5,258
|
)
|
(4,194
|
)
|
(3,838
|
)
|
|||||
|
Professional
fees
|
(2,398
|
)
|
(2,672
|
)
|
(1,653
|
)
|
|||||
|
Office
overhead
|
(598
|
)
|
(637
|
)
|
(628
|
)
|
|||||
|
Property,
franchise and other taxes
|
(250
|
)
|
(283
|
)
|
(256
|
)
|
|||||
|
All
other
|
(1,424
|
)
|
(1,703
|
)
|
(1,466
|
)
|
|||||
|
Total
selling, general and administrative
|
(9,928
|
)
|
(9,489
|
)
|
(7,841
|
)
|
|||||
|
Other
income
|
883
|
144
|
165
|
||||||||
|
Other
expense
|
(120
|
)
|
(386
|
)
|
(375
|
)
|
|||||
|
Total
general corporate expenses and other business
operations, net
|
$
|
(6,835
|
)
|
$
|
(7,586
|
)
|
$
|
(6,560
|
)
|
||
Information
about our property, plant and equipment and total assets by industry segment
is
detailed below:
|
2005
|
2004
|
2003
|
|
(In
Thousands)
|
|
Depreciation
of property, plant and equipment:
|
||||||||||
|
Climate
Control
|
$
|
2,223
|
$
|
1,720
|
$
|
2,188
|
||||
|
Chemical
|
8,503
|
8,288
|
7,938
|
|||||||
|
Corporate
assets and other
|
149
|
186
|
186
|
|||||||
|
Total
depreciation of property, plant and equipment
|
$
|
10,875
|
$
|
10,194
|
$
|
10,312
|
||||
|
Additions
to property, plant and equipment:
|
||||||||||
|
Climate
Control
|
$
|
4,322
|
$
|
730
|
$
|
1,543
|
||||
|
Chemical
|
11,617
|
8,606
|
6,043
|
|||||||
|
Corporate
assets and other
|
232
|
96
|
230
|
|||||||
|
Total
additions to property, plant and equipment
|
$
|
16,171
|
$
|
9,432
|
$
|
7,816
|
||||
|
Total
assets:
|
||||||||||
|
Climate
Control
|
$
|
60,970
|
$
|
54,423
|
$
|
51,683
|
||||
|
Chemical
|
111,212
|
94,981
|
92,093
|
|||||||
|
Corporate
assets and other
|
16,781
|
18,164
|
18,037
|
|||||||
|
Total
assets
|
$
|
188,963
|
$
|
167,568
|
$
|
161,813
|
F-60
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
20.
Segment Information (continued)
Net
sales
by industry segment include net sales to unaffiliated customers as reported
in
the consolidated financial statements. Net sales classified as “Other” consist
of sales of industrial machinery and related components. Intersegment net sales
are not significant.
Gross
profit by industry segment represents net sales less cost of sales. Gross profit
classified as “Other” relates to industrial machinery and components.
Our
chief
operating decision makers use operating income (loss) by industry segment for
purposes of making decisions which include resource allocations and performance
evaluations. Operating income (loss) by industry segment represents gross profit
by industry segment less selling, general and administrative expenses
(“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.
Information
about our domestic and foreign operations from continuing operations for each
of
the three years in the period ended December 31, is detailed below:
|
Geographic
Region
|
2005
|
2004
|
2003
|
|
(In
Thousands)
|
|
Net
sales:
|
|||||||||||
|
Domestic
operations
|
$
|
396,722
|
$
|
359,800
|
$
|
316,584
|
|||||
|
Foreign
operations (1)
|
-
|
3,808
|
77
|
||||||||
|
$
|
396,722
|
$
|
363,608
|
$
|
316,661
|
||||||
|
Income
(loss) from continuing operations before cumulative
effect of accounting change:
|
|||||||||||
|
Domestic
operations
|
$
|
5,768
|
$
|
2,501
|
$
|
2,817
|
|||||
|
Foreign
operations (1)
|
(22
|
)
|
(595
|
)
|
96
|
||||||
|
$
|
5,746
|
$
|
1,906
|
$
|
2,913
|
||||||
|
Long-lived
assets:
|
|||||||||||
|
Domestic
operations
|
$
|
74,082
|
$
|
70,219
|
$
|
71,931
|
|||||
|
Foreign
operations
|
-
|
-
|
3
|
||||||||
|
$
|
74,082
|
$
|
70,219
|
$
|
71,934
|
F-61
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
20.
Segment Information (continued)
(1)
Net
sales by foreign operations are to unaffiliated customers. The 2004 amounts
relate primarily to MultiClima’s operations as discussed in Note 2 - Summary of
Significant Accounting Policies.
Net
sales
to unaffiliated customers include foreign export sales as follows:
|
Geographic
Area
|
2005
|
2004
|
2003
|
|
(In
Thousands)
|
|
Canada
|
$
|
12,077
|
$
|
11,464
|
$
|
6,162
|
||
|
Middle
East
|
2,647
|
2,193
|
996
|
|||||
|
South
and East Asia
|
1,502
|
1,173
|
816
|
|||||
|
Europe
|
1,148
|
1,752
|
1,650
|
|||||
|
Mexico,
Central and South America
|
831
|
1,075
|
1,376
|
|||||
|
Other
|
397
|
320
|
279
|
|||||
|
$
|
18,602
|
$
|
17,977
|
$
|
11,279
|
Major
Customers
Net
sales
to one customer, Orica USA, Inc., of our Chemical Business segment represented
approximately 11%, 10% and 11% of our total net sales for 2005, 2004 and 2003,
respectively. As discussed in Note 11 - Commitments and Contingencies, under
the
terms of the Supply Agreement, EDC will supply from the El Dorado Facility
industrial grade ammonium nitrate through at least March 2008, with provisions
for renewal thereafter.
Net
sales
to another customer, Bayer, of our Chemical Business segment represented
approximately 9%, 11% and 12% of our total net sales for 2005, 2004 and 2003,
respectively. As discussed in Note 11 - Commitments and Contingencies, under
the
terms of the Bayer Agreement, Bayer will purchase, from one of our subsidiaries,
all of its requirements for nitric acid to be used at the Baytown, Texas
facility for a term through at least May 2009, with provisions for renewal
thereafter.
21.
Subsequent Events (Unaudited)
On
March
14, 2006, the Company completed a private placement to six qualified
institutional buyers (“OIBs”), pursuant to which the Company sold $18 million
aggregate principal amount of its 7% Convertible Senior Subordinated Debentures
due 2011 (the “Debentures”) 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/or Regulation D promulgated under the Act. The
Debentures are eligible for resale by the investors under Rule144A under the
Act
prior to registration of the Debentures. J. Giordano Securities Group acted
as
the Company’s exclusive placement agent for this transaction and was paid an
aggregate of 6% of the aggregate gross proceeds in the financing. Aggregate
estimated offering expenses in connection with the
F-62
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
21.
Subsequent Events (Unaudited) (continued)
transaction,
including discounts and commissions, were approximately $.4 million. In
connection with the closing, the Company entered into an indenture (the
“Indenture”) with UMB Bank, n.a., as trustee (the “Trustee”), governing the
Debentures. The Trustee is also the Company’s transfer agent. The Trustee
receives customary compensation from the Company for such services.
Jayhawk
Institutional Partners, L.P., who together with its affiliates, Kent C. McCarthy
and Jayhawk Capital Management, L.L.C., owned beneficially approximately 17.4%
our common stock (including shares issuable upon conversion of our preferred
stock and exercise of an outstanding warrant) prior to the closing of the
private placement, purchased $1 million principal amount of the Debentures.
The
Debentures are convertible by holders in whole or in part into shares of the
Company’s common stock prior to their maturity on March 1, 2011. The
conversion rate of the Debentures for holders electing to convert all or any
portion of a debenture prior to September 1, 2006 will be 125 shares per $1,000
principal amount of debentures (representing a conversion price of $8.00 per
share). Holders of debentures electing to convert all or any portion of a
debenture on or after September 1, 2006 and before March 1, 2009 will obtain
the
following conversion rate per $1,000 principal amount of debentures during
the
dates indicated: September 1, 2006 to February 28, 2007, 141.25 shares
(representing a conversion price of approximately $7.08 per share); March 1,
2007 to August 31, 2007, 141.04 shares (representing a conversion price of
approximately $7.09 per share); September 1, 2007 to February 29, 2008, 137.27
shares (representing a conversion price of approximately $7.28 per share);
March
1, 2008 to August 31, 2008, 133.32 shares (representing a conversion price
of
approximately $7.50 per share); and September 1, 2008 to February 28, 2009,
129.23 shares (representing a conversion price of approximately $7.74 per
share). On March 1, 2009, the conversion rate returns to 125 shares per $1,000
principal amount of debentures (representing a conversion price of $8.00 per
share), until their maturity on March 1, 2011. The
conversion price will be adjusted to reflect dividends, stock splits, issuances
of rights to purchase shares of common stock and other events, as set forth
in
the Indenture.
The
Debentures may be redeemable beginning March 1, 2009, under certain conditions.
The redemption price is payable at our option in cash or, subject to certain
conditions, in shares of our common stock. At maturity, we may elect to pay
up
to one-half of the principal amount of the Debentures, plus accrued and unpaid
interest due thereon at maturity, in shares of our common stock under certain
conditions. If we pay the redemption price on any portion of the Debentures
at
maturity on our common stock, our common stock is to be valued for those
purposes at 95% of the weighted average of the closing sales price of our common
stock for the 20 consecutive trading days ending on the 5th
trading
day prior to the applicable redemption date or maturity date.
We
will
use all, or substantially all, of the net proceeds for the repayment or purchase
of our higher interest rate debt or debt of our subsidiaries, including
ThermaClime’s 10-3/4% Senior Unsecured Notes due 2007 (“Notes”), and the
remaining balance, if any, for general corporate
F-63
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
(continued)
21.
Subsequent Events (Unaudited) (continued)
purposes.
Pending such uses, the net proceeds of this offering will be invested in
investments with highly rated money market funds, U.S. government securities,
treasury bills and/or short-term commercial paper.
On
March
28, 2006, we purchased approximately $6 million of the Notes at ThermaClime’s
carrying value.
We
are
obligated to register the Debentures and the common stock issuable upon
conversion of the Debentures pursuant to the terms and conditions of a
Registration Rights Agreement entered into between us and each of the
OIBs.
F-64
LSB
Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
(In Thousands, Except Per Share Amounts)
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
(In Thousands, Except Per Share Amounts)
|
Three
months ended
|
|||||||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
||||||||||||
|
2005
|
|||||||||||||||
|
Net
sales (1)
|
$
|
86,681
|
$
|
109,508
|
$
|
105,181
|
$
|
95,352
|
|||||||
|
Gross
profit (1) (2) (3)
|
$
|
14,549
|
$
|
17,720
|
$
|
17,733
|
$
|
16,069
|
|||||||
|
Income
from continuing operations before cumulative effect of accounting
change
(4) (5) (6) (7) (8) (9) (10)
|
$ |
1,414 |
$ |
2,077 |
$ |
2,168 |
$ |
87 |
|||||||
|
Net
loss from discontinued operations (11)
|
-
|
-
|
(512
|
)
|
(132
|
)
|
|||||||||
|
Net
income (loss)
|
$
|
1,414
|
$
|
2,077
|
$
|
1,656
|
$
|
(45
|
)
|
||||||
|
Net
income (loss) applicable to common stock
|
$
|
852
|
$
|
1,522
|
$
|
1,102
|
$
|
(657
|
)
|
||||||
|
Income
(loss) per common share:
|
|||||||||||||||
|
Basic:
|
|||||||||||||||
|
Income
(loss) from continuing operations
|
$
|
.06
|
$
|
.11
|
$
|
.12
|
$
|
(.04
|
)
|
||||||
|
Loss
from discontinued operations, net
|
-
|
-
|
(.04
|
)
|
(.01
|
)
|
|||||||||
|
Net
income (loss)
|
$
|
.06
|
$
|
.11
|
$
|
.08
|
$
|
(.05
|
)
|
||||||
|
Diluted:
|
|||||||||||||||
|
Income
(loss) from continuing operations
|
$
|
.06
|
$
|
.10
|
$
|
.10
|
$
|
(.04
|
)
|
||||||
|
Loss
from discontinued operations, net
|
-
|
-
|
(.03
|
)
|
(.01
|
)
|
|||||||||
|
Net
income (loss)
|
$
|
.06
|
$
|
.10
|
$
|
.07
|
$
|
(.05
|
)
|
||||||
|
2004
|
|||||||||||||||
|
Net
sales (1) (12)
|
$
|
83,669
|
$
|
103,910
|
$
|
92,243
|
$
|
83,786
|
|||||||
|
Gross
profit (1) (3) (12) (13) (14) (15)
|
$
|
11,031
|
$
|
16,484
|
$
|
14,615
|
$
|
10,981
|
|||||||
|
Income
(loss) before cumulative effect of accounting change (4) (5) (8)
(12) (16)
|
$
|
293
|
$
|
1,601
|
$
|
3,398
|
$
|
(3,386
|
)
|
||||||
|
Cumulative
effect of accounting change (12)
|
(536
|
)
|
-
|
-
|
-
|
||||||||||
|
Net
income (loss)
|
$
|
(243
|
)
|
$
|
1,601
|
$
|
3,398
|
$
|
(3,386
|
)
|
|||||
|
Net
income (loss) applicable to common stock
|
$
|
(810
|
)
|
$
|
1,034
|
$
|
2,832
|
$
|
(4,008
|
)
|
|||||
|
Income
(loss) per common share:
|
|||||||||||||||
|
Basic:
|
|||||||||||||||
|
Income
(loss) before cumulative effect of accounting change
|
$
|
(.02
|
)
|
$
|
.08
|
$
|
.22
|
$
|
(.31
|
)
|
|||||
|
Cumulative
effect of accounting change
|
(.04
|
)
|
-
|
-
|
-
|
||||||||||
|
Net
income (loss)
|
$
|
(.06
|
)
|
$
|
.08
|
$
|
.22
|
$
|
(.31
|
)
|
|||||
|
Diluted:
|
|||||||||||||||
|
Income
(loss) before cumulative effect of accounting
change
|
$
|
(.02
|
)
|
$
|
.07
|
$
|
.18
|
$
|
(.31
|
)
|
|||||
|
Cumulative
effect of accounting change
|
(.04
|
)
|
-
|
-
|
-
|
||||||||||
|
Net
income (loss)
|
$
|
(.06
|
)
|
$
|
.07
|
$
|
.18
|
$
|
(.31
|
)
|
|||||
F-65
LSB
Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
(1)
Beginning in October 2004 and continuing into June 2005, the Chemical Business’
results were adversely affected as a result of the loss of production due to
a
mechanical failure of one of the four nitric acid plants at the El Dorado
Facility. The plant was restored to normal production in June 2005. During
the
fourth quarter of 2005, we recognized insurance recoveries of $1.9 million
under
our business interruption insurance policy relating to this claim which is
recorded as a reduction to cost of sales.
(2)
During the first and fourth quarters of 2005, we had cost recoveries of $1
million and $1 million, respectively, of production catalyst (precious metals)
used in the Chemical Business’s manufacturing process.
(3)
We
recorded provisions for (realization and reversal of) losses on certain
nitrate-based inventories of $(.3 million), $(.7 million), $(.1 million) and
$1.2 million during the first, second, third and fourth quarters of 2005,
respectively, and of $.8 million, $(.6 million) and $.5 million during the
first, second and fourth quarters of 2004, respectively.
(4)
During the first and fourth quarters of 2005, we recognized impairments on
long-lived assets of $.1 million and $.1 million, respectively, compared to
of
$.3 million and $.4 million, respectively, during the third and fourth quarters
of 2004.
(5)
During the first and second quarters of 2005, we recognized gains of $.4 million
and $.3 million, respectively, from the sales of corporate assets. During the
first and second quarters of 2004, we recognized gains of $1.8 million and
$.5
million, respectively, from the sales of certain current assets (primarily
precious metals).
(6)
During the second, third and fourth quarter of 2005, we recognized gains of
$.4
million, $.6 million and $.4 million, respectively, from replacement cost
property insurance recoveries.
(7)
During the first quarter of 2005, we recognized $1.1 million in net proceeds
from certain key individual life insurance policies as the result of the
untimely death of one of our executives in January 2005.
(8)
During the first, second and third quarters of 2005, Trison incurred
professional fees of $.1 million, $.3 million and $.6 million, respectively.
During the second quarter of 2004, we incurred professional fees and other
costs
of $1 million relating to a proposed unregistered offering of Senior Secured
Notes which was terminated in June 2004.
(9)
During the third quarter of 2005, we recognized personnel costs of $.4 million
relating to the change in estimate of the obligations under a death benefit
agreement with our CEO.
F-66
LSB
Industries, Inc.
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
Supplementary Financial Data
Quarterly Financial Data (Unaudited)
(10)
During the first, second and third quarters of 2005, we recognized interest
expense of $1.4 million, $1.5 million and $1.6 million, respectively, relating
to the Senior Secured Loan which was completed in September 2004.
(11)
As
discussed in Note 11, during 2005, representatives of Slurry and a prior owner
met with the KDHE and proposed to remove the bulk of contaminated soil at the
Hallowell site, which was orally agreed to by the KDHE subject to approval
of a
written work plan submitted to the KDHE. As a result of meetings with the KDHE,
provisions of $.5 million and $.1 million were recorded for our share of these
costs during the third and fourth quarters of 2005.
(12)
As a
result of FIN 46, as revised, we were required to consolidate MultiClima and
its
parent company at the end of the first quarter of 2004. Therefore, we recorded
a
cumulative effect of accounting change of $.5 million. For the second quarter
of
2004, the parent company of MultiClima had consolidated net sales of $3.8
million, gross profit of $.8 million and a loss before cumulative effect of
accounting change of $.6 million. Based on our assessment of MultiClima and
its
parent’s historical and forecasted liquidity and results of operations during
2004, we concluded the outstanding notes receivable with the parent company
of
MultiClima were not collectible and recognized a provision for loss of $1.4
million at the beginning of the third quarter of 2004.
(13)
We
recorded a provision for loss on firm sales commitments of $.3 million in the
third quarter of 2004.
(14)
During the fourth quarter of 2004, we
recorded an inventory adjustment of $1.1 million in the Climate Control Business
as a result of increased raw material costs not passed through to
customers.
(15)
During the second, third and fourth quarters of 2004, net settlements of $.6
million, $.3 million and $.6 million were reached with a vendor’s insurance
carrier and our insurance carrier relating to several mechanical problems with
a
boiler that had been repaired by one of our vendors at the El Dorado Facility.
These amounts are classified as reductions of cost of sales.
(16)
During the third quarter of 2004, we recognized a gain on extinguishment of
debt
of $4.4 million as a result of the repayment of loans under the Financing
Agreement.
F-67
LSB
Industries, Inc.
Schedule
I - Condensed Financial Information of Registrant
Condensed
Balance Sheets
The
following condensed financial statements in this Schedule I are of the parent
company only, LSB Industries, Inc.
|
December
31,
|
|||
|
2005
|
2004
|
||
|
Assets
|
(In
Thousands)
|
||||||
|
Current
assets:
|
|||||||
|
Cash
|
$
|
1,783
|
$
|
114
|
|||
|
Accounts
receivable, net
|
52
|
46
|
|||||
|
Supplies,
prepaid items and other
|
2,689
|
2,806
|
|||||
|
Due
from subsidiaries
|
1,872
|
1,480
|
|||||
|
Total
current assets
|
6,396
|
4,446
|
|||||
|
Property,
plant and equipment, net
|
234
|
142
|
|||||
|
Investments
in and due from subsidiaries
|
25,639
|
21,934
|
|||||
|
Other
assets, net
|
315
|
356
|
|||||
|
$
|
32,584
|
$
|
26,878
|
||||
|
Liabilities
and Stockholders' Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
129
|
$
|
94
|
|||
|
Accrued
liabilities
|
1,014
|
829
|
|||||
|
Redeemable,
noncumulative, convertible preferred stock
|
83
|
97
|
|||||
|
Current
portion of long-term debt
|
41
|
1,662
|
|||||
|
Total
current liabilities
|
1,267
|
2,682
|
|||||
|
Long-term
debt
|
1,727
|
16
|
|||||
|
Due
to subsidiaries
|
2,558
|
2,558
|
|||||
|
Other
noncurrent liabilities
|
1,745
|
1,103
|
|||||
|
Stockholders'
equity:
|
|||||||
|
Preferred
stock
|
34,177
|
34,177
|
|||||
|
Common
stock
|
1,708
|
1,640
|
|||||
|
Capital
in excess of par value
|
57,547
|
57,352
|
|||||
|
Accumulated
deficit
|
(61,738
|
)
|
(66,840
|
)
|
|||
|
31,694
|
26,329
|
||||||
|
Treasury
stock
|
(6,407
|
)
|
(5,810
|
)
|
|||
|
Total
stockholders' equity
|
25,287
|
20,519
|
|||||
|
$
|
32,584
|
$
|
26,878
|
||||
See
accompanying notes.
F-68
LSB
Industries, Inc.
Schedule
I - Condensed Financial Information of Registrant
Condensed
Statements of Income
|
Year
ended December 31,
|
|||||
|
2005
|
2004
|
2003
|
|||
|
(In
Thousands)
|
|||||||||||
|
Fees
under service, tax sharing and management agreements with
subsidiaries
|
$
|
1,001
|
$
|
1,001
|
$
|
1,150
|
|||||
|
Selling,
general and administrative
|
4,161
|
3,352
|
2,633
|
||||||||
|
Other
income, net
|
(708
|
)
|
(594
|
)
|
(630
|
)
|
|||||
|
Operating
loss
|
(2,452
|
)
|
(1,757
|
)
|
(853
|
)
|
|||||
|
Interest
expense
|
|
2,553
|
1,427
|
2,529
|
|||||||
|
Net
proceeds from certain key individual life insurance
policies in excess of benefit obligations
|
(1,162
|
)
|
-
|
-
|
|||||||
|
Interest
and other non-operating income, net
|
(373
|
)
|
(229
|
)
|
(618
|
)
|
|||||
|
Loss
from continuing operations
|
|
(3,470
|
)
|
(2,955
|
)
|
(2,764
|
)
|
||||
|
Equity
in earnings of subsidiaries
|
9,216
|
4,325
|
5,677
|
||||||||
|
Loss
from discontinued operations, net
|
(644
|
)
|
-
|
-
|
|||||||
|
Net
income
|
$
|
5,102
|
$
|
1,370
|
$
|
2,913
|
|||||
See
accompanying notes.
F-69
LSB
Industries, Inc.
Schedule
I - Condensed Financial Information of Registrant
Condensed
Statements of Cash
Flows
|
2005
|
2004
|
2003
|
|
(In
Thousands)
|
||||||||||
|
Cash
flows used by continuing operating activities
|
$
|
(2,484
|
)
|
$
|
(2,950
|
)
|
$
|
(2,728
|
)
|
|
|
Cash
flows from investing activities:
|
||||||||||
|
Capital
expenditures
|
(9
|
)
|
(27
|
)
|
(11
|
)
|
||||
|
Proceeds
from sales of property and equipment
|
-
|
4
|
-
|
|||||||
|
Other
assets
|
40
|
-
|
76
|
|||||||
|
Net
cash provided (used) by investing activities
|
31
|
(23
|
)
|
65
|
||||||
|
Cash
flows from financing activities:
|
||||||||||
|
Payments
on long-term and other debt
|
(4
|
)
|
(277
|
)
|
(445
|
)
|
||||
|
Long-term
borrowings
|
-
|
22
|
-
|
|||||||
|
Net
change in due to/from subsidiaries
|
4,475
|
2,658
|
847
|
|||||||
|
Net
proceeds from issuance of common stock and warrants
|
248
|
820
|
1,770
|
|||||||
|
Acquisition
of non-redeemable preferred stock
|
(597
|
)
|
(271
|
)
|
-
|
|||||
|
Net
cash provided by financing activities
|
4,122
|
2,952
|
2,172
|
|||||||
|
Net
increase (decrease) in cash
|
1,669
|
(21
|
)
|
(491
|
)
|
|||||
|
Cash
at the beginning of year
|
114
|
135
|
626
|
|||||||
|
Cash
at the end of year
|
$
|
1,783
|
$
|
114
|
$
|
135
|
||||
See
accompanying notes.
F-70
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.
Commitments and Contingencies
The
Company has guaranteed the payment of principal and interest under the terms
of
various debt. Subsidiaries long-term debt outstanding at December 31, 2005,
which is guaranteed by the Company is as follows (in thousands):
|
Senior
Secured Loan due 2009
|
$
|
50,000
|
|
|
Secured
revolving credit facility - ThermaClime
|
31,975
|
||
|
Other,
most of which is collateralized by machinery, equipment and real
estate
|
8,601
|
||
|
$
|
90,576
|
In
addition, the Company has guaranteed approximately $8 million of our
subsidiaries performance bonds.
See
Notes
9 and 11 of the notes to the Company's consolidated financial statements for
discussion of the long-term debt and commitments and contingencies.
3.
Preferred Stock and Stockholders' Equity
At
December 31, 2005 and 2004, 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 12, 13
and
14 of notes to the Company's consolidated financial statements for discussion
of
matters relating to the Company's preferred stock and other stockholders' equity
matters.
F-71
LSB
Industries, Inc.
Schedule
II - Valuation and Qualifying Accounts
Years
ended December 31, 2005, 2004 and 2003
(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):
|
||||||||||||||||
|
2005
|
$
|
2,332
|
$
|
810
|
$
|
462
|
$
|
2,680
|
||||||||
|
2004
|
$
|
3,225
|
$
|
211
|
$
|
1,104
|
$
|
2,332
|
||||||||
|
2003
|
$
|
2,405
|
$
|
1,031
|
$
|
211
|
$
|
3,225
|
|
Inventory-reserve
for
slow-moving
items (1):
|
||||||||||||||||
|
2005
|
$
|
908
|
$
|
121
|
$
|
1
|
$
|
1,028
|
||||||||
|
2004
|
$
|
1,441
|
$
|
303
|
$
|
836
|
$
|
908
|
||||||||
|
2003
|
$
|
1,261
|
$
|
222
|
$
|
42
|
$
|
1,441
|
|
Notes
receivable-allowance
for
doubtful accounts (1):
|
||||||||||||||||
|
2005
|
$
|
1,020
|
$
|
-
|
$
|
50
|
$
|
970
|
||||||||
|
2004
|
$
|
13,655
|
$
|
1,447
|
$
|
14,082
|
$
|
1,020
|
||||||||
|
2003
|
$
|
13,655
|
$
|
-
|
$
|
-
|
$
|
13,655
|
|
Deferred
tax assets - valuation (1):
|
||||||||||||||||
|
2005
|
$
|
27,928
|
$
|
-
|
$
|
1,782
|
$
|
26,146
|
||||||||
|
2004
|
$
|
28,051
|
$
|
-
|
$
|
123
|
$
|
27,928
|
||||||||
|
2003
|
$
|
28,632
|
$
|
-
|
$
|
581
|
$
|
28,051
|
F-72
LSB
Industries, Inc.
Schedule
II - Valuation and Qualifying Accounts (continued)
Years
ended December 31, 2005, 2004 and 2003
(In
Thousands)
|
Description
|
Balance
at Beginning of Year
|
Additions-
Charged to Costs and Expenses
|
Deductions-
Write-offs/ Costs Incurred
|
Balance
at End of Year
|
|
Accrual
for plant turnaround:
|
||||||||||||
|
2005
|
$
|
1,517
|
$
|
2,601
|
$
|
2,713
|
$
|
1,405
|
||||
|
2004
|
$
|
2,678
|
$
|
1,742
|
$
|
2,903
|
$
|
1,517
|
||||
|
2003
|
$
|
1,886
|
$
|
2,745
|
$
|
1,953
|
$
|
2,678
|
||||
(1)
Deducted in the consolidated balance sheet from the related assets to which
the
reserve applies.
Other
valuation and qualifying accounts are detailed in our notes to consolidated
financial statements.
F-73
|
DIRECTORS
|
LSB
CORPORATE,
SUBSIDIARY AND
OPERATING
UNIT
EXECUTIVE
OFFICERS
(OTHER THAN DIRECTORS)
AS OF
YEAR
2006
|
|
|
RAYMOND
B. ACKERMAN
Chairman
Emeritus of
Ackerman
McQueen, Inc.
ROBERT
C. BROWN, M.D.
V.P.,
Plaza Medical Group, P.C.
President
and CEO
ClaimLogic,
LLC
CHARLES
(CHUCK) A. BURTCH
Former
Executive Vice President
and
West Division Manager
of
BankAmerica
GRANT
J. DONOVAN
President,
Galehead, Inc.
N.
ALLEN FORD, PH.D
Professor,
University of Kansas
JACK
E. GOLSEN
Board
Chairman and CEO
BARRY
H. GOLSEN
J.D., Board Vice Chairman,
COO
and President, LSB Industries and Climate Control Business
DAVID
R. GOSS
C.P.A.,
Executive Vice President,
of
Operations
BERNARD
G. ILLE
Former
CEO and Board Chairman
First
Life Assurance Company
DONALD
W. MUNSON
Former
President of Lennox Corp.
President
Ducane Europe
HORACE
G. RHODES
Chairman
Kerr,
Irvine, Rhodes and Ables
TONY
M. SHELBY
C.P.A.,
Executive Vice President
of
Finance, CFO
JOHN
A. SHELLEY
President,
CEO & Chairman
The
Bank of Union
|
MICHAEL
G. ADAMS
C.P.A.,
Vice President
Financial
Services
HEIDI
L. BROWN
J.D.,
L.L.M., Vice President, Managing Counsel
JUDI
BURNETT
Assistant
Vice President,
Risk
Manager
JOHN
CARVER
Vice
President,
Environmental & Safety
Compliance
DAN
ELLIS
President,
Climate
Master, Inc.
LARRY
FITZWATER
Senior
Vice President, Operations LSB Chemical Group
STEVE
J. GOLSEN
Co-Chairman,
CEO
Climate
Master, Inc. and
COO
Climate Control Business
PHIL
GOUGH
Senior
Vice President,
Agricultural
Products
EL
Dorado Chemical Company and Cherokee Nitrogen Company
BRIAN
HAGGART
President,
The
Climate Control Group. Inc.
LARRY
L. JEWELL
President,
International Environmental
Corporation
|
JIM
D. JONES
C.P.A.,
Senior Vice President, Corporate Controller and Treasurer
WALTER
P. MECOZZI
President,
ClimateCraft,
Inc.
ANN
MUISE-MILLER
J.D.,
Assistant Vice President,
Associate
General Counsel
JAMES
W.M. MURRAY, III
J.D.,
Vice President, Senior Associate General Counsel
ANNE
RENDON
President,
El
Dorado Nitric Company
HAROLD
RIEKER
C.P.A.,
Vice President,
Financial
Reporting
PAUL
RYDLUND
President,
El Dorado Chemical Company and Cherokee Nitrogen
Company
DAVID
M. SHEAR
J.D.,
Senior Vice President,
General
Counsel and Secretary
MIKE
TEPPER
Senior
Vice President, International Operations
MIKE
WOLFE
Vice
President,
Retail
& Wholesale Ag Centers
El
Dorado Chemical Company
|
|
FACILITIES AND
DISTRIBUTION:
|
CORPORATE INFORMATION:
|
|
|
|
||
|
CHEMICAL
|
CLIMATE CONTROL
|
|
|
|
||
|
CORPORATE
OFFICE:
Oklahoma
City, OK
|
CORPORATE
OFFICE:
Oklahoma
City, OK
|
TRANSFER AGENT & REGISTRAR:
UMB
Bank, N.A.
|
|
PRODUCTION FACILITIES:
Baytown, TX |
PRODUCTION FACILITIES:
Five
plants located in
|
Securities
Transfer Division
P.O.
Box 410064
Kansas
City, Missouri
64141-0064
816-860-7786
|
|
El
Dorado, AR
|
Oklahoma
City, OK
|
|
|
Cherokee,
AL
|
|
|
|
|
|
|
|
SALES AND MARKETING OFFICES:
|
SALES AND MARKETING OFFICES:
|
STOCK
LISTED:
|
|
Oklahoma
City, OK
|
Oklahoma
City, OK
|
Common
Stock
|
|
Rockwall,
TX
|
|
Ticker
Symbol: LXU (AMEX)
|
|
St.
Louis, MO
|
|
Series 2, $3.25 Convertible Exchangeable
|
|
|
|
Class
C Preferred Stock
|
|
AGRICULTURAL PRODUCTS
|
SALES AND
DISTRIBUTION
|
Ticker
Symbol: LSBDP
|
|
LOCATIONS:
|
LOCATIONS:
|
|
|
Annona,
TX
|
Manufacturers’
Representatives,
|
AUDITORS:
|
|
Athens,
TX
|
Distributors
and Dealers
|
Ernst
& Young LLP
|
|
Bells,
TN
|
in
fifty states.
|
Oklahoma
City, Oklahoma
|
|
Bryan,
TX
|
|
|
|
Cooper,
TX
|
FOREIGN
DISTRIBUTORS:
|
LSB INDUSTRIES CORPORATE OFFICES:
|
|
Corsicana,
TX
|
Manufacturers’
Representatives,
|
16
South Pennsylvania Avenue
|
|
Dublin,
TX
|
Distributors,
or Salesmen in
|
Oklahoma
City, Oklahoma 73107
|
|
Itasca,
TX
|
forty-eight
countries.
|
405-235-4546
|
|
Lamar,
MO
|
|
405-235-5067
fax
|
|
Marquez,
TX
|
|
|
|
Newbern,
TN
|
|
Website:
www.lsb-okc.com
|
|
Pittsburg,
TX
|
|
Visit
our website for details about our plants,
|
|
Terrell,
TX
|
|
products,
operations and policies.
|
|
Trinity,
TX
|
|
|
|
Tyler,
TX
|
|
|
|
Whitewright,
TX
|
|
|
|
|
|
|