12 31 06 10K
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, 2006
or
[
]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
transition period from __________ to __________
Commission
File Number: 1-7677
LSB
INDUSTRIES,
INC.
(Exact
Name of Registrant as Specified in its Charter)
(State
of Incorporation)
|
|
(I.R.S.
Employer)
Identification
No.)
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16
South Pennsylvania Avenue
Oklahoma
City, Oklahoma
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73107
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant's
Telephone Number, Including Area Code: (405) 235-4546
Securities
Registered Pursuant to Section 12(b) of the Act:
Title
of Each Class
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|
Name
of Each Exchange
On
Which Registered
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Common
Stock, Par Value $.10
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|
American
Stock Exchange
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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
(Facing
Sheet Continued)
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
Indicate
by check mark whether the Registrant (1) has filed all reports required by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for the shorter period that the Registrant has had to file the
reports), and (2) has been subject to the filing requirements for the past
90
days. [X] Yes [ ] No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer
[X]
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). [ ] Yes [X] No
The
aggregate market value of the Registrant’s voting common equity held by
non-affiliates of the Registrant, computed by reference to the price at which
the voting common stock was last sold as of June 30, 2006, was
approximately $69 million. For purposes of this computation, shares of the
Registrant’s common stock beneficially owned by each executive officer and
director of the Registrant and by Jayhawk Capital Management, L.L.C. and its
affiliates (together “Jayhawk”) are deemed to be owned by affiliates of the
Registrant. Such determination should not be deemed an admission that such
executive officers, directors and other beneficial owners of our common stock
are, in fact, affiliates of the Registrant. In addition, this computation does
not include the 719 shares of voting Convertible Non-Cumulative Preferred Stock
(the “Non-Cumulative Preferred”) held by non-affiliates of the Company. An
active trading market does not exist for the shares of Non-Cumulative Preferred.
As
of
March 19, 2007 the Registrant had 19,479,139 shares of common stock outstanding
(excluding 3,447,754 shares of common stock held as treasury
stock).
FORM
10-K
OF LSB INDUSTRIES, INC.
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Page
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PART
I
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18
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25
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PART
II
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32
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36
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67
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69
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PART
III
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74
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74
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FORM
10-K OF LSB INDUSTRIES, INC.
TABLE
OF CONTENTS
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Page
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74
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74
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74
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PART
IV
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75
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PART
I
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 for the
niche markets we serve. These products are used in commercial and
residential new building construction, renovation of existing buildings
and replacement of existing
systems.
|
|
·
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Chemical
Business engaged in the manufacturing and selling of chemical products
produced from plants in Texas, Arkansas and Alabama for the industrial,
mining and agricultural markets.
|
Certain
statements contained in this Part I may be deemed to be forward-looking
statements. See "Special Note Regarding Forward-Looking
Statements."
We
believe our Climate Control Business has developed leadership positions in
niche
markets by offering extensive product lines, customized products and improved
technologies. Under this focused strategy, we have developed what we believe
to
be the most extensive line of water source heat pumps and hydronic fan coils
in
the United States. Further, we were a pioneer in the use of geothermal
technology in the climate control industry and have used it to create what
we
believe to be the most energy efficient climate control systems commercially
available today. We employ highly flexible production capabilities that allow
us
to custom design units for new construction markets and for the retrofit and
replacement markets, and our products are currently installed in some of the
most recognizable commercial developments in the country, including Prudential
Tower, Rockefeller Plaza, Trump Tower, and Time Warner Center, and are slated
to
be in a number of developments currently under construction. In addition, we
have a significant presence in the lodging industry with installations in
numerous Hyatt, Marriott, Four Seasons, Starwood, Ritz Carlton and Hilton
hotels. We also have a substantial share of resort destinations in Las Vegas
where we have units installed in over 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 (the “Baytown” facility), El Dorado, Arkansas (the “El Dorado” facility)
and Cherokee, Alabama (the “Cherokee” facility). Our Chemical Business is a
supplier to some of the world’s leading chemical and industrial companies. By
focusing on specific geographic areas, we have developed freight and
distribution advantages over many of our competitors and have 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 price fluctuations and are purchased at prices in effect
at time of purchase. Baytown consumes approximately 120,000 tons of purchased
anhydrous ammonia per year. The majority of Baytown’s production is sold
pursuant to a long-term contract that provides for a pass-through of certain
costs, including the anhydrous ammonia costs, plus a profit. El Dorado purchases
approximately 200,000 tons of anhydrous ammonia annually and produces and sells
approximately 500,000 tons of nitrogen-based products per year. The anhydrous
ammonia is purchased pursuant to a supply agreement whereby El Dorado secures
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 anhydrous
ammonia is an internationally traded commodity and the relative price is set
in
the world market while natural gas is primarily a nationally traded commodity.
The ammonia supply to El Dorado is transported from the Gulf of Mexico by
pipeline. Our cost of anhydrous ammonia is based upon formulas indexed to
published industry prices, primarily tied to import prices. Cherokee normally
consumes 4 to 6 million MMBtu’s of natural gas annually and produces
and sells approximately 300,000 tons of nitrogen-based products per year.
Natural
gas is a primary raw material for anhydrous ammonia. Natural gas costs continue
to exhibit volatility. In 2006, we saw daily spot prices per MMBtu, excluding
transportation, range from $3.54 to $9.90. 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 these raw material costs. These
pricing arrangements help mitigate the commodity risk inherent in the raw
material feedstocks of natural gas and anhydrous ammonia. For 2006,
approximately 65% of the Chemical Business’ sales were made pursuant to
pass-through sales agreements. It is our goal to continue developing
pass-through agreements with our customers. The remaining sales are primarily
into agricultural markets at the price in effect at time of shipment. The sales
prices of our agricultural products have only a moderate correlation to the
anhydrous ammonia and natural gas feedstock costs and also reflect market
conditions for like and competing nitrogen sources. This can compromise our
ability to recover our full cost to produce the product in this market.
Additionally, the lack of sufficient non-seasonal sales volume to operate our
manufacturing facilities at optimum levels has kept the Chemical Business from
reaching full performance potential. Our primary efforts to improve the results
of our Chemical Business include securing increased non-seasonal sales volumes
with an emphasis on customers that will accept the commodity risk inherent
with
natural gas and anhydrous ammonia.
Segment
Information and Foreign and Domestic Operations and Export Sales
Schedules
of the amounts of net sales, gross profit, operating income (loss) and
identifiable assets attributable to each of our lines of business and of the
amount of our export sales in the aggregate and by major geographic area for
each of the last three years appear in Note 20 of the Notes to Consolidated
Financial Statements included elsewhere in this report.
Climate
Control Business
General
Our
Climate Control Business manufactures and sells a broad range of standard and
custom designed geothermal and water source heat pumps and hydronic fan coils
as
well as other products for the niche markets we serve. These products are for
use in commercial and residential HVAC systems including large custom air
handlers and modular chiller systems. The construction of commercial,
institutional and residential buildings including multi and single-family homes,
the renovation of existing buildings and the replacement of existing HVAC
systems drive the demand for our Climate Control products. Our Climate Control
commercial products are used in a wide variety of buildings, such as: hotels,
motels, office buildings, schools, universities, apartments, condominiums,
hospitals, nursing homes, extended care facilities, industrial and high tech
manufacturing facilities, food and chemical processing facilities, and
pharmaceutical manufacturing facilities. We target many of our products to
meet
increasingly stringent indoor air quality and energy efficiency standards.
The
following table summarizes net sales information relating to our products of
the
Climate Control Business:
Percentage
of net sales of the Climate Control Business:
|
|
|
|
|
|
|
|
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|
Geothermal
and water source heat pumps
|
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61
|
%
|
|
54
|
%
|
|
52
|
%
|
Hydronic
fan coils
|
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27
|
%
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34
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%
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|
35
|
%
|
Other
HVAC products
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12
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%
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|
12
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%
|
|
13
|
%
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Percentage
of our consolidated net sales:
|
|
|
|
|
|
|
|
|
|
Geothermal
and water source heat pumps
|
|
27
|
%
|
|
21
|
%
|
|
20
|
%
|
Hydronic
fan coils
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|
12
|
%
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|
13
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%
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14
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%
|
Other
HVAC products
|
|
6
|
%
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5
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%
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|
5
|
%
|
|
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45
|
%
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39
|
%
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39
|
%
|
Geothermal
and Water Source Heat Pumps
We
believe we are a leading provider of geothermal and water source heat pumps
to
the commercial construction and renovation markets in the United States. Water
source heat pumps are highly efficient heating and cooling products which enable
individual room climate control through the transfer of heat through a water
pipe system which is connected to a centralized cooling tower or heat injector.
Water source heat pumps enjoy a broad range of commercial applications,
particularly in medium to large sized buildings with many small, individually
controlled spaces. We believe the market for commercial water source heat pumps
will continue to grow due to the relative efficiency and long life of such
systems as compared to other air conditioning and heating systems, as well
as to
the emergence of the replacement market for those systems.
Our
Climate Control Business has also developed the use of geothermal water source
heat pumps in residential and commercial applications. Geothermal systems,
which
circulate water and antifreeze through an underground heat exchanger, are among
the most energy efficient systems available. We believe the longer life, lower
cost to operate, and relatively short payback periods of geothermal systems,
as
compared with air-to-air systems, will continue to increase demand for our
geothermal products. We specifically target new residential construction of
moderate and high-end multi and single-family homes.
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 and 2006, this specific market continued to
improve.
Geothermal
and Water Source Heat Pump and Hydronic Fan Coil
Market
We
estimate the annual United States market for water source heat pumps and
hydronic fan coils to be approximately $480 million based on data supplied
by
the Air-Conditioning and Refrigeration Institute (“ARI”). Levels of repair,
replacement, and new construction activity generally drive demand in these
markets. In aggregate, the United States market for geothermal and water source
heat pump and fan coil products is returning to historical levels based on
data
supplied by the ARI. 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, 2006 and 2005, the backlog of confirmed orders
for our Climate Control Business was approximately $80.4 million and $56.2
million, respectively. The increase in our backlog relates primarily to the
increase in demand for our geothermal and water source heat pumps and hydronic
fan coils. Past experience indicates that customers generally do not cancel
orders after we receive them. We anticipate shipping substantially all of this
backlog within twelve months.
In
response to a record order intake level of our heat pump products, we have
increased unit capacity by almost 70% through additional shifts, overtime and
capital investment since the end of 2005. During 2006, we invested
approximately $4.9 million in fabrication equipment, plant-wide process control
systems and other upgrades relating to our Climate Control Business. For 2007,
we have committed to spend an additional $3.6 million for production equipment
and other upgrades. Our investment in the Climate Control Business will
continue if order intake levels continue to warrant. In addition to the
spending on equipment and systems, during 2006, we have invested approximately
$2.8 million in facilities, including a new 46,000 square foot building next
to
our existing heat pump manufacturing facility and the renovation of an existing
facility. These investments have and will increase our capacity to produce
and distribute our Climate Control products, primarily heat pump
products.
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:
Net
sales to original equipment manufacturers as a percentage
of:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales of the Climate Control Business
|
|
17
|
%
|
|
22
|
%
|
|
21
|
%
|
Consolidated
net sales
|
|
8
|
%
|
|
9
|
%
|
|
8
|
%
|
Market
Our
Climate Control Business depends primarily on the commercial construction
industry, including new construction and the remodeling and renovation of older
buildings, and on the residential construction industry for both new and
replacement markets relating to their geothermal products.
Raw
Materials
Numerous
domestic and foreign sources exist for the materials used by our Climate Control
Business, which materials include compressors, steel, electric motors, valves
and copper. Periodically, our Climate Control Business enters into fixed-price
copper contracts. We do not anticipate any difficulties in obtaining necessary
materials for our Climate Control Business. In 2007, however, changes in market
supply and demand could result in increased costs, lost production and/or
delayed shipments. We believe the majority of cost increases, if any, will
be
passed to our customers in the form of higher prices as product price increases
are implemented and take effect and while we believe we will have sufficient
materials, a shortage of raw materials could impact production of our Climate
Control products.
Competition
Our
Climate Control Business competes primarily with seven companies, some of whom
are also our customers. Some of our competitors serve other markets and have
greater financial and other resources than we do. Our Climate Control Business
manufactures a broader line of geothermal and water source heat pump and fan
coil products than any other manufacturer in the United States, and we believe
that we are competitive as to price, service, warranty and product
performance.
Continue
to Introduce New Products
Our
Climate Control Business will continue to launch new products and product
upgrades in an effort to maintain and increase our current market position
and
to establish a presence in new markets.
Chemical
Business
General
Our
Chemical Business manufactures three principal product lines that are derived
from natural gas, anhydrous ammonia, and sulfur:
|
·
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concentrated,
blended and regular nitric acid, mixed nitrating acids, metallurgical
grade anhydrous ammonia, sulfuric acid, and high purity ammonium
nitrate
for industrial applications,
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|
·
|
anhydrous
ammonia, fertilizer grade ammonium nitrate, urea ammonium nitrate
(UAN),
and ammonium nitrate ammonia solution (ANA) for the agricultural
applications, and
|
|
·
|
industrial
grade ammonium nitrate and solutions for the mining
industry.
|
The
following table summarizes net sales information relating to our products of
the
Chemical Business:
Percentage
of net sales of the Chemical Business:
|
|
|
|
|
|
|
|
|
|
Industrial
acids and other chemical products
|
|
37
|
%
|
|
34
|
%
|
|
38
|
%
|
Agricultural
products
|
|
34
|
%
|
|
35
|
%
|
|
33
|
%
|
Mining
products
|
|
29
|
%
|
|
31
|
%
|
|
29
|
%
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Percentage
of our consolidated net sales:
|
|
|
|
|
|
|
|
|
|
Industrial
acids and other chemical products
|
|
19
|
%
|
|
20
|
%
|
|
22
|
%
|
Agricultural
products
|
|
18
|
%
|
|
21
|
%
|
|
20
|
%
|
Mining
products
|
|
16
|
%
|
|
18
|
%
|
|
17
|
%
|
|
|
53
|
%
|
|
59
|
%
|
|
59
|
%
|
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 and commercial grade
ammonia and sulfuric acid. We compete based upon service, price, location of
production and distribution sites, product quality and performance. We believe
we are the largest domestic merchant marketer of concentrated and blended nitric
acids and provide inventory management as part of the value-added services
offered to certain customers.
Baytown
is one of the two largest nitric acid manufacturing units in the United States,
with demonstrated capacity exceeding 1,350 short tons per day. Subsidiaries
within our Chemical Business entered into a series of agreements with Bayer
Corporation ("Bayer") (collectively, the "Bayer Agreement"). Under the Bayer
Agreement, El Dorado Nitric Company ("EDNC"), a subsidiary within our Chemical
Business, operates Baytown at Bayer's Baytown, Texas operation. Bayer purchases
from EDNC all of its requirements for nitric acid at its Baytown operation
for a
term through at least May 2009. EDNC purchases from Bayer certain of its
requirements for materials, utilities and services for the manufacture of nitric
acid. Upon expiration of the initial ten-year term in 2009, the Bayer Agreement
may be renewed for up to six renewal terms of five years each; however, prior
to
each renewal period, either party to the Bayer Agreement may opt against
renewal.
Agricultural
Products
Our
Chemical Business produces ammonium nitrate at El Dorado and anhydrous ammonia,
UAN, and ammonium nitrate ammonia solution (“ANA”) at Cherokee; all of which are
nitrogen based fertilizers. Cherokee also has the ability to produce
agricultural grade ammonium nitrate. Although, to some extent, the various
forms
of nitrogen-based fertilizers are interchangeable, each has its own
characteristics which produce agronomic preferences among end users. Farmers
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 El Dorado and Cherokee 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. We have been expanding further into the Southeastern
and
NorthCentral United States. Using a proprietary prilling process, El Dorado
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, El
Dorado establishes long-term relationships with end-users through its network
of
wholesale and retail distribution centers and Cherokee sells directly to
agricultural customers.
Mining
Products
Our
Chemical Business manufactures industrial grade ammonium nitrate (“AN”) and 83%
AN 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 which
was
amended during August 2006. Under this supply agreement, EDC supplies Orica
USA,
Inc. (“Orica”) with a significant volume of industrial grade ammonium nitrate
per year for a term through at least December 2010, with provisions for renewal
thereafter.
Major
Customers
The
following summarizes net sales to major customers relating to our products
of
the Chemical Business:
Net
sales to Orica as a percentage of:
|
|
|
|
|
|
|
|
|
|
Net
sales of the Chemical Business
|
|
20
|
%
|
|
19
|
%
|
|
17
|
%
|
Consolidated
net sales
|
|
10
|
%
|
|
11
|
%
|
|
10
|
%
|
Net
sales to Bayer as a percentage of:
|
|
|
|
|
|
|
|
|
|
Net
sales of the Chemical Business
|
|
14
|
%
|
|
15
|
%
|
|
18
|
%
|
Consolidated
net sales
|
|
7
|
%
|
|
9
|
%
|
|
11
|
%
|
Raw
Materials
Anhydrous
ammonia and natural gas represent the primary components in the production
of
most of the products of our Chemical Business. Spot natural gas and anhydrous
ammonia costs have fluctuated dramatically in recent years. The following table
shows, for the period indicated, the high and low daily spot price for natural
gas based
on
the price received on the Tennessee 500 Leg and for ammonia (excluding
transportation and other charges) based on the Green Markets low
Tampa.
Daily
Spot Natural Gas Prices Per MMBtu
|
Ammonia
Price Per Metric Ton
|
|
High
|
Low
|
High
|
Low
|
2004
|
$7.93
|
$4.16
|
$340
|
$182
|
2005
|
$15.25
|
$5.50
|
$399
|
$235
|
2006
|
$9.90
|
$3.54
|
$395
|
$270
|
As
of
March 10, 2007, the price of natural gas was approximately $---7.00 per MMBtu
and ammonia was $370 per metric ton. Natural gas is an integral raw material
in
the production of anhydrous ammonia. Prices of raw material feedstocks of
natural gas and anhydrous ammonia remain volatile, and we have pursued a
strategy of developing customers that purchase substantial quantities of
products pursuant to sales agreements and/or formulas that provide for the
pass-through of these raw material costs. These pricing arrangements provide
a
hedge against the commodity risk inherent in the raw material feedstocks of
natural gas and anhydrous ammonia. In addition, we economically hedge the
natural gas requirements in the financial markets for most forward sales
commitments made at fixed sales prices.
Interruptions
to the natural gas supply chain by the hurricanes of 2005 continued to
exacerbate natural gas prices into early 2006. Cherokee was forced to curtail
production in January and February of 2006 when major customers reduced
purchases due to the high natural gas raw material pass-through costs. The
natural gas supply chain continued to recover and by mid-2006, the Gulf of
Mexico supply was back to approximately 90% of pre-hurricane levels based on
a
report from the U.S. Department of the Interior.
Under
an
agreement, as amended, with its principal supplier of anhydrous ammonia, EDC
will purchase a majority of its anhydrous ammonia requirements using a market
price-based formula plus transportation to El Dorado through December 31, 2008.
We believe that we can obtain anhydrous ammonia from other sources in the event
of an interruption of service under the above-referenced contract. Our Chemical
Business natural gas feedstock requirements are generally purchased at spot
market price for delivery at Cherokee. 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 as discussed under “Environmental Matters" and
"Legal Proceedings" of Item 3.
Because
of growing concerns over ammonium nitrate, other nitrogen fertilizers and other
potentially hazardous materials, there have been new and proposed federal,
state
and industry requirements to place additional security controls over the
distribution, transportation and handling of these products.
We
fully
support these initiatives and believe they will not materially affect the
viability of ammonium nitrate as a valued product to the agricultural
industry.
Competition
Our
Chemical Business competes with several chemical companies in our markets,
of
whom CF Industries, Dyno Nobel North America and Terra Industries, have greater
financial and other resources than us. We believe that competition within the
markets served by our Chemical Business is primarily based upon service, price,
location of production and distribution sites, and product quality and
performance.
Employees
As
of
December 31, 2006, we employed 1,565 persons. As of that date, our Climate
Control Business employed 1,143 persons, none of whom was represented by a
union, and our Chemical Business employed 357 persons, with 117 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 and are reasonably expected to be incurred in the future.
The
Company has certain facilities in our Chemical Business that contain asbestos
insulation around certain piping and heated surfaces. The asbestos insulation
is
in adequate condition to prevent leakage and can remain in place as long as
the
facility is operated or remains assembled. The Company plans to maintain the
facilities in an adequate condition to prevent leakage through its standard
repair and maintenance activities.
1.
Discharge Water Matters
The
El
Dorado, Arkansas facility (“El Dorado”) within our Chemical Business generates
process wastewater. The process water discharge and storm-water run off are
governed by a state National Pollutant Discharge Elimination System (“NPDES”)
water discharge permit issued by the Arkansas Department of Environmental
Quality (“ADEQ”), which permit is to be renewed every five years. The ADEQ
issued to El Dorado a new revised NPDES water discharge permit in 2004, and
El
Dorado has until June 2007 to meet the compliance deadline for the more
restrictive limits under the 2004 NPDES permit. In order to meet El Dorado’s
June 2007 limits, El Dorado has reduced the effluent levels of its wastewater
and believes that the ADEQ will allow El Dorado to directly discharge its
wastewater into the creek that runs through its property.
In
order
to directly discharge its wastewater from El Dorado into the creek and to meet
the June 2007 permit limits, El Dorado has conducted a study of the adjacent
stream to determine whether a permit modification is appropriate. On September
22, 2006, the Arkansas Pollution Control and Ecology Commission (“Commission”)
approved the results of the study that showed that the proposed permit
modification is appropriate. A public hearing was held on the matter on
November
13, 2006 with minimal opposition. We believe that the ADEQ will issue to El
Dorado the permit modification during the third quarter of 2007. Accordingly,
direct discharge of wastewater into the creek appears at this time to be the
most likely wastewater discharge option, although there are no assurances that
this option will ultimately be made available to El Dorado.
If
El
Dorado is unable to directly discharge its wastewater, El Dorado is considering
the following other options to discharge its wastewater:
|
·
|
discharge
into the sewer discharge system of the city of El Dorado, Arkansas
(the
“City”), subject to El Dorado obtaining a sewer discharge permit from the
City; or
|
|
· |
utilization
of a joint pipeline to be constructed by the
City. |
El
Dorado
has submitted an application to the City which, if approved, would allow El
Dorado to tie-in to the City’s sewer discharge system and become an industrial
customer of the City. While we believe this to be a feasible option, this option
has been put in abeyance while El Dorado concentrates on reducing its effluent
levels to allow it to directly discharge its wastewater as discussed above.
Further,
for the past several years, El Dorado has anticipated utilizing a joint pipeline
to be built by the City to discharge its wastewater. The City has approved
the
construction of a joint pipeline, but the City’s construction of the pipeline 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.
During March 2006, the ADEQ issued a draft permit to the City for the joint
pipeline, and a public hearing occurred in May 2006 to receive public comments.
The final permit was issued in March 2007. It is anticipated that both the
joint
pipeline group and opposing residents will appeal the final permit. The pipeline
will not be available by the June 1, 2007 deadline. The ADEQ has stated to
El
Dorado that since the direct discharge of wastewater appears promising, the
ADEQ
has declined to allow an extension of compliance deadlines that would coincide
with a delayed construction schedule for the City’s planned joint wastewater
pipeline.
Irrespective
of the option that El Dorado is required to utilize to dispose of its wastewater
El Dorado anticipates spending approximately $0.8 million to remove certain
contaminants from its wastewater as though it was permitted to directly
discharge into the creek. If El Dorado is required to utilize the City’s sewer
discharge system and obtains a sewer discharge permit from the City, El Dorado
will be required to obtain from the ADEQ an extension of the June 1, 2007
deadline and will spend an additional $0.5 million to connect to the City’s
sewer discharge system. If El Dorado is required to ultimately participate
in
the City’s joint pipeline to discharge its wastewater, it will be required to
obtain from the ADEQ an extension of the June 1, 2007 deadline, and anticipates
spending an additional $2 million for its pro-rata share of the City’s cost of
engineering and construction of the City’s pipeline.
In
addition, El Dorado has entered into a consent administrative order (“CAO”) that
recognizes the presence of nitrate contamination in the shallow groundwater
at
El Dorado. A new CAO to address the shallow groundwater contamination became
effective on November 16, 2006 and requires the evaluation of the current
conditions and remediation based upon a risk assessment. The 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.
Based on area well surveys performed, 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. As an interim measure,
El
Dorado has installed two recovery wells to recycle ground water and to recover
nitrates. The cost of any additional remediation that may be required will
be
determined based on the results of the investigation and risk assessment and
cannot currently be reasonably estimated. Therefore, no liability has been
established at December 31, 2006.
2.
Air Matters
To
resolve ammonia emissions from certain of our nitric acid plants, El Dorado
entered into a new air consent order which became effective December 19, 2006.
Under the terms of the consent order, El Dorado replaced the catalyst on the
units used for abatement of nitrogen oxide (a periodic maintenance requirement),
agreed to monitor ammonia slippage, and agreed to submit an air permit
modification to set an allowable limit for the ammonia emissions.
Under
the
terms of a consent administrative order relating to air matters (“AirCAO”),
which became effective in February 2004, resolving certain air regulatory
alleged violations associated with El Dorado’s sulfuric acid plant and certain
other alleged air emission violations, El Dorado is required to implement
additional air emission controls at El Dorado 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 $2.5
million to $4 million of capital expenditures, depending on the technology
changes as may be required. Our initial engineering evaluation began during
the
fourth quarter of 2006.
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. The successor (“Chevron”) of the prior owner of the
Hallowell Facility has agreed, within certain limitations, to pay and has been
paying one-half of the costs of certain interim remediation measures at the
site
approved by the KDHE, subject to reallocation.
As
a
result of meetings with the KDHE, we recorded a provision of $0.6 million for
our share of these additional estimated costs for 2005. In addition, during
2006, additional costs were estimated due to requirements by the KDHE to further
investigate and delineate the site. As a result, for 2006, we recorded
provisions totaling $0.2 million for our share of these estimated additional
costs. The above provisions are classified as discontinued operations (in
accordance with SFAS 144) in the accompanying consolidated statements of income
(there are no income tax benefits related to this expense). At December 31,
2006, the total estimated liability (which is included in current and noncurrent
accrued and other liabilities) in connection with this remediation matter is
$1.4 million and Chevron’s share for one-half of these costs (which is included
in accounts receivable and other assets) is $0.7 million. 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. Should
soil remediation be required, it is expected to be completed during 2007
followed by up to five years of ground water monitoring.
Recently,
a site modeling was performed by a consulting firm for Slurry and Chevron which
indicates that the removal of the contaminated soil would have only limited
beneficial effect on the reduction of the contamination of the ground water
down
gradient of the site. The consultant’s modeling report was presented for review
to the KDHE in March 2007. As a result, Slurry and Chevron expect to attempt
to
pursue a course with the KDHE of long-term surface and ground water monitoring
to track the natural decline in contamination, instead of the soil excavation.
We estimate the costs relating to this course of action to be substantially
less
than the cost of the soil excavation but we are unable to determine if the
KDHE
will ultimately accept the proposal.
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. Historically, there has been volatility
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 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 any
increases in anhydrous ammonia and natural gas costs. We have suspended in
the
past, and could in the future, from time to time, suspend production at our
chemical facilities due to, among other things, the high cost or lack of
availability of such primary raw materials. Accordingly, our results of
operations and financial condition have in the past been, and may in the future
be, materially affected by the cost or unavailability 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. Our Climate Control Business depends on certain suppliers to deliver
the key components that are required in the production of its products. Any
disruption in such supply could result in lost production or delayed shipments,
which could materially affect our operations and cash flow.
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 (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.
We
may be required to expand our security procedures and install additional
security equipment for our Chemical Business in order to comply with the
Homeland Security Act of 2002 and possible future government
regulation.
The
chemical industry in general, and producers and distributors of ammonium nitrate
specifically, are scrutinized by the government, industry and public on security
issues. Under the Homeland Security Act of 2002, as well as current and
proposed regulations, we may be required to incur substantial additional costs
relating to security at our chemical facilities and distribution centers and
security for the transportation of our products. These costs could have a
material impact on our financial condition and results of
operation.
A
substantial portion of our sales is dependent upon a limited number of
customers.
During
2006, six customers of our Chemical Business accounted for 54% of its net sales
and 29% of our consolidated sales, and our Climate Control Business had one
customer that accounted for 16% 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.
Jack
E.
Golsen, our Chairman of the Board and Chief Executive Officer (“CEO”), members
of his immediate family (spouse and children), including Barry H. Golsen, our
Vice Chairman and President, entities owned by them and trusts for which they
possess voting or dispositive power as trustee (collectively, the “Golsen
Group”) beneficially owned as of March 14, 2007, an aggregate of 3,542,375
shares of our common stock and 1,020,000 shares of our voting preferred stock
(1,000,000 of which shares have .875 votes per share, or 875,000 votes), which
together votes as a class and represented approximately 21.8% of the voting
power of our issued and outstanding voting securities as of that date. At such
date, the Golsen Group also beneficially owned options, rights and other
convertible preferred stock that allowed its members to acquire an additional
392,926 shares of our common stock within 60 days of March 14, 2007. Thus,
the
Golsen Group may be considered to effectively control us. As a result, the
ability of other stockholders to influence our management and policies could
be
limited.
Loss
of key personnel could negatively affect our business.
We
believe that our performance has been and will continue to be dependent upon
the
efforts of our principal executive officers. We cannot promise you that our
principal executive officers will continue to be available. Jack E. Golsen
has
an employment agreement with us. No other principal executive has an employment
agreement with us. The loss of some of our principal executive officers could
have a material adverse effect on us. We believe that our future success will
depend in large part on our continued ability to attract and retain highly
skilled and qualified personnel.
We
may have inadequate insurance.
While
we
maintain liability insurance, including certain coverage for environmental
contamination, it is subject to coverage limits and policies may exclude
coverage for some types of damages. 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.
Terrorist
attacks and other acts of violence or war, and natural disasters (such as
hurricanes, pandemic health crisis, etc.), have and could negatively impact
the
U.S. and foreign companies, the financial markets, the industries where we
operate, our operations and profitability.
Terrorist
attacks and natural disasters (such as hurricanes) have in the past, and can
in
the future, negatively affect our operations. We cannot predict further
terrorist attacks and natural disasters in the United States and elsewhere.
These attacks or natural disasters have contributed to economic instability
in
the United States and elsewhere, and further acts of terrorism, violence, war
or
natural disasters could further affect the industries where we operate, our
ability to purchase raw materials, our business, results of operations and
financial condition. In addition, terrorist attacks and natural disasters may
directly impact our physical facilities, especially our chemical facilities,
or
those of our suppliers or customers and could impact our sales, our production
capability and our ability to deliver products to our customers. In the past,
hurricanes affecting the Gulf Coast of the United States have resulted in
damages to, or shutdown of, the gas pipeline to Cherokee, resulting in that
facility being shutdown for several weeks. The consequences of any terrorist
attacks or hostilities or natural disasters are unpredictable, and we may not
be
able to foresee events that could have an adverse effect on our
operations.
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 $49.3
million at December 31, 2006. The use of the net
operating
loss carryovers is, however, subject to certain limitations and will expire
to
the extent not utilized beginning in 2019. 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.
Restatements
and amendments to our 2004 audited financial statements and certain matters
related to our disclosure controls and procedures may present a risk of future
restatements and could in turn lead to legal exposure.
In
response to comments from the SEC to our 2004 Form 10-K, and as a result of
changes we made internally, we restated and amended our 2004 audited financial
statements and on December 30, 2005, filed a Form 10-K/A (Amendment No. 1)
for
year ended December 31, 2004. As a result of the restatement and amendments
to
our 2004 audited financial statements and SEC comments, we also filed on
December 30, 2005, an amended Form 10-Q/A for each of the quarters ended March
31, 2005 and June 30, 2005.
As
a
result of this restatement to our 2004 financial statements, we also revised
our
2004 Form 10-K and first two quarters 2005 Form 10-Qs to provide that our
disclosure controls and procedures were not effective as of December 31, 2004,
March 31, 2005 and June 30, 2005, in our Form 10-K/A and Forms 10-Q/A, as a
result of assessing that the change from the LIFO method to the FIFO method
of
accounting was not material resulting in the decision at the time of the change
not to disclose and not to restate the prior years financial statements. We
believe that during December 2005, we corrected the weakness to our disclosure
controls and procedures by, among other things, establishing a Disclosure
Committee to maintain oversight activities and to examine and reevaluate our
policies, procedures and criteria to determine materiality of items relative
to
our financial statements taken as a whole. Restatements by others have, in
some
cases, resulted in the filing of class action lawsuits against such companies
and their management and further inquiries from the SEC. Any similar lawsuit
against us could result in substantial defense and/or liability costs and would
likely consume a material amount of management’s attention that might otherwise
be applied to our business. Under certain circumstances, these costs might
not
be covered by, or might exceed the limits of, our insurance
coverage.
In
addition, by letter received in August 2006 from the SEC, the SEC has made
an
informal inquiry of us relating to the change in inventory accounting from
LIFO
to FIFO resulting in the restatement of our financial statements, and, at this
time, we do not know if the informal inquiry:
|
·
|
will
rise to the level of an investigation or proceeding,
or
|
|
·
|
will
result in an enforcement action, if any, by the
SEC.
|
We
are a holding company and depend, in large part, on receiving funds from our
subsidiaries to fund our indebtedness.
Because
we are a holding company and operations are conducted through our subsidiaries,
principally ThermaClime and its subsidiaries, our ability to make scheduled
payments of principal and interest on our indebtedness depend on operating
performance and cash flows of our subsidiaries and the ability of our
subsidiaries to make distributions and pay dividends to us. Under its loan
agreements, ThermaClime and its subsidiaries may only make distributions and
pay
dividends to us under limited circumstances and in limited amounts. If
ThermaClime is unable to make distributions or pay dividends to us, or the
amounts of such distributions or dividends are not sufficient for us to service
our debts, we may not be able to pay the principal or interest, or both, due
on
our indebtedness.
We
are leveraged, which could affect our ability to pay our
indebtedness.
We
have a
substantial amount of debt. At December 31, 2006, our aggregate consolidated
debt was approximately $97.7 million resulting in total debt as a percentage
of
total capitalization of 70%.
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.
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.
Future
sales of substantial amounts of our common stock or equity-related securities
in
the public market, or the perception that such sales could occur, could
adversely affect prevailing trading prices of our common stock and could impair
our ability to raise capital through future offerings of equity or
equity-related securities. No prediction can be made as to the effect, if any,
that future sales of shares of common stock or the availability of shares of
common stock for future sale, will have on the trading price of our common
stock. Such future sales could also significantly reduce the percentage
ownership of our existing common stockholders.
We
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
from
January 1, 1999, through December 31, 2005, we did not pay any accrued 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, during each quarter in 2006, our board of directors
declared nominal dividends on certain outstanding series of our preferred stock,
as follows: $.10 per share on the then outstanding shares of our Series 2
Preferred, $.37 per share on our outstanding Series B 12% Cumulative Convertible
Preferred, and $.31 per share on our outstanding Non-Cumulative Preferred.
These
dividends are not for the full amount of the required quarterly dividends
pursuant to the terms of our outstanding series of preferred stock. As of March
19, 2007, there were approximately $6.8 million of accrued and unpaid dividends
on our outstanding cumulative preferred stock after the completion of our
recently completed exchange offer which is discussed under “Sale of Unregistered
Securities -Preferred Stock Exchanges and Completion of Exchange Offer” of Item
5.
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 the 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.
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) 55,520,861 shares
of
common stock and 4,036,093 shares of preferred stock as of March 14, 2007.
These
unissued shares could be used by our management to make it more difficult,
and
thereby discourage an attempt to acquire control of us.
We
have
adopted a preferred share purchase plan, which is designed to ensure that all
of
our stockholders receive fair and equal treatment in the event of a proposed
takeover or abusive tender offer.
The
foregoing provisions and agreements are designed to discourage a third party
tender offer or proxy contest for control of us and could have the effect of
making it more difficult to remove incumbent management.
Delaware
has adopted an anti-takeover law which, among other things, will delay for
three
years business combinations with acquirers of 15% or more of the outstanding
voting stock of publicly-held companies (such as us), unless (a) the acquirer
owned at least 85% of the outstanding voting stock of such company prior to
commencement of the transaction, or (b) two-thirds of the stockholders, other
than the acquirer, vote to approve the business combination after approval
thereof by the board of directors, and (c) the stockholders decide to opt out
of
the statute.
Not
applicable.
Climate
Control Business
Our
Climate Control Business manufactures most of its heat pump products in a
270,000 square foot facility in Oklahoma City, Oklahoma. We lease this facility,
with an option to buy, through May 2016, with options to renew for three
additional five-year periods. For 2006, approximately 98% of the productive
capacity of this manufacturing facility was being utilized, based on two
ten-hour shifts per day and a four-day work week in one department and one
ten-hour shift per day and a four-day work week in all other departments.
During
mid-2006, we added three twelve-hour shifts per weekend. 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 2006, our Climate
Control Business was using 87% of the productive capacity, based on one ten-hour
shift per day and a four-day work week and a limited second shift in selected
areas.
Our
Climate Control Business conducts its large air handler manufacturing operation
in a facility located in Oklahoma City, Oklahoma, consisting of approximately
110,000 square feet. We own this facility subject to a mortgage. For 2006,
approximately 53% of the productive capacity of this manufacturing facility
was
being utilized, based on one eight-hour shift on a five-day work week and
a
partial second shift in selected areas.
All
of
the properties utilized by our Climate Control Business are considered by our
management to be suitable to meet the current needs of that business. However,
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.
Chemical
Business
Our
Chemical Business primarily conducts manufacturing operations (a) on 150 acres
of a 1,400 acre tract of land located at El Dorado, (b) on 160 acres of a 1,300
acre tract of land located at Cherokee and (c) on leased property within Bayer’s
complex in Baytown, Texas. The Company and/or its subsidiaries own all of its
manufacturing facilities except Baytown. Baytown is being leased pursuant to
a
long-term lease with an unrelated third party. Certain real property and
equipment located at El Dorado and Cherokee are being used to secure a $50
million term loan. For 2006, the following facilities were utilized based on
continuous operation:
|
El
Dorado (1)
|
91
|
%
|
|
|
Cherokee
(2)
|
83
|
%
|
|
|
Baytown
(3)
|
90
|
%
|
|
(1)
The
percentage of capacity for El Dorado relates to its nitric acid capacity. El
Dorado has capacity to produce other nitrogen products in excess of its nitric
acid capacity.
(2)
The
percentage of capacity for Cherokee relates to its ammonia production capacity
and was compromised by the curtailments in early 2006 as explained under
“Overview - Chemical Business” of Item 7. Cherokee has additional capacity for
nitric acid, ammonium nitrate and urea in excess of its ammonia capacity.
(3)
Production projects were completed at Baytown from 2004 through 2006 which
increased nameplate capacity by 7%. Further process fine tuning and capacity
increases are planned for 2007.
In
addition to El Dorado and Cherokee, our Chemical Business distributes its
agricultural products through 15 wholesale and retail distribution centers,
with
13 of the centers located in Texas (10 of which we own and 3 of which we lease);
1 center located in Tennessee (owned); and 1 center located in Missouri
(owned).
All
of
the properties utilized by our Chemical Business are considered by our
management to be suitable and adequate to meet the current needs of that
business.
1.
Environmental
See
“Business-Environmental Matters” for a discussion as to:
|
·
|
claims
by the KDHE regarding Slurry’s former facility in Hallowell, Kansas and
Chevron, the successor of the prior owner of the facility; and
|
|
·
|
discussion
as to a consent order between El Dorado and the ADEQ entered into
during
December 2006 to resolve certain ammonia
emissions.
|
2.
Chemical Business
Cherokee
Nitrogen Company (“CNC”), a subsidiary within our Chemical Business, has been
sued for an undisclosed amount of monies based on a claim that CNC 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. CNC 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. The suit is Nelson
Brothers, LLC v. Cherokee Nitrogen v. Dynegy Marketing,
and is
pending in Alabama state court in Colbert County. Dynegy has filed a
counterclaim against CNC for $600,000 allegedly owed on account, which has
been
recorded by CNC. Although there is no assurance, counsel for CNC has advised
us
that, at this time, they believe that CNC will recover monies from Dynegy
and
the likelihood of Dynegy recovering from CNC is remote. Our counsel also
has
advised us that they believe that the likelihood of Nelson recovering monies
from CNC over and above any monies which may be recovered from Dynegy by
CNC is
remote.
CNC
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 of $140,000 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. CNC is vigorously pursuing this matter, and counsel for CNC
has
advised that they believe there is a good likelihood CNC will recover from
the
defendants and that the likelihood of Meecorp recovering from CNC 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 was informed by the PBGC of a possible under-funding of the plan and
a
possible takeover of the plan by the PBGC. The PBGC previously advised the
Company that the PBGC may consider the Company 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 alleged that the under-funding is approximately $600,000. However,
the
Company’s ERISA counsel was verbally informed by a PBGC representative that he
would probably recommend no further action by the PBGC with respect to the
Company’s involvement with the Zeller plan. There are no assurances that such
recommendation, will be made or, if made, will be accepted by the
PBGC.
MEI
Drafts
On
July
18, 2006, Masinexportimport Foreign Trade Company (“MEI”) gave notice to the
Company and a subsidiary of the Company alleging that it was owed $1,533,000
in
connection with MEI’s attempted collection of ten non-negotiable bank
drafts payable to the order of MEI. The bank drafts were issued by Aerobit
Ltd.
(“Aerobit”), a non-U.S. company and at the time of issuance of the bank drafts
was a subsidiary of the Company. Each of the bank drafts has a face value of
$153,300, for an aggregate principal face value of $1,533,000. The bank drafts
were issued in September 1992, and had a maturity date of December 31, 2001.
Each bank draft was endorsed by LSB Corp., which, at the time of endorsement,
was a subsidiary of the Company.
On
October 22, 1990, a settlement agreement between the Company, its subsidiary
Summit Machine Tool Manufacturing Corp. (“Summit”), and MEI (the “Settlement
Agreement”), was entered into, and in connection with the Settlement Agreement,
Summit issued to MEI obligations totaling $1,533,000. On May 16, 1992, the
Settlement Agreement was rescinded by the Company, Summit, and MEI at the
request of MEI, and replaced with an agreement purportedly substantially similar
to the Settlement Agreement between MEI and Aerobit, pursuant to which MEI
agreed to replace the original $1,533,000 of Summit’s obligations with Aerobit
bank drafts totaling $1,533,000, endorsed by LSB Corp. Aerobit previously
advised us that MEI has not fulfilled the requirements under the bank drafts
for
payment thereof.
All
of
the Company’s ownership interest in LSB Corp. was sold to an unrelated third
party in September 2002. Further, all of the Company’s interest in Aerobit was
sold to a separate unrelated third party, in a transaction completed on or
before November 2002. Accordingly, neither Aerobit, which was the issuer of
the
bank drafts, nor LSB Corp., which was the endorser of the bank drafts, are
currently subsidiaries of the Company.
Neither
the Company nor any of its currently owned subsidiaries are makers or endorsers
of the bank drafts in question. The Company intends to vigorously defend itself
in connection with this matter. No liability has been established relating
to
these bank drafts as of December 31, 2006.
Securities
and Exchange Commission Inquiry
The
Securities and Exchange Commission (“SEC”) made an informal inquiry to the
Company by letter dated August 15, 2006. The inquiry relates to the restatement
of the Company’s consolidated financial statements for the year ending December
31, 2004 and accounting matters relating to the change in inventory accounting
from LIFO to FIFO. The Company has responded to the inquiry. At the present
time
the informal inquiry is not a pending proceeding nor does it rise to the level
of a government investigation. Until further communication and clarification
with the SEC, if any, the Company is unable to determine:
|
· |
if
the inquiry will ever rise to the level of an investigation or proceeding,
or |
|
·
|
the
materiality to the Company’s financial position with respect to
enforcement actions, if any, the SEC may have available to it.
|
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 2006.
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. Mr. Golsen, age 78, 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.
|
|
|
|
Barry
H. Golsen (1)
|
|
Vice
Chairman of the Board, President, and President of the Climate Control
Business. Mr. Golsen, age 56, first became a director in 1981. His
term
will expire in 2009. Mr. Golsen was elected President of the Company
in
2004. Mr. Golsen has served as our Vice Chairman of the Board of
Directors
since August 1994, and has been the President of our Climate Control
Business for more than five years. Mr. Golsen also serves as a director
of
the Oklahoma branch of the Federal Reserve Bank. Mr. Golsen has both
his
undergraduate and law degrees from the University of
Oklahoma.
|
|
|
|
David
R. Goss
|
|
Executive
Vice President of Operations and Director. Mr. Goss, age 66, first
became
a director in 1971. His term will expire in 2009. Mr. Goss, a certified
public accountant, is our Executive Vice President of Operations
and has
served in substantially the same capacity for more than five years.
Mr.
Goss is a graduate of Rutgers University.
|
|
|
|
Tony
M. Shelby
|
|
Executive
Vice President of Finance and Director. Mr. Shelby, age 65, 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.
|
|
|
|
Jim
D. Jones
|
|
Senior
Vice President, Corporate Controller and Treasurer. Mr. Jones, age
64, 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 47, has been Senior
Vice President since July 2004 and General Counsel and Secretary
since
1990. Mr. Shear attended Brandeis University, graduating cum laude
in
1981. At Brandeis University, Mr. Shear was the founding Editor-In-Chief
of Chronos, the first journal of undergraduate scholarly articles.
Mr.
Shear attended the Boston University School of Law, where he was
a
contributing Editor of the Annual Review of Banking Law.
Mr.
Shear acted as a staff attorney at the Bureau of Competition with
the
Federal Trade Commission from 1985 to 1986. From 1986 through 1989,
Mr.
Shear was an associate in the Boston law firm of Weiss, Angoff, Coltin,
Koski and Wolf. 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.
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 under the
symbol “LXU”. The following table shows, for the periods indicated, the high and
low bid information for our common stock which reflects inter-dealer prices,
without retail markup, markdown or commission, and may not represent actual
transactions.
|
Quarter
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First
|
|
$
|
7.48
|
|
$
|
5.87
|
|
$
|
7.93
|
|
$
|
5.95
|
|
Second
|
|
$
|
9.19
|
|
$
|
6.95
|
|
$
|
7.50
|
|
$
|
6.00
|
|
Third
|
|
$
|
10.25
|
|
$
|
8.25
|
|
$
|
7.35
|
|
$
|
6.05
|
|
Fourth
|
|
$
|
13.20
|
|
$
|
8.50
|
|
$
|
6.70
|
|
$
|
4.84
|
Stockholders
As
of
March 14, 2007, we had 740 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:
|
·
|
the
amount of income taxes that ThermaClime would be required to pay
if they
were not consolidated with us;
|
|
·
|
an
amount not to exceed fifty percent (50%) of ThermaClime's consolidated
net
income during each fiscal year determined in accordance with generally
accepted accounting principles plus amounts paid to us within the
first
bullet above, provided that certain other conditions are
met;
|
|
·
|
the
amount of direct and indirect costs and expenses incurred by us on
behalf
of ThermaClime pursuant to a certain services
agreement;
|
|
·
|
amounts
under a certain management agreement between us and ThermaClime,
provided
certain conditions are met.
|
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 Series
2
Preferred, or declared and amounts set apart for the current period, and, if
cumulative, prior periods.
As
discussed below under “Sale of Unregistered Securities - Preferred Stock
Exchanges and Completion of Exchange Offer”, during 2006, we had transactions in
which Series 2 Preferred was exchanged for our common stock. Because the
exchanges were pursuant to terms other than the original terms, the transactions
were considered extinguishments of the preferred stock. In addition, the
transactions qualified as induced conversions under SFAS 84. Accordingly, we
recorded a charge (stock dividend) to accumulated deficit of approximately
$2.9
million which equaled the excess of the fair value of the common stock issued
over the fair value of the common stock issuable pursuant to the original
conversion terms. To measure fair value, we used the closing price of our common
stock on the day the parties entered into an exchange agreement.
As
of
March 14, 2007, we have issued and outstanding, 193,295 shares of the Series
2
Preferred, 1,000,000 shares of Series D Cumulative Convertible Class C Preferred
Stock ("Series D Preferred"), 612 shares of a series of the Non-Cumulative
Preferred and 20,000 shares of Series B 12% Convertible, Cumulative Preferred
Stock ("Series B Preferred"). Each share of preferred stock is entitled to
receive an annual dividend, if and when declared by our Board of Directors,
payable as follows:
|
·
|
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;
|
|
·
|
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;
|
|
·
|
Non-Cumulative
Preferred at the rate of $10.00 a share payable April 1, which are
non-cumulative; and
|
|
·
|
Series
B Preferred at the rate of $12.00 a share payable January 1, which
dividend is cumulative.
|
We
have
not paid cash dividends on our outstanding common stock in many years, and
from
January 1, 1999, through December 31, 2005, we did not pay any accrued 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, during each quarter in 2006, our board of directors
declared nominal dividends on certain outstanding series of our preferred stock,
as follows: $.10 per share on the then outstanding shares of our Series 2
Preferred, $.37 per share on our outstanding Series B Preferred, and $.31 per
share on our outstanding Non-Cumulative
Preferred.
These dividends are not for the full amount of the required quarterly dividends
pursuant to the terms of our outstanding series of preferred stock.
No
dividends or other distributions, other than dividends payable in common stock,
shall be declared or paid, 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 March 19, 2007,
the
aggregate amount of unpaid dividends in arrears on our Series 2 Preferred,
Series D Preferred and Series B Preferred totaled approximately $4.8 million,
$0.3 million and $1.7 million, respectively.
Our
Board
of Directors did not, and does not plan, to declare a dividend on our preferred
stock during March 2007. 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”.
Sale
of Unregistered Securities
Completion
of Exchange Offer
On
November 10, 2006, the Company entered into an agreement (“Jayhawk Agreement”)
with Jayhawk Capital Management, L.L.C. and certain of its affiliates
(collectively, the “Jayhawk Group”). Under the Jayhawk Agreement, the Jayhawk
Group agreed, if the Company made an exchange offer for the Series 2 Preferred,
to tender (discussed below) 180,450 shares of the 346,662 shares of Series
2
Preferred owned by the Jayhawk Group. In addition, as a condition to the Jayhawk
Group’s obligation to tender such shares of Series 2 Preferred in an exchange
offer, the Jayhawk Agreement further provided that Jack E. Golsen (Chairman
of
the Board and CEO of the Company), his wife, children and certain entities
controlled by them (the “Golsen Group”) would exchange only 26,467 of the 49,550
shares of Series 2 Preferred beneficially owned by them. As a result, only
309,807 of the 499,102 shares of Series 2 Preferred outstanding would be
eligible to participate in an exchange offer, with the remaining 189,295 being
held by the Jayhawk Group and the Golsen Group.
On
January 26, 2007, our Board of Directors approved and on February 9, 2007,
we
began an exchange offer to exchange shares of our common stock for up to 309,807
of the 499,102 outstanding shares of the Series 2 Preferred. The exchange offer
expired on March 12, 2007. The terms of the exchange offer provided for the
issuance by the Company of 7.4 shares of common stock in exchange for each
share
of Series 2 Preferred tendered in the exchange offer and the waiver of all
rights to accrued and unpaid dividends on the Series 2 Preferred tendered.
As a
result of this exchange offer, we issued 2,262,965 shares of our common stock
for 305,807 shares of Series 2 Preferred that were tendered. In addition, an
aggregate of approximately $7.3 million in accrued and unpaid dividends were
waived as a result of this exchange offer. Pursuant
to the Jayhawk Agreement and the terms of the exchange offer, the Jayhawk Group
and the Golsen Group tendered 180,450 and 26,467 shares, respectively, of Series
2 Preferred for 1,335,330 and 195,855 shares, respectively, of our common stock
and waived a total of approximately $4.96 million in accrued and unpaid
dividends, with the Jayhawk Group waiving a total of $4.33 million and the
Golsen Group waiving a total of $0.63 million.
The
shares of common stock issued by us as a result of the tender offer were not
registered under the Securities Act of 1933, as amended (“Securities Act”)
pursuant to an exemption from registration under Section 3(a)(9) of the
Securities Act. No fractional shares were issued so cash was paid in lieu of
any
additional shares in an amount equal to the fraction of a share times the
closing price per share of our common stock on the last business day immediately
preceding the expiration date of the tender offer.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
During
the three months ended December 31, 2006, the Company and affiliated purchasers,
as defined, did not purchase any of its equity securities except that during
October 2006, we entered into various Exchange Agreements with certain holders
of our Series 2 Preferred to exchange an aggregate of 104,548 shares of Series
2
Preferred for an aggregate of 773,655 shares of common stock in transactions
exempted from registration pursuant to Section 3(a)(9) of the Securities Act.
These exchanges were subject to approval by AMEX to list the shares of common
stock to be issued in connection with the Exchange Agreements. In accordance
with the Exchange Agreements, the holders that exchanged Series 2 Preferred
for
our common stock waived any and all accrued and unpaid dividends on the Series
2
Preferred exchanged. On November 7, 2006, the AMEX approved the listing of
the
shares to be issued in the exchange. All such exchanges are shown in the
following table:
Period
|
(a)
Total number of shares of Series 2 Preferred
purchased
|
(b)
Average price paid per share of
Series
2 Preferred
|
(c)
Total number of shares of Series 2 Preferred purchased
as
part of publicly announced plans
or
programs
|
(d)
Maximum number (or approximate dollar value) of shares of Series 2
Preferred that may yet
be
purchased under
the
plans or programs
|
October
1, 2006 - October 31, 2006
|
104,548
|
|
$
|
66.43
|
-
|
-
|
|
|
|
|
|
|
|
November
1, 2006 - November 30, 2006
|
-
|
|
$
|
-
|
-
|
-
|
|
|
|
|
|
|
|
December
1, 2006 - December 31, 2006
|
-
|
|
$
|
-
|
-
|
-
|
Total
|
104,548
|
|
$
|
66.43
|
-
|
-
|
These
shares of Series 2 Preferred were cancelled. The average price paid per share
of
Series 2 Preferred is based on the closing market price of our common stock
on
the dates of the underlying Exchange Agreements.
ITEM
6. SELECTED FINANCIAL DATA
|
Years
ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
(Dollars
in thousands, except per share
data)
|
Selected
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$
|
491,952
|
|
|
$
|
397,115
|
|
|
$
|
363,984
|
|
|
$
|
317,026
|
|
|
$
|
283,553
|
|
Interest
expense (1)
|
$
|
11,915
|
|
|
$
|
11,407
|
|
|
$
|
7,393
|
|
|
$
|
6,097
|
|
|
$
|
8,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before cumulative effect of accounting
changes
(1) (2)
|
$
|
16,183
|
|
|
$
|
5,746
|
|
|
$
|
1,906
|
|
|
$
|
2,913
|
|
|
$
|
2,723
|
|
Cumulative
effect of accounting changes
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(536
|
)
|
|
$
|
-
|
|
|
$
|
860
|
|
Net
income
|
$
|
15,930
|
|
|
$
|
5,102
|
|
|
$
|
1,370
|
|
|
$
|
2,913
|
|
|
$
|
122
|
|
Net
income (loss) applicable to common stock
|
$
|
13,300
|
|
|
$
|
2,819
|
|
|
$
|
(952
|
)
|
|
$
|
586
|
|
|
$
|
(2,205
|
)
|
Income
(loss) per common share applicable to
common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before cumulative effect of accounting
changes
|
$
|
.95
|
|
|
$
|
.26
|
|
|
$
|
(.03
|
)
|
|
$
|
.05
|
|
|
$
|
.04
|
|
Net
loss from discontinued operations
|
$
|
(.02
|
)
|
|
$
|
(.05
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(.29
|
)
|
Cumulative
effect of accounting changes
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(.04
|
)
|
|
$
|
-
|
|
|
$
|
.07
|
|
Net
income (loss)
|
$
|
.93
|
|
|
$
|
.21
|
|
|
$
|
(.07
|
)
|
|
$
|
.05
|
|
|
$
|
(.18
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before cumulative effect of accounting
changes
|
$
|
.79
|
|
|
$
|
.23
|
|
|
$
|
(.03
|
)
|
|
$
|
.04
|
|
|
$
|
.03
|
|
Net
loss from discontinued operations
|
$
|
(.01
|
)
|
|
$
|
(.04
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(.27
|
)
|
Cumulative
effect of accounting changes
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(.04
|
)
|
|
$
|
-
|
|
|
$
|
.07
|
|
Net
income (loss)
|
$
|
.78
|
|
|
$
|
.19
|
|
|
$
|
(.07
|
)
|
|
$
|
.04
|
|
|
$
|
(.17
|
)
|
(1) In
May
2002, the repurchase of Senior Unsecured Notes using proceeds from a Financing
Agreement was accounted for as a voluntary debt restructuring. As a result,
subsequent interest payments associated with the Financing Agreement debt were
recognized against the unrecognized gain on the transaction. The Financing
Agreement debt was repaid in September 2004.
(2) Income
from continuing operations before cumulative effect of accounting changes
includes gains on extinguishment of debt of $4.4 million and $1.5 million for
2004 and 2002, respectively.
ITEM
6. SELECTED FINANCIAL DATA (CONTINUED)
|
(Dollars
in thousands, except per share
data)
|
Selected
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
219,927
|
|
|
$
|
188,963
|
|
|
$
|
167,568
|
|
|
$
|
161,813
|
|
|
$
|
166,276
|
|
Redeemable
preferred stock
|
$
|
65
|
|
|
$
|
83
|
|
|
$
|
97
|
|
|
$
|
103
|
|
|
$
|
111
|
|
Long-term
debt, including current portion
|
$
|
97,692
|
|
|
$
|
112,124
|
|
|
$
|
106,507
|
|
|
$
|
103,275
|
|
|
$
|
113,361
|
|
Stockholders'
equity
|
$
|
42,644
|
|
|
$
|
13,456
|
|
|
$
|
8,398
|
|
|
$
|
6,184
|
|
|
$
|
1,204
|
|
Selected
other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per common share
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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, 2006
Consolidated Financial Statements included elsewhere in this report. Certain
statements contained in this MD&A may be deemed to be forward-looking
statements. See "Special Note Regarding Forward-Looking
Statements."
Overview
General
We
are a
manufacturing, marketing and engineering company. Our wholly-owned subsidiary,
ThermaClime, through its subsidiaries, owns substantially all of our core
businesses consisting of the:
·
|
Climate
Control Business engaged in the manufacturing and selling of a broad
range
of air conditioning and heating products in the niche markets we
serve
consisting of geothermal and water source heat pumps, hydronic fan
coils,
large custom air handlers and other products used in commercial and
residential new building construction, renovation of existing buildings
and replacement of existing
systems.
|
·
|
Chemical
Business engaged in the manufacturing and selling of chemical products
produced from three plants located in Arkansas, Alabama and Texas
for the
industrial, mining and agricultural markets.
|
2006
Results
LSB’s
2006 sales were $492.0 million compared to $397.1 million in 2005, operating
income was $27.6 million compared to $15.0 million in 2005 and income from
continuing operations was $16.2 million compared to $5.7 million in 2005. Net
income was $15.9 million compared to $5.1 million for 2005.
The
Climate Control Business continued to report strong sales and operating results
due to record high backlogs and new order flow. Their sales were $221.2 million
compared to $156.9 million in 2005. Their operating income before allocation
of
corporate overhead was $25.4 million, an 80% increase over the $14.1 million
in
2005.
Our
Chemical Business reported improved results in 2006 with sales of $260.7 million
compared to $233.4 million in 2005. Operating income before allocation of
corporate overhead was $10.2 million, a 32% increase over the $7.7 million
in
2005.
Climate
Control Business
The
Climate Control Business has historically and consistently generated annual
profits and positive cash flows and continues to do so. Climate Control’s sales
for 2006 were $221 million, a 41% increase from the same period last year.
As
indicated above the Climate Control Business’
sales
and
operating income for 2006 were higher than in 2005. The increase in 2006 sales
and operating income as compared to 2005 is attributable to strong demand for
the geothermal and water source heat pumps that reported a 57% sales increase
and to the fan coil and other products that reported a 21% increase.
Management’s objectives for the Climate Control Business include the continued
emphasis on:
|
·
|
increasing
the sales and operating margins of all products,
|
|
·
|
developing
and introducing new and energy efficient products, and
|
|
·
|
increasing
production to meet customer demand.
|
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 maintains significant backlogs that eliminate the
necessity to carry substantial inventories other than for firm customer orders.
Due to the increase in the demand for Climate Control’s products, the backlog of
confirmed orders has also increased. The backlog of confirmed orders at December
31, 2006, was approximately $80 million as compared to $56 million at 2005
and
$28 million at 2004. We anticipate shipping substantially all of this backlog
within twelve months.
Management
is taking certain actions to increase the production level to reduce the product
delivery lead times and the current backlog. In response to record intake level
of customer orders, we recently increased our unit output through additional
shifts and overtime. Management
has also invested $4.9 million in fabrication equipment, plant-wide process
control systems and other upgrades during 2006 and has plans for additional
production equipment during 2007 including $3.6 million already
committed.
This investment is expected to increase capacity and reduce overtime. In
addition, during the fourth quarter of 2006, we acquired a 46,000 sq. ft.
building adjacent to our existing 270,000 sq. ft. geothermal and water source
heat pump production facility at an approximate cost of $2.5 million to increase
production and warehouse space. We
have
also committed approximately $1.2 million to renovate an existing building
as a
distribution center for our geothermal and water source heat pumps. At December
31, 2006, approximately $0.3 million of the $1.2 million commitment had been
expended. Both
of
these real property investments have been financed by mortgages.
In
October 2006, Trison Construction, Inc. (“Trison”), a subsidiary within our
Climate Control Business, was awarded reimbursement of defense costs of $1.2
million in connection with a binding arbitration filed with the American
Arbitration Association. The amount was paid in the fourth quarter and is
classified as other income which is included in operating income.
Our
Climate Control Business will continue to launch new products and product
upgrades in an effort to maintain our current market position and to establish
a
presence in new markets. In recent periods, the Climate Control Business's
profitability was affected by operating losses of certain new product lines
being developed over the past few years. Our emphasis has been to increase
the
sales levels of these operations above the breakeven point. During
2006, the results for these new products have not improved appreciably. We
believe that the prospects for these new product lines are improving and that
these products will contribute favorably in the future.
Chemical
Business
The
Chemical Business has production facilities in Baytown, Texas (the “Baytown”
facility), El Dorado, Arkansas (the “El Dorado” facility) and Cherokee, Alabama
(the “Cherokee” facility). Baytown and El Dorado produce nitrogen products from
anhydrous ammonia that is delivered by pipeline. Cherokee produces nitrogen
products from natural gas that is delivered by pipeline. As indicated above,
for
2006, the Chemical Business reported a sales increase of $27.2 million or 12%
and a $2.5 million or 32% increase in operating income before allocation of
corporate overhead.
Sales
in
all product lines were higher in 2006 in tons shipped, while our average price
per ton remained consistent with 2005. Industrial acids and other chemical
products increased $15.0 million or 18.7%; agricultural products increased
$9.1
million or 11.3%; and mining products increased $3.1 million or 4.3%.
Agricultural volumes increased in spite of a severe drought throughout the
mid-south and southeast United States. The increase in agricultural volume
is
attributable to our ability to reach outside our traditional geographic markets
and sell into markets previously served by competitors that have exited the
market.
The
increase in operating income is attributable to higher industrial acid and
agricultural sales, the improvement in production performance due to higher
throughput volumes, and an improvement in the natural gas supply and
corresponding average costs as the result of the hurricane disruptions of
2005.
Our
raw
materials, anhydrous ammonia and natural gas, are commodities subject to
significant price fluctuations, and 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 these
raw
material costs. These pricing arrangements help mitigate the commodity price
risk inherent in anhydrous ammonia and natural gas. Approximately 65% of the
Chemical Business’ sales in 2006 were subject to these pricing
arrangements.
Although
anhydrous ammonia is produced from natural gas, the price of anhydrous ammonia
does not necessarily follow the price of natural gas in the United States.
Much
of the anhydrous ammonia consumed in the U.S. is produced off shore and
delivered inland by pipeline, barge and rail with originations at or near the
Gulf of Mexico. Our raw material cost of anhydrous ammonia is based upon
formulas indexed to published industry ammonia prices tied to import
prices.
Most
of
the production from Baytown 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 and reported higher sales and profits in 2006 than in 2005.
El
Dorado
produces approximately 500,000 tons of products per year from purchased
anhydrous ammonia. Approximately 59% of the volume sold in 2006 was sold
pursuant to pricing arrangements that allow for the pass through of the cost
of
anhydrous ammonia to the
customer.
The balance of these products sold during 2006 was primarily agricultural and
was sold at the spot market price in effect at the time of shipment. During
August 2006, a sales agreement for El Dorado to supply a significant amount
of
industrial grade ammonium nitrate each year pursuant to pricing arrangements
was
amended with mutual benefit to the parties for a term extending through 2010.
The amendment provides for, among other things, an increase of 10% of the
minimum annual tons beginning in 2007 and a price increase in the profit-per-ton
component.
Following
a trial in October 2006, a jury verdict awarded El Dorado approximately $9.8
million in damages due to the faulty repair of a hot gas expander in one of
EDC’s nitric acid plants. EDC will pay attorneys fees equal to 31.67% of any
recovery. The award is under appeal and will be recognized if and when
realized.
As
previously reported, Cherokee incurred losses in the third and fourth quarters
of 2005 and continuing into the first quarter 2006, related to disruptions
at
the plant caused by the record climb in natural gas costs due to the hurricanes
in the U.S. Gulf. Although Cherokee’s operating results were negative for 2006,
due to high natural gas costs in the first quarter and downtime in the third
and
fourth quarters, the 2006 operating loss was reduced from 2005.
Natural
gas prices continue to be unpredictable. Daily spot prices per MMBtu, excluding
transportation, during 2006 ranged from a high of $9.90 to a low of $3.54.
During 2006, approximately 71% of Cherokee’s sales were priced to include the
cost of natural gas.
Our
Chemical Business will continue to focus on growing our non-seasonal industrial
customer base with an emphasis on customers that accept the risk inherent with
raw material costs, while maintaining a strong presence in the seasonal
agricultural sector. The operations strategy is to maximize production of the
plants, thereby lowering the fixed cost of each ton of production.
Stock
Options
On
June
19, 2006, the Executive Compensation and Option Committee of our Board of
Directors granted 450,000 shares of non-qualified stock options to certain
employees which are subject to shareholders’ approval. The option price of these
options is $8.01 per share which is based on the market value of our common
stock at the date of authorization. These options will vest over a ten-year
period at a rate of 10% per year and expire on September 16, 2016 with certain
restrictions. Under SFAS 123(R), the fair value for these options will be
estimated, using an option pricing model, as of the date we receive
shareholders’ approval which is currently expected to be no later than our 2007
annual shareholders’ meeting. In general, a ratable portion of the total
estimated fair value relating to these options will be charged to selling,
general, and administrative expense (“SG&A”) at the date of shareholders’
approval and the remaining balance amortized to SG&A over the options’
remaining vesting period.
Preferred
Stock Exchanges and Completion of Exchange Offer
During
October 2006, we entered into Exchange Agreements with certain holders of our
Series 2 Preferred. Pursuant to the terms of the Exchange Agreements we issued
773,655 shares of our common stock in exchange for 104,548 shares of Series
2
Preferred. The holders that were parties to an Exchange Agreement waived their
rights to all unpaid dividends on the Series 2 Preferred exchanged which totaled
approximately $2.43 million.
As
discussed under “Sale of Unregistered Securities” of Item 5, during November
2006, the Company entered into the Jayhawk Agreement with the Jayhawk Group.
Under the Jayhawk Agreement, the Jayhawk Group agreed to tender in an exchange
offer (discussed below) 180,450 shares of Series 2 Preferred owned by the
Jayhawk Group. In addition, as a condition to the Jayhawk Group’s obligation to
tender such shares of Series 2 Preferred in an exchange offer, the Jayhawk
Agreement further provided that the Golsen Group would exchange 26,467 shares
of
Series 2 Preferred beneficially owned by them.
Our
Board
of Directors approved and on February 9, 2007, we began an exchange offer
to
exchange shares of our common stock for up to 309,807 shares of the Series
2
Preferred. The terms of the exchange offer provided for the issuance by the
Company of 7.4 shares of common stock in exchange for each share of Series
2
Preferred tendered in the exchange offer and the waiver of all rights to
accrued
and unpaid dividends on the Series 2 Preferred tendered. As a result of this
exchange offer, we issued 2,262,965 shares of our common stock for 305,807
shares of Series 2 Preferred that were tendered. In addition, an aggregate
of
approximately $7.3 million in accrued and unpaid dividends were waived as
a
result of this exchange offer. This exchange transaction qualified as an
induced
conversion under SFAS 84. As a result, in the first quarter of 2007, we will
record a charge (stock dividend) to accumulated deficit which will equal
the
excess of the fair value of the common stock issued over the fair value of
the
common stock issuable pursuant to the original conversion terms. In addition,
such stock dividend will decrease net income applicable to common stock,
thereby
negatively impacting earnings per common share for the first quarter of
2007.
Pursuant
to the Jayhawk Agreement and the terms of the exchange offer, the Jayhawk Group
and the Golsen Group tendered 180,450 and 26,467 shares, respectively, of Series
2 Preferred for 1,335,330 and 195,855 shares, respectively, of our common stock
and waived a total of approximately
$5.0
million in accrued and unpaid dividends.
Amendments
to the Series 2 Preferred
On
March
6, 2007, our stockholders approved two amendments to the Series 2 Preferred,
which amendments became effective on that date. The first amendment provides
that the right of the holders of the Series 2 Preferred to elect two directors
to our board of directors when at least six quarterly dividends on the Series
2
Preferred are in arrears and unpaid may be exercised only if and so long as
at
least 140,000 shares of Series 2 Preferred are issued and outstanding. The
second amendment permits us to purchase or otherwise acquire shares of our
common stock for a five-year period even though cumulative accrued and unpaid
dividends exist on the Series 2 Preferred. The five-year period commenced on
March 13, 2007, upon the completion of the exchange offer.
Business
Interruption and Property Insurance Claims
El
Dorado -
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,
Arkansas plant. The plant was restored
to normal production in June 2005. We filed a property damage insurance claim
for $3.8 million, net of a $1.0 million deductible. We also filed a business
interruption claim for $5.0 million, net of the forty-five day waiting period.
As of December 31, 2006, the insurers have paid claims totaling $5.5 million.
The insurers are contesting our remaining claims.
On
March
23, 2006, we filed a lawsuit in Federal Court in the Western District of
Arkansas, El Dorado Division, to collect amounts from our insurers to which
we
believe we are owed under the policy. The total amount claimed under the lawsuit
which includes business interruption and property claims, is approximately
$2.3
million, plus attorney fees. Additional recoveries, if any, will be recognized
when realized.
Cherokee
- As a
result of damage caused by Hurricane Katrina, the natural gas pipeline servicing
the Cherokee Facility suffered damage and the owner of the pipeline declared
an
event of Force Majeure. This event of Force Majeure caused curtailments and
interruption in the delivery of natural gas to the Cherokee Facility. Cherokee
Nitrogen Company’s (“CNC”) insurer was promptly put on notice of a claim, but
the quantification of the claim amount took time and involved the retention
of a
gas market expert and a business interruption consultant.
On
September 25, 2006, CNC filed a contingent business interruption claim. CNC
is
now in discussions with, and providing additional documentation to, the forensic
accountant hired by CNC’s insurers to examine the claim. The recovery of this
claim, if any, will be recognized when realized.
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.
On
March
14, 2006, we completed an $18.0 million private placement of the Company’s 7%
Convertible Senior Subordinated Debentures due 2011 (the “Debentures”). Interest
on the Debentures is payable semi-annually each year beginning September 1,
2006. We used substantially all of the net proceeds of $16.5 million from the
Debentures to purchase or redeem higher interest rate debt, including
ThermaClime’s 10 3/4% Senior Unsecured Notes due 2007 (“Senior Unsecured
Notes”). The remaining balance was used for general corporate
purposes.
Our
total
outstanding debt at December 31, 2006 was $97.7 million compared to $112.1
million at December 31, 2005.
During
the third and fourth quarters of 2006, $14.0 million of the Debentures were
converted into common stock at $7.08 per common share. At December 31, 2006,
there were $4.0 million
of
Debentures outstanding. In February 2007, there were additional conversions
of
$3.0 million leaving $1.0 million currently outstanding. The conversions from
debt to stockholders’ equity of $17.0 million improves the Company’s debt
leverage ratio. As a result of the $17.0 million conversions, annual interest
expense will be reduced by approximately $1.2 million.
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 the Company and its non-ThermaClime affiliates and
certain ThermaClime subsidiaries. This limitation does not prohibit payment
to
the Company of amounts due under a Services Agreement, Management Agreement
and
a Tax Sharing Agreement. ThermaClime’s Working Capital Revolver is a $50.0
million facility. As of December 31, 2006, ThermaClime had availability for
additional borrowing under its Working Capital Revolver Loan of $22.8 million.
Borrowing availability is based upon certain percentages of accounts receivable
and inventory.
The
Company is discussing with prospective lenders, the possibilities of refinancing
certain outstanding debt at more favorable terms, including, among other issues,
reduced interest rates. As of the date of this report, the Company has not
entered into definitive negotiations with any prospective lender to provide
such
refinancing. There are no assurances that the Company will be successful in
their efforts to refinance portions of its outstanding debt, or that if the
Company is successful in refinancing any of its outstanding debt that the terms
will be more favorable than the terms of the outstanding debt.
Capital
Expenditures
General
Capital
expenditures in 2006 were $14.7 million, including $7.7 million primarily for
additional capacity in the Climate Control Business and $7.0 million for the
Chemical Business, primarily for process and reliability improvements of
existing facilities. As discussed below, our current commitment for 2007
includes spending for production equipment, facilities upgrades and capacity
expansion in the Climate Control Business and spending for production equipment
and environmental compliance in the Chemical Business.
Other
capital expenditures for 2007 are believed to be discretionary and are dependent
upon an adequate amount of liquidity and/or obtaining acceptable funding. We
have carefully managed those expenditures to projects necessary to execute
our
business plans and those for environmental and safety compliance.
Current
Commitments
As
of the
date of this report, we have committed capital expenditures of approximately
$8.4 million for production equipment, facilities upgrades and environmental
compliance in 2007. The expenditures include $4.8 million for the Chemical
Business and $3.6 million for the Climate Control Business. We plan to finance
approximately $3.6 million and the balance will be funded from working
capital.
In
addition, we plan to spend approximately $0.9 million in 2007 ($1.2 million
in
total) on an existing building to expand the distribution facilities of our
geothermal and water source heat pump business which has been funded by mortgage
debt.
In
addition, certain additional capital expenditures will be required to bring
the
sulfuric acid plant's air emissions to lower limits. There have been minimal
expenditures on this project since 2004. The ultimate cost is believed to be
between $2.5 million and $4.0 million, to be expended through February 2010.
Currently, there are no committed capital expenditures for the
project.
The
ADEQ
issued to El Dorado a new revised NPDES water discharge permit in 2004, and
El
Dorado has until June 2007 to meet the compliance deadline for the more
restrictive limits under the recently issued NPDES permit. In order to meet
El
Dorado’s June 2007 limits, El Dorado is considering three options to discharge
its wastewater.
The
estimated remaining capital expenditures to meet the requirements of the NPDES
permit ranges from $0.8 million to $2.8 million, depending on which option
El
Dorado utilizes or is required to utilize to meet the permit requirements.
Dividends
We
have
not paid cash dividends on our outstanding common stock in many years, and
from
1999 through 2005, we had not paid any dividends on our outstanding cumulative
preferred stock. During each of the quarters of 2006, our Board of Directors
declared and we paid partial dividends on certain outstanding series of our
preferred stock as follows: $.10 per share on our outstanding Series 2
Preferred, $.37 per share on our outstanding Series B Preferred, and $.31 per
share on our outstanding Non-Cumulative Preferred. These dividends were not
for
the full amount of the required quarterly dividends pursuant to the terms of
all
of our outstanding series of preferred stock. See discussion under “Dividends”
and “Sale of Unregistered Securities” of Item 5 concerning the issuance of
common stock in exchange for a portion of the Series 2 Preferred in October
2006
and March 2007. As of March 19, 2007, there were approximately $6.8 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.
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
financial covenants. ThermaClime's forecasts for 2007 indicate that ThermaClime
will be able to meet all required covenant tests.
Summary
Cash
flow
and liquidity will continue to be managed very carefully. We believe, with
the
$15.9 million net income for 2006 and the infusion of new capital as a result
of
the debenture offering and the subsequent conversion of the debentures to
stockholders’ equity, our capital base is improved. Based upon current
forecasts, we should have adequate cash from internal cash flows and financing
sources to enable us to satisfy our cash requirements for 2007. Due to the
volatility of the cost of 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 from our forecast, which could
have
a material impact on our liquidity and future operating results.
Loan
Agreements - Terms and Conditions
7%
Convertible Senior Subordinated Debentures - On
March
14, 2006, we completed a private placement to six qualified institutional
buyers, pursuant to which we sold $18.0 million aggregate principal amount
of
our 7% Convertible Senior Subordinated Debentures due 2011 (the “Debentures”).
Interest on the Debentures is payable semi-annually in arrears on March 1 and
September 1 of each year which began September 1, 2006.
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. Holders
of Debentures electing to convert all or any portion of a Debenture will obtain
the following conversion rate per $1,000 principal amount of Debentures during
the dates indicated:
|
|
Shares
Per $1,000 Principal Amount
|
|
Conversion
Price
Per Share
|
|
March
1, 2007 - August 31, 2007
|
|
141.04
|
|
|
$
|
7.09
|
|
September
1, 2007 - February 29, 2008
|
|
137.27
|
|
|
$
|
7.28
|
|
March
1, 2008 - August 31, 2008
|
|
133.32
|
|
|
$
|
7.50
|
|
September
1, 2008 - February 28, 2009
|
|
129.23
|
|
|
$
|
7.74
|
|
March
1, 2009 - March 1, 2011
|
|
125.00
|
|
|
$
|
8.00
|
|
The
conversion rates 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.
We
have
used substantially all of the net proceeds for the purchase or redemption of
our
higher interest rate debt or debt of our subsidiaries, including ThermaClime’s
Senior Unsecured Notes. The remaining balance was used for general corporate
purposes.
Approximately
$13.6 million of the net proceeds have been used to purchase or redeem all
of
the Senior Unsecured Notes held by unrelated third parties and Jayhawk at
ThermaClime’s carrying value (which includes $1.0 million that was held by
Jayhawk) including accrued interest of $0.3 million. Approximately $6.95 million
of the Senior Unsecured Notes held by us remain outstanding.
During
2006, $14 million of the Debentures were converted into 1,977,499 shares of
our
common stock at the conversion price of $7.08 per share. Certain of the
conversions related to offers received from the holders and accepted by us
which
included additional consideration of $277,000 to be paid to the holders. Because
the offer met the criteria within SFAS 84-Induced Conversions of Convertible
Debt, the additional consideration was expensed. During February 2007, an
additional $3.0 million of the Debentures were converted into common stock
at
the conversion price of $7.08 per common share.
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 $50.0
million based on specific percentages of eligible accounts receivable and
inventories. The Working Capital Revolver Loan matures in April 2009. As of
December 31, 2006, borrowings outstanding were $26.0 million and the net credit
available for additional borrowings was $22.8 million. The Working Capital
Revolver Loan requires that ThermaClime and its Climate Control Business meet
certain financial covenants measured quarterly. ThermaClime and its Climate
Control Business were in compliance with those covenants for the twelve-month
period ended December 31, 2006.
Senior
Secured Loan - In
September 2004, ThermaClime and certain of its subsidiaries (the “Borrowers”)
completed a $50.0 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, 2006, the annual interest
rate
was 11%.
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, 2006 and the coverage
ratio
is considered to be achievable for 2007. 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.
Seasonality
We
believe that our only seasonal products are fertilizer and related chemical
products sold by our Chemical Business to the agricultural industry. The selling
seasons for those products are primarily during the spring and fall planting
seasons, which typically extend from March through June and from September
through November in the geographical markets in which the majority of our
agricultural products are distributed. As a result, our Chemical Business
increases its inventory of agricultural products prior to the beginning of
each
planting season. In addition, the amount and timing of sales to the agricultural
markets depend upon weather conditions and other circumstances beyond our
control.
Related
Party Transactions
One
of
the manufacturing facilities within our Climate Control Business sustained
substantial water damage in its office area resulting from the improper
installation by an unrelated third-party vendor of certain plumbing to a
water
line. As a result of the water damage, it became necessary to replace all
of the
carpet in the office area of the facility. During 2006, we purchased replacement
carpet from a company (“Designer Rugs”) owned by Linda Golsen Rappaport, the
daughter of Jack E. Golsen, our Chairman and Chief Executive Officer, and
sister
of Barry H. Golsen, our President. We paid approximately $159,000 to Designer
Rugs for the new carpet, removal of the damaged carpeting and installation
of
the new carpet. During the second quarter of 2006, we were reimbursed under
our
insurance coverage for the cost of the carpet and installation except for
a
deductible amount of $25,000.
In
addition, another subsidiary within our Climate Control Business is in the
process of remodeling their offices including the replacement of carpet and
flooring throughout the office area. Payments totaling $69,000 were made
during
2006 towards a purchase totaling $75,000 from Designer Rugs. Substantially
all
of the carpet was delivered and installed in 2006. Final completion expected
early in 2007.
During
2006, Jayhawk purchased $1.0 million principal amount of the Debentures.
In
addition, we purchased $1.0 million principal amount of the Notes held by
Jayhawk. Jayhawk earned interest of $117,000 relating to these debt instruments
in 2006.
During
2006 we paid nominal cash dividends to holders of certain series of our
preferred stock. These dividend payments included $91,000 and $133,000 to
the
Golsen Group and the Jayhawk Group, respectively. Additionally, the dividend
payments included $23,000 collectively to the significant shareholders discussed
below.
As
discussed above under “Overview-Preferred Stock Exchanges and Completion of
Exchange Offer”, in October 2006, we issued 773,655 shares of our common stock
to certain holders of our Series 2 Preferred in exchange for 104,548 shares
of
Series 2 Preferred. The shares of common stock issued included 303,400 and
262,167 shares issued for exchange for 41,000 and 35,428 shares of Series
2
Preferred stock to Paul Denby and James Sight (“Significant Shareholders”),
respectively, or to entities controlled by the Significant
Shareholders.
As
discussed above under “Overview-Preferred Stock Exchanges and Completion of
Exchange Offer”, during November 2006, we entered into the Jayhawk Agreement
with the Jayhawk Group. Under the Jayhawk Agreement, the Jayhawk Group agreed,
if we made an exchange offer for the Series 2 Preferred, to tender 180,450
shares of the 346,662 shares of Series 2 Preferred owned by the Jayhawk Group.
In addition, as a condition to the Jayhawk Group’s obligation to tender the
shares of Series 2 Preferred in an exchange offer, the Jayhawk Agreement
further
provided that the Golsen Group would exchange 26,467 shares of Series 2
Preferred beneficially owned by them. Pursuant to the Jayhawk Agreement and
the
terms of the exchange offer, during March 2007, the Jayhawk Group and the
Golsen
Group tendered 180,450 and 26,467 shares, respectively, of Series 2 Preferred
for 1,335,330 and 195,855 shares, respectively, of our common stock and waived
a
total of approximately $5.0 million in accrued and unpaid
dividends.
Critical
Accounting Policies and Estimates
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amount of assets, liabilities, revenues
and
expenses, and disclosures of contingencies. In addition, the more critical
areas
of financial reporting impacted by management's judgment, estimates and
assumptions include the following:
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, 10 customers account for
approximately 30% of our total net receivables
at December 31, 2006. We do not believe this concentration in these 10 customers
represents a significant credit risk due to the financial stability of these
customers. At December 31, 2006 and 2005, our allowance for doubtful accounts
of
$2.3 million and $2.7 million, respectively, were netted against our accounts
receivable.
Inventory
Valuations
-
Inventories are priced at the lower of cost or market, with cost being
determined using the first-in, first-out basis. Finished goods and
work-in-process inventories include material, labor and manufacturing overhead
costs. At December 31, 2006 and 2005, 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 $0.4 million and $1.4
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 $0.8 million and $1.0 million
at December 31, 2006 and 2005, 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, 2006 and 2005, precious
metals were $6.4 million and $5.0 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 2006, 2005
and 2004, the amounts expensed for precious metals were approximately $5.1
million, $3.5 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 2006, 2005 and
2004, we recognized recoveries of precious metals at historical FIFO costs
of
approximately $2.4 million, $2.1 million and $0.2 million, respectively, which
are reductions to cost of sales.
Impairment
of Long-Lived Assets and Goodwill
-
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable and
goodwill is reviewed for impairment at least annually. If assets to be held
and
used are considered to be impaired, the impairment to be recognized is the
amount by which the carrying amounts of the assets exceed the fair values of
the
assets as measured by the present value of future net cash flows expected to
be
generated by the assets or their appraised value. Assets to be disposed of
are
reported at the lower of the carrying amounts of the assets or fair values
less
costs to sell. At December 31, 2006, we had no long-lived assets that met the
criteria presented in SFAS 144 to be classified as assets held for sale. We
have
considered impairment of our long-lived assets and goodwill. We obtained third
party appraisals of the fair values associated with Cherokee 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 permanently decline dramatically without a
similar decline in the raw material costs or should other matters, including
the
environmental requirements and/or operating requirements set by Federal and
State agencies change substantially from our current expectations, a provision
for impairment may be required based upon such event or events. See Item 1
"Business-Environmental Matters." Based on estimates obtained from external
sources and internal estimates based on inquiry and other techniques, we
recognized impairments relating to certain non-core equipment of $0.1 million
and $0.4 million relating to Corporate assets during 2005 and 2004,
respectively, (none in 2006) and $0.3 million, $0.1 million and $0.4 million
relating to certain capital spare parts and idle assets in our Chemical Business
during 2006, 2005 and 2004, respectively. These impairments are included in
other expense in the consolidated statements of income.
Accrued
Insurance Liabilities - We
are
self-insured up to certain limits for group health, workers’ compensation and
general liability insurance claims. Above these limits, we have 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, 2006 and 2005, our claims liabilities were $1.6 million and $1.4
million, respectively, and are included in accrued and other liabilities. It
is
possible that the actual development of claims could exceed our
estimates.
Product
Warranty
- Our
Climate Control Business sells equipment for which we provide warranties
covering defects in materials and workmanship. Generally, the base warranty
coverage for most of the manufactured equipment is limited to 18 months from
the
date of shipment or 12 months from the date of start-up, whichever is shorter,
and to 90 days for spare parts. In some cases, the customer may purchase an
extended warranty. Our accounting policy and methodology for warranty
arrangements is to periodically measure and recognize the expense and liability
for such warranty obligations using a percentage of net sales, based on
historical warranty costs. It is possible that future warranty costs could
exceed our estimates. At December 31, 2006 and 2005, our accrued product
warranty obligations were $1.3 million and $0.9 million, respectively and are
included in current and noncurrent accrued and other 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, 2006
and 2005, current and noncurrent accrued and other liabilities include $1.0
million and $1.4 million, respectively, relating to Turnarounds.
In
September 2006, the Financial Accounting Standards Board (“FASB”) completed a
project to clarify guidance on the accounting for Turnarounds. The FASB issued
FASB Staff Position No. AUG AIR-1 (“FSP”) which eliminates the accrue-in-advance
method of accounting for Turnarounds. In addition, the adoption of the
provisions in the FSP is to be considered a change in accounting principle
with
retrospective application as described in SFAS 154-Accounting Changes and Error
Corrections, if practical. The
FSP
became effective for us on January 1, 2007. We currently are using the
accrue-in-advance method for Turnarounds that is eliminated under the FSP.
There
are three acceptable accounting methods for Turnarounds that we may adopt of
which we have elected to adopt the deferral method. We are currently assessing
the impact
the FSP may have on our financial statements which we believe could be
significant.
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, 2006 and 2005, the liability for these benefits
under the 1992 Agreements is $1.0 million and $0.9 million, respectively, which
is included in current and noncurrent accrued and other liabilities in the
accompanying consolidated balance sheets.
In
1981,
we entered into individual death benefit agreements with certain key executives.
In addition, as part of the 1992 Agreements, should the executive die prior
to
attaining the age of 65, we will pay the beneficiary named in the agreement
in
120 equal monthly installments aggregating to an amount specified in the
agreement. In 2005, we entered into a death benefit agreement with our CEO.
As
of December 31, 2006, the liability for death benefits is $1.4 million ($0.9
million at December 31, 2005) which is included in current and noncurrent
accrued and noncurrent liabilities.
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, 2006,
liabilities totaling $1.4 million have been accrued relating to a consent
administrative order (“CAO”) covering El Dorado and a CAO covering our former
Hallowell facility. These liabilities are included in current and noncurrent
accrued and other liabilities and are based on current estimates that may be
revised in the near term based on results 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.
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. Currently, there is
insufficient information to estimate the fair value of the asset retirement
obligation. However, we will continue to review this obligation and record
a
liability when a reasonable estimate of the fair value can be made.
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, 2006 and 2005, our deferred tax assets were net
of
a valuation allowance of $19.3 million and $26.1 million, respectively. The
decrease in the valuation allowance is due primarily to the utilization of
net
operating loss carry forwards in 2006.
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. Revenue relating to construction contracts is
recognized using the percentage-of-completion method based primarily on contract
costs incurred to date compared with total estimated contract costs. Changes
to
total estimated contract costs or losses, if any, are recognized in the period
in which they are determined. Sales of warranty contracts are recognized as
revenue ratably over the life of the contract. See discussion above under
“Product Warranty” for our accounting policy for recognizing warranty
expense.
Recognition
of Insurance Recoveries -
If an
insurance claim relates to a recovery of our losses, we recognize the recovery
when it is probable and reasonably estimable. If our insurance claim relates
to
a contingent gain, we recognize the recovery when it is realized.
Management's
judgment and estimates in these areas are based on information available from
internal and external resources at that time. Actual results could differ
materially from these estimates and judgments, as additional information becomes
known.
Results
of Operations
The
following Results of Operations should be read in conjunction with our
Consolidated Financial Statements for the years ended December 31, 2006, 2005
and 2004 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:
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
$
|
221,161
|
|
|
$
|
156,859
|
|
|
$
|
141,014
|
|
Chemical
|
|
260,651
|
|
|
|
233,447
|
|
|
|
216,264
|
|
Other
|
|
10,140
|
|
|
|
6,809
|
|
|
|
6,706
|
|
|
$
|
491,952
|
|
|
$
|
397,115
|
|
|
$
|
363,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
$
|
65,496
|
|
|
$
|
48,122
|
|
|
$
|
42,721
|
|
Chemical
|
|
22,438
|
|
|
|
16,426
|
|
|
|
8,917
|
|
Other
|
|
3,343
|
|
|
|
2,330
|
|
|
|
2,145
|
|
|
$
|
91,277
|
|
|
$
|
66,878
|
|
|
$
|
53,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
$
|
25,428
|
|
|
$
|
14,097
|
|
|
$
|
11,707
|
|
Chemical
|
|
10,200
|
|
|
|
7,703
|
|
|
|
(877
|
)
|
General
corporate expense and other business operations, net
|
|
(8,074
|
)
|
|
|
(6,835
|
)
|
|
|
(7,586
|
)
|
|
|
27,554
|
|
|
|
14,965
|
|
|
|
3,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(11,915
|
)
|
|
|
(11,407
|
)
|
|
|
(7,393
|
)
|
Gains
on extinguishment of debt
|
|
-
|
|
|
|
-
|
|
|
|
4,400
|
|
Provision
for loss on notes receivable-Climate Control
|
|
-
|
|
|
|
-
|
|
|
|
(1,447
|
)
|
Non-operating
income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Chemical
|
|
311
|
|
|
|
362
|
|
|
|
2,463
|
|
Corporate
and other business operations
|
|
312
|
|
|
|
1,199
|
|
|
|
(29
|
)
|
Provision
for income taxes
|
|
(901
|
)
|
|
|
(118
|
)
|
|
|
-
|
|
Equity
in earnings of affiliate - Climate Control
|
|
821
|
|
|
|
745
|
|
|
|
668
|
|
Income
from continuing operations before cumulative effect of accounting
chang
|
$
|
16,183
|
|
|
$
|
5,746
|
|
|
$
|
1,906
|
|
Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005
Net
Sales
The
following table contains certain information about our net sales in different
industry segments for 2006 and 2005:
|
2006
|
|
2005
|
|
Change
|
|
Percentage
Change
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geothermal
and water source heat pumps
|
$
|
134,210
|
|
|
$
|
85,268
|
|
|
$
|
48,942
|
|
|
57.4
|
%
|
Hydronic
fan coils
|
|
59,497
|
|
|
|
53,564
|
|
|
|
5,933
|
|
|
11.1
|
%
|
Other
HVAC products
|
|
27,454
|
|
|
|
18,027
|
|
|
|
9,427
|
|
|
52.3
|
%
|
Total
Climate Control
|
$
|
221,161
|
|
|
$
|
156,859
|
|
|
$
|
64,302
|
|
|
41.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemical:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
acids and other chemical products
|
$
|
95,208
|
|
|
$
|
80,228
|
|
|
$
|
14,980
|
|
|
18.7
|
%
|
Agricultural
products
|
|
89,735
|
|
|
|
80,638
|
|
|
|
9,097
|
|
|
11.3
|
%
|
Mining
products
|
|
75,708
|
|
|
|
72,581
|
|
|
|
3,127
|
|
|
4.3
|
%
|
Total
Chemical
|
$
|
260,651
|
|
|
$
|
233,447
|
|
|
$
|
27,204
|
|
|
11.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
$
|
10,140
|
|
|
$
|
6,809
|
|
|
$
|
3,331
|
|
|
48.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
$
|
491,952
|
|
|
$
|
397,115
|
|
|
$
|
94,837
|
|
|
23.9
|
%
|
Climate
Control Business
· Net
sales
of our geothermal and water source heat pump products increased primarily as
a
result of a 52% increase in the number of units sold in the commercial and
residential markets due to customer demand representing an approximate 4% gain
in market share based on data supplied by the ARI;
· Net
sales
of our hydronic fan coils increased primarily due to a 10% increase in overall
average unit sales prices as the result of lowering discounting and higher
selling prices driven by raw material cost increases;
· Net
sales
of our other HVAC products increased as the result of an increase in the number
of larger custom air handlers sold primarily relating to three large
projects.
Chemical
Business
El
Dorado
and Cherokee produce all the chemical products described in the table above
and
Baytown produces only industrial acids products. Overall, volume of tons sold
for the Chemical Business increased 12% while sales prices remained consistent
with 2005.
· Volume
at
El Dorado increased 14% primarily related to agricultural products as the result
of the loss of production during the first half of 2005 as discussed below,
to
industrial acid and other chemical products due to spot sales opportunities,
and
to mining products relating to the growth of coal mining in the mining
industry;
·
|
Volume
at Baytown increased 24% as the result of a closing of a chemical
facility
within our market and other various spot sales
opportunities;
|
·
|
Volume
at Cherokee decreased 6% resulting from the suspension of production
during the first half of January 2006 as the result of a reduction
in
orders from several key customers due to the increased natural gas
costs
and further production curtailments throughout the first quarter
of
2006.
|
Other
- Net
sales
classified as “Other” consists of sales of industrial machinery and related
components. The increase in net sales relates primarily to increased customer
demand for our machine tool products.
Gross
Profit
Gross
profit by industry segment represents net sales less cost of sales. The
following table contains certain information about our gross profit in different
industry segments for 2006 and 2005:
|
2006
|
|
2005
|
|
Change
|
|
Percentage
Change
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
$
|
65,496
|
|
|
$
|
48,122
|
|
|
|
$
|
17,374
|
|
|
36.1
|
%
|
Chemical
|
|
22,438
|
|
|
|
16,426
|
|
|
|
|
6,012
|
|
|
36.6
|
%
|
Other
|
|
3,343
|
|
|
|
2,330
|
|
|
|
|
1,013
|
|
|
43.5
|
%
|
|
$
|
91,277
|
|
|
$
|
66,878
|
|
|
|
$
|
24,399
|
|
|
36.5
|
%
|
In
addition to the information presented in the above table, our Climate Control
Business’ gross profit percentage (as a percentage of net sales) was 29.6% for
2006 compared to 30.7% for 2005. The gross profit percentage of our Chemical
Business was 8.6% for 2006 compared to 7.0% for 2005. The gross profit
percentage relating to “Other” (see discussion above) was 33.0% for 2006
compared to 34.2% for 2005.
The
increase in gross profit in our Climate Control Business was a direct result
of
the increase in sales volume as discussed above. The decline in our gross profit
percentage was primarily due to raw material costs increases being incurred
ahead of customer price increases becoming effective.
The
net
increase in gross profit of our Chemical Business relates primarily
to:
|
·
|
Cherokee
as the result of not incurring the disruptions at the plant caused
by the
rise in natural gas costs due to the hurricanes in the U.S. Gulf
in 2005
and a decrease in electricity costs as a result of a negotiated reduction
in utility rates in 2006;
|
|
·
|
Baytown
due primarily to the increase in sales volume as discussed
above;
|
|
·
|
El
Dorado as the result of the increase in sales volume as discussed
above.
|
As
previously reported, beginning in October 2004 and continuing into June 2005,
the Chemical Business’ results were adversely affected as a result of the loss
of production due to a mechanical failure of one of the four nitric acid plants
at El Dorado. The plant was restored to normal production in June 2005. We
recognized insurance recoveries of $0.9 million and $1.9 million under our
business interruption insurance policy relating to this claim for 2006 and
2005,
respectively, which is recorded as a reduction to cost of sales. The negative
impact on gross profit resulting from the lost production was approximately
$4.1
million in 2005.
The
increase in gross profit classified as “Other” (see discussion above) is due
primarily to the increase in sales as discussed above.
Operating
Income
Our
chief
operating decision makers use operating income by industry segment for purposes
of making decisions which include resource allocations and performance
evaluations. Operating income by industry segment represents gross profit by
industry segment less selling, general and administrative expense (“SG&A”)
incurred by each industry segment plus other income and other expense
earned/incurred by each industry segment before general corporate expenses
and
other business operations, net. General corporate expenses and other business
operations, net consist of unallocated portions of gross profit, SG&A, other
income and other expense. The following table contains certain information
about
our operating income for 2006 and 2005:
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
$
|
25,428
|
|
|
$
|
14,097
|
|
|
$
|
11,331
|
|
Chemical
|
|
10,200
|
|
|
|
7,703
|
|
|
|
2,497
|
|
General
corporate expense and other business operations, net
|
|
(8,074
|
)
|
|
|
(6,835
|
)
|
|
|
(1,239
|
)
|
|
$
|
27,554
|
|
|
$
|
14,965
|
|
|
$
|
12,589
|
|
Operating
Income - Climate Control: The
net
increase in operating income of our Climate Control Business resulted primarily
from the net increase of gross profit of $17.4 million as discussed above,
an
arbitration award of $1.2 million received in 2006 relating to the arbitration
case involving Trison as discussed under “Climate Control Business” of Item 3,
and a decrease in professional fees of $1.0 million primarily as the result
of
fees incurred during 2005 relating to this arbitration case. This increase
in
operating income was partially offset by increased shipping and handling costs
of $3.9 million due to increased sales volume and rising fuel costs, increased
commissions of $1.8 million due to increased sales volume and distribution
mix
and increased personnel cost of $1.6 million as the result of increased number
of personnel and higher incentives, and increased warranty costs of $0.7 million
due to the increased sales volume.
Operating
Income - Chemical: The
net
increase of our Chemical Business’ operating income primarily relates to the net
increase in gross profit of $6.0 million as discussed above. This increase
in
operating income was partially offset by an increase in handling costs of $0.8
million due primarily to increased sales volume and an increase in professional
fees of $0.4 million relating to legal costs associated with ammonium nitrate
anti-dumping tariffs. In addition, we recognized gains of $1.6 million from
certain property insurance claims in 2005.
General
Corporate Expense and Other Business Operations, Net: The
net
increase in our general corporate expense and other business operations, net
relates primarily to an increase of $0.6 million in personnel costs relating
to
increased group health care costs of $0.4 million and commissions of $0.3
million on the increased sales classified as “Other” as discussed above, an
increase in professional fees of $0.6 million due, in part, for assistance
in
our evaluation of our internal controls and procedures and related documentation
for Sarbanes-Oxley requirements, a litigation settlement of $0.3 million
relating to an asserted financing fee, and a decrease in gains of $0.7 million
from the sales of corporate assets. The increase was partially offset by the
increase in gross profit classified as “Other” of $1.0 million and a refund of
$0.4 million relating to insurance brokerage fees.
Interest
Expense
-
Interest expense was $11.9 million for 2006 compared to $11.4 million for 2005,
an increase of $0.5 million. This net increase in interest expense includes
$1.1
million relating to the Debentures sold in March 2006 and $0.3 million of
additional consideration paid in conjunction with the conversion of a portion
of
the Debentures during 2006 which was partially offset by a decrease of $0.8
million relating to the Notes which were purchased or redeemed during 2006.
Non-Operating
Other Income, net
- Our
non-operating other income, net was $0.6 million for 2006 compared to $1.6
million for 2005. In 2005, we recognized net proceeds from life insurance
policies of $1.2 million.
Provision
For Income Taxes
- Due to
net operating loss (“NOL”) carryforwards, provisions for income taxes consist of
federal alternative minimum taxes and state income taxes for 2006 and federal
alternative minimum taxes for 2005.
Net
Loss From Discontinued Operations
- Net
loss from discontinued operations includes provisions of $0.2 million and $0.6
million for 2006 and 2005, respectively, for our share of estimated
environmental remediation costs to investigate and delineate a site in
Hallowell, Kansas as a result of meetings with the KDHE. There are no income
tax
benefits related to these expenses.
Year
Ended December 31, 2005 Compared to Year Ended December 31,
2004
Net
Sales
The
following table contains certain information about our net sales in different
industry segments for 2005 and 2004:
|
2005
|
|
2004
|
|
Change
|
|
Percentage
Change
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geothermal
and water source heat pumps
|
$
|
85,268
|
|
|
$
|
73,920
|
|
|
$
|
11,348
|
|
|
15.4
|
%
|
Hydronic
fan coils
|
|
53,564
|
|
|
|
48,760
|
|
|
|
4,804
|
|
|
9.9
|
%
|
Other
HVAC products
|
|
18,027
|
|
|
|
18,334
|
|
|
|
(307
|
)
|
|
(1.7
|
)
%
|
Total
Climate Control
|
$
|
156,859
|
|
|
$
|
141,014
|
|
|
$
|
15,845
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemical:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
products
|
$
|
80,638
|
|
|
$
|
72,154
|
|
|
$
|
8,484
|
|
|
11.8
|
%
|
Industrial
acids and other chemical products
|
|
80,228
|
|
|
|
82,040
|
|
|
|
(1,812
|
)
|
|
(2.2
|
)
%
|
Mining
products
|
|
72,581
|
|
|
|
62,070
|
|
|
|
10,511
|
|
|
16.9
|
%
|
Total
Chemical
|
$
|
233,447
|
|
|
$
|
216,264
|
|
|
$
|
17,183
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
$
|
6,809
|
|
|
$
|
6,706
|
|
|
$
|
103
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
$
|
397,115
|
|
|
$
|
363,984
|
|
|
$
|
33,131
|
|
|
9.1
|
%
|
Climate
Control Business
· Net
sales
of our geothermal and water source heat pump products increased 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 primarily from 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 $0.3 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, $0.9 million relating to our
large custom air handlers, $0.9 million as a result of an increase in
construction projects and $0.7 million relating to a new product line with
increasing demand.
Chemical
Business
As
discussed above, El Dorado and Cherokee produce all the chemical products
described in the table above and Baytown produces only industrial acids
products. Overall sales prices for the Chemical Business increased 13% but
overall volume of tons sold decreased 5%.
·
|
The
overall increase in sales prices reflects, in part, higher sales
prices
resulting from the increased cost of the raw material feedstocks
(anhydrous ammonia and natural gas) as discussed below;
|
·
|
The
volume at Baytown was down 14% due to lower demand for nitric acid
by
Bayer resulting from the shutdown of one of North America’s consuming
locations;
|
·
|
The
volume at Cherokee decreased 4% due primarily to the suspension of
production resulting from the hurricanes in the U.S. Gulf as discussed
above under “Overview-Chemical Business.”
|
Other
- Net
sales
classified as “Other” consists of sales of industrial machinery and related
components.
Gross
Profit
Gross
profit by industry segment represents net sales less cost of sales. The
following table contains certain information about our gross profit in different
industry segments for 2005 and 2004:
|
2005
|
|
2004
|
|
Change
|
|
Percentage
Change
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
$
|
48,122
|
|
|
$
|
42,721
|
|
|
$
|
5,401
|
|
|
12.6
|
%
|
Chemical
|
|
16,426
|
|
|
|
8,917
|
|
|
|
7,509
|
|
|
84.2
|
%
|
Other
|
|
2,330
|
|
|
|
2,145
|
|
|
|
185
|
|
|
8.6
|
%
|
|
$
|
66,878
|
|
|
$
|
53,783
|
|
|
$
|
13,095
|
|
|
24.3
|
%
|
In
addition to the information presented in the above table, our Climate Control
Business’ gross profit percentage (as a percentage of net sales) was 30.7% for
2005 compared to 30.3% for 2004. The gross profit percentage of our Chemical
Business was 7.0% for 2005 compared to 4.1% for 2004. The gross profit
percentage relating to “Other” (see discussion above) was 34.2% for 2005
compared to 32.0% for 2004.
The
net
increase in gross profit of our Climate Control Business resulted primarily
by
the increase in sales of our geothermal and water source heat pumps and hydronic
fan coils 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 $0.8 million
relates to MultiClima in the second quarter of 2004 as discussed
above.
The
net
increase in gross profit of our Chemical Business 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 $0.2 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 El Dorado, the 34% increase in costs of
natural gas sustained by Cherokee and the suspension of production at Cherokee
resulting from the hurricanes in the U.S. Gulf as discussed above under
“Overview-Chemical Business”. Cherokee 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 above and previously reported, 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 El Dorado. 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 $1.0 million in
2004.
See
discussion above for products sold which are classified as “Other”.
Operating
Income (Loss)
See
discussion above concerning the definition and use of operating income (loss)
by
industry segment by our chief operating decision makers. The following table
contains certain information about our operating income (loss) for 2005 and
2004:
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
$
|
14,097
|
|
|
$
|
11,707
|
|
|
$
|
2,390
|
|
Chemical
|
|
7,703
|
|
|
|
(877
|
)
|
|
|
8,580
|
|
General
corporate expense and other business operations, net
|
|
(6,835
|
)
|
|
|
(7,586
|
)
|
|
|
751
|
|
|
$
|
14,965
|
|
|
$
|
3,244
|
|
|
$
|
11,721
|
|
Operating
Income - Climate Control: The
net
increase in our Climate Control Business’ operating income resulted primarily by
selling, general and administrative expenses of $1.4 million relating to
MultiClima which were only incurred in the second quarter of 2004 and the net
increase in gross profit of $5.4 million as discussed above. This increase
in
operating income was partially offset by increased shipping and handling costs
of $1.0 million as a result of increased sales volume and rising fuel costs,
increased professional fees of $0.9 million primarily relating to litigation
and
related arbitrations between Trison and a customer (as discussed under “Climate
Control Business” of Item 3), increased commissions of $0.8 million due to
increased sales volume, increased personnel costs of $0.6 million due primarily
to increased group health insurance costs and increased provision for losses
on
accounts receivable of $0.5 million due primarily to lower than usual incidence
in 2004 and the increased sales volumes in 2005.
Operating
Income (Loss) - Chemical:
The net
increase in our Chemical Business’ operating income included the net increase in
gross profit of $7.5 million as discussed above and gains of $1.6 million from
replacement cost property insurance recoveries which includes $1.5 million
of
recoveries discussed above under “Business Interruption and Property Insurance
Claims” of Item 3 and a decrease in personnel costs of $0.3 million as a result
of a reduction in personnel at El Dorado. This increase was partially offset
by
an increase in handling costs of $1.0 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: The
decrease in our general corporate expense and other business operations, net
relates primarily to an increase in gains of $0.7 million from the sales of
corporate assets, a decrease in professional fees of $0.3 million which includes
costs incurred during 2004 relating to a proposed unregistered offering of
Senior Secured Notes which was terminated, a decrease of $0.3 million of
provisions for impairments on corporate assets and a decrease of approximately
$0.6 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, 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.
Interest
Expense
-
Interest expense was $11.4 million for 2005 compared to $7.4 million for 2004.
The increase of $4.0 million relates primarily to interest expense incurred
on
the $50.0 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 $5.0 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 cancelled
the
loan agreements in exchange for 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.
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 $0.8 million. In 2005, we received net proceeds
from life insurance policies of $1.2 million. In addition, we recognized gains
of $0.2 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
- Net
loss from discontinued operations in 2005 consists of provisions of $0.6 million
for our share of estimated environmental remediation costs to investigate and
delineate a site in Hallowell, Kansas as a result of meetings held during 2005
with the KDHE. 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.
As a
result, we recorded a cumulative effect of accounting change of $0.5 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.
Effective July 1, 2004, we no longer had a variable interest in this entity
and
were no longer required to consolidate this entity.
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
2006,
net cash provided by continuing operating activities was $17.7 million,
including net income (which includes insurance recoveries of $0.9 million under
our business interruption insurance policy), plus depreciation and amortization
and other adjustments offset by cash used by changes in assets and liabilities.
Accounts
receivable increased $18.1 million relating primarily to the Climate Control
Business as the result of increased sales of our heat pump products, large
custom air handlers, and hydronic fan coils as discussed above under “Results of
Operations.”
Inventories
increased a net $7.3 million including:
· an
increase of $10.4 million relating to the Climate Control Business primarily
relating to the increased cost of certain raw materials and the increased
quantities of raw materials on hand due to increasing sales volume, partially
offset by
· a
decrease of $3.2 million relating to the Chemical Business as the results of
the
decline in the average cost of anhydrous ammonia and natural gas in December
2006 compared to December 2005 and reduced inventory on hand at Cherokee due
to
a Turnaround performed in December 2006.
Other
supplies and prepaid items increased $1.9 million primarily due to a net
increase of $1.4 million in precious metals as a result of the increased cost
of
precious metals and recoveries performed and additional precious metals
purchased net of the amount consumed in the manufacturing process in the
Chemical Business.
Accounts
payable increased $11.2 million primarily due to:
· an
increase of $5.4 million in our Climate Control Business resulting from
increased production of our heat pump products, large custom air handlers,
and
hydronic fan coils, increased cost of certain raw materials, and increased
levels of raw materials on hand and
· an
increase of $5.1 million in our Chemical Business resulting primarily from
Baytown’s property taxes and scheduled lease payments, costs incurred by
Cherokee relating to a Turnaround performed in December 2006, and increased
sales volume at Baytown in December 2006 compared to December 2005.
Customer
deposits increased $1.0 million primarily due to the increase in deposits
received on sales commitments by Cherokee and as down payments on two customer
orders of large air handlers in the Climate Control Business.
The
increase in other current and noncurrent liabilities of $3.5 million includes
primarily:
· an
increase of $1.2 million of accrued commissions primarily as the result of
increased sales volume in the Climate Control Business,
· an
increase of $1.0 million of deferred revenue on extended warranty contracts
as
the result of increased sales volume in the Climate Control Business,
· an
increase in accrued contractual manufacturing obligations of $1.0 million
pursuant to EDC’s supply agreement and EDNC’s Bayer Agreement in the Chemical
Business,
· an
increase of $0.7 million in accrued payroll and benefits due primarily to an
increase in the number of employees and to salary and wage incentives in the
Climate Control Business,
· an
increase of $0.6 million of accrued death benefits relating to our benefit
agreements with certain key executives partially offset by,
· a
decrease of $1.1 million of accrued property and franchise taxes primarily
due
to Baytown’s property taxes being processed and included in accounts payable at
December 31, 2006 as discussed above.
Cash
Flow from Investing Activities
Net
cash
used by continuing investing activities was $18.4 million for 2006 which
included $14.7 million for capital expenditures of which $7.7 million and
$7.0
million are for the benefit of our Climate Control Business and Chemical
Business, respectively. In addition, we made deposits of $3.5 million of
current
and noncurrent restricted cash which is to be used for capital expenditures
in
the Climate Control Business, working capital, and to fund an
unrealized loss on exchange-traded contracts.
Cash
Flow from Financing Activities
Net
cash
used by continuing financing activities was $1.4 million and primarily consisted
of:
· the
acquisition of $13.3 million of the Notes as discussed above under “Loan
Agreements - Terms and Conditions”,
· payments
of $6.9 million on other long-term debt, and
· payments
of $6.1 million on revolving debt facilities, net of proceeds, offset, in part,
by
· proceeds
of $16.5 million from the Debentures, net of fees of $1.5 million, as discussed
above under “Loan Agreements - Terms and Conditions” and
· net
proceeds of $8.2 million from other long-term debt.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K under the Securities Exchange Act of 1934, as amended, except
for
the following:
Cepolk
Holding, Inc. (“CHI”), a subsidiary of the Company, is a limited partner and has
a 50% equity interest in Cepolk Limited Partnership (“Partnership”) which is
accounted for on the equity method. The Partnership owns an energy savings
project located at the Ft. Polk Army base in Louisiana (“Project”). At December
31, 2006, our investment was $3.3 million. For 2006, distributions received
from
this Partnership were $0.9 million and our equity in earnings was $0.8 million.
As of December 31, 2006, the Partnership and general partner to the Partnership
is indebted to a term lender (“Lender”) of the Project, in the amount of
approximately $5.3 million, net of restricted cash for debt service of $0.9
million, with a term extending to December 2010 (“Loan”). CHI has pledged its
limited partnership interest in the Partnership to the Lender as part of
the
Lender’s collateral securing all obligations under the Loan. This guarantee and
pledge is limited to CHI’s limited partnership interest and does not expose CHI
or the Company to liability in excess of CHI’s limited partnership interest. No
liability has been established for this pledge since it was entered into
prior
to adoption of FIN 45. CHI has no recourse provisions or available collateral
that would enable CHI to recover its partnership interest should the Lender
be
required to perform under this pledge.
Aggregate
Contractual Obligations
Our
aggregate contractual obligations as of December 31, 2006 are summarized in
the
following table.
Payments
Due in the Year Ending December 31,
Contractual
Obligations
|
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
(In
thousands)
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
Capital Revolver Loan (1)
|
|
$
|
26,048
|
|
|
$
|
5,492
|
|
|
$
|
-
|
|
|
$
|
20,556
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Loan due 2009
|
|
|
50,000
|
|
|
|
625
|
|
|
|
1,250
|
|
|
|
48,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7%
Convertible Senior Subordinated Notes
|
|
|
4,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
leases
|
|
|
767
|
|
|
|
342
|
|
|
|
360
|
|
|
|
34
|
|
|
|
31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
16,877
|
|
|
|
5,120
|
|
|
|
2,293
|
|
|
|
954
|
|
|
|
1,047
|
|
|
|
1,079
|
|
|
|
6,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
|
97,692
|
|
|
|
11,579
|
|
|
|
3,903
|
|
|
|
69,669
|
|
|
|
1,078
|
|
|
|
5,079
|
|
|
|
6,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
payments on long-term debt (2)
|
|
|
26,858
|
|
|
|
9,388
|
|
|
|
9,059
|
|
|
|
5,732
|
|
|
|
860
|
|
|
|
676
|
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures (3)
|
|
|
8,169
|
|
|
|
8,169
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baytown
lease
|
|
|
26,351
|
|
|
|
10,297
|
|
|
|
11,173
|
|
|
|
4,881
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating leases
|
|
|
12,052
|
|
|
|
3,120
|
|
|
|
2,244
|
|
|
|
1,794
|
|
|
|
1,226
|
|
|
|
819
|
|
|
|
2,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange-traded
futures contracts
|
|
|
3,208
|
|
|
|
3,208
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
contractual manufacturing obligations
|
|
|
2,161
|
|
|
|
2,161
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
obligations
|
|
|
3,828
|
|
|
|
1,044
|
|
|
|
1,044
|
|
|
|
1,044
|
|
|
|
696
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
obligations included in noncurrent accrued and other
liabilities
|
|
|
2,700
|
|
|
|
-
|
|
|
|
171
|
|
|
|
174
|
|
|
|
171
|
|
|
|
171
|
|
|
|
2,013
|
|
Total
|
|
$
|
183,019
|
|
|
$
|
48,966
|
|
|
$
|
27,594
|
|
|
$
|
83,294
|
|
|
$
|
4,031
|
|
|
$
|
6,745
|
|
|
$
|
12,389
|
|
(1
|
)
|
We
primarily utilize a cash management system with a series of separate
accounts consisting of several “zero-balance” disbursement accounts for
funding of payroll and accounts payable. As a result of our cash
management system, checks issued, but not presented to the banks
for
payment, may create negative book cash balances. These negative book
cash
balances are included in current portion of long-term debt since
these
accounts are primarily funded by our Working Capital Revolver
Loan.
|
(2
|
)
|
The
estimated interest payments relating to variable interest rate debt
are
based on the effective interest rates at December 31, 2006. In addition,
we used the balance of the Working Capital Revolver Loan at December
31,
2006 as the average outstanding balance of the Working Capital Revolver
Loan through maturity.
|
|
|
|
(3
|
)
|
Capital
expenditures include only non-discretionary amounts in our 2007 capital
expenditure budget. These amounts do not include, as discussed in
“Environmental Matters” under Item 1, an estimated range from $0.8 million
to $2.8 million as required under a NPDES permit effective June 2007
based
on current assumptions and an estimated $2.5 million to $4.0 million
over
the next four years relating to the Air
CAO.
|
Availability
of Company's Loss Carry-Overs
For
a
discussion on our net operating loss carry-overs, see Note 12 of Notes to
Consolidated Financial Statements.
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, 2006, we had $0.3 million of embedded losses associated with sales
commitments with firm sales prices in our Chemical Business.
Interest
Rate Risk
Our
interest rate risk exposure results from our debt portfolio which is impacted
by
short-term rates, primarily variable rate-based borrowings from commercial
banks, and long-term rates, primarily fixed-rate notes, some of which prohibit
prepayment or require substantial prepayment penalties.
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 133. At December 31, 2006, the market value of these
contracts was $385,000.
Commodity
Price Risk
Our
Climate Control Business buys substantial quantities of copper and steel for
use
in manufacturing processes and our Chemical Business buys substantial quantities
of anhydrous ammonia and natural gas as feedstocks generally at market prices.
Periodically, our Climate Control Business enters into exchange-traded futures
for copper and our Chemical Business enters into exchange-traded futures for
natural gas, which contracts are generally accounted for on a mark-to-market
basis in accordance with SFAS 133. At December 31, 2006, our purchase
commitments under these contracts were for 300,000 pounds of copper through
March 2007 at a weighted average cost of $3.10 per pound ($931,000) and a
weighted average market value of $2.86 per pound ($859,000). In addition, our
Chemical Business had purchase commitments under these contracts for 300,000
MMBtu of natural gas through June 2007 at a weighted average cost of $7.59
per
MMBtu ($2,278,000) and a weighted average market value of $6.47 per MMBtu
($1,942,000).
The
following table presents principal amounts and related weighted-average interest
rates by maturity date for our interest rate sensitive financial instruments
and
our purchase commitments under exchange-traded futures contracts and related
weighted-average contract costs by contract terms as of December 31,
2006.
|
Years
ending December 31,
|
|
|
(Dollars
in thousands,except for per pound and
MMBtu)
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
Total
|
|
Expected
maturities of long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
rate debt
|
$
|
7,032
|
|
|
$
|
1,610
|
|
|
$
|
68,916
|
|
|
$
|
258
|
|
|
$
|
283
|
|
|
$
|
466
|
|
|
$
|
78,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
rate (1)
|
|
10.31
|
%
|
|
|
10.37
|
%
|
|
|
10.36
|
%
|
|
|
8.95
|
%
|
|
|
8.95
|
%
|
|
|
8.95
|
%
|
|
|
10.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate debt (2)
|
$
|
4,547
|
|
|
$
|
2,293
|
|
|
$
|
753
|
|
|
$
|
820
|
|
|
$
|
4,796
|
|
|
$
|
5,918
|
|
|
$
|
19,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
rate (2)
|
|
7.07
|
%
|
|
|
6.99
|
%
|
|
|
6.89
|
%
|
|
|
6.89
|
%
|
|
|
6.85
|
%
|
|
|
6.80
|
%
|
|
|
6.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange-traded
futures contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of contracts
|
$
|
931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average cost per pound
|
$
|
3.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of contracts
|
$
|
2,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average cost per MMBtu
|
$
|
7.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7.59
|
|
(1) Interest
rate is based on the aggregate amount of debt outstanding as of December 31,
2006. On the Working Capital Revolver Loan, the interest rate is based on the
lender's prime rate plus .75% per annum, or at our 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, 2006.
The
following table shows the estimated fair value and carrying value of our
borrowings at:
|
December
31, 2006
|
|
December
31, 2005
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
Variable
Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Loan (1)
|
|
$
|
53,774
|
|
$
|
50,000
|
|
$
|
48,695
|
|
$
|
50,000
|
Bank
debt and equipment financing
|
|
|
28,565
|
|
|
28,565
|
|
|
35,197
|
|
|
35,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
debt and equipment financing
|
|
|
14,853
|
|
|
15,127
|
|
|
13,574
|
|
|
13,627
|
7%
Convertible Senior Subordinated Notes (2)
|
|
|
6,543
|
|
|
4,000
|
|
|
-
|
|
|
-
|
Senior
Unsecured Notes due 2007 (3)
|
|
|
-
|
|
|
-
|
|
|
6,118
|
|
|
13,300
|
|
|
$
|
103,735
|
|
$
|
97,692
|
|
$
|
103,584
|
|
$
|
112,124
|
(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 is based on the conversion rate and market price of our
common stock at December 31, 2006.
(3)
At
December 31, 2005, the estimated fair value was based on market quotations;
however, there had been a low volume of trading activity. In 2006, we purchased
the $13.3 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.
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 procedures. Although during the
evaluation we noted several significant deficiencies in our disclosure controls
and procedures, our disclosure controls and procedures are effective as of
December 31, 2006.
There
were no changes to our internal control over financial reporting during the
quarter ended December 31, 2006 that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.
None.
SPECIAL
NOTE REGARDING
FORWARD-LOOKING
STATEMENTS
Certain
statements contained within this report may be deemed "Forward-Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933,
as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
All
statements in this report other than statements of historical fact are
Forward-Looking Statements that are subject to known and unknown risks,
uncertainties and other factors which could cause actual results and performance
of the Company to differ materially from such statements. The words "believe",
"expect", "anticipate", "intend", "will", and similar expressions identify
Forward-Looking Statements. Forward-Looking Statements contained herein relate
to, among other things,
·
|
our
Climate Control Business has developed leadership positions in
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 geothermal and 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,
|
·
|
we
are the largest domestic merchant marketer of concentrated and
blended
nitric acids,
|
·
|
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
amount of capital expenditures relating to the Climate Control
Business
and related increase in our capacity to produce and distribute
Climate
Control products,
|
·
|
obtaining
raw materials for our Climate Control Business,
|
·
|
the
majority of raw material cost increases, if any, will be passed
to our
customers in the form of higher prices as product price increases
are
implemented and take effect and while we believe we will have
sufficient
materials, a shortage of raw materials could impact production
of our
Climate Control products,
|
·
|
our
Climate Control Business manufactures a broader line of geothermal
and
water source heat pump and fan coil products than any other manufacturer
in the United States,
|
·
|
we
are competitive as to price, service, warranty and product performance
in
our Climate Control Business,
|
·
|
our
Climate Control Business will continue to launch new products
and product
upgrades in an effort to maintain and increase our current market
position
and to establish a presence in new markets,
|
·
|
shipping
substantially all of our backlog at December 31, 2006 within
twelve
months,
|
·
|
utilizing
additional space at other facilities for distribution purposes
for the
Climate Control Business,
|
·
|
the
prospects for these new product lines in the Climate Control
Business are
improving and that these products will contribute favorably in
the
future,
|
·
|
increasing
the sales and operating margins of all products, developing
and
introducing new and energy efficient products, and increasing
production
to meet customer demand in the Climate Control
Business,
|
·
|
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,
|
·
|
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, paying dividends on our
common
stock,
|
·
|
the
concentration relating to receivable accounts of ten customers
at December
31, 2006 does not represent a significant credit risk due to
the financial
stability of these customers,
|
·
|
the
"E-2" brand ammonium nitrate fertilizer is recognized as a
premium product
within our primary market,
|
·
|
the
agricultural products are the only seasonal products,
|
·
|
competition
within the Chemical Business is primarily based on service,
price,
location of production and distribution sites, and product
quality and
performance,
|
·
|
the
ADEQ allowing EDC to directly discharge its wastewater into
the
creek,
|
·
|
the
ADEQ issuing the wastewater permit modification during the
third quarter
of 2007,
|
·
|
EDC
using the City’s sewer discharge system is a feasible
option,
|
·
|
the
joint pipeline group and opposing residents will appeal the
final
permit,
|
·
|
the
amount of and ability to obtain financing for discharging the
wasterwater
at El Dorado,
|
·
|
the
amount of additional expenditures relating to the Air
CAO,
|
·
|
the
amount of costs under the proposal submitted to the KDHE will
be
substantially less than the cost of the soil
excavation,
|
·
|
our
Chemical Business to focus on growing our non-seasonal industrial
customer
base with the emphasis on customers that accept the risk inherent
with raw
material costs, while maintaining a strong presence in the
seasonal
agricultural sector,
|
·
|
obtaining
our requirements for raw materials in 2007,
|
·
|
the
amount of committed capital expenditures for 2007,
|
·
|
liquidity
and availability of funds,
|
·
|
anticipated
financial performance,
|
·
|
adequate
resources to meet our obligations as they come due,
|
·
|
ability
to make planned capital improvements,
|
·
|
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,
|
·
|
under
the terms of an agreement with a supplier, EDC purchasing a
majority of
its anhydrous ammonia requirements through December 31,
2008,
|
·
|
ability
to obtain anhydrous ammonia from other sources in the event
of an
interruption of service under our existing purchase
agreement,
|
·
|
meeting
all required covenant tests for all quarters and the year ending
in
2007,
|
·
|
our
primary efforts to improve the results of our Chemical Business
include
securing increased non-seasonal sales volumes with an emphasis
on
customers that will accept the commodity risk with natural
gas and
anhydrous ammonia, and
|
·
|
environmental
and health laws and enforcement policies thereunder could result,
in
compliance expenses, cleanup costs, penalties or other liabilities
relating to the handling, manufacture, use, emission, discharge
or
disposal of pollutants or other substances at or from our facilities
or
the use or disposal of certain of its chemical
products.
|
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.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information
required under this item with respect to Directors is incorporated by reference
from the definitive proxy statement (the “Proxy Statement”) which we intend to
file with the SEC on or before April 30, 2007, in connection with our 2007
annual meeting of stockholders.
Information
required under this Item with respect to our Executive Officers is included
in
Item 4A of Part I of this report.
Information
required under this item is incorporated by reference from the Proxy
Statement.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information
required under this item is incorporated by reference from the Proxy
Statement.
ITEM
13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Information
required under this item is incorporated by reference from the Proxy
Statement.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information
required under this item is incorporated by reference from the Proxy
Statement.
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, 2006 and 2005
|
|
F-3
to F-4
|
|
|
|
Consolidated
Statements of Income for each of the three years in the period ended
December 31, 2006
|
|
F-5
|
|
|
|
Consolidated
Statements of Stockholders' Equity for each of the three years in
the
period ended December 31, 2006
|
|
F-6
|
|
|
|
Consolidated
Statements of Cash Flows for each of the three years in the period
ended
December 31, 2006
|
|
F-7
to F-8
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-9
to F-60
|
|
|
|
Quarterly
Financial Data (Unaudited)
|
|
F-61
to F-63
|
(a)
(2) Financial Statement Schedules
The
Company has included the following schedules in this report:
I
-
Condensed Financial Information of Registrant F-64
to F-67
II
-
Valuation and Qualifying Accounts F-68
to
F-69
We
have
omitted all other schedules because the conditions requiring their filing do
not
exist or because the required information appears in our Consolidated Financial
Statements, including the notes to those statements.
(a)(3)
Exhibits
3.1
|
Restated
Certificate of Incorporation, filed September 2, 1987.
|
|
|
3.2
|
Certificate
of Designations, filed February 21, 1989.
|
|
|
3.3
|
Certificate
of Elimination, filed May 13, 1993.
|
|
|
3.4
|
Certificate
of Designations, filed May 21, 1993.
|
|
|
3.5
|
Certificate
of Amendment, filed September 3, 1993.
|
|
|
3.6
|
Certificate
of Change of Registered Agent, filed November 24, 1998.
|
|
|
3.7
|
Certificate
of Designations, filed February 5, 1999.
|
|
|
3.8
|
Certificate
of Elimination, filed April 16, 1999.
|
|
|
3.9
|
Certificate
of Designations, filed November 15, 2001.
|
|
|
3.10
|
Certificate
of Amendment to Certificate of Designations of the $3.25 Convertible
Exchangeable Class C Preferred Stock, Series 2, filed March 6,
2007.
|
|
|
3.11
|
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 which the Company incorporates by reference
from
Exhibit 4.1 to the company’s Form 10-K for the fiscal year ended December
31, 2005.
|
|
|
4.2
|
Specimen
Certificate for the Company's Series B Preferred Stock, having
a par value
of $100 per share, which the Company hereby incorporates by reference
from
Exhibit 4.27 to the Company's Registration Statement No.
33-9848.
|
|
|
4.3
|
Specimen
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
|
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
|
|
|
4.8
|
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.
|
|
|
4.9
|
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.
|
|
|
4.10
|
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.
|
|
|
4.11
|
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.
|
|
|
4.12
|
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.
|
4.13
|
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.
|
|
|
4.14
|
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.
|
|
|
4.15
|
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.
|
|
|
4.16
|
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 which
the Company hereby incorporates by reference from Exhibit 4.20
to the
Company’s Form 10-K for the year ended December
31, 2005.
|
|
|
4.17
|
Wells
Fargo Foothill consent, dated May 5, 2006 to the redemption of
the Senior
Notes by ThermaClime which the Company hereby incorporates by
reference
from Exhibit 4.1 to the Company’s Form 10-Q for the fiscal quarter ended
June 30, 2006.
|
|
|
4.18
|
Tenth
amendment to Loan and Security Agreement, dated March 21, 2007,
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.
|
|
|
4.19
|
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.
|
|
|
4.20
|
First
Amendment, dated February 18, 2005 to Loan Agreement, dated as
of
September 15, 2004, among ThermaClime, Inc., and certain subsidiaries
of
ThermaClime, Cherokee Nitrogen Holdings, Inc., and Orix Capital
Markets,
L.L.C. which the Company hereby incorporates by reference from
Exhibit
4.21 to the Company’s Form 10-K for the year ended December 31,
2004.
|
4.21
|
Waiver
and Consent, dated as of January 1, 2006 to the Loan Agreement
dated as of
September 15, 2004 among ThermaClime, Inc., and certain subsidiaries
of
ThermaClime, Inc., Cherokee Nitrogen Holdings, Inc., Orix Capital
Markets,
L.L.C. and LSB Industries, Inc. which
the Company hereby incorporates by reference from Exhibit 4.23
to the
Company’s Form 10-K for the year ended December 31,
2005.
|
|
|
4.22
|
Consent
of Orix Capital Markets, LLC and the Lenders of the Senior Credit
Agreement, dated May 12, 2006, to the interest rate of a loan
between LSB
and ThermaClime and the utilization of the loan proceeds by ThermaClime
and the waiver of related covenants which the Company hereby
incorporates
by reference from Exhibit 4.2 to the Company’s Form 10-Q for the fiscal
quarter ended June 30, 2006.
|
|
|
4.23
|
Indenture,
dated March 3, 2006, by and among the Company and UMB Bank, which
the
Company hereby incorporates by reference from Exhibit 99.2 to
the
Company’s Form 8-K, dated March 14, 2006.
|
|
|
4.24
|
Certificate
of 7% Senior Subordinated Convertible Debentures which the Company
hereby
incorporates by reference from Exhibit 4.1 to the Company’s Form 8-K,
dated March 14, 2006.
|
|
|
10.1
|
Limited
Partnership Agreement dated as of May 4, 1995 between the general partner,
and LSB Holdings, Inc., an Oklahoma Corporation, as limited partner
which
the Company hereby incorporates by reference from Exhibit 10.11
to the
Company's Form 10-K for the fiscal year ended December 31, 1995.
See SEC
file number 001-07677.
|
|
|
10.2
|
Form
of Death Benefit Plan Agreement between the Company and the employees
covered under the plan, which the Company incorporates by reference
from
Exhibit 10.2 to the company’s Form 10-K for the fiscal year ended December
31, 2005.
|
|
|
10.3
|
The
Company's 1993 Stock Option and Incentive Plan, which the Company
incorporates by reference, which the Company incorporates by
reference
from Exhibit 10.3 to the company’s Form 10-K for the fiscal year ended
December 31, 2005.
|
|
|
10.4
|
First
Amendment to Non-Qualified Stock Option Agreement, dated March
2, 1994 and
Second Amendment to Stock Option Agreement, dated April 3, 1995
each
between the Company and Jack E. Golsen, which the Company hereby
incorporates by reference from Exhibit 10.1 to the Company's
Form 10-Q for
the fiscal quarter ended March 31, 1995. See SEC file number
001-07677.
|
|
|
10.5
|
Non-Qualified
Stock Option Agreement, dated April 22, 1998 between the Company
and
Robert C. Brown, M.D., which the Company hereby incorporates
by reference
from Exhibit 10.43 to the Company’s Form 10-K for the fiscal year ended
December 31, 1998. The Company entered into substantially identical
agreements with Bernard G. Ille, Raymond B. Ackerman, Horace
G. Rhodes,
and Donald W. Munson. The Company will provide copies of these
agreements
to the Commission upon request. See SEC file number
001-07677.
|
10.6
|
The
Company's 1998 Stock Option and Incentive Plan, which the Company
hereby
incorporates by reference from Exhibit 10.44 to the Company's
Form 10-K
for the year ended December 31, 1998. See SEC file number
001-07677.
|
|
|
10.7
|
LSB
Industries, Inc. 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.
|
|
|
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), Jim D. Jones (35,000 shares),
and four
other employees (130,000 shares), copies of which will be provided
to the
Commission upon request.
|
|
|
10.13
|
Severance
Agreement, dated January 17, 1989 between the Company and Jack
E. Golsen
which
the Company hereby incorporates by reference from Exhibit 10.13
to the
Company’s Form 10-K for the year ended December 31, 2005.The
Company also entered into identical agreements with Tony M. Shelby,
David
R. Goss, Barry H. Golsen, David M. Shear, and Jim D. Jones and
the Company
will provide copies thereof to the Commission upon
request.
|
10.14
|
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.
|
|
|
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.
|
|
|
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
COMMISSION ORDER CF 12179, DATED MAY 24, 2006, GRANTING A REQUEST
FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
|
|
|
10.31
|
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
COMMISSION ORDER CF 12179, DATED MAY 24, 2006, GRANTING A REQUEST
FOR
CONFIDENTIAL TREATMENT UNDER THE FREEDOM OF INFORMATION ACT
AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
|
|
|
10.32
|
Second
Amendment to AN Supply Agreement, executed August 24, 2006,
to be
effective as of January 1, 2006, between Orica USA, Inc. and
El Dorado
Company which the Company hereby incorporates by reference
from Exhibit
10.1 to the Company’s Form 10-Q for the fiscal quarter ended September 30,
2006. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF A
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.
|
|
|
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
|
First
Amendment to Anhydrous Ammonia Sales Agreement, dated effective
August 29,
2005, between Koch Nitrogen Company and El Dorado Chemical
Company, which
the Company hereby incorporates by reference from Exhibit 10.42
to the
Company's Form 10-K for the fiscal year ended December 31,
2005, filed
March 31, 2006. CERTAIN
INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE
SUBJECT OF 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.
|
10.40
|
Purchase
Confirmation, dated July 1, 2006, between Koch Nitrogen Company
and
Cherokee Nitrogen 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.
|
|
|
10.41
|
Second
Amendment to Anhydrous Ammonia Sales Agreement, dated November
3, 2006,
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.
|
|
|
10.42
|
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.
|
|
|
10.43
|
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.
|
|
|
10.44
|
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.
|
|
|
10.45
|
Agreement,
dated November 10, 2006 by and among LSB Industries, Inc.,
Kent C.
McCarthy, Jayhawk Capital Management, L.L.C., Jayhawk Institutional
Partners, L.P. and Jayhawk Investments, L.P., which the Company
hereby
incorporates by reference from Exhibit 99d1 to the Company’s Schedule
TO-I, filed February 9, 2007.
|
|
|
10.46
|
Second
Amendment and Extension of Stock Purchase Option, effective
July 1, 2004,
between LSB Holdings, Inc., an Oklahoma corporation and Dr.
Hauri AG, a
Swiss corporation, which the Company hereby incorporates by
reference from
Exhibit 10.1 to the Company’s Form 10-Q for the fiscal quarter ended
September 30, 2004.
|
|
|
10.47
|
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.
|
|
|
10.48
|
Purchase
Agreement, dated March 3, 2006, by and among the Company and
the investors
identified on the Schedule of Purchasers which the Company
hereby
incorporates by reference from Exhibit 99.1 to the Company’s Form 8-K,
dated March 14, 2006.
|
|
|
10.49
|
Registration
Rights Agreement, dated March 3, 2006, by and among the Company
and the
Purchasers set fourth in the signature pages which the Company
hereby
incorporates by reference from Exhibit 99.3 to the Company’s Form 8-K,
dated March 14, 2006.
|
|
|
10.50
|
Exchange
Agreement, dated October 6, 2006, between LSB Industries, Inc.,
Paul
Denby, Trustee of the Paul Denby Revocable Trust, U.A.D. 10/12/93,
The
Paul J. Denby IRA, Denby Enterprises, Inc., Tracy Denby, and
Paul Denby
which the Company hereby incorporates by reference from Exhibit
10.2 to
the Company’s Form 10-Q for the fiscal quarter ended September 30, 2006.
Substantially similar Exchange Agreements (each having the
same exchange
rate) were entered with the following individuals or entities
on the dates
indicated for the exchange of the number of shares of LSB’s $3.25
Convertible Exchangeable Class C Preferred Stock, Series 2
(the “Series 2
Preferred”) noted: October 6, 2006 - James W. Sight (35,428 shares of
Series 2 Preferred), Paul Denby, Trustee of the Paul Denby
Revocable
Trust, U.A.D. 10/12/93 (25,000 shares of Series 2 Preferred),
The Paul J.
Denby IRA (11,000 shares of Series 2 Preferred), Denby Enterprises,
Inc.
(4,000 shares of Series 2 Preferred), Tracy Denby (1,000 shares
of Series
2 Preferred); October 12, 2006 - Harold Seidel (10,000 shares
of Series 2
Preferred); October 11, 2006 -Brent Cohen (4,000 shares of
Series 2
Preferred), Brian J. Denby and Mary Denby (1,200 shares of
Series 2
Preferred), Brian J. Denby, Trustee, Money Purchase Pension
Plan (5,200
shares of Series 2 Preferred), Brian Denby, Inc. Profit Sharing
Plan (600
shares of Series 2 Preferred); October 25, 2006 - William M.
and Laurie
Stern ( 400 shares of Series 2 Preferred), William M. Stern
Revocable
Living Trust, UTD July 9, 1992 (1,570 shares of Series 2 Preferred),
the
William M. Stern IRA (2,000 shares of Series 2 Preferred),
and William M.
Stern, Custodian for David Stern (1,300 shares of Series 2
Preferred),
John Cregan (500 shares of Series 2 Preferred), and Frances
Berger (1,350
shares of Series 2 Preferred). Copies of the foregoing Exchange
Agreements
will be provided to the Commission upon request.
|
|
|
14.1
|
Code
of Ethics for CEO and Senior Financial Officers of Subsidiaries
of LSB
Industries, Inc., which the Company hereby incorporates by
reference from
Exhibit 14.1 to the Company’s Form 10-K for the fiscal year ended December
31, 2003.
|
|
|
21.1
|
Subsidiaries
of the Company.
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
31.1
|
Certification
of Jack E. Golsen, Chief Executive Officer, pursuant to Sarbanes-Oxley
Act
of 2002, Section 302.
|
31.2
|
Certification
of Tony M. Shelby, Chief Financial Officer, pursuant to Sarbanes-Oxley
Act
of 2002, Section 302.
|
|
|
32.1
|
Certification
of Jack E. Golsen, Chief Executive Officer, furnished pursuant
to
Sarbanes-Oxley Act of 2002, Section 906.
|
|
|
32.2
|
Certification
of Tony M. Shelby, Chief Financial Officer, furnished pursuant
to
Sarbanes-Oxley Act of 2002, Section
906.
|
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of
1934, as amended, the Registrant has duly caused this report to be signed
on its
behalf by the undersigned, thereunto duly authorized.
Dated: |
By:
|
/s/
Jack E. Golsen
|
March
26, 2007
|
|
Jack
E. Golsen
Chairman
of the Board and
Chief
Executive Officer
(Principal
Executive Officer)
|
Dated: |
By:
|
/s/
Tony
M. Shelby
|
March
26, 2007
|
|
Tony
M. Shelby
Executive
Vice President of Finance
and
Chief Financial Officer
(Principal
Financial Officer)
|
Dated: |
By:
|
/s/
Jim D. Jones
|
March
26, 2007
|
|
Jim
D. Jones
Senior
Vice President,
Corporate
Controller and Treasurer
(Principal
Accounting Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended,
this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates
indicated.
Dated:
|
By:
/s/ Jack E. Golsen
|
March
23, 2007
|
Jack
E. Golsen, Director
|
Dated:
|
By:
/s/ Tony M. Shelby
|
March
23, 2007
|
Tony
M. Shelby, Director
|
Dated:
|
By:
/s/ David R. Goss
|
March
23, 2007
|
David
R. Goss, Director
|
Dated:
|
By:
/s/ Barry H. Golsen
|
March
23, 2007
|
Barry
H. Golsen, Director
|
Dated:
|
By:
/s/ Robert C. Brown MD
|
March
23, 2007
|
Robert
C. Brown MD, Director
|
Dated:
|
By:
/s/ Bernard G. Ille
|
March
23, 2007
|
Bernard
G. Ille, Director
|
Dated:
|
By:
/s/ Raymond B. Ackerman
|
March
23, 2007
|
Raymond
B. Ackerman, Director
|
Dated:
|
By:
/s/ Horace G. Rhodes
|
March
23, 2007
|
Horace
G. Rhodes, Director
|
Dated:
|
By:
/s/ Donald W. Munson
|
March
23, 2007
|
Donald
W. Munson, Director
|
Dated:
|
By:
/s/ Charles A. Burtch
|
March
23, 2007
|
Charles
A. Burtch, Director
|
Dated:
|
By:
/s/ John A. Shelley
|
March
23, 2007
|
John
A. Shelley, Director
|
Dated:
|
By:
/s/ Grant J. Donovan
|
March
23, 2007
|
Grant
J. Donovan, Director
|
Dated:
|
By:
/s/ N. Allen Ford
|
March
23, 2007
|
N.
Allen Ford, Director
|
LSB
Industries, Inc.
Consolidated
Financial Statements
for
Inclusion in Form 10-K
Years
ended December 31, 2006, 2005 and 2004
|
F-
2
|
|
|
|
F-
3
|
|
|
|
F-
5
|
|
|
|
F-
6
|
|
|
|
F-
7
|
|
|
|
F-
9
|
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, 2006 and 2005, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in
the
period ended December 31, 2006. 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
audits 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, 2006 and 2005, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31,
2006, 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.
ERNST
& YOUNG LLP
Oklahoma
City, Oklahoma
March
23,
2007
LSB
Industries, Inc.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
2,255
|
|
$
|
4,653
|
|
Restricted
cash
|
|
2,479
|
|
|
177
|
|
Accounts
receivable, net
|
|
67,571
|
|
|
49,437
|
|
Inventories
|
|
45,449
|
|
|
37,271
|
|
Supplies,
prepaid items and other:
|
|
|
|
|
|
|
Prepaid
insurance
|
|
3,443
|
|
|
3,453
|
|
Precious
metals
|
|
6,406
|
|
|
4,987
|
|
Supplies
|
|
3,424
|
|
|
3,050
|
|
Other
|
|
1,468
|
|
|
1,382
|
|
Total
supplies, prepaid items and other
|
|
14,741
|
|
|
12,872
|
|
Total
current assets
|
|
132,495
|
|
|
104,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
76,404
|
|
|
74,082
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
Noncurrent
restricted cash |
|
1,202 |
|
|
- |
|
Debt
issuance and other debt-related costs, net
|
|
2,221
|
|
|
2,573
|
|
Investment
in affiliate
|
|
3,314
|
|
|
3,368
|
|
Goodwill
|
|
1,724
|
|
|
1,724
|
|
Other,
net
|
|
2,567
|
|
|
2,806
|
|
Total
other assets
|
|
11,028
|
|
|
10,471
|
|
|
$
|
219,927
|
|
$
|
188,963
|
|
(Continued
on following page)
LSB
Industries, Inc.
Consolidated
Balance Sheets (continued)
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
$
|
42,870
|
|
|
$
|
31,687
|
|
Short-term
financing and drafts payable
|
|
2,986
|
|
|
|
2,790
|
|
Accrued
and other liabilities
|
|
27,806
|
|
|
|
23,219
|
|
Current
portion of long-term debt
|
|
11,579
|
|
|
|
7,088
|
|
Total
current liabilities
|
|
85,241
|
|
|
|
64,784
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
86,113
|
|
|
|
105,036
|
|
|
|
|
|
|
|
|
|
Noncurrent
accrued and other liabilities
|
|
5,929
|
|
|
|
5,687
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Series
B 12% cumulative, convertible preferred stock, $100 par value; 20,000
shares issued and outstanding; aggregate liquidation preference of
$3,650,400 in 2006 ($3,440,000 in 2005)
|
|
2,000
|
|
|
|
2,000
|
|
Series
2 $3.25 convertible, exchangeable Class C preferred stock, $50
stated value; 517,402 shares issued (623,550 in 2005); aggregate
liquidation preference of $37,836,070 in 2006 ($43,963,406 in
2005)
|
|
25,870
|
|
|
|
31,177
|
|
Series
D 6% cumulative, convertible Class C preferred stock, no par value;
1,000,000 shares issued; aggregate liquidation preference of $1,300,000
in
2006 ($1,240,000 in 2005)
|
|
1,000
|
|
|
|
1,000
|
|
Common
stock, $.10 par value; 75,000,000 shares authorized, 20,215,339 shares
issued (17,082,265 in 2005)
|
|
2,022
|
|
|
|
1,708
|
|
Capital
in excess of par value
|
|
79,838
|
|
|
|
57,547
|
|
Accumulated
other comprehensive loss
|
|
(701
|
)
|
|
|
(990
|
)
|
Accumulated
deficit
|
|
(48,952
|
)
|
|
|
(61,738
|
)
|
|
|
61,077
|
|
|
|
30,704
|
|
Less
treasury stock, at cost:
|
|
|
|
|
|
|
|
Series
2 preferred, 18,300 shares
|
|
797
|
|
|
|
797
|
|
Common
stock, 3,447,754 shares (3,321,607 in 2005)
|
|
17,636
|
|
|
|
16,451
|
|
Total
stockholders' equity
|
|
42,644
|
|
|
|
13,456
|
|
|
$
|
219,927
|
|
|
$
|
188,963
|
|
See
accompanying notes.
LSB
Industries, Inc.
Consolidated
Statements of Income
|
(In
Thousands, Except Per Share
Amounts)
|
|
$
|
491,952
|
|
|
$
|
397,115
|
|
|
$
|
363,984
|
|
Cost
of sales
|
|
400,675
|
|
|
|
330,237
|
|
|
|
310,201
|
|
Gross
profit
|
|
91,277
|
|
|
|
66,878
|
|
|
|
53,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
64,134
|
|
|
|
53,453
|
|
|
|
49,891
|
|
Provisions
for losses on accounts receivable
|
|
426
|
|
|
|
810
|
|
|
|
211
|
|
Other
expense
|
|
722
|
|
|
|
332
|
|
|
|
1,111
|
|
Other
income
|
|
(1,559
|
)
|
|
|
(2,682
|
)
|
|
|
(674
|
)
|
Operating
income
|
|
27,554
|
|
|
|
14,965
|
|
|
|
3,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
11,915
|
|
|
|
11,407
|
|
|
|
7,393
|
|
Provision
for loss on notes receivable
|
|
-
|
|
|
|
-
|
|
|
|
1,447
|
|
Gains
on extinguishment of debt
|
|
-
|
|
|
|
-
|
|
|
|
(4,400
|
)
|
Non-operating
other income, net
|
|
(624
|
)
|
|
|
(1,561
|
)
|
|
|
(2,434
|
)
|
Income
from continuing operations before provision for income taxes,
equity in earnings of affiliate and cumulative effect of accounting
change
|
|
16,263
|
|
|
|
5,119
|
|
|
|
1,238
|
|
Provision
for income taxes
|
|
901
|
|
|
|
118
|
|
|
|
-
|
|
Equity
in earnings of affiliate
|
|
(821
|
)
|
|
|
(745
|
)
|
|
|
(668
|
)
|
Income
from continuing operations before cumulative effect of accounting
change
|
|
16,183
|
|
|
|
5,746
|
|
|
|
1,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations
|
|
253
|
|
|
|
644
|
|
|
|
-
|
|
Cumulative
effect of accounting change
|
|
-
|
|
|
|
-
|
|
|
|
536
|
|
Net
income
|
|
15,930
|
|
|
|
5,102
|
|
|
|
1,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
requirements and stock dividend on preferred stock
|
|
2,630
|
|
|
|
2,283
|
|
|
|
2,322
|
|
Net
income (loss) applicable to common stock
|
$
|
13,300
|
|
|
$
|
2,819
|
|
|
$
|
(952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before cumulative effect
of accounting change
|
$
|
.95
|
|
|
$
|
.26
|
|
|
$
|
(.03
|
)
|
Net
loss from discontinued operations
|
|
(.02
|
)
|
|
|
(.05
|
)
|
|
|
-
|
|
Cumulative
effect of accounting change
|
|
-
|
|
|
|
-
|
|
|
|
(.04
|
)
|
Net
income (loss)
|
$
|
.93
|
|
|
$
|
.21
|
|
|
$
|
(.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before cumulative effect
of accounting change
|
$
|
.79
|
|
|
$
|
.23
|
|
|
$
|
(.03
|
)
|
Net
loss from discontinued operations
|
|
(.01
|
)
|
|
|
(.04
|
)
|
|
|
-
|
|
Cumulative
effect of accounting change
|
|
-
|
|
|
|
-
|
|
|
|
(.04
|
)
|
Net
income (loss)
|
$
|
.78
|
|
|
$
|
.19
|
|
|
$
|
(.07
|
)
|
See
accompanying notes.
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
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,392
|
|
Exercise
of stock warrants
|
586
|
|
|
|
|
|
59
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Exercise
of stock options
|
89
|
|
|
|
|
|
8
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248
|
|
Acquisition
of 13,300 shares of non-redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(597
|
)
|
|
|
|
|
|
|
(597
|
)
|
Conversion
of 156 shares of redeemable preferred stock to common
stock
|
6
|
|
|
|
|
|
1
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Balance
at December 31, 2005
|
17,082
|
|
|
34,177
|
|
|
1,708
|
|
|
57,547
|
|
|
(990
|
)
|
|
|
(61,738
|
)
|
|
|
(797
|
)
|
|
|
(16,451
|
)
|
|
|
13,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,930
|
|
|
|
|
|
|
|
|
|
|
|
15,930
|
|
Amortization
of cash flow hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,219
|
|
Dividends
paid on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(262
|
)
|
|
|
|
|
|
|
|
|
|
|
(262
|
)
|
Conversion
of debentures to common stock
|
1,977
|
|
|
|
|
|
198
|
|
|
12,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,010
|
|
Exercise
of stock options
|
374
|
|
|
|
|
|
38
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,185
|
)
|
|
|
298
|
|
Exchange
of 104,548 shares of non-redeemable preferred stock for 773,655
shares of
common stock
|
774
|
|
|
(5,227
|
)
|
|
77
|
|
|
8,032
|
|
|
|
|
|
|
(2,882
|
)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Acquisition
of 1,600 shares of non-redeemable preferred stock
|
|
|
|
(80
|
)
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95
|
)
|
Conversion
of 188 shares of redeemable preferred stock to common stock
|
8
|
|
|
|
|
|
1
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
Balance
at December 31, 2006
|
20,215
|
|
$
|
28,870
|
|
$
|
2,022
|
|
$
|
79,838
|
|
$
|
(701
|
)
|
|
$
|
(48,952
|
)
|
|
$
|
(797
|
)
|
|
$
|
(17,636
|
)
|
|
$
|
42,644
|
|
See
accompanying notes.
LSB
Industries, Inc.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
15,930
|
|
|
$
|
5,102
|
|
|
$
|
1,370
|
|
Adjustments
to reconcile net income to net cash provided by continuing operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations
|
|
253
|
|
|
|
644
|
|
|
|
-
|
|
Cumulative
effect of accounting change
|
|
-
|
|
|
|
-
|
|
|
|
536
|
|
Gains
on extinguishment of debt
|
|
-
|
|
|
|
-
|
|
|
|
(4,400
|
)
|
Gains
on sales of property and equipment
|
|
(12
|
)
|
|
|
(714
|
)
|
|
|
(340
|
)
|
Gains
on property insurance recoveries
|
|
-
|
|
|
|
(1,618
|
)
|
|
|
-
|
|
Depreciation
of property, plant and equipment
|
|
11,381
|
|
|
|
10,875
|
|
|
|
10,194
|
|
Amortization
|
|
1,168
|
|
|
|
1,151
|
|
|
|
1,101
|
|
Provisions
for losses on accounts receivable
|
|
426
|
|
|
|
810
|
|
|
|
211
|
|
Provisions
for (realization and reversal of) losses on inventory
|
|
(711
|
)
|
|
|
239
|
|
|
|
548
|
|
Provision
for loss on notes receivable
|
|
-
|
|
|
|
-
|
|
|
|
1,447
|
|
Provisions
for impairment on long-lived assets
|
|
286
|
|
|
|
237
|
|
|
|
737
|
|
Provision
for (realization and reversal of) losses on firm sales commitments
|
|
328
|
|
|
|
-
|
|
|
|
(106
|
)
|
Net
loss of variable interest entity
|
|
-
|
|
|
|
-
|
|
|
|
575
|
|
Other
|
|
98
|
|
|
|
(36
|
)
|
|
|
121
|
|
Cash
provided (used) by changes in assets and liabilities (net
of effects of discontinued operations):
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(18,066
|
)
|
|
|
(8,664
|
)
|
|
|
(6,554
|
)
|
Inventories
|
|
(7,287
|
)
|
|
|
(8,888
|
)
|
|
|
(1,763
|
)
|
Other
supplies and prepaid items
|
|
(1,871
|
)
|
|
|
798
|
|
|
|
(1,447
|
)
|
Accounts
payable
|
|
11,183
|
|
|
|
3,990
|
|
|
|
5,688
|
|
Customer
deposits
|
|
1,011
|
|
|
|
(1,494
|
)
|
|
|
(1,155
|
)
|
Deferred
rent expense
|
|
122
|
|
|
|
6,047
|
|
|
|
(4,704
|
)
|
Other
current and noncurrent liabilities
|
|
3,453
|
|
|
|
2,496
|
|
|
|
(959
|
)
|
Net
cash provided by continuing operating activities
|
|
17,692
|
|
|
|
10,975
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from continuing investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(14,701
|
)
|
|
|
(15,315
|
)
|
|
|
(9,600
|
)
|
Proceeds
from property insurance recoveries
|
|
-
|
|
|
|
2,888
|
|
|
|
-
|
|
Proceeds
from sales of property and equipment
|
|
147
|
|
|
|
2,355
|
|
|
|
262
|
|
Deposits
of current and noncurrent restricted cash
|
|
(3,504
|
)
|
|
|
(19
|
)
|
|
|
(158
|
)
|
|
|
|
)
|
|
|
(483
|
)
|
|
|
|
)
|
Net
cash used by continuing investing activities
|
|
(18,421
|
)
|
|
|
(10,574
|
) |
|
|
(10,026
|
) |
(Continued
on following page)
LSB
Industries, Inc.
Consolidated
Statements of Cash Flows (continued)
Cash
flows from continuing financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from revolving debt facilities
|
$
|
460,335
|
|
|
$
|
363,671
|
|
|
$
|
330,680
|
|
Payments
on revolving debt facilities, including fees
|
|
(466,445
|
)
|
|
|
(359,451
|
)
|
|
|
(327,103
|
)
|
Proceeds
from 7% convertible debentures, net of fees
|
|
16,520
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds
from Senior Secured Loan, net of fees
|
|
-
|
|
|
|
-
|
|
|
|
47,708
|
|
Payments
on Financing Agreement
|
|
-
|
|
|
|
-
|
|
|
|
(38,531
|
)
|
Acquisition
of 10 3/4% Senior Unsecured Notes
|
|
(13,300
|
)
|
|
|
-
|
|
|
|
(5,000
|
)
|
Proceeds
from other long-term debt, net of fees
|
|
8,218
|
|
|
|
3,584
|
|
|
|
2,666
|
|
Payments
on other long-term debt
|
|
(6,853
|
)
|
|
|
(3,267
|
)
|
|
|
(4,886
|
)
|
Proceeds
from short-term financing and drafts payable
|
|
3,984
|
|
|
|
5,061
|
|
|
|
5,774
|
|
Payments
on short-term financing and drafts payable
|
|
(3,788
|
)
|
|
|
(5,978
|
)
|
|
|
(5,100
|
)
|
Proceeds
from exercise of stock options
|
|
298
|
|
|
|
248
|
|
|
|
820
|
|
Dividends
paid on preferred stock
|
|
(262
|
)
|
|
|
-
|
|
|
|
-
|
|
Acquisition
of non-redeemable preferred stock
|
|
(95
|
)
|
|
|
(597
|
)
|
|
|
(271
|
)
|
Net
cash provided (used) by continuing financing activities
|
|
(1,388
|
)
|
|
|
3,271
|
|
|
|
6,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
Operating
cash flows
|
|
(281
|
)
|
|
|
(39
|
)
|
|
|
-
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
(2,398
|
)
|
|
|
3,633
|
|
|
|
(2,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
4,653
|
|
|
|
1,020
|
|
|
|
3,189
|
|
Cash
and cash equivalents at end of year
|
$
|
2,255
|
|
|
$
|
4,653
|
|
|
$
|
1,020
|
|
Supplemental
cash flow information:
Cash
payments for:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on long-term debt and other
|
$
|
11,084
|
|
|
$
|
10,291
|
|
|
$
|
6,294
|
|
Income
taxes, net of refunds
|
$
|
445
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Receivable
from sale of property and equipment
|
$
|
182
|
|
|
$
|
-
|
|
|
$
|
202
|
|
Debt
issuance costs
|
$
|
1,546
|
|
|
$
|
-
|
|
|
$
|
2,315
|
|
Mark-to-market
provision on interest rate caps
|
$
|
(44
|
)
|
|
$
|
(162
|
)
|
|
$
|
-
|
|
Long-term
and other debt issued for property, plant
and
equipment
|
$
|
149
|
|
|
$
|
1,036
|
|
|
$
|
-
|
|
Debt
issuance costs associated with 7% convertible debentures converted
to
common stock
|
$
|
998
|
|
|
$
|
-
|
|
|
$
|
-
|
|
7%
convertible debentures converted to common stock
|
$
|
14,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Series
2 preferred stock converted to common stock of which $2,882,000 was
charged to accumulated deficit
|
$
|
8,109
|
|
|
$
|
-
|
|
|
$
|
-
|
|
See
accompanying notes.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements
The
accompanying consolidated financial statements include the accounts of LSB
Industries, Inc. (the "Company", "We", "Us", or "Our") and its subsidiaries.
We
are a manufacturing, marketing and engineering company which is primarily
engaged, through our wholly-owned subsidiary ThermaClime, Inc. (“ThermaClime”)
and its subsidiaries, in the manufacture and sale of geothermal and water
source heat pumps and air handling products (the "Climate Control Business")
and
the manufacture and sale of chemical products (the "Chemical Business"). The
Company and ThermaClime are holding companies with no significant assets or
operations other than our investments in our subsidiaries. Entities that are
20%
to 50% owned and for which we have significant influence are accounted for
on
the equity method. All material intercompany accounts and transactions have
been
eliminated.
Based
on
internal reviews of our accounting policies and financial presentation, we
have
made classification changes relating to outstanding checks in excess of our
zero-balance cash disbursement accounts, extended warranty contracts, and
warranty expense. At December 31, 2005, we had outstanding checks in excess
of
our zero-balance cash disbursement accounts of $3,740,000 included in long-term
debt since these accounts are primarily funded by our Working Capital Revolver
Loan due 2009. In addition, we had deferred revenue relating to sales of
extended warranty contracts of $1,441,000 included in accrued warranty costs
of
$2,302,000 at December 31, 2005. In 2006, we have reclassified the 2005 balance
relating to the outstanding checks in excess of our zero-balance cash
disbursement accounts as current portion of long-term debt and have reclassified
the 2005 balance relating to deferred revenue as deferred revenue on extended
warranty contracts. These reclassifications increased current portion of
long-term debt and decreased long-term debt by $3,740,000 in our 2005
consolidated balance sheet (the deferred revenue reclassification did not affect
our balance for current or noncurrent liabilities).
In
addition, for 2005 and 2004, revenue recognized relating to extended warranty
contracts of $393,000 and $376,000, respectively, was classified as reductions
of selling, general and administrative expense (“SG&A”) and warranty costs
of $414,000 and $296,000, respectively, were classified as cost of sales by
one
of our subsidiaries. In 2006, we have reclassified revenue recognized relating
to extended warranty contacts as net sales and warranty costs as SG&A. The
effect of these classification changes on our consolidated statement of income
for 2005 and 2004 was an increase in net sales, a decrease in cost of sales,
an
increase in gross profit, and an increase in SG&A. The net result did not
affect operating or net income. These classification changes did not affect
our
consolidated statements of cash flows for 2005 and 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.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
2.
Summary of Significant Accounting Policies (continued)
Cash
and Cash Equivalents - Short-term
investments, which consist of highly liquid investments with original maturities
of three months or less, are considered cash equivalents. We primarily utilize
a
cash management system with a series of separate accounts consisting of several
“zero-balance” disbursement accounts for funding of payroll and accounts
payable. As a result of our cash management system, checks issued, but not
presented to the banks for payment, may create negative book cash balances.
These negative book cash balances are included in current portion of long-term
debt since these accounts are funded primarily by our Working Capital Revolver
Loan. Outstanding checks in excess of related book cash balances were $5,849,000
and $3,740,000 at December 31, 2006 and 2005, respectively.
Current
and Noncurrent Restricted Cash - At
December 31, 2006, we had restricted cash totaling $3,681,000 of which
$1,202,000 is classified as noncurrent since it is to be used for capital
expenditures in the Climate Control Business. A
portion
of the current restricted cash was released in January 2007 and used for working
capital while the remaining balance is to fund an unrealized loss on
exchange-traded futures contracts.
Accounts
Receivable and Credit Risk
- Sales
to contractors and independent sales representatives are generally subject
to a
mechanic’s lien in the Climate Control Business. Other sales are generally
unsecured. Credit is extended to customers based on an evaluation of the
customer's financial condition and other factors. Credit losses are provided
for
in the consolidated financial statements based on historical experience and
periodic assessment of outstanding accounts receivable, particularly those
accounts which are past due (determined based upon how recently payments have
been received). Our periodic assessment of accounts and credit loss provisions
are based on our best estimate of amounts that are not recoverable.
Inventories
- Inventories
are priced at the lower of cost or market, with cost being determined using
the
first-in, first-out basis. Finished goods and work-in-process inventories
include material, labor, and manufacturing overhead costs. At December 31,
2006
and 2005, we had inventory reserves for certain slow-moving inventory items
(primarily Climate Control products) and inventory reserves for certain
nitrogen-based inventories provided by our Chemical Business because cost
exceeded the net realizable value.
Precious
Metals - Precious
metals are used as a catalyst in the Chemical Business manufacturing
process. Precious metals are carried at cost, with cost being determined
using the first-in, first-out (“FIFO”) basis. Because some of the catalyst
consumed in the production process cannot be readily recovered and the amount
and timing of recoveries are not predictable, we follow the practice of
expensing precious metals as they are consumed. Occasionally, during major
maintenance or capital projects, we may be able to perform procedures to recover
precious metals (previously expensed) which have accumulated over time within
the manufacturing equipment.
Property,
Plant and Equipment - Property,
plant and equipment are carried at cost. For financial reporting purposes,
depreciation is primarily computed using the straight-line method over the
estimated useful lives of the assets. Leases meeting capital lease criteria
have
been capitalized and included in property, plant and equipment. Amortization
of
assets under capital
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
2.
Summary of Significant Accounting Policies (continued)
leases
is
included in depreciation expense. No provision for depreciation is made on
construction in progress or capital spare parts until such time as the relevant
assets are put into service. Maintenance, repairs and minor renewals are charged
to operations while major renewals and improvements are capitalized in property,
plant and equipment.
Impairment
of Long-Lived Assets - Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. If assets to be
held
and used are considered to be impaired, the impairment to be recognized is
the
amount by which the carrying amounts of the assets exceed the fair values of
the
assets as measured by the present value of future net cash flows expected to
be
generated by the assets or their appraised value. Assets to be disposed of
are
reported at the lower of the carrying amounts of the assets or fair values
less
costs to sell. At December 31, 2006, we had no long-lived assets that met the
criteria presented in Statement of Financial Accounting Standards (“SFAS”) 144
to be classified as assets held for sale.
We
have
obtained estimates from external sources and made internal estimates based
on
inquiry and other techniques of the fair values of certain capital spare parts
and idle assets in our Chemical Business and certain non-core equipment included
in our Corporate assets in order to determine recoverability of the carrying
amounts of such assets.
Debt
Issuance and Other Debt-Related Costs - Debt
issuance and other debt-related costs are amortized over the term of the
associated debt instrument except for the cost of interest caps. Interest rate
cap contracts that are free-standing derivatives are accounted for on a
mark-to-market basis in accordance with SFAS 133.
Goodwill
-
Goodwill is reviewed for impairment at least annually in accordance with SFAS
142. As of December 31, 2006 and 2005, goodwill was $1,724,000 of which $103,000
and $1,621,000 relates to business acquisitions in prior periods in the Climate
Control and Chemical Businesses, respectively.
Accrued
Insurance Liabilities - We
are
self-insured up to certain limits for group health, workers’ compensation and
general liability claims. Above these limits, we have 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, 2006 and
2005, our claims liabilities were $1,646,000 and $1,426,000, respectively,
which
are included in accrued and other liabilities. It is possible that the actual
development of claims could exceed our estimates.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
2.
Summary of Significant Accounting Policies (continued)
Product
Warranty - Our
Climate Control Business sells equipment that has an expected life, under normal
circumstances and use that extends over several years. As such, we provide
warranties after equipment shipment/start-up covering defects in materials
and
workmanship.
Generally,
the base warranty coverage for most of the manufactured equipment in the Climate
Control Business is limited to eighteen months from the date of shipment or
twelve months from the date of start-up, whichever is shorter, and to ninety
days for spare parts. The warranty provides that most equipment is required
to
be returned to the factory or an authorized representative and the warranty
is
limited to the repair and replacement of the defective product, with a maximum
warranty of the refund of the purchase price. Furthermore, companies within
the
Climate Control Business generally disclaim and exclude warranties related
to
merchantability or fitness for any particular purpose and disclaim and exclude
any liability for consequential or incidental damages. In some cases, the
customer may purchase or a specific product may be sold with an extended
warranty. The above discussion is generally applicable to such extended
warranties, but variations do occur depending upon specific contractual
obligations, to certain system components, and local laws.
Our
accounting policy and methodology for warranty arrangements is to periodically
measure and recognize the expense and liability for such warranty obligations
using a percentage of net sales, based upon our historical warranty costs.
It is
possible that future warranty costs could exceed our estimates.
Changes
in our product warranty obligation are as follows:
|
Balance
at Beginning of Year
|
|
Additions-
Charged to Costs and Expenses
|
|
Deductions-
Costs Incurred
|
|
Balance
at End
of
Year
|
2006
|
|
$
|
861
|
|
$
|
2,199
|
|
$
|
1,809
|
|
$
|
1,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
897
|
|
$
|
1,491
|
|
$
|
1,527
|
|
$
|
861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
676
|
|
$
|
1,651
|
|
$
|
1,430
|
|
$
|
897
|
|
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. Turnaround
costs are accrued on a straight-line basis over the scheduled period between
Turnarounds, which generally ranges from 12 to 24 months. As of December 31,
2006 and 2005, accrued Turnarounds were $990,000 and $1,405,000, respectively,
which are included in current and noncurrent accrued and other liabilities
in
the accompanying consolidated balance sheets.
In
September 2006, the Financial Accounting Standards Board (“FASB”) completed a
project to clarify guidance on the accounting for Turnarounds. The FASB
issued
FASB Staff Position No.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
2.
Summary of Significant Accounting Policies (continued)
AUG
AIR-1
(“FSP”) which eliminates the accrue-in-advance method of accounting for
Turnarounds. In addition, the adoption of the provisions in the FSP is to be
considered a change in accounting principle with retrospective application
as
described in SFAS 154-Accounting Changes and Error Corrections, if practical.
The FSP became effective for us on January 1, 2007. We currently are using
the
accrue-in-advance method for Turnarounds that is eliminated under the FSP.
There
are three acceptable accounting methods for Turnarounds that we may adopt of
which we have elected to adopt the deferral method. We are currently assessing
the impact the FSP may have on our financial statements which we believe could
be significant.
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.
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, 2006 and 2005, our deferred
tax assets were net of a valuation allowance of $19.3 million and $26.1 million,
respectively.
Contingencies
- We
accrue for contingent losses when such losses are probable and reasonably
estimable. In addition, we recognize contingent gains when such gains are
realized. Our Chemical Business is subject to specific federal and state
regulatory and environmental compliance laws and guidelines. We have developed
policies and procedures related to environmental and regulatory compliance.
We
must continually monitor whether we have maintained compliance with such laws
and regulations and the operating implications, if any, and amount of penalties,
fines and assessments that may result from noncompliance. Loss contingency
liabilities are included in current and noncurrent accrued and other liabilities
and are based on current estimates that may be revised in the near term.
Asset
Retirement Obligations
- We
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. Currently, there is
insufficient information to estimate the fair value of the asset retirement
obligation. However, we will continue to review this obligation and record
a
liability when a reasonable estimate of the fair value can be made in accordance
of FASB Interpretation (“FIN”) 47.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
2.
Summary of Significant Accounting Policies (continued)
Stock
Options - Effective January 1, 2006, we adopted SFAS 123 (revised
2004), Share-Based Payment (“SFAS 123(R)”) using the modified prospective
method. Since all outstanding stock options were fully vested at December 31,
2005, the adoption of SFAS 123(R) did not impact our consolidated financial
statements. During 2005 and 2004, we accounted for those plans under the
recognition and measurement principles of APB Opinion No. 25 (“APB 25”),
Accounting for Stock Issued to Employees, and related interpretations. Under
APB
25, stock-based compensation cost was not usually reflected in our 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. We issue new shares of common stock upon the exercise of stock
options. See “Non-Qualified Stock Option Plans” within Note 14 -
Stockholders’ Equity for discussion of non-qualified stock options granted in
2006 but are subject to shareholders’ approval.
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 123(R) to stock-based compensation during 2005
and 2004. 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): risk-free
interest rates of 4.64%; a dividend yield of 0; volatility factors of the
expected market price of our common stock of .75; and a weighted average
expected life of the options of 7.36 years.
For
purposes of pro forma disclosures, the estimated fair value of the qualified
and
non-qualified stock options was amortized to expense over the options' vesting
period. Since our Board of Directors in 2005 approved the acceleration of the
vesting schedule of both qualified and non-qualified stock options that were
unvested at December 31, 2005, the remaining portion (unvested) of the pro
forma
stock-based compensation expense prior to the acceleration is included in the
2005 deduction amount below.
|
(In
Thousands, except per share
amounts)
|
Net
income (loss) applicable to common stock, as reported
|
$
|
2,819
|
|
|
$
|
(952
|
)
|
Less
total stock-based compensation expense determined under fair value
based
method for all awards, net of related tax effects
|
|
(530
|
)
|
|
|
(235
|
)
|
Pro
forma net income (loss) applicable to common stock
|
$
|
2,289
|
|
|
$
|
(1,187
|
)
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
Basic-as
reported
|
$
|
.21
|
|
|
$
|
(.07
|
)
|
Basic-pro
forma
|
$
|
.17
|
|
|
$
|
(.09
|
)
|
|
|
|
|
|
|
|
|
Diluted-as
reported
|
$
|
.19
|
|
|
$
|
(.07
|
)
|
Diluted-pro
forma
|
$
|
.15
|
|
|
$
|
(.09
|
)
|
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 remain no significant future
performance obligations by us. Revenue relating to construction contracts is
recognized using the percentage-of-completion method based primarily on contract
costs incurred to date compared with total estimated contract costs. Changes
to
total estimated contract costs or losses, if any, are recognized in the period
in which they are determined. Sales of warranty contracts are recognized as
revenue ratably over the life of the contract. See discussion above under
“Product Warranty” for our accounting policy for recognizing warranty
expense.
Recognition
of Insurance Recoveries - If
an
insurance claim relates to a recovery of our losses, we recognize the recovery
of when it is probable and reasonably estimable. If our insurance claim relates
to a contingent gain, we recognize the recovery when it is
realized.
Cost
of Sales - Cost
of
sales includes materials, labor and overhead costs to manufacture the products
sold plus inbound freight, purchasing and receiving costs, inspection costs,
internal transfer costs and warehousing costs (excluding certain handling costs
directly related to loading product being shipped to customers in our Chemical
Business which are included in SG&A). In addition, recoveries from precious
metals (Chemical Business), sales of material scrap (Climate Control Business),
and business interruption insurance claims are reductions to cost of sales.
Selling,
General and Administrative Expense - Selling,
general and administrative expense includes costs associated with the sales,
marketing and administrative functions. Such costs include personnel costs,
including benefits, advertising costs, commission expenses, warranty costs,
office and occupancy costs associated with the sales, marketing and
administrative functions. Selling, general and administrative expense also
includes outbound freight in our Climate Control Business and certain handling
costs directly related to product being shipped to customers in our Chemical
Business. These handling costs primarily consist of personnel costs for loading
product into transportation equipment, rent and maintenance costs related to
the
transportation equipment, and certain indirect costs.
Shipping
and Handling Costs - For
the
Chemical Business in 2006, 2005 and 2004, shipping costs of $17,448,000,
$10,564,000 and $8,567,000, respectively, are included in net sales as these
costs relate to amounts billed to our customers. In addition, in 2006,
2005, and 2004 handling costs of $4,950,000, $4,177,000 and $3,208,000,
respectively, are included in selling, general and administrative expense as
discussed above under "Selling, General and Administrative Expense." For the
Climate Control Business, shipping and handling costs of $10,326,000, $6,396,000
and $5,416,000 are included in selling, general and administrative expense
for
2006, 2005 and 2004, respectively.
Advertising
Costs - Costs
in
connection with advertising and promotion of our products are expensed as
incurred. Such costs amounted to $1,233,000 in 2006, $1,402,000 in 2005 and
$1,023,000 in 2004.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
2.
Summary of Significant Accounting Policies (continued)
Derivatives,
Hedges and Financial Instruments - We
account for derivatives in accordance with SFAS 133, which requires the
recognition of derivatives in the balance sheet and the measurement of these
instruments at fair value. Changes in fair value of derivatives are recorded
in
results of operations unless the normal purchase or sale exceptions apply or
hedge accounting is elected.
In
1997,
we entered into an interest rate forward agreement to effectively fix the
interest rate of a long-term lease commitment (not for trading purposes). In
1999, we executed a long-term lease agreement (initial lease term of ten years)
and terminated the forward agreement at a net cost of $2.8 million. We
historically accounted for this cash flow hedge under the deferral method (as
an
adjustment of the initial term lease rentals). Upon adoption of SFAS 133 in
2001, the remaining deferred cost amount was reclassified from other assets
to
accumulated other comprehensive loss and is being amortized to operations over
the term of the lease arrangement. At December 31, 2006 and 2005, accumulated
other comprehensive loss consisted of the remaining deferred cost of $701,000
and $990,000, respectively. The amounts amortized were $289,000, $290,000 and
$290,000 for 2006, 2005 and 2004, respectively, and are included in selling,
general and administrative expense. There were no income tax benefits related
to
these expenses. For 2007, 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 133. At December 31, 2006, and
2005, the market values of these contracts were $385,000 and $429,000,
respectively, and are included in other assets in the accompanying consolidated
balance sheets. The changes in the value of these contracts are included in
interest expense. For 2005, cash used to purchase these interest rate cap
contracts are included in cash used by continuing investing activities in the
accompanying consolidated statement of cash flows.
Raw
materials for use in our manufacturing processes include copper used by our
Climate Control Business and natural gas used by our Chemical Business. As
part
of our raw material price risk management, we periodically enter into
exchange-traded futures contracts for these materials, which contracts are
generally accounted for on a mark-to-market basis in accordance with SFAS 133.
At December 31, 2006, the unrealized loss on the futures contracts was $408,000
and is included in accrued and other liabilities and at December 31, 2005,
the
unrealized gain was $367,000 and is included in supplies, prepaid items and
other in the accompanying consolidated balance sheets. The unrealized gains
and
losses are classified as current assets and liabilities, respectively, as the
term of these contracts are for periods of twelve months or less. For 2006,
we
incurred losses of $1,516,000 on such contracts. For 2005 and 2004, we
recognized gains of $931,000 and $189,000, respectively. These losses and gains
are included in cost of sales. In addition, the cash flows relating to these
contracts are included in cash flows from continuing operating activities.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
2.
Summary of Significant Accounting Policies (continued)
Income
(Loss) per Common Share - Net
income (loss) applicable to common stock is computed by adjusting net income
(loss) by the amount of preferred stock dividends requirements. 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 net income
(loss) applicable to common stock plus preferred stock dividend requirements
on
preferred stock assumed to be converted, if dilutive, and interest expense
including amortization of debt issuance cost, net of income taxes, on
convertible debt assumed to be converted, if dilutive, and the weighted average
number of common shares and dilutive common equivalent shares outstanding,
and
the assumed conversion of dilutive convertible securities outstanding.
During
2006, $14 million of the 7% Convertible Senior Subordinated Debentures due
2011
(the “Debentures”) was converted into our common stock. In addition, 104,548
shares of our Series 2 $3.25 convertible, exchangeable Class C preferred stock
(“Series 2 Preferred”) was exchanged for 773,655 shares of our common stock.
Also partial cash dividends were paid on certain preferred stock.
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)
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
15,930
|
|
|
$
|
5,102
|
|
|
$
|
1,370
|
|
Dividend
requirements and stock dividend on preferred stock exchanged in
2006
|
|
(705
|
)
|
|
|
(340
|
)
|
|
|
(340
|
)
|
Other
preferred stock dividend requirements
|
|
(1,925
|
)
|
|
|
(1,943
|
)
|
|
|
(1,982
|
)
|
Numerator
for basic net income (loss) per share - net income (loss) applicable
to
common stock
|
|
13,300
|
|
|
|
2,819
|
|
|
|
(952
|
)
|
Preferred
stock dividend requirements on preferred stock assumed to be converted,
if
dilutive
|
|
1,925
|
|
|
|
-
|
|
|
|
-
|
|
Interest
expense including amortization of debt issuance costs, net of income
taxes, on convertible debt assumed to be converted
|
|
1,083
|
|
|
|
-
|
|
|
|
-
|
|
Numerator
for diluted net income (loss) per share
|
$
|
16,308
|
|
|
$
|
2,819
|
|
|
$
|
(952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic net income (loss) per share - weighted-average
shares
|
|
14,331,963
|
|
|
|
13,617,418
|
|
|
|
12,888,136
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock
|
|
3,112,483
|
|
|
|
38,390
|
|
|
|
-
|
|
Convertible
notes payable
|
|
2,100,325
|
|
|
|
4,000
|
|
|
|
-
|
|
Stock
options
|
|
1,261,661
|
|
|
|
1,195,320
|
|
|
|
-
|
|
Warrants
|
|
65,227
|
|
|
|
51,583
|
|
|
|
-
|
|
Dilutive
potential common shares
|
|
6,539,696
|
|
|
|
1,289,293
|
|
|
|
-
|
|
Denominator
for dilutive net income (loss) per share - adjusted weighted-average
shares and assumed conversions
|
|
20,871,659
|
|
|
|
14,906,711
|
|
|
|
12,888,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
$
|
.93
|
|
|
$
|
.21
|
|
|
$
|
(.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
$
|
.78
|
|
|
$
|
.19
|
|
|
$
|
(.07
|
)
|
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
2.
Summary of Significant Accounting Policies (continued)
The
following weighted-average shares of securities were not included in the
computation of diluted net income (loss) per share as their effect would have
been antidilutive:
Convertible
preferred stock
|
|
348,366
|
|
|
|
3,546,402
|
|
|
|
3,634,599
|
|
Convertible
notes payable
|
|
-
|
|
|
|
-
|
|
|
|
4,000
|
|
Stock
options
|
|
-
|
|
|
|
-
|
|
|
|
2,063,829
|
|
Warrants
|
|
-
|
|
|
|
-
|
|
|
|
708,085
|
|
|
|
348,366
|
|
|
|
3,546,402
|
|
|
|
6,410,513
|
|
Variable
Interest Entities - 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, 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 cancelled 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.
Recently
Issued Accounting Pronouncements - See
discussion above under “Accrued Plant Turnaround Costs” relating to FASB Staff
Position No. AUG AIR-1 which eliminates the accrue-in-advance method of
accounting for Turnarounds.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
2.
Summary of Significant Accounting Policies (continued)
In
July 2006, the FASB issued FASB Interpretation No. 48 - Accounting for
Uncertainty in Income Taxes (“FIN 48”). FIN 48 requires that realization of an
uncertain income tax position must be “more likely than not” (i.e. greater than
50% likelihood) the position will be sustained upon examination by taxing
authorities before it can be recognized in the financial statements. Further,
FIN 48 prescribes the amount to be recorded in the financial statements as
the
amount most likely to be realized assuming a review by tax authorities having
all relevant information and applying current conventions. FIN 48 also clarifies
the financial statement classification of tax-related penalties and interest
and
sets forth new disclosures regarding unrecognized tax benefits. FIN 48 became
effective in the first quarter of 2007 for the Company. We have performed
a
preliminary analysis of our income tax position and do not expect a significant
impact to our financial statements as a result of adopting FIN 48.
In
September 2006, the FASB issued SFAS 157 - Fair Value Measurements (“SFAS
157”). SFAS 157 is definitional and disclosure oriented and addresses how
companies should approach measuring fair value when required by generally
accepted accounting principles (GAAP); it does not create or modify any current
GAAP requirements to apply fair value accounting. SFAS 157 provides a single
definition for fair value that is to be applied consistently for all accounting
applications, and also generally describes and prioritizes according to
reliability the methods and input used in valuations. SFAS 157 prescribes
various disclosures about financial statement categories and amounts which
are
measured at fair value, if such disclosures are not already specified elsewhere
in GAAP. The new measurement and disclosure and requirements of SFAS 157
are
effective for the Company in the first quarter of 2008 and we currently do
not
expect a significant impact from adopting SFAS 157.
In
February 2007, the FASB issued SFAS 159 - The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”). This statement permits
entities to choose to measure many financial instruments and certain other
items
at fair value. SFAS 159 is effective for the Company beginning in the first
quarter of 2008. The Company is currently assessing the impact SFAS 159 may
have
on its financial statements.
In
September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin 108 - Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in the Current Year Financial Statements (“SAB
108”). SAB 108 provides interpretive guidance on how the effects of prior-year
uncorrected misstatements should be considered when quantifying misstatements
in
the current year financial statements. SAB 108 requires registrants to quantify
misstatements using both an income statement and balance sheet approach and
then
evaluate whether either approach results in a misstatement that, when all
relevant quantitative and qualitative factors are considered, is material.
If
prior year errors that had been previously considered immaterial now are
considered material based on either approach, no restatement is required
so long
as management properly applied its previous approach and all relevant facts
and
circumstances were considered. If prior year’s financial statements are not
restated, the cumulative effect adjustment is recorded in opening accumulated
deficit as of the beginning of the fiscal year of adoption. The adoption
of SAB
108 during the fourth quarter of 2006 did not impact our financial
statements.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
3.
Accounts Receivable
Trade
receivables
|
$
|
68,165
|
|
|
$
|
51,096
|
|
Other
|
|
1,675
|
|
|
|
1,021
|
|
|
|
69,840
|
|
|
|
52,117
|
|
Allowance
for doubtful accounts
|
|
(2,269
|
)
|
|
|
(2,680
|
)
|
|
$
|
67,571
|
|
|
$
|
49,437
|
|
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, ten customers
account for approximately 30% of our total net receivables at December 31,
2006.
We do not believe this concentration in these ten customers represents a
significant credit risk due to the financial stability of these customers.
4.
Inventories
|
|
Finished
Goods
|
|
Work-in- Process
|
|
Raw
Materials
|
|
Total
|
December
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control products
|
$
|
6,910
|
|
$
|
3,205
|
|
$
|
16,631
|
|
$
|
26,746
|
Chemical
products
|
|
11,443
|
|
|
-
|
|
|
5,361
|
|
|
16,804
|
Industrial
machinery and components
|
|
1,899
|
|
|
-
|
|
|
-
|
|
|
1,899
|
|
$
|
20,252
|
|
$
|
3,205
|
|
$
|
21,992
|
|
$
|
45,449
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
4.
Inventories (continued)
At
December 31, 2006 and 2005, inventory reserves for certain slow-moving inventory
items (primarily Climate Control products) were $829,000 and $1,028,000,
respectively. In addition, inventory reserves for certain nitrogen-based
inventories provided by our Chemical Business were $426,000 and $1,395,000
at
December 31, 2006 and 2005, respectively, because cost exceeded the net
realizable value.
Changes
in our inventory reserves are as follows:
|
|
Balance
at Beginning of Year
|
|
Additions-
Provision for (realization and reversal of)
losses
|
|
Deductions-
Write-offs/ disposals
|
|
Balance
at End
of
Year
|
|
2006
|
$
|
2,423
|
|
|
$
|
(711
|
)
|
|
$
|
457
|
|
|
$
|
1,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
$
|
2,185
|
|
|
$
|
239
|
|
|
$
|
1
|
|
|
$
|
2,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
$
|
2,004
|
|
|
$
|
1,017
|
|
|
$
|
836
|
|
|
$
|
2,185
|
|
The
provision for losses are included in cost of sales (realization and reversal
of
losses are reductions to cost of sales) in the accompanying consolidated
statements of income.
5.
Precious Metals
Precious
metals are used as a catalyst in the Chemical Business manufacturing process.
As
of December 31, 2006 and 2005, precious metals were $6,406,000 and $4,987,000,
respectively, and are included in supplies, prepaid items and other in the
accompanying consolidated balance sheets. For 2006, 2005 and 2004, the amounts
expensed for precious metals were approximately $5,133,000, $3,535,000 and
$3,332,000, respectively. These precious metals expenses are included in cost
of
sales in the accompanying consolidated statements of income. During major
maintenance and/or capital projects, we were able to perform procedures to
recover precious metals (previously expensed) which had accumulated over time
within our manufacturing equipment. For 2006, 2005 and 2004, we recognized
recoveries of precious metals at historical FIFO costs of approximately
$2,392,000, $2,050,000 and $189,000, respectively. These recoveries are
reductions to cost of sales.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
6.
Property, Plant and Equipment
|
Useful
lives
|
|
December
31,
|
Machinery,
equipment and automotive
|
3-25
|
|
$
|
141,362
|
|
$
|
133,192
|
|
Buildings
and improvements
|
3-30
|
|
|
25,867
|
|
|
22,806
|
|
Furniture,
fixtures and store equipment
|
3-10
|
|
|
7,182
|
|
|
6,818
|
|
Assets
under capital leases
|
3-12
|
|
|
1,056
|
|
|
1,688
|
|
Construction
in progress
|
N/A
|
|
|
7,077
|
|
|
5,034
|
|
Capital
spare parts
|
N/A
|
|
|
2,123
|
|
|
2,156
|
|
Land
|
N/A
|
|
|
2,194
|
|
|
2,152
|
|
|
|
|
|
186,861
|
|
|
173,846
|
|
Less
accumulated depreciation
|
|
|
|
110,457
|
|
|
99,764
|
|
|
|
|
$
|
76,404
|
|
$
|
74,082
|
|
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, 2006 and 2005, assets under capital leases consist of $961,000 and
$1,593,000 of machinery, equipment and automotive, respectively, and $95,000
of
furniture, fixtures and store equipment. Accumulated depreciation for assets
under capital leases were $118,000 and $326,000 at December 31, 2006 and 2005,
respectively.
7.
Debt Issuance and Other Debt-Related Costs, net
Debt
issuance and other debt-related costs, which are primarily included in other
assets in the accompanying consolidated balance sheets, were $2,221,000 and
$2,583,000, net of accumulated amortization of $3,681,000 and $2,991,000 as
of
December 31, 2006 and 2005, respectively.
In
2006,
we incurred debt issuance costs of $1,480,000 relating to the Debentures. During
2006, a portion of the Debentures were converted into our common stock. As
a
result of the conversions, approximately $998,000 of the debt issuance costs,
net of amortization, associated with the Debentures was charged against capital
in excess of par value.
See
discussion in "Derivatives, Hedges and Financial Instruments"of Note
2 concerning our interest rate cap contracts.
8.
Investment in Affiliate
Cepolk
Holding, Inc. (“CHI”), a subsidiary of the Company, is a limited partner and has
a 50% equity interest in Cepolk Limited Partnership (“Partnership”) which is
accounted for on the equity method. The Partnership owns an energy savings
project located at the Ft. Polk Army base
in
Louisiana (“Project”). At December 31, 2006 and 2005, our investment was
$3,314,000
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
8.
Investment in Affiliate (continued)
and
$3,368,000, respectively. For 2006, 2005 and 2004, distributions received
from
this affiliate were $875,000, $488,000 and $250,000, respectively. As of
December 31, 2006, the Partnership and general partner to the Partnership
is
indebted to a term lender (“Lender”) of the Project. CHI has pledged its
limited partnership interest in the Partnership to the Lender as part of
the
Lender’s collateral securing all obligations under the loan. This guarantee and
pledge is limited to CHI’s limited partnership interest and does not expose CHI
or the Company to liability in excess of CHI’s limited partnership interest. No
liability has been established for this pledge since it was entered into
prior
to adoption of FIN 45. CHI has no recourse provisions or available
collateral that would enable CHI to recover its partnership interest should
the
Lender be required to perform under this pledge.
9.
Current and Noncurrent Accrued and Other Liabilities
Deferred
rent expense
|
$
|
5,231
|
|
$
|
5,109
|
|
Accrued
payroll and benefits
|
|
4,170
|
|
|
3,519
|
|
Customer
deposits
|
|
2,938
|
|
|
1,927
|
|
Accrued
commissions
|
|
2,565
|
|
|
1,406
|
|
Deferred
revenue on extended warranty contracts
|
|
2,426
|
|
|
1,441
|
|
Accrued
contractual manufacturing obligations
|
|
1,801
|
|
|
841
|
|
Accrued
insurance
|
|
1,646
|
|
|
1,426
|
|
Accrued
death benefits
|
|
1,446
|
|
|
869
|
|
Accrued
environmental costs
|
|
1,432
|
|
|
1,491
|
|
Accrued
warranty costs
|
|
1,251
|
|
|
861
|
|
Accrued
precious metals costs
|
|
1,068
|
|
|
680
|
|
Plant
turnaround costs
|
|
990
|
|
|
1,405
|
|
Accrued
property and franchise taxes
|
|
833
|
|
|
1,902
|
|
Other
|
|
5,938
|
|
|
6,029
|
|
|
|
33,735
|
|
|
28,906
|
|
Less
noncurrent portion
|
|
5,929
|
|
|
5,687
|
|
Current
portion of accrued and other liabilities
|
$
|
27,806
|
|
$
|
23,219
|
|
|
|
|
|
|
|
|
10.
Redeemable Preferred Stock
At
December 31, 2006 and 2005, we had 683 shares and 871 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. During
each
quarter in 2006, our board of directors declared nominal dividends of $.31
per
share on the then
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
10.
Redeemable Preferred Stock (continued)
outstanding
redeemable preferred stock. At December 31, 2006 and 2005, the redeemable
preferred stock was $65,000 and $83,000, respectively, and is classified as
accrued and other liabilities in the accompanying consolidated balance
sheets.
11.
Long-Term Debt
Senior
Secured Loan due 2009 (A)
|
$
|
50,000
|
|
$
|
50,000
|
|
Working
Capital Revolver Loan due 2009 - ThermaClime (B)
|
|
26,048
|
|
|
31,975
|
|
7%
Convertible Senior Subordinated Notes due 2011 (C)
|
|
4,000
|
|
|
-
|
|
10-3/4%
Senior Unsecured Notes due 2007 (C)
|
|
-
|
|
|
13,300
|
|
Other,
with current interest rates of 4.25% to 9.36%, most of which is secured
by
machinery, equipment and real estate (D)
|
|
17,644
|
|
|
16,849
|
|
|
|
97,692
|
|
|
112,124
|
|
Less
current portion of long-term debt
|
|
11,579
|
|
|
7,088
|
|
Long-term
debt due after one year
|
$
|
86,113
|
|
$
|
105,036
|
|
(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, 2006 the effective interest
rate was 11%.
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. At December 31, 2006, the
restricted net assets of ThermaClime and its subsidiaries were approximately
$35
million. 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, 2006.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
11.
Long-Term Debt (continued)
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 1% of the
principal amount should the Borrowers elect to prepay any principal amount
prior
to September 15, 2007 but is eliminated 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 $190 million at December 31, 2006. 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 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
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
11.
Long-Term Debt (continued)
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%. The interest rate at December 31, 2006 was 6.59% considering
the
impact of the interest rate cap contracts discussed below. 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, 2006 were $22.8 million. Under the Working Capital Revolver Loan,
as amended, the lender also requires the borrowers to pay a letter of credit
fee
equal to 1% per annum of the undrawn amount of all outstanding letters of
credit, an unused line fee equal to .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.
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 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 $174 million at December 31, 2006.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
11.
Long-Term Debt (continued)
A
prepayment premium equal to 2% of the facility is due to the lender should
the
borrowers elect to prepay the facility prior to April 13, 2007. This premium
is
reduced to 1% during the following twelve-month period and is eliminated
thereafter.
The
Working Capital Revolver Loan, as amended, requires ThermaClime and its Climate
Control Business to meet certain financial covenants measured quarterly.
ThermaClime and its Climate Control Business were in compliance with those
covenants during 2006. The Working Capital Revolver Loan also contains covenants
that, among other things, limit the Borrowers' (which does not include the
Company) 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 assets, or (f) repurchase ThermaClime's 10-3/4% Senior Unsecured Notes
(the “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.
In
connection with the redemption of the Notes in July 2006 as discussed in (C)
below, the lenders of the Working Capital Revolver Loan and the Senior Secured
Loan provided consents to permit ThermaClime to borrow $6.4 million from the
Company for the purpose of redeeming the Notes.
(C) On
March
14, 2006, we completed a private placement to six qualified institutional buyers
pursuant to which we sold $18 million aggregate principal amount of our 7%
Convertible Senior Subordinated Debentures due 2011 (the “Debentures”). We used
a placement agent for this transaction which we paid a fee of 6% of the
aggregate gross proceeds received in the financing. Other offering expenses
in
connection with the transaction were $.4 million. As a result, the total debt
issuance costs related to this transaction were $1.5 million. Interest on the
Debentures is payable semi-annually in arrears on March 1 and September 1 of
each year which began September 1, 2006.
Jayhawk
Capital Management, L.L.C. and its affiliates (together “Jayhawk”) purchased $1
million principal amount of the Debentures. Prior to the closing of the private
placement, Jayhawk owned beneficially approximately 17.4% of our common stock
(of which 10% relates to shares issuable upon conversion of our preferred stock
at a conversion price of $11.55 per share and exercise of an outstanding warrant
for up to 112,500 shares at an exercise price of $3.49 per share).
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
11.
Long-Term Debt (continued)
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. Holders
of Debentures electing to convert all or any portion of a Debenture will obtain
the following conversion rate per $1,000 principal amount of Debentures during
the dates indicated:
|
|
Shares
Per $1,000 Principal Amount
|
|
Conversion
Price
Per Share
|
March
1, 2007 - August 31, 2007
|
|
141.04
|
|
|
$
|
7.09
|
|
September
1, 2007 - February 29, 2008
|
|
137.27
|
|
|
$
|
7.28
|
|
March
1, 2008 - August 31, 2008
|
|
133.32
|
|
|
$
|
7.50
|
|
September
1, 2008 - February 28, 2009
|
|
129.23
|
|
|
$
|
7.74
|
|
March
1, 2009 - March 1, 2011
|
|
125.00
|
|
|
$
|
8.00
|
|
The
conversion rates 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.
During
2006, $14 million of the Debentures were converted into 1,977,499 shares of
our
common stock at the conversion price of $7.08 per share. Several of the
conversions related to offers received from holders and accepted by us which
included additional consideration totaling $277,000 which were paid to these
holders. Because these offers met the criteria within SFAS 84-Induced
Conversions of Convertible Debt, the additional consideration was expensed.
See
Note 22 - Subsequent Events for additional information concerning
subsequent conversions.
If
a
designated event (as defined in the Debenture) occurs at any time prior to
the
maturity of the Debentures, the holders may require us to repurchase the
Debentures, in whole or in part, for cash on a repurchase date specified by
us
that is not less than 45 days after the date of mailing of our notice of the
designated event. We will repurchase the Debentures at a cash price equal to
101% of the principal amount to be repurchased, plus accrued and unpaid interest
in accordance with the terms of the Debentures.
The
Debentures may be redeemed by us 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, in shares of our common stock under certain
conditions; provided that payment of a portion of the principal amount in common
stock is subject to shareholder approval. 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
have
used substantially all of the net proceeds from the sale of the Debentures
for
the redemption or purchase of our higher interest rate debt or debt of our
subsidiaries,
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
11.
Long-Term Debt (continued)
including
the Notes. The remaining balance was used for general corporate purposes.
Approximately $13.6 million of the net proceeds have been used to purchase
or
redeem all of the outstanding Notes held by unrelated third parties and Jayhawk
at ThermaClime’s carrying value (which includes $1 million that was held by
Jayhawk) including accrued interest of $.3 million. Approximately $6.95 million
of the Notes held by the Company remain outstanding for ThermaClime at December
31, 2006.
(D)
Amounts include capital lease obligations of $767,000 and $1,200,000 at December
31, 2006 and 2005, respectively.
Maturities
of long-term debt for each of the five years after December 31, 2006 are as
follows (in thousands):
|
2007
|
|
$
|
11,579
|
|
|
2008
|
|
|
3,903
|
|
|
2009
|
|
|
69,669
|
|
|
2010
|
|
|
1,078
|
|
|
2011
|
|
|
5,079
|
|
|
Thereafter
|
|
|
6,384
|
|
|
|
|
$
|
97,692
|
|
12.
Income Taxes
Temporary
differences and carryforwards which gave rise to deferred tax assets and
liabilities at December 31, 2006 and 2005 include:
Deferred
tax assets
|
|
|
|
|
|
|
Amounts
not deductible for tax purposes:
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
$
|
1,286
|
|
$
|
1,461
|
|
Asset
impairment
|
|
769
|
|
|
781
|
|
Inventory
reserves
|
|
646
|
|
|
945
|
|
Deferred
compensation
|
|
2,123
|
|
|
1,510
|
|
Other
accrued liabilities
|
|
2,314
|
|
|
1,600
|
|
Other
|
|
607
|
|
|
-
|
|
Capitalization
of certain costs as inventory for tax purposes
|
|
881
|
|
|
1,434
|
|
Net
operating loss carryforwards
|
|
19,236
|
|
|
26,129
|
|
Alternative
minimum tax credit carryforwards
|
|
1,288
|
|
|
793
|
|
Total
deferred tax assets
|
|
29,150
|
|
|
34,653
|
|
Less
valuation allowance on deferred tax assets
|
|
19,318
|
|
|
26,146
|
|
Net
deferred tax assets
|
$
|
9,832
|
|
$
|
8,507
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
Accelerated
depreciation used for tax purposes
|
$
|
8,017
|
|
$
|
8,042
|
|
Excess
of book gain over tax gain resulting from sale of land
|
|
403
|
|
|
391
|
|
Investment
in unconsolidated affiliate
|
|
1,412
|
|
|
-
|
|
Other
|
|
-
|
|
|
74
|
|
Total
deferred tax liabilities
|
$
|
9,832
|
|
$
|
8,507
|
|
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
12.
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.
Detailed
below are the differences between the amount of the provision for income taxes
(consisting of federal alternative minimum tax and state income taxes) and
the amount which would result from the application of the federal statutory
rate
to “Income from continuing operations before provision for income taxes and
cumulative effect of accounting change” for each of the three years in the
period ended December 31:
Provision
for income taxes at federal statutory rate
|
$
|
5,979
|
|
|
$
|
2,097
|
|
|
$
|
434
|
|
Changes
in the valuation allowance related to deferred tax assets, net of
rate
differential
|
|
(6,095
|
)
|
|
|
(1,782
|
)
|
|
|
(123
|
)
|
Effect
of discontinued operations and other on valuation
allowance
|
|
58
|
|
|
|
(249
|
) |
|
|
(350
|
) |
Federal
alternative minimum tax
|
|
312
|
|
|
|
118
|
|
|
|
-
|
|
State
income taxes, net of federal benefit
|
|
383
|
|
|
|
-
|
|
|
|
-
|
|
Permanent
differences
|
|
264
|
|
|
|
(66
|
)
|
|
|
39
|
|
Provision
for income taxes
|
$
|
901
|
|
|
$
|
118
|
|
|
$
|
-
|
|
At
December 31, 2006 we have regular-tax net operating loss (“NOL”) carryforwards
of approximately $49.3 million ($32.9 million alternative minimum tax NOLs)
that
begin expiring in 2019.
13.
Commitments and Contingencies
Capital
and Operating Leases - We
and
our subsidiaries lease certain property, plant and equipment under capital
leases and non-cancelable operating leases in accordance with SFAS 13. Leased
assets meeting capital lease criteria have been capitalized and the present
value of the related lease payments is included in long-term debt. Future
minimum payments on leases, including the Nitric Acid Plant lease (“Baytown
Lease”) discussed below, with initial or remaining terms of one year or more at
December 31, 2006, are as follows (in thousands):
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
13.
Commitments and Contingencies (continued)
|
Capital
Leases
|
|
Baytown
Lease
|
|
Others
|
|
Total
|
2007
|
$
|
388
|
|
|
$
|
10,297
|
|
|
$
|
3,120
|
|
|
$
|
13,805
|
|
2008
|
|
386
|
|
|
|
11,173
|
|
|
|
2,244
|
|
|
|
13,803
|
|
2009
|
|
39
|
|
|
|
4,881
|
|
|
|
1,794
|
|
|
|
6,714
|
|
2010
|
|
32
|
|
|
|
-
|
|
|
|
1,226
|
|
|
|
1,258
|
|
2011
|
|
-
|
|
|
|
-
|
|
|
|
819
|
|
|
|
819
|
|
Thereafter
|
|
-
|
|
|
|
-
|
|
|
|
2,849
|
|
|
|
2,849
|
|
Total
minimum lease payments
|
|
845
|
|
|
$
|
26,351
|
|
|
$
|
12,052
|
|
|
$
|
39,248
|
|
Less
amounts representing interest
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present
value of minimum lease payments
included in long-term debt
|
$
|
767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
expense under all operating lease agreements, including month-to-month leases,
was $12,587,000 in 2006, $12,205,000 in 2005 and $12,313,000 in 2004. 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
in
2009, the Bayer Agreement may be renewed for up to six renewal terms of five
years each; however, prior to each renewal period, either party to the Bayer
Agreement may opt against renewal. The total amount of future minimum payments
due under the Baytown Lease is being charged to rent expense on the
straight-line method over the initial ten-year term of the lease. The difference
between rent expense recorded and the amount paid is charged to deferred rent
expense which is included in accrued and other liabilities in the accompanying
consolidated balance sheets. The Company and its subsidiaries have not provided
a residual value guarantee on the value of the equipment related to the Baytown
Lease and Bayer has the unilateral right to determine if the fixed-price
purchase option is exercised in 2009. If Bayer decides to exercise the purchase
option, they must also fund it. EDNC's ability to perform on its lease
commitments is contingent upon Bayer's performance under the Bayer Agreement.
One of our subsidiaries has guaranteed the performance of EDNC's obligations
under the Bayer Agreement.
Purchase
and Sales Commitments - Under
an
agreement, as amended, with its principal supplier of anhydrous ammonia, the
El
Dorado Chemical Company (“EDC”) will purchase a majority of its anhydrous
ammonia requirements using a market price-based formula plus transportation
to
the El Dorado Facility through December 31, 2008.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
13.
Commitments and Contingencies (continued)
In
1995,
EDC entered into a product supply agreement with a third party whereby EDC
is
required to make monthly facility fee and other payments which aggregate
$87,000. In return for this payment, EDC is entitled to certain quantities
of
compressed oxygen produced by the third party. Except in circumstances as
defined by the agreement, the monthly payment is payable regardless of the
quantity of compressed oxygen used by EDC. The term of this agreement is
for
fifteen years; however, EDC can currently terminate the agreement without
cause
at a cost of approximately $4.5 million. Based on EDC’s estimate of compressed
oxygen demands of the plant, the cost of the oxygen under this agreement
is
expected to be favorable compared to floating market prices. Purchases under
this agreement aggregated $1,052,000, $1,035,000 and $988,000 in 2006, 2005,
and
2004, respectively.
At
December 31, 2006, our Climate Control Business had purchase commitments
under
exchange-traded futures for 300,000 pounds of copper through March 2007 at
a
weighted average cost of $3.10 per pound and a weighted average market value
of
$2.86 per pound. At December 31, 2006, our Chemical Business had purchase
commitments under exchange-traded futures for 300,000 MMBtu of natural gas
through June 2007 at a weighted average cost of $7.59 per MMBtu and a weighted
average market value of $6.47 per MMBtu.
At
December 31, 2006, we also had standby letters of credit outstanding of $1.3
million of which $.5 million related to our Climate Control Business.
At
December 31, 2006, we had deposits from customers of $2.9 million for forward
sales commitments including $1.9 million relating to our Climate Control
Business and $.8 million relating to our Chemical Business.
In
2001,
EDC entered into a long-term cost-plus industrial grade ammonium nitrate
supply
agreement ("Supply Agreement") with a third party. During August 2006, the
Supply Agreement was amended. Under the amended Supply Agreement, beginning
in
2007, EDC will supply from the El Dorado Facility approximately 210,000 tons
of
industrial grade ammonium nitrate per year, which is approximately 75% of
the
plant's manufacturing capacity for that product, for a term through
2010.
Employment
and Severance Agreements - We
have
employment and severance agreements with several of our officers. The agreements
provide for annual base salaries, bonuses and other benefits commonly found
in
such agreements. In the event of termination of employment due to a change
in
control (as defined in the agreements), the agreements provide for payments
aggregating $9.1 million at December 31, 2006.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
13.
Commitments and Contingencies (continued)
Legal
Matters - Following
is a summary of certain legal matters involving the Company.
A.
Environmental Matters
Our
operations are subject to numerous environmental laws (“Environmental Laws”) and
to other federal, state and local laws regarding health and safety matters
(“Health Laws”). In particular, the manufacture and distribution of chemical
products are activities which entail environmental risks and impose obligations
under the Environmental Laws and the Health Laws, many of which provide for
certain performance obligations, substantial fines and criminal sanctions for
violations. There can be no assurance that material costs or liabilities will
not be incurred by us in complying with such laws or in paying fines or
penalties for violation of such laws. The Environmental Laws and Health Laws
and
enforcement policies thereunder relating to our Chemical Business have in the
past resulted, and could in the future result, in compliance expenses, cleanup
costs, penalties or other liabilities relating to the handling, manufacture,
use, emission, discharge or disposal of 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 and are reasonably expected to be incurred in the future.
We
are
required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably
estimated in accordance with FIN 47. We 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 the facilities is indeterminable, an asset retirement
liability has not been recognized. Currently, there is insufficient information
to estimate the fair value of the asset retirement obligations. However, we
will
continue to review these obligations and record a liability when a reasonable
estimate of the fair value can be made.
The
Company has certain facilities in our Chemical Business that contain asbestos
insulation around certain piping and heated surfaces. The asbestos insulation
is
in adequate condition to prevent leakage and can remain in place as long as
the
facility is operated or remains assembled. The Company plans to maintain the
facilities in an adequate condition to prevent leakage through its standard
repair and maintenance activities. 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, Arkansas facility (the “El Dorado Facility”) within our Chemical
Business generates process wastewater. The process water discharge and
storm-water run off are governed by a state National Pollutant Discharge
Elimination System (“NPDES”) water discharge permit issued by the Arkansas
Department of Environmental Quality (“ADEQ”), which permit is to be
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
13.
Commitments and Contingencies (continued)
renewed
every five years. The ADEQ issued to the El Dorado Facility a new revised
NPDES
water discharge permit in 2004, and the El Dorado Facility has until June
2007
to meet the compliance deadline for the more restrictive limits under the
2004
NPDES permit. In order to meet the El Dorado Facility’s June 2007 limits, the El
Dorado Facility has reduced the effluent levels of its wastewater and believes
that the ADEQ will allow the El Dorado Facility to directly discharge its
wastewater into the creek that runs through its property.
In
order
to directly discharge its wastewater from the El Dorado Facility into the
creek
and to meet the June 2007 permit limits, the El Dorado Facility has conducted
a
study of the adjacent stream to determine whether a permit modification is
appropriate. On September 22, 2006, the Arkansas Pollution Control and Ecology
Commission (“Commission”) approved the results of the study that showed that the
proposed permit modification is appropriate. A public hearing was held on
the
matter on November 13, 2006 with minimal opposition. We believe that the
ADEQ
will issue to the El Dorado Facility the permit modification during the third
quarter of 2007. Accordingly, direct discharge of wastewater into the creek
appears at this time to be the most likely wastewater discharge option, although
there are no assurances that this option will ultimately be made available
to
the El Dorado Facility.
If
the El
Dorado Facility is unable to directly discharge its wastewater, the El Dorado
Facility is considering the following other options to discharge its
wastewater:
· |
discharge
into the sewer discharge system of the city of El Dorado, Arkansas
(the
“City”), subject to the El Dorado Facility obtaining a sewer discharge
permit from the City; or
|
· |
utilization
of a joint pipeline to be constructed by the
City. |
The
El
Dorado Facility has submitted an application to the City which, if approved,
would allow the El Dorado Facility to tie-in to the City’s sewer discharge
system and become an industrial customer of the City. While we believe this
to
be a feasible option, this option has been put in abeyance while the El Dorado
Facility concentrates on reducing its effluent levels to allow it to directly
discharge its wastewater as discussed above.
Further,
for the past several years, the El Dorado Facility has anticipated utilizing
a
joint pipeline to be built by the City to discharge its wastewater. The City
has
approved the construction of a joint pipeline, but the City’s construction of
the pipeline 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. During March 2006, the ADEQ issued a draft permit to the City
for
the joint pipeline, and a public hearing occurred in May 2006 to receive public
comments. The final permit was issued in March 2007. It is anticipated that
both
the joint pipeline group and opposing residents will appeal the final permit.
The pipeline will not be available by the June 1, 2007 deadline. The ADEQ has
stated to the El Dorado Facility that since the direct discharge of wastewater
appears promising, the ADEQ has declined to allow an extension of compliance
deadlines that would coincide with a delayed construction schedule for the
City’s planned joint wastewater pipeline.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
13.
Commitments and Contingencies (continued)
Irrespective
of the option that the El Dorado Facility is required to utilize to dispose
of
its wastewater, the El Dorado Facility anticipates spending approximately $.8
million to remove certain contaminants from its wastewater as though it was
permitted to directly discharge into the creek. If the El Dorado Facility is
required to utilize the City’s sewer discharge system and obtains a sewer
discharge permit from the City, the El Dorado Facility will be required to
obtain from the ADEQ an extension of the June 1, 2007 deadline and will spend
an
additional $.5 million to connect to the City’s sewer discharge system. If the
El Dorado Facility is required to ultimately participate in the City’s joint
pipeline to discharge its wastewater, it will be required to obtain from the
ADEQ an extension of the June 1, 2007 deadline, and anticipates spending an
additional $2 million for its pro-rata share of the City’s cost of engineering
and construction of the City’s pipeline.
In
addition, the El Dorado Facility has entered into a consent administrative
order
(“CAO”) that recognizes the presence of nitrate contamination in the shallow
groundwater at the El Dorado Facility. A new CAO to address the shallow
groundwater contamination became effective on November 16, 2006 and requires
the
evaluation of the current conditions and remediation based upon a risk
assessment. The 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. Based on area well surveys performed, 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.
As an
interim measure, the El Dorado Facility has installed two recovery wells to
recycle ground water and to recover nitrates. The cost of any additional
remediation that may be required will be determined based on the results of
the
investigation and risk assessment and cannot currently be reasonably estimated.
Therefore, no liability has been established at December 31, 2006.
2.
Air Matters
To
resolve ammonia emissions from certain of our nitric acid plants, the El Dorado
Facility entered into a new air consent order which became effective December
19, 2006. Under the terms of the consent order, El Dorado replaced the catalyst
on the units used for abatement of nitrogen oxide (a periodic maintenance
requirement), agreed to monitor ammonia slippage, and agreed to submit an air
permit modification to set an allowable limit for the ammonia
emissions.
Under
the
terms of a consent administrative order relating to air matters (“AirCAO”),
which became effective in February 2004, resolving certain air regulatory
alleged violations associated with the El Dorado Facility’s sulfuric acid plant
and certain other alleged air emission violations, the El Dorado Facility is
required to implement additional air emission controls at the El Dorado Facility
no later than 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 $2.5 million to $4 million of capital expenditures,
depending on the technology changes as may be required. Our initial engineering
evaluation began during the fourth quarter of 2006.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
13.
Commitments and Contingencies (continued)
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. The successor (“Chevron”) of the prior owner of the
Hallowell Facility has agreed, within certain limitations, to pay and has been
paying one-half of the costs of certain interim remediation measures at the
site
approved by the KDHE, subject to reallocation.
As
a
result of meetings with the KDHE, we recorded a provision of $644,000 for our
share of these additional estimated costs for 2005. In addition, during 2006,
additional costs were estimated due to requirements by the KDHE to further
investigate and delineate the site. As a result, for 2006, we recorded
provisions totaling $203,000 for our share of these estimated additional costs.
The above provisions are classified as discontinued operations (in accordance
with SFAS 144) in the accompanying consolidated statements of income (there
are
no income tax benefits related to this expense). At December 31, 2006, the
total
estimated liability (which is included in current and noncurrent accrued and
other liabilities) in connection with this remediation matter is $1,399,000
and
Chevron’s share for one-half of these costs (which is included in accounts
receivable and other assets) is $700,000. 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. Should soil remediation
be
required, it is expected to be completed during 2007 followed by up to five
years of ground water monitoring.
Recently,
a site modeling was performed by a consulting firm for Slurry and Chevron which
indicates that the removal of the contaminated soil would have only limited
beneficial effect on the reduction of the contamination of the ground water
down
gradient of the site. The consultant’s modeling report was presented for review
to the KDHE in March 2007. As a result
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
13.
Commitments and Contingencies (continued)
Slurry
and Chevron expect to attempt to pursue a course with the KDHE of long-term
surface and ground water monitoring to track the natural decline in
contamination, instead of the soil excavation. We estimate the costs relating
to
this course of action to be substantially less than the cost of the soil
excavation but we are unable to determine if the KDHE will ultimately accept
the
proposal.
B.
Other Pending, Threatened or Settled Litigation
1.
Climate Control Business
Trison
Construction, Inc. (“Trison”), a subsidiary within our Climate Control Business,
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”). 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 $1.7 million. Trison denied that its work was defective
or otherwise incomplete.
On
January 16, 2006, the arbitrator issued his Interim Award finding in favor
of
Trison and against JCI on all allegations. On October 20, 2006, the arbitrator
filed his Final Award, which awarded Trison approximately $1.2 million for
reimbursement of defense costs which JCI paid in the fourth quarter of 2006.
This arbitration award is included in other income in the accompanying
consolidated statement of income.
2.
Chemical Business
In
2005,
EDC sued the general partners of Dresser Rand Company, Ingersoll-Rand Company
and DR Holdings Corp., and an individual employee of Dresser Rand Company,
in
connection with its faulty repair of a hot gas expander of one of EDC’s nitric
acid plants. As a result of defects in the repair, on October 8, 2004, the
hot
gas expander failed, leading to a fire at the nitric acid plant. The lawsuit
is
styled El Dorado Chemical Company, et al v. Ingersoll-Rand Company (NJ),
et al. in the Union County Arkansas Circuit Court.
The
complaint alleged that negligent repair led to the hot gas expander failure
and
resulting fire, and claimed $5 million for property damage to the nitric
acid
plant and $5 million in lost profits while the nitric acid plant was down
for
repair. The Defendants claimed that a limitation of liability clause in a
purchase order of Dresser Rand Company, the general partnership, applies,
effectively limiting damages to the amount of the purchase order, approximately
$.1 million.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
13.
Commitments and Contingencies (continued)
A
trial
was held in October 2006 resulting in a jury verdict awarding EDC approximately
$9.8 million in damages. The Defendants filed a Notice to Appeal and filed
a
$10.7 million bond. Post-judgment interest is accruing at the rate of 10%.
It is
expected that the appeal will be concluded in 2007. EDC will pay attorneys
fees
equal to 31.67% of any recovery. We will recognize the jury award if
and when realized.
Cherokee
Nitrogen Company (“CNC”), a subsidiary within our Chemical Business, has been
sued for an undisclosed amount of monies based on a claim that CNC 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. CNC 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. The suit is Nelson
Brothers, LLC v. Cherokee Nitrogen v. Dynegy Marketing,
and is
pending in Alabama state court in Colbert County. Dynegy has filed a
counterclaim against CNC for $600,000 allegedly owed on account, which
has been
recorded by CNC. Although there is no assurance, counsel for CNC has advised
us
that, at this time, they believe that CNC will recover monies from Dynegy
and
the likelihood of Dynegy recovering from CNC is remote. Our counsel also
has
advised us that they believe that the likelihood of Nelson recovering monies
from CNC over and above any monies which may be recovered from Dynegy by
CNC is
remote.
CNC
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 of $140,000 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. CNC is vigorously pursuing this matter, and counsel for CNC
has
advised that they believe there is a good likelihood CNC will recover from
the
defendants and that the likelihood of Meecorp recovering from CNC 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 was informed by the PBGC of a possible under-funding of the plan and
a
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
13.
Commitments and Contingencies (continued)
possible
takeover of the plan by the PBGC. The PBGC previously advised the Company
that
the PBGC may consider 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
alleged that the under-funding is approximately $600,000. However, the Company’s
ERISA counsel was verbally informed by a PBGC representative that he would
probably recommend no further action by the PBGC with respect to the Company’s
involvement with the Zeller plan. There are no assurances that such
recommendation, will be made or, if made, will be accepted by the
PBGC.
MEI
Drafts
On
July
18, 2006, Masinexportimport Foreign Trade Company (“MEI”) gave notice to the
Company and a subsidiary of the Company alleging that it was owed $1,533,000
in
connection with MEI’s attempted collection of ten non-negotiable bank
drafts payable to the order of MEI. The bank drafts were issued by Aerobit
Ltd.
(“Aerobit”), a non-U.S. company and at the time of issuance of the bank drafts
was a subsidiary of the Company. Each of the bank drafts has a face value
of
$153,300, for an aggregate principal face value of $1,533,000. The bank drafts
were issued in September 1992, and had a maturity date of December 31, 2001.
Each bank draft was endorsed by LSB Corp., which, at the time of endorsement,
was a subsidiary of the Company.
On
October 22, 1990, a settlement agreement between the Company, its subsidiary
Summit Machine Tool Manufacturing Corp. (“Summit”), and MEI (the “Settlement
Agreement”), was entered into, and in connection with the Settlement Agreement,
Summit issued to MEI obligations totaling $1,533,000. On May 16, 1992, the
Settlement Agreement was rescinded by the Company, Summit, and MEI at the
request of MEI, and replaced with an agreement purportedly substantially
similar
to the Settlement Agreement between MEI and Aerobit, pursuant to which MEI
agreed to replace the original $1,533,000 of Summit’s obligations with Aerobit
bank drafts totaling $1,533,000, endorsed by LSB Corp. Aerobit previously
advised us that MEI has not fulfilled the requirements under the bank drafts
for
payment thereof.
All
of
the Company’s ownership interest in LSB Corp. was sold to an unrelated third
party in September 2002. Further, all of the Company’s interest in Aerobit was
sold to a separate unrelated third party, in a transaction completed on or
before November 2002. Accordingly, neither Aerobit, which was the issuer
of the
bank drafts, nor LSB Corp., which was the endorser of the bank drafts, are
currently subsidiaries of the Company.
Neither
the Company nor any of its currently owned subsidiaries are makers or endorsers
of the bank drafts in question. The Company intends to vigorously defend
itself
in connection with this matter. No liability has been established relating
to
these bank drafts as of December 31, 2006.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
13.
Commitments and Contingencies (continued)
Business
Interruption and Property Insurance Claims
1.
El
Dorado Facility
Beginning
in October 2004 and continuing into June 2005, the Chemical Business’ results
were adversely affected as a result of the loss of production due to a
mechanical failure of one of the four nitric acid plants at the El Dorado,
Arkansas plant. 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. We also filed a business interruption claim for $5 million, net
of
the forty-five day waiting period. As of December 31, 2006, the insurers
have
paid claims totaling $5.5 million. The insurers are contesting our remaining
claims.
On
March
23, 2006, we filed a lawsuit in Federal Court in the Western District of
Arkansas, El Dorado Division, to collect amounts from our insurers to which
we
believe we are owed under the policy. The total amount claimed under the
lawsuit
which includes business interruption and property claims, is approximately
$2.3
million, plus attorney fees. Additional recoveries, if any, will be recognized
when realized.
2.
Cherokee Facility
As
a
result of damage caused by Hurricane Katrina, the natural gas pipeline servicing
the Cherokee Facility suffered damage and the owner of the pipeline declared
an
event of Force Majeure. This event of Force Majeure caused curtailments and
interruption in the delivery of natural gas to the Cherokee
Facility. CNC's insurer was promptly put on notice of a claim, but the
quantification of the claim amount took time and involved the retention of
a gas
market expert and a business interruption consultant.
On
September 25, 2006, CNC filed a contingent business interruption claim. CNC
is in discussions with, and providing additional documentation to, the
forensic accountant hired by CNC’s insurers to examine the claim. The recovery
of this claim, if any, will be recognized when realized.
Securities
and Exchange Commission Inquiry
The
Securities and Exchange Commission (“SEC”) made an informal inquiry to the
Company by letter dated August 15, 2006. The inquiry relates to the restatement
of the Company’s consolidated financial statements for the year ending December
31, 2004 and accounting matters relating to the change in inventory accounting
from LIFO to FIFO. The Company has responded to the inquiry. At the present
time
the informal inquiry is not a pending proceeding nor does it rise to the
level
of a government investigation. Until further communication and clarification
with the SEC, if any, the Company is unable to determine:
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
13.
Commitments and Contingencies (continued)
· |
if
the inquiry will ever rise to the level of an investigation or proceeding,
or
|
· |
the
materiality to the Company’s financial position with respect to
enforcement actions, if any, the SEC may have available to it.
|
We
are
also involved in various other claims and legal actions which in the opinion
of
management, after consultation with legal counsel, if determined adversely
to
us, would not have a material effect on our business, financial condition
or
results of operations.
14.
Stockholders' Equity
Qualified
Stock Option Plans - At
December 31, 2006, 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. Effective December 31, 2005, our Board of Directors approved the
acceleration of the vesting schedule of 61,500 shares of qualified stock
options
which would have been fully vested on November 17, 2009. Based on FIN 44,
since
the modification to the vesting schedule did not renew or increase the life
of
these stock options, a remeasurement of the stock options was not required
and
no stock-based compensation was recognized in 2005. At December 31, 2006,
there
are 8,000 options available to be granted. At December 31, 2006, there were
48,000 options outstanding related to the 1993 Plan and 477,304 options
outstanding relating to the 1998 Plan all of which were exercisable. The
exercise price of options granted under these plans was equal to the market
value of our common stock at the date of grant. For participants who own
10% or
more of our common stock at the date of grant, the exercise price is 110%
of the
market value at the date of grant and the options lapse after five years
from
the date of grant.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
14.
Stockholders' Equity (continued)
Activity
in our qualified stock option plans during each of the three years in the
period
ended December 31, 2006 is as follows:
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise
Price
|
Outstanding
at beginning of year
|
885,704
|
|
|
$
|
2.78
|
|
921,204
|
|
|
$
|
2.65
|
|
1,283,800
|
|
|
$
|
2.37
|
|
Granted
|
-
|
|
|
$
|
-
|
|
61,500
|
|
|
$
|
5.10
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
(352,400
|
)
|
|
$
|
4.04
|
|
(80,500
|
)
|
|
$
|
2.83
|
|
(346,596
|
)
|
|
$
|
1.59
|
|
Cancelled,
forfeited or expired
|
(8,000
|
)
|
|
$
|
1.25
|
|
(16,500
|
)
|
|
$
|
3.79
|
|
(16,000
|
)
|
|
$
|
2.72
|
|
Outstanding
at end of year
|
525,304
|
|
|
$
|
1.97
|
|
885,704
|
|
|
$
|
2.78
|
|
921,204
|
|
|
$
|
2.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of year
|
525,304
|
|
|
$
|
1.97
|
|
885,704
|
|
|
$
|
2.78
|
|
863,454
|
|
|
$
|
2.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted during year
|
|
|
|
|
N/A
|
|
|
|
|
$
|
3.78
|
|
|
|
|
|
N/A
|
|
Total
intrinsic value of options exercised during the year
|
$
|
1,886,000
|
|
|
$
|
333,000
|
|
|
$
|
1,896,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fair value of options vested during the year
|
$
|
-
|
|
|
$
|
362,000
|
|
|
$
|
141,000
|
|
The
following table summarizes information about qualified stock options outstanding
and exercisable at December 31, 2006:
|
Stock
Options Outstanding and
Exercisable
|
Exercise
Prices
|
|
Shares
Outstanding and Exercisable
|
|
Weighted
Average Remaining Contractual Life in
Years
|
|
Weighted
Average Exercise Price
|
|
Intrinsic
Value
of
Shares Outstanding
|
$
|
1.25
|
|
|
|
|
354,304
|
|
2.58
|
|
$
|
1.25
|
|
$
|
3,660,000
|
|
$
|
2.73
|
|
|
|
|
119,000
|
|
4.92
|
|
$
|
2.73
|
|
|
1,053,000
|
|
$
|
5.10
|
|
|
|
|
52,000
|
|
8.92
|
|
$
|
5.10
|
|
|
337,000
|
|
$
|
1.25
|
-
|
$
|
5.10
|
|
525,304
|
|
3.74
|
|
$
|
1.97
|
|
$
|
5,050,000
|
|
Non-Qualified
Stock Option Plans - Our
Board
of Directors approved the grants of non-qualified stock options to our outside
directors, our Chief Executive Officer, Chief Financial Officer and certain
key
employees, included in the tables below. The option prices are generally
based
on the market value of our common stock at the dates of grants. Effective
December 31, 2005, our Board of Directors approved the acceleration of the
vesting schedule of 30,000 shares
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
14.
Stockholders' Equity (continued)
of
non-qualified stock options which would have been fully vested on April 22,
2008
and 15,000 shares of non-qualified stock options which would have been fully
vested on November 7, 2006. Based on FIN 44, since this modification to the
vesting schedule did not
renew or
increase the life of these stock options, a remeasurement of the stock options
was not required and no stock-based compensation was recognized in 2005.
At
December 31, 2006, all outstanding non-qualified stock options were exercisable.
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, 2006. At December 31, 2006, 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, 2006 is as follows:
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
Outstanding
at beginning of year
|
1,005,600
|
|
|
$
|
2.00
|
|
1,014,000
|
|
|
$
|
2.01
|
|
1,254,000
|
|
|
$
|
2.17
|
|
Granted
|
-
|
|
|
$
|
-
|
|
-
|
|
|
$
|
-
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
(22,000
|
)
|
|
$
|
2.68
|
|
(8,400
|
)
|
|
$
|
2.44
|
|
(235,000
|
)
|
|
$
|
2.81
|
|
Surrendered,
forfeited, or expired
|
(3,000
|
)
|
|
$
|
4.19
|
|
-
|
|
|
$
|
-
|
|
(5,000
|
)
|
|
$
|
4.19
|
|
Outstanding
at end of year
|
980,600
|
|
|
$
|
1.98
|
|
1,005,600
|
|
|
$
|
2.00
|
|
1,014,000
|
|
|
$
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of year
|
980,600
|
|
|
$
|
1.98
|
|
1,005,600
|
|
|
$
|
2.00
|
|
913,250
|
|
|
$
|
1.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intrinsic value of options exercised during the year
|
$
|
147,000
|
|
|
$
|
38,000
|
|
|
$
|
1,173,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fair value of options vested during the year
|
$
|
-
|
|
|
$
|
257,000
|
|
|
$
|
126,000
|
|
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
14.
Stockholders' Equity (continued)
The
following table summarizes information about non-qualified stock options
outstanding and exercisable at December 31, 2006:
|
Stock
Options Outstanding and
Exercisable
|
Exercise
Prices
|
|
Shares
Outstanding and Exercisable
|
|
Weighted
Average Remaining Contractual Life in Years
|
|
Weighted
Average Exercise Price
|
|
Intrinsic
Value
of
Shares
Outstanding
|
|
$
|
1.25
|
-
|
$
|
1.38
|
|
706,500
|
|
2.58
|
|
$
|
1.26
|
|
$
|
7,291,000
|
|
|
$
|
2.62
|
-
|
$
|
2.73
|
|
86,500
|
|
5.15
|
|
$
|
2.70
|
|
|
768,000
|
|
|
$
|
4.19
|
|
|
|
|
102,600
|
|
1.33
|
|
$
|
4.19
|
|
|
758,000
|
|
|
$
|
4.54
|
-
|
$
|
5.36
|
|
85,000
|
|
.58
|
|
$
|
4.59
|
|
|
594,000
|
|
|
$
|
1.25
|
-
|
$
|
5.36
|
|
980,600
|
|
2.51
|
|
$
|
1.98
|
|
$
|
9,411,000
|
|
On
June
19, 2006, the Executive Compensation and Option Committee of our Board of
Directors granted 450,000 shares of non-qualified stock options to certain
employees which are subject to shareholders’ approval. The option price of these
options is $8.01 per share which is based on the market value of our common
stock at the date of authorization. These options will vest over a ten-year
period at a rate of 10% per year and expire on September 16, 2016 with certain
restrictions. Under SFAS 123(R), the fair value for these options will be
estimated, using an option pricing model, as of the date we receive
shareholders’ approval which is currently expected to be no later than our 2007
annual shareholders’ meeting. In general, a ratable portion of the total
estimated fair value relating to these options will be charged to selling,
general, and administrative expense (“SG&A”) at the date of shareholders’
approval and the remaining balance amortized to SG&A over the options’
remaining vesting period.
Preferred
Share Purchase Rights
- In
1999, we adopted a preferred share rights plan (the "Rights Plan"). Under
the
Rights Plan, we declared a dividend distribution of one Renewed Preferred
Share
Purchase Right (the "Renewed Preferred Right") for each outstanding share
of our
common stock outstanding as of February 27, 1999 and all further issuances
of
our common stock would carry the rights. The Rights Plan has a term of ten
years
from its effective date. The Renewed Preferred Rights are designed to ensure
that all of our stockholders receive fair and equal treatment in the event
of a
proposed takeover or abusive tender offer.
The
Renewed Preferred Rights are generally exercisable when a person or group
(other
than Jack E. Golsen, our Chairman and Chief Executive Officer (“CEO”), and his
affiliates, our company or any of our subsidiaries, our employee savings
plans
and certain other limited excluded persons or entities, as set forth in the
Rights Plan) acquire beneficial ownership of 20% or more of our common stock
(such a person or group will be referred to as the "Acquirer"). Each Renewed
Preferred Right (excluding Renewed Preferred Rights owned by the Acquirer)
entitles stockholders to buy one one-hundredth (1/100) of a share of a new
series of participating preferred stock at an exercise price of $20. Following
the acquisition by the Acquirer of
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
14.
Stockholders' Equity (continued)
beneficial
ownership of 20% or more of our common stock, and prior to the acquisition
of
50% or more of our common stock by the Acquirer, our Board of Directors may
exchange all or a portion of the Renewed Preferred Rights (other than Renewed
Preferred Rights owned by the Acquirer) for our common stock at the rate of
one
share of common stock per Renewed Preferred Right. Following acquisition by
the
Acquirer of 20% or more of our common stock, each Renewed Preferred Right (other
than the Renewed Preferred Rights owned by the Acquirer) will entitle its holder
to purchase a number of our common shares having a market value of two times
the
Renewed Preferred Right's exercise price in lieu of the new preferred stock.
Thus, only as an example, if our common shares at such time were trading at
$10
per share and the exercise price of the Renewed Preferred Right is $20, each
Renewed Preferred Right would thereafter be exercisable at $20 for four of
our
common shares.
If
after
the Renewed Preferred Share Rights are triggered, we are acquired, or we
sell
50% or more of our assets or earning power, each Renewed Preferred Right
(other
than the Renewed Preferred Rights owned by the Acquirer) will entitle its
holder
to purchase a number of the acquiring company's common shares having a market
value at the time of two times the Renewed Preferred Right's exercise price,
except if the transaction is consummated with a person or group who acquired
our
common shares pursuant to a Permitted Offer, the price for all of our common
shares paid to all of our common shareholders is not less than the price
per
share of our common stock pursuant to the Permitted Offer and the form of
consideration offered in the transaction is the same as the form of
consideration paid pursuant to the Permitted Offer. As defined in the Rights
Plan, a "Permitted Offer" is an offer for all of our common shares at a price
and on terms that a majority of our Board, who are not officers, or the person
or group who could trigger the exerciseability of the Renewed Preferred Rights,
deems adequate and in our best interest and that of our shareholders. Thus,
only
as an example, if our common shares were trading at $10 per share and the
exercise price of a Renewed Preferred Right is $20, each Renewed Preferred
Right
would thereafter be exercisable at $20 for four shares of the
Acquirer.
Prior
to
the acquisition by the Acquirer of beneficial ownership of 20% or more of
our
stock, our Board of Directors may redeem the Renewed Preferred Rights for
$.01
per Renewed Preferred Right.
Other
- As
of
December 31, 2006, there was a warrant outstanding (exercisable at $3.49
per
share until March 2008) to purchase 112,500 shares of common stock.
In
March
2005, holders exercised certain warrants, under a cashless exercise provision,
to purchase 586,140 shares of our common stock.
As
of
December 31, 2006, we have reserved 5.3 million shares of common stock issuable
upon potential conversion of convertible debt, preferred stocks, stock options
and warrants pursuant to original terms. See Note 22 - Subsequent
Events.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
15.
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 entitle 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. During each quarter in 2006,
our board of directors declared nominal dividends of $.37 per share on our
outstanding Series B preferred stock. At December 31, 2006, $1.65 million of
dividends ($82.52 per share) on the Series B preferred stock were in
arrears.
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.
During each quarter in 2006, our board of directors declared nominal dividends
of $.10 per share on the then outstanding Series 2 Preferred. At December 31,
2006, $11.97 million of dividends ($23.975 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
October 2006, we entered into agreements (“Exchange Agreements”) with certain
holders of our Series 2 Preferred. Pursuant to the terms of the Exchange
Agreements, we issued 773,655 shares of our common stock in exchange for 104,548
shares of Series 2 Preferred and the waiver by the holders of their rights
to
all unpaid dividends. As of the date of the Exchange Agreements, the amount
of
unpaid dividends on the Series 2 Preferred was approximately $2.4 million
($23.2625 per share). Because the exchanges were pursuant to terms other the
original terms, the transactions were considered extinguishments of the
preferred stock. In addition, the transactions qualified as induced conversions
under SFAS 84. Accordingly, we recorded a charge (stock dividend) to accumulated
deficit of approximately $2.9 million which equaled the excess of the fair
value
of the common stock issued over the fair value of the common stock issuable
pursuant to the original conversion terms. To measure fair value, we used the
closing price of our common stock on the day the parties entered into an
Exchange Agreement.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
15.
Non-Redeemable Preferred Stock (continued)
During
November 2006, we entered into an agreement with Jayhawk Capital Management,
L.L.C. and certain of its affiliates (collectively, the “Jayhawk Group”). Under
the agreement, the Jayhawk Group agreed, if the Company made an exchange
offer
for the Series 2 Preferred, to tender 180,450 shares of the 346,662 shares
of
Series 2 Preferred owned by the Jayhawk Group. In addition, as a condition
to
the Jayhawk Group’s obligation to tender such shares of Series 2 Preferred in an
exchange offer, the agreement further provides that Jack E. Golsen (Chairman
of
the Board and CEO of the Company), his wife, children and certain entities
controlled by them (the “Golsen Group”) would exchange only 26,467 of the 49,550
shares of Series 2 Preferred beneficially owned by them. As a result, only
309,807 of the 499,102 shares of Series 2 Preferred outstanding would be
eligible to participate in an exchange offer, with the remaining 189,295
being
held by the Jayhawk Group and the Golsen Group. See Note 22 - Subsequent
Events for a discussion concerning the subsequent exchange offer.
During
2006, we purchased 1,600 shares of Series 2 Preferred in the open market
for
$95,000 (average cost of $59.74 per share). These shares are to be cancelled
by
the Company. During 2005, we purchased 13,300 shares of Series 2 Preferred
in
the open market for $597,000 (average cost of $44.90 per share). These shares
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 cancelled 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,
2006,
dividends of $300,000 ($0.30 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, 2006, we are authorized to issue an additional 229,317 shares
of
$100 par value preferred stock and an additional 3,500,898 shares of no par
value preferred stock. Upon issuance, our Board of Directors will determine
the
specific terms and conditions of such preferred stock.
16.
Executive Benefit Agreements and Employee Savings Plans
In
1981,
we entered into individual death benefit agreements with certain key executives
(“1981 Agreements”). Under the 1981 Agreements, should the executive die while
employed, we are 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, 2006, 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
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
16.
Executive Benefit Agreements and Employee Savings Plans
(continued)
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, 2006 and 2005, the liability
for benefits under the 1992 Agreements is $979,000 and $938,000, respectively,
which is included in current and noncurrent accrued and other liabilities
in the
accompanying consolidated balance sheets. The liability reflects the present
value of the remaining estimated payments at discount rates of 6.01% and
5.57%
as of December 31, 2006 and 2005, respectively. Future estimated
undiscounted payments aggregate to $2.1 million as of December 31, 2006.
For
2006, 2005 and 2004, charges to selling, general and administrative expense
for
these benefits were $75,000, $110,000 and $171,000, respectively. As part
of the
1992 Agreements, should the executive die prior to attaining the age of 65,
we
will pay the beneficiary named in the agreement in 120 equal monthly
installments aggregating to an amount specified in the agreement. This amount
is
in addition to any amount payable under the 1981 Agreement should that executive
have both a 1981 and 1992 agreement. At December 31, 2006, the aggregate
undiscounted death benefit payments specified in the 1992 Agreements are
$615,000. The benefits under the 1992 Agreements are forfeited if the respective
executive's employment is terminated prior to age 65 for any reason other
than
death. The 1992 Agreements may be terminated by the Company at any time and
for
any reason prior to the death of the employee.
In
2005,
we entered into a death benefit agreement (“2005 Agreement”) with our CEO. The
Death Benefit Agreement provides that, upon our CEO’s death, we will pay to our
CEO’s designated beneficiary, a lump-sum payment of $2.5 million to be funded
from the net proceeds received by us under certain life insurance policies
on
our CEO’s life that are owned by us. We are obligated to keep in existence life
insurance policies with a total face amount of no less than $2.5 million
of the
stated death benefit. As of December 31, 2006, 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, 2006, the liability for death benefits under the 1981, 1992
and
2005 Agreements is $1,446,000 ($869,000 at December 31, 2005) which is included
in current and noncurrent accrued and other liabilities. We accrue for such
liabilities when they become probable and discount the liabilities to their
present value.
To
assist
us in funding the benefit agreements discussed above and for other business
reasons, we purchased life insurance contracts on various individuals in
which
we are the beneficiary. As of December 31, 2006, the total face amount of
these
policies is $21 million of which $2.5
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
16.
Executive Benefit Agreements and Employee Savings Plans
(continued)
million
of the proceeds is required to be paid under the 2005 Agreement as discussed
above. Some of these life insurance policies have cash surrender values that
we
have borrowed against. The cash surrender values are included in other assets
in
the amounts of $917,000 and $632,000, net of borrowings of $2,084,000 and
$1,939,000 at December 31, 2006 and 2005, respectively. Increases in cash
surrender values of $432,000, $574,000 and $465,000 are netted against the
premiums paid for life insurance policies of $837,000, $1,037,000 and $678,000
in 2006, 2005 and 2004, respectively, and are included in selling, general
and
administrative expense.
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, 2006.
17.
Fair Value of Financial Instruments
The
following discussion of fair values is not indicative of the overall fair
value
of our assets and liabilities since the provisions of SFAS 107 do not apply
to
all assets, including intangibles.
As
of
December 31, 2006 and 2005, due to their short-term nature, the carrying
values
of financial instruments classified as cash, restricted cash, accounts
receivable, accounts payable, short-term financing and drafts payable, and
accrued and other liabilities approximated their estimated fair values. Carrying
values for our interest rate cap contracts and exchange-traded futures contracts
approximate their fair value since they are accounted for on a mark-to-market
basis. Carrying values for variable rate borrowings are believed to approximate
their fair value. Fair values for fixed rate borrowings, other than the
Debentures and 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 estimated fair value of
the
Debentures is based on the conversion rate and market price of our common
stock
at December 31, 2006. At December 31, 2005, the fair value for the Notes
was
based on market quotations; however, there had been a low volume of trading
activity. In 2006, we purchased the $13.3 million of the Notes at carrying
value.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
17.
Fair Value of Financial Instruments (continued)
|
December
31, 2006
|
|
December
31, 2005
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated Fair
Value
|
|
Carrying
Value
|
Variable
Rate:
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Loan (1)
|
$
|
53,774
|
|
$
|
50,000
|
|
$
|
48,695
|
|
$
|
50,000
|
Bank
debt and equipment financing
|
|
28,565
|
|
|
28,565
|
|
|
35,197
|
|
|
35,197
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate:
|
|
|
|
|
|
|
|
|
|
|
|
Bank
debt and equipment financing
|
|
14,853
|
|
|
15,127
|
|
|
13,574
|
|
|
13,627
|
7%
Convertible Senior Subordinated Notes
|
|
6,543
|
|
|
4,000
|
|
|
|
|
|
|
Senior
Unsecured Notes due 2007
|
|
-
|
|
|
-
|
|
|
6,118
|
|
|
13,300
|
|
$
|
103,735
|
|
$
|
97,692
|
|
$
|
103,584
|
|
$
|
112,124
|
(1)
The
Senior Secured Loan has a variable interest rate not to exceed 11% or 11.5%
depending on ThermaClime’s leverage ratio.
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
insurance claims for recovery of business interruption and property losses
related to this incident. For 2006 and 2005, we realized insurance recoveries
of
$882,000 and $1,929,000, respectively, relating to the business interruption
claim which is recorded as a reduction to cost of sales. For 2005, we recognized
insurance recoveries totaling $1,618,000, of which most were under our
replacement cost insurance policy relating to this property damage claim
which
are recorded as other income. We have instituted litigation for the balance
of
our business interruption and property insurance claims relating to this
incident. Additional recoveries, if any, related to this incident will be
recognized when realized.
Beginning
in 2001 through 2003, we incurred business interruptions when the sulfuric
acid
plant at the El Dorado Facility experienced 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
$1,497,000 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.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
19.
Other Expense, Other Income and Non-Operating Other Income,
net
Other
expense:
|
|
|
|
|
|
|
|
|
|
|
|
Litigation
settlement (1)
|
$
|
300
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Impairments
of long-lived assets (2)
|
|
286
|
|
|
|
237
|
|
|
|
737
|
|
Other
miscellaneous expense (3)
|
|
136
|
|
|
|
95
|
|
|
|
374
|
|
Total
other expense
|
$
|
722
|
|
|
$
|
332
|
|
|
$
|
1,111
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
Arbitration
award
|
$
|
1,217
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Property
insurance recoveries in excess of losses incurred
|
|
-
|
|
|
|
1,618
|
|
|
|
-
|
|
Rental
income
|
|
25
|
|
|
|
142
|
|
|
|
128
|
|
Gains
on the sale of property and equipment, net
|
|
12
|
|
|
|
714
|
|
|
|
340
|
|
Other
miscellaneous income (3)
|
|
305
|
|
|
|
208
|
|
|
|
206
|
|
Total
other income
|
$
|
1,559
|
|
|
$
|
2,682
|
|
|
$
|
674
|
|
Non-operating
other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
523
|
|
|
$
|
174
|
|
|
$
|
121
|
|
Net
proceeds from certain key individual life
insurance
policies (4)
|
|
-
|
|
|
|
1,162
|
|
|
|
-
|
|
Gains
on sale of certain current assets, primarily
precious
metals
|
|
-
|
|
|
|
237
|
|
|
|
2,335
|
|
Miscellaneous
income (3)
|
|
199
|
|
|
|
137
|
|
|
|
137
|
|
Miscellaneous
expense (3)
|
|
(98
|
)
|
|
|
(149
|
)
|
|
|
(159
|
)
|
Total
non-operating other income, net
|
$
|
624
|
|
|
$
|
1,561
|
|
|
$
|
2,434
|
|
(1)
During
2006, a litigation settlement was reached relating to an asserted financing
fee.
(2)
Based
on estimates of the fair values obtained from external sources and estimates
made internally based on inquiry and other techniques, we recognized the
following impairments:
Chemical
Business assets
|
$
|
286
|
|
|
$
|
117
|
|
|
$
|
362
|
|
Corporate
assets
|
|
-
|
|
|
|
120
|
|
|
|
375
|
|
|
$
|
286
|
|
|
$
|
237
|
|
|
$
|
737
|
|
(3)
Amounts represent numerous unrelated transactions, none of which are
individually significant requiring separate disclosure.
(4) Amount
relates to the recognition in net proceeds from life insurance policies due
to
the unexpected death of one of our executives in January 2005.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
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 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 heating, ventilation, and air conditioning
(“HVAC”) products for use in commercial and residential new building
construction, renovation of existing buildings and replacement of existing
systems. Our HVAC products consist of geothermal and water source heat pumps,
hydronic fan coils, and other HVAC products including large custom air handlers,
modular chiller systems and other products and services. 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
business segment manufactures and sells concentrated, blended and regular
nitric
acid, mixed nitrating acids, metallurgical and commercial grade anhydrous
ammonia, sulfuric acid, and high purity ammonium nitrate for industrial
applications, anhydrous ammonia, ammonium nitrate, urea ammonium nitrate,
and
ammonium nitrate ammonia solution for agricultural applications, and industrial
grade ammonium nitrate and solutions for the mining industry. Our primary
manufacturing facilities are located in El Dorado, Arkansas, Baytown, Texas
and
Cherokee, Alabama. Sales to customers of this segment primarily include
industrial users of acids throughout the United States and parts of Canada,
farmers, ranchers, fertilizer dealers and distributors located in the Central
and Southeastern United States, and explosive manufacturers in the United
States.
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.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
20.
Segment Information (continued)
As
of
December 31, 2006, our Chemical Business employed 357 persons, with 117
represented by unions under agreements expiring in July through November of
2007.
Other
The
business operation classified as “Other” sells industrial machinery and related
components to machine tool dealers and end users located primarily in North
America.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
20.
Segment Information (continued)
Segment
Financial Information
Information
about our continuing operations in different industry segments for each of
the
three years in the period ended December 31, is detailed below.
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control:
|
|
|
|
|
|
|
|
|
|
|
|
Geothermal
and water source heat pumps
|
$
|
134,210
|
|
|
$
|
85,268
|
|
|
$
|
73,920
|
|
Hydronic
fan coils
|
|
59,497
|
|
|
|
53,564
|
|
|
|
48,760
|
|
Other
HVAC products
|
|
27,454
|
|
|
|
18,027
|
|
|
|
18,334
|
|
Total
Climate Control
|
|
221,161
|
|
|
|
156,859
|
|
|
|
141,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemical:
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
acids and other chemical products
|
|
95,208
|
|
|
|
80,228
|
|
|
|
82,040
|
|
Agricultural
products
|
|
89,735
|
|
|
|
80,638
|
|
|
|
72,154
|
|
Mining
products
|
|
75,708
|
|
|
|
72,581
|
|
|
|
62,070
|
|
Total
Chemical
|
|
260,651
|
|
|
|
233,447
|
|
|
|
216,264
|
|
Other
|
|
10,140
|
|
|
|
6,809
|
|
|
|
6,706
|
|
|
$
|
491,952
|
|
|
$
|
397,115
|
|
|
$
|
363,984
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
$
|
65,496
|
|
|
$
|
48,122
|
|
|
$
|
42,721
|
|
Chemical
|
|
22,438
|
|
|
|
16,426
|
|
|
|
8,917
|
|
Other
|
|
3,343
|
|
|
|
2,330
|
|
|
|
2,145
|
|
|
$
|
91,277
|
|
|
$
|
66,878
|
|
|
$
|
53,783
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
$
|
25,428
|
|
|
$
|
14,097
|
|
|
$
|
11,707
|
|
Chemical
|
|
10,200
|
|
|
|
7,703
|
|
|
|
(877
|
)
|
General
corporate expenses and other business operations,
net (1)
|
|
(8,074
|
)
|
|
|
(6,835
|
)
|
|
|
(7,586
|
)
|
|
|
27,554
|
|
|
|
14,965
|
|
|
|
3,244
|
|
Interest
expense
|
|
(11,915
|
)
|
|
|
(11,407
|
)
|
|
|
(7,393
|
)
|
Gains
on extinguishment of debt
|
|
-
|
|
|
|
-
|
|
|
|
4,400
|
|
Provision
for loss on notes receivable-Climate Control
|
|
-
|
|
|
|
-
|
|
|
|
(1,447
|
)
|
Non-operating
income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Chemical
|
|
311
|
|
|
|
362
|
|
|
|
2,463
|
|
Corporate
and other business operations
|
|
312
|
|
|
|
1,199
|
|
|
|
(29
|
)
|
Provision
for income taxes
|
|
(901
|
)
|
|
|
(118
|
)
|
|
|
-
|
|
Equity
in earnings of affiliate - Climate Control
|
|
821
|
|
|
|
745
|
|
|
|
668
|
|
Income
from continuing operations before cumulative
effect of accounting change
|
$
|
16,183
|
|
|
$
|
5,746
|
|
|
$
|
1,906
|
|
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:
Gross
profit-Other
|
$
|
3,343
|
|
|
$
|
2,330
|
|
|
$
|
2,145
|
|
Selling,
general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
costs
|
|
(5,862
|
)
|
|
|
(5,258
|
)
|
|
|
(4,194
|
)
|
Professional
fees
|
|
(3,004
|
)
|
|
|
(2,398
|
)
|
|
|
(2,672
|
)
|
Office
overhead
|
|
(598
|
)
|
|
|
(598
|
)
|
|
|
(637
|
)
|
Property,
franchise and other taxes
|
|
(198
|
)
|
|
|
(250
|
)
|
|
|
(283
|
)
|
All
other
|
|
(1,467
|
)
|
|
|
(1,424
|
)
|
|
|
(1,703
|
)
|
Total
selling, general and administrative
|
|
(11,129
|
)
|
|
|
(9,928
|
)
|
|
|
(9,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
28
|
|
|
|
883
|
|
|
|
144
|
|
Other
expense
|
|
(316
|
)
|
|
|
(120
|
)
|
|
|
(386
|
)
|
Total
general corporate expenses and other business operations,
net
|
$
|
(8,074
|
)
|
|
$
|
(6,835
|
)
|
|
$
|
(7,586
|
)
|
Information
about our property, plant and equipment and total assets by industry segment
is
detailed below:
Depreciation
of property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
$
|
2,591
|
|
|
$
|
2,223
|
|
|
$
|
1,720
|
|
Chemical
|
|
8,633
|
|
|
|
8,503
|
|
|
|
8,288
|
|
Corporate
assets and other
|
|
157
|
|
|
|
149
|
|
|
|
186
|
|
Total
depreciation of property, plant and equipment
|
$
|
11,381
|
|
|
$
|
10,875
|
|
|
$
|
10,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
$
|
7,600
|
|
|
$
|
4,322
|
|
|
$
|
730
|
|
Chemical
|
|
6,482
|
|
|
|
11,617
|
|
|
|
8,606
|
|
Corporate
assets and other
|
|
37
|
|
|
|
232
|
|
|
|
96
|
|
Total
additions to property, plant and equipment
|
$
|
14,119
|
|
|
$
|
16,171
|
|
|
$
|
9,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control
|
$
|
97,166
|
|
|
$
|
60,970
|
|
|
$
|
54,423
|
|
Chemical
|
|
109,122
|
|
|
|
111,212
|
|
|
|
94,981
|
|
Corporate
assets and other
|
|
13,639
|
|
|
|
16,781
|
|
|
|
18,164
|
|
Total
assets
|
$
|
219,927
|
|
|
$
|
188,963
|
|
|
$
|
167,568
|
|
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 the sales of industrial machinery and related
components.
Our
chief
operating decision makers use operating income (loss) by industry segment for
purposes of making decisions which include resource allocations and performance
evaluations. Operating income (loss) by industry segment represents gross profit
by industry segment less selling, general and administrative expense
(“SG&A”) incurred by each industry segment plus other income and other
expense earned/incurred by each industry segment before general corporate
expenses and other business operations, net. General corporate expenses and
other business operations, net consist of unallocated portions of gross profit,
SG&A, other income and other expense.
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
|
2006
|
|
2005
|
|
2004
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
operations
|
$
|
491,952
|
|
|
$
|
397,115
|
|
|
$
|
360,176
|
|
Foreign
operations (1)
|
|
-
|
|
|
|
-
|
|
|
|
3,808
|
|
|
$
|
491,952
|
|
|
$
|
397,115
|
|
|
$
|
363,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before cumulative effect of accounting
change:
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
operations
|
$
|
16,205
|
|
|
$
|
5,768
|
|
|
$
|
2,501
|
|
Foreign
operations (1)
|
|
(22
|
)
|
|
|
(22
|
)
|
|
|
(595
|
)
|
|
$
|
16,183
|
|
|
$
|
5,746
|
|
|
$
|
1,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
All
long-lived assets relate to domestic operations for the periods
presented.
(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.
LSB
Industries, Inc.
Notes
to
Consolidated Financial Statements (continued)
20.
Segment Information (continued)
Net
sales
to unaffiliated customers include foreign export sales as follows:
|
Geographic
Area
|
|
2006
|
|
2005
|
|
2004
|
|
Canada
|
$
|
14,869
|
|
$
|
12,077
|
|
$
|
11,464
|
|
Mexico,
Central and South America
|
|
3,240
|
|
|
581
|
|
|
1,075
|
|
Europe
|
|
1,732
|
|
|
1,148
|
|
|
1,752
|
|
South
and East Asia
|
|
1,271
|
|
|
1,502
|
|
|
1,173
|
|
Caribbean
|
|
968
|
|
|
282
|
|
|
-
|
|
Middle
East
|
|
688
|
|
|
2,647
|
|
|
2,193
|
|
Other
|
|
390
|
|
|
365
|
|
|
320
|
|
|
$
|
23,158
|
|
$
|
18,602
|
|
$
|
17,977
|
Major
Customers
Net
sales
to one customer, Orica USA, Inc., of our Chemical Business segment represented
approximately 10%, 11% and 10% of our total net sales for 2006, 2005 and 2004,
respectively. Under the terms of the Supply Agreement, EDC will supply from
the
El Dorado Facility industrial grade ammonium nitrate through 2010.
Net
sales
to another customer, Bayer, of our Chemical Business segment represented
approximately 7%, 9% and 11% of our total net sales for 2006, 2005 and 2004,
respectively. 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.
Related Party Transactions
One
of
the manufacturing facilities within our Climate Control Business sustained
substantial water damage in its office area resulting from the improper
installation by an unrelated third-party vendor of certain plumbing to a
water
line. As a result of the water damage, it became necessary to replace all
of the
carpet in the office area of the facility. During 2006, we purchased replacement
carpet from a company (“Designer Rugs”) owned by Linda Golsen Rappaport, the
daughter of Jack E. Golsen, our Chairman and Chief Executive Officer, and
sister
of Barry H. Golsen, our President. We paid approximately $159,000 to Designer
Rugs for the new carpet, removal of the damaged carpeting and installation
of
the new carpet. During the second quarter of 2006, we were reimbursed under
our
insurance coverage for the cost of the carpet and installation except for
a
deductible amount of $25,000.
In
addition, another subsidiary within our Climate Control Business is in the
process of remodeling their offices including the replacement of carpet and
flooring throughout the office area. Payments totaling $69,000 were made
during
2006 towards a purchase totaling $75,000
21.
Related Party Transactions (continued)
from
Designer Rugs. Substantially all of the carpet was delivered and installed
in
2006. Final completion expected early in 2007.
During
2006, Jayhawk purchased $1 million principal amount of the Debentures.
In
addition, we purchased $1 million principal amount of the Notes held by
Jayhawk.
Jayhawk earned interest of $117,000 relating to these debt instruments
in
2006.
During
2006 we paid nominal cash dividends to holders of certain series of our
preferred stock. These dividend payments included $91,000 and $133,000
to the
Golsen Group and the Jayhawk Group, respectively. Additionally, the dividend
payments included $23,000 collectively to the significant shareholders
discussed
below.
In
October 2006, we issued 773,655 shares of our common stock to certain holders
of
our Series 2 Preferred in exchange for 104,548 shares of Series 2 Preferred.
The
shares of common stock issued included 303,400 and 262,167 shares issued
for
exchange for 41,000 and 35,428 shares of Series 2 Preferred stock to Paul
Denby
and James Sight (“Significant Shareholders”), respectively, or to entities
controlled by the Significant Shareholders.
During
November 2006, we entered into the Jayhawk Agreement with the Jayhawk Group.
Under the Jayhawk Agreement, the Jayhawk Group agreed, if we made an exchange
offer for the Series 2 Preferred, to tender 180,450 shares of the 346,662
shares
of Series 2 Preferred owned by the Jayhawk Group. In addition, as a condition
to
the Jayhawk Group’s obligation to tender the shares of Series 2 Preferred in an
exchange offer, the Jayhawk Agreement further provided that the Golsen
Group
would exchange 26,467 shares of Series 2 Preferred beneficially owned by
them.
See Note 22-Subsequent Events.
22.
Subsequent Events (Unaudited)
On
January 26, 2007, our Board of Directors approved and on February 9, 2007,
we
began an exchange offer to exchange shares of our common stock for up to
309,807
of the 499,102 outstanding shares of the Series 2 Preferred. The exchange
offer
expired on March 12, 2007. The terms of the exchange offer provided for
the
issuance by the Company of 7.4 shares of common stock in exchange for each
share
of Series 2 Preferred tendered in the exchange offer and the waiver of
all
rights to accrued and unpaid dividends on the Series 2 Preferred tendered.
As a
result of this exchange offer, we issued 2,262,965 shares of our common
stock
for 305,807 shares of Series 2 Preferred that were tendered. In addition,
an
aggregate of approximately $7.3 million in accrued and unpaid dividends
were
waived as a result of this exchange offer. This exchange transaction qualified
as an induced conversion under SFAS 84. As a result, in the first quarter
of
2007, we will record a charge (stock dividend) to accumulated deficit which
will
equal the excess of the fair value of the common stock issued over the
fair
value of the common stock issuable pursuant to the original conversion
terms.
In
addition, such stock dividend will decrease net income applicable to common
stock, thereby negatively impacting earnings per common share for the first
quarter of 2007.
22.
Subsequent Events (Unaudited) (continued)
Pursuant
to the Jayhawk Agreement and the terms of the exchange offer, the Jayhawk
Group
and the Golsen Group tendered 180,450 and 26,467 shares, respectively,
of Series
2 Preferred for 1,335,330 and 195,855 shares, respectively, of our common
stock
and waived a total of approximately $5.0 million in accrued and unpaid
dividends.
During
February 2007, $3.0 million of the Debentures were converted into 423,750
shares
of our common stock at the conversion price of $7.08 per common
share.
On
March
6, 2007, our stockholders approved two amendments to the Series 2 Preferred,
which amendments became effective on that date. The first amendment provides
that the right of the holders of the Series 2 Preferred to elect two directors
to our board of directors when at least six quarterly dividends on the
Series 2
Preferred are in arrears and unpaid may be exercised only if and so long
as at
least 140,000 shares of Series 2 Preferred are issued and outstanding.
The
second amendment permits us to purchase or otherwise acquire shares of
our
common stock for a five-year period even though cumulative accrued and
unpaid
dividends exist on the Series 2 Preferred. The five-year period commenced
on
March 13, 2007, upon the completion of the exchange offer.
LSB
Industries, Inc.
Supplementary
Financial Data
Quarterly
Financial Data (Unaudited)
(In
Thousands, Except Per Share Amounts)
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales (1)
|
$
|
111,857
|
|
|
$
|
132,391
|
|
|
$
|
123,968
|
|
|
$
|
123,736
|
|
Gross
profit (1) (2)
|
$
|
19,757
|
|
|
$
|
25,182
|
|
|
$
|
23,866
|
|
|
$
|
22,472
|
|
Income
from continuing operations (2) (3)
|
$
|
2,656
|
|
|
$
|
6,677
|
|
|
$
|
3,453
|
|
|
$
|
3,397
|
|
Net
loss from discontinued operations
|
|
(100
|
)
|
|
|
(31
|
)
|
|
|
(113
|
)
|
|
|
(9
|
)
|
Net
income
|
$
|
2,556
|
|
|
$
|
6,646
|
|
|
$
|
3,340
|
|
|
$
|
3,388
|
|
Net
income applicable to common stock
|
$
|
2,004
|
|
|
$
|
6,094
|
|
|
$
|
2,789
|
|
|
$
|
2,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
$
|
.16
|
|
|
$
|
.44
|
|
|
$
|
.21
|
|
|
$
|
.15
|
|
Loss
from discontinued operations, net
|
|
(.01
|
)
|
|
|
-
|
|
|
|
(.01
|
)
|
|
|
-
|
|
Net
income
|
$
|
.15
|
|
|
$
|
.44
|
|
|
$
|
.20
|
|
|
$
|
.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
$
|
.13
|
|
|
$
|
.34
|
|
|
$
|
.18
|
|
|
$
|
.14
|
|
Loss
from discontinued operations, net
|
|
(.01
|
)
|
|
|
-
|
|
|
|
(.01
|
)
|
|
|
-
|
|
Net
income
|
$
|
.12
|
|
|
$
|
.34
|
|
|
$
|
.17
|
|
|
$
|
.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales (1)
|
$
|
86,775
|
|
|
$
|
109,606
|
|
|
$
|
105,280
|
|
|
$
|
95,454
|
|
Gross
profit (1) (2)
|
$
|
14,720
|
|
|
$
|
17,912
|
|
|
$
|
18,069
|
|
|
$
|
16,177
|
|
Income
from continuing operations (2) (3)
|
$
|
1,414
|
|
|
$
|
2,077
|
|
|
$
|
2,168
|
|
|
$
|
87
|
|
Net
loss from discontinued operations
|
|
-
|
|
|
|
-
|
|
|
|
(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
|
)
|
LSB
Industries, Inc.
Supplementary
Financial Data
Quarterly
Financial Data (Unaudited) (continued)
(1)
As
discussed in Note 1 of the Notes to Consolidated Financial Statements, we made
classification changes relating to extended warranty contracts and warranty
expense. The following table reconciles net sales and gross profit as previously
reported:
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
previously reported
|
$
|
111,744
|
|
|
$
|
132,273
|
|
|
$
|
123,847
|
|
|
|
N/A
|
|
Change
in classification
|
|
113
|
|
|
|
118
|
|
|
|
121
|
|
|
|
|
|
As
adjusted
|
$
|
111,857
|
|
|
$
|
132,391
|
|
|
$
|
123,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
previously reported
|
$
|
86,681
|
|
|
$
|
109,508
|
|
|
$
|
105,181
|
|
|
$
|
95,352
|
|
Change
in classification
|
|
94
|
|
|
|
98
|
|
|
|
99
|
|
|
|
102
|
|
As
adjusted
|
$
|
86,775
|
|
|
$
|
109,606
|
|
|
$
|
105,280
|
|
|
$
|
95,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
previously reported
|
$
|
19,547
|
|
|
$
|
24,963
|
|
|
$
|
23,567
|
|
|
|
N/A
|
|
Change
in classification
|
|
210
|
|
|
|
219
|
|
|
|
299
|
|
|
|
|
|
As
adjusted
|
$
|
19,757
|
|
|
$
|
25,182
|
|
|
$
|
23,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
previously reported
|
$
|
14,549
|
|
|
$
|
17,720
|
|
|
$
|
17,733
|
|
|
$
|
16,069
|
|
Change
in classification
|
|
171
|
|
|
|
192
|
|
|
|
336
|
|
|
|
108
|
|
As
adjusted
|
$
|
14,720
|
|
|
$
|
17,912
|
|
|
$
|
18,069
|
|
|
$
|
16,177
|
|
(2)
The
following items increased (decreased) gross profit and income from continuing
operations:
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
Business
interruption insurance recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
$
|
554
|
|
|
$
|
41
|
|
|
$
|
287
|
|
|
$
|
-
|
|
2005
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precious
metals recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
$
|
939
|
|
|
$
|
186
|
|
|
$
|
1,267
|
|
|
$
|
-
|
|
2005
|
$
|
1,053
|
|
|
$
|
125
|
|
|
$
|
-
|
|
|
$
|
872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in inventory reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
$
|
836
|
|
|
$
|
(297
|
)
|
|
$
|
366
|
|
|
$
|
(194
|
)
|
2005
|
$
|
242
|
|
|
$
|
674
|
|
|
$
|
77
|
|
|
$
|
(1,232
|
)
|
|
LSB
Industries, Inc.
Supplementary
Financial Data
Quarterly
Financial Data (Unaudited) (continued)
(3)
The
following items increased (decreased) income from continuing
operations:
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
Award
received related to Trison arbitration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
fees related to Trison arbitration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
$
|
(125
|
)
|
|
$
|
(320
|
)
|
|
$
|
(645
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
(losses) on sale of assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
$
|
15
|
|
|
$
|
(8
|
)
|
|
$
|
3
|
|
|
$
|
2
|
|
2005
|
$
|
422
|
|
|
$
|
322
|
|
|
$
|
15
|
|
|
$
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from life insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
$
|
1,138
|
|
|
$
|
24
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
on property insurance recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
$
|
-
|
|
|
$
|
523
|
|
|
$
|
647
|
|
|
$
|
448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
|
$
|
881
|
|
|
$
|
1,783
|
|
Accounts
receivable, net
|
|
43
|
|
|
|
52
|
|
Supplies,
prepaid items and other
|
|
2,734
|
|
|
|
2,689
|
|
Investment
in senior unsecured notes of a subsidiary
|
|
6,950
|
|
|
|
-
|
|
Due
from subsidiaries
|
|
5,413
|
|
|
|
1,872
|
|
Total
current assets
|
|
16,021
|
|
|
|
6,396
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
192
|
|
|
|
234
|
|
Note
receivable from a subsidiary
|
|
6,400
|
|
|
|
-
|
|
Investments
in and due from subsidiaries
|
|
41,014
|
|
|
|
25,639
|
|
Other
assets, net
|
|
800
|
|
|
|
315
|
|
|
$
|
64,427
|
|
|
$
|
32,584
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
$
|
142
|
|
|
$
|
129
|
|
Accrued
and other liabilities
|
|
1,050
|
|
|
|
1,014
|
|
Redeemable,
noncumulative, convertible preferred stock
|
|
65
|
|
|
|
83
|
|
Current
portion of long-term debt
|
|
44
|
|
|
|
41
|
|
Total
current liabilities
|
|
1,301
|
|
|
|
1,267
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
4,038
|
|
|
|
1,727
|
|
Due
to subsidiaries
|
|
2,558
|
|
|
|
2,558
|
|
Noncurrent
accrued and other liabilities
|
|
2,344
|
|
|
|
1,745
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock
|
|
28,870
|
|
|
|
34,177
|
|
Common
stock
|
|
2,022
|
|
|
|
1,708
|
|
Capital
in excess of par value
|
|
79,838
|
|
|
|
57,547
|
|
Accumulated
deficit
|
|
(48,952
|
)
|
|
|
(61,738
|
)
|
|
|
61,778
|
|
|
|
31,694
|
|
Less
treasury stock
|
|
7,592
|
|
|
|
6,407
|
|
Total
stockholders' equity
|
|
54,186
|
|
|
|
25,287
|
|
|
$
|
64,427
|
|
|
$
|
32,584
|
|
See
accompanying notes.
LSB
Industries, Inc.
Schedule
I - Condensed Financial Information of Registrant
Condensed
Statements of Income
Fees
under service, tax sharing and management agreements with
subsidiaries
|
$
|
2,801
|
|
|
$
|
1,001
|
|
|
$
|
1,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
4,367
|
|
|
|
4,161
|
|
|
|
3,352
|
|
Other
income, net
|
|
(308
|
)
|
|
|
(708
|
)
|
|
|
(594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
(1,258
|
)
|
|
|
(2,452
|
)
|
|
|
(1,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
4,452
|
|
|
|
2,553
|
|
|
|
1,427
|
|
Net
proceeds from certain key individual life insurance policies
|
|
-
|
|
|
|
(1,162
|
)
|
|
|
-
|
|
Interest
and other non-operating income, net
|
|
(1,355
|
)
|
|
|
(373
|
)
|
|
|
(229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
(4,355
|
)
|
|
|
(3,470
|
)
|
|
|
(2,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in earnings of subsidiaries
|
|
20,538
|
|
|
|
9,216
|
|
|
|
4,325
|
|
Net
loss from discontinued operations
|
|
(253
|
)
|
|
|
(644
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
15,930
|
|
|
$
|
5,102
|
|
|
$
|
1,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
LSB
Industries, Inc.
Schedule
I - Condensed Financial Information of Registrant
Condensed
Statements of Cash Flows
Net
cash flows used by operating activities
|
$
|
(985
|
)
|
|
$
|
(2,484
|
)
|
|
$
|
(2,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(30
|
)
|
|
|
(9
|
)
|
|
|
(27
|
)
|
Proceeds
from sales of property and equipment
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
Purchase
of senior unsecured notes of a subsidiary
|
|
(6,950
|
)
|
|
|
-
|
|
|
|
-
|
|
Note
receivable from a subsidiary
|
|
(6,400
|
)
|
|
|
-
|
|
|
|
-
|
|
Other
assets
|
|
(209
|
)
|
|
|
40
|
|
|
|
-
|
|
Net
cash provided (used) by investing activities
|
|
(13,589
|
)
|
|
|
31
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from 7% convertible debentures, net of fees
|
|
16,520
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds
from other long-term debt
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
Payments
on other long-term debt
|
|
(1,655
|
)
|
|
|
(4
|
)
|
|
|
(277
|
)
|
Net
change in due to/from subsidiaries
|
|
(1,134
|
)
|
|
|
4,475
|
|
|
|
2,658
|
|
Proceeds
from exercise of stock options
|
|
298
|
|
|
|
248
|
|
|
|
820
|
|
Dividends
paid on preferred stock
|
|
(262
|
)
|
|
|
-
|
|
|
|
-
|
|
Acquisition
of non-redeemable preferred stock
|
|
(95
|
)
|
|
|
(597
|
)
|
|
|
(271
|
)
|
Net
cash provided by financing activities
|
|
13,672
|
|
|
|
4,122
|
|
|
|
2,952
|
|
Net
increase (decrease) in cash
|
|
(902
|
)
|
|
|
1,669
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at the beginning of year
|
|
1,783
|
|
|
|
114
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at the end of year
|
$
|
881
|
|
|
$
|
1,783
|
|
|
$
|
114
|
|
See
accompanying notes.
LSB
Industries, Inc.
Schedule
I - Condensed Financial Information of Registrant
Notes
to
Condensed Financial Statements
1.
Basis of Presentation
The
accompanying condensed financial statements of the parent company include the
accounts of LSB Industries, Inc. (the "Company") only. The Company's investments
in subsidiaries are stated at cost plus equity in undistributed earnings
(losses) of subsidiaries since date of acquisition. These condensed financial
statements should be read in conjunction with the Company's consolidated
financial statements.
2.
Debt Issuance Costs
In
2006,
the Company incurred debt issuance costs of $1,480,000 relating to the
Debentures. During 2006, a portion of the Debentures were converted into our
common stock. As a result of the conversions, approximately $998,000 of the
debt
issuance costs, net of amortization, associated with the Debentures was charged
against capital in excess of par value.
3.
Commitments and Contingencies
The
Company has guaranteed the payment of principal and interest under the terms
of
various debt. Subsidiaries’ long-term debt outstanding at December 31, 2006,
which is guaranteed by the Company is as follows (in thousands):
Senior
Secured Loan due 2009
|
|
$
|
50,000
|
|
Secured
revolving credit facility - ThermaClime
|
|
|
26,048
|
|
Other,
most of which is collateralized by machinery, equipment and real
estate
|
|
|
16,333
|
|
|
|
$
|
92,381
|
|
In
addition, the Company has guaranteed approximately $4.9 million of our
subsidiaries performance bonds.
See
Notes
11 and 13 of the notes to the Company's consolidated financial statements
for discussion of the long-term debt and commitments and
contingencies.
4.
Preferred Stock and Stockholders' Equity
At December 31,
2006 and
2005, a subisdiary of the Company owns 2,451,527 shares of the Company's
common
stock which shares have been considered as issued and outstandig
in the accompanying
Condensed Balance Sheets included in this Schedule I - Condensed Financial
Information of Registrant. See Notes 10, 14 and 15 of notes to
the Company's
consolidated financial
statements for duscussion of matters relating to the Company's preferred
stock
and other shockholders' equity matters.
LSB
Industries, Inc.
Schedule
II - Valuation and Qualifying Accounts
Years
ended December 31, 2006, 2005 and 2004
(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):
|
|
2006
|
|
$
|
2,680
|
|
|
$
|
426
|
|
|
$
|
837
|
|
|
$
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
2,332
|
|
|
$
|
810
|
|
|
$
|
462
|
|
|
$
|
2,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
3,225
|
|
|
$
|
211
|
|
|
$
|
1,104
|
|
|
$
|
2,332
|
|
Inventory-reserve
for slow-moving items (1):
|
|
2006
|
|
$
|
1,028
|
|
|
$
|
258
|
|
|
$
|
457
|
|
|
$
|
829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
908
|
|
|
$
|
121
|
|
|
$
|
1
|
|
|
$
|
1,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
1,441
|
|
|
$
|
303
|
|
|
$
|
836
|
|
|
$
|
908
|
|
Notes
receivable - allowance for doubtful accounts (1):
|
|
2006
|
|
$
|
970
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
1,020
|
|
|
$
|
-
|
|
|
$
|
50
|
|
|
$
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
13,655
|
|
|
$
|
1,447
|
|
|
$
|
14,082
|
|
|
$
|
1,020
|
|
Deferred
tax assets - valuation (1):
|
|
2006
|
|
$
|
26,146
|
|
|
$
|
|
|
|
$
|
6,828
|
|
|
$
|
19,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
27,928
|
|
|
$
|
-
|
|
|
$
|
1,782
|
|
|
$
|
26,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
28,051
|
|
|
$
|
-
|
|
|
$
|
123
|
|
|
$
|
27,928
|
|
LSB
Industries, Inc.
Schedule
II - Valuation and Qualifying Accounts (continued)
Years
ended December 31, 2006, 2005 and 2004
(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:
|
|
2006
|
|
$
|
1,405
|
|
$
|
3,307
|
|
$
|
3,722
|
|
$
|
990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
1,517
|
|
$
|
2,601
|
|
$
|
2,713
|
|
$
|
1,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$
|
2,678
|
|
$
|
1,742
|
|
$
|
2,903
|
|
$
|
1,517
|
(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.