PROSPECTUS Filed
Pursuant to Rule
424(b)(3)
Registration
No. 333-134111
LSB
INDUSTRIES, INC.
7%
Convertible Senior Subordinated Debentures Due 2011
2,542,500
Shares of Common Stock
The
debentures and shares of our common stock will be offered and sold by the
Selling Security Holders named in this prospectus or in any amendment or
supplement to this prospectus. See “Selling Security Holders” beginning on page
40 .
We will
not receive any of the proceeds from the sale by the Selling Security Holders
of
these securities.
Our
common stock is listed on the American Stock Exchange under the symbol “LXU.”
The last reported sale price of our common stock on the American Stock Exchange
on April 4, 2007 was $15.15 per share. There is no established market for the
debentures and we do not intend to apply for listing of the debentures on any
securities exchange or for quotation of the debentures through any automated
quotation system.
The
Selling Security Holders may sell the securities offered by this prospectus
from
time to time on any exchange on which the securities are listed. They may also
sell the securities in private sales or through dealers or agents. The Selling
Security Holders may sell the securities at prevailing market prices or at
prices negotiated with buyers. The Selling Security Holders will be responsible
for any commissions due to brokers, dealers or agents. We will pay all expenses
of the registration of the debentures and the common stock and certain other
expenses as set forth in the registration rights agreement described in this
prospectus.
Investing
in the debentures or in our common stock involves risks.
See
“Risk Factors” beginning on page 5.
Neither
the Securities and Exchange Commission nor any state securities
commission
has
approved or disapproved of these securities or passed upon the adequacy of
this
prospectus. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is April 18, 2007.
This
prospectus is part of a registration statement that we have filed with the
Securities and Exchange Commission. The securities described in this prospectus
may be offered and sold by the Selling Security Holders using this prospectus
from time to time as described the “Plan of Distribution” beginning on page
43.
You
should carefully read this prospectus and the information described under the
heading “Incorporation by Reference” beginning on page 15 and
“Where You Can Find More Information” on page 15 .
You
should rely only on the information contained in, or incorporated by reference
in, this document. We have not authorized anyone to provide you with information
that is different. This document may only be used where it is legal to sell
these securities. The information in this document may only be accurate on
the
date of this document.
This
summary highlights certain information concerning our business and this
offering. It does not contain all of the information that may be important
to
you and to your investment decision and is qualified in its entirety by, and
should be read in conjunction with, the more detailed information about us
and
the debenture in this prospectus, including the section entitled “Risk Factors,”
along with our business information, our financial information and other
documents incorporated by reference in this prospectus.
LSB
Industries, Inc.
LSB
Industries, Inc. (the “Company,” “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 operating through our subsidiaries. Our wholly-owned
subsidiary, ThermaClime, Inc. (“ThermaClime”) through its subsidiaries, owns
substantially all of our core businesses consisting of the:
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Climate
Control Business, which is engaged in the manufacturing and selling
of a
broad range of heating, ventilation and air conditioning products
used in
commercial and residential new building construction, renovation
of
existing buildings and replacement of existing systems;
and
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Chemical
Business, which is engaged in the manufacturing and selling of chemical
products produced from three plants in Texas, Arkansas and Alabama
for the
industrial, mining and agricultural markets.
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Company
Information
Our
executive offices are located at 16 South Pennsylvania Avenue, Oklahoma City,
Oklahoma 73107, telephone (405) 235-4546. Our Web site is located at
www.lsb-okc.com.
The
information on our Web site is not part of this prospectus and should not be
considered in your decision to invest in the debentures or our common
stock.
THE
OFFERING
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Issuer
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LSB
Industries, Inc.
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Selling
Security Holders
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The
securities to be offered and sold using this prospectus will be offered
and sold by the Selling Security Holders named in this prospectus,
or in
any amendment or supplement to this prospectus. See “Selling Security
Holders.”
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Securities
covered by this prospectus
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$1,000,000
aggregate principal amount of 7% convertible senior subordinated
debentures due 2011. A total of $18,000,000 aggregate principal amount
of
the debentures were included in the original prospectus included
in the
registration statement, and $17,000,000 aggregate principal amount
of such
debentures were converted prior to the date of this prospectus into
shares
of common stock. In connection with certain of the prior conversions,
we
agreed to pay certain holders interest through the March 1, 2007,
interest
payment date, although the debentures owned by them were converted
prior
to such time. Only $1,000,000 aggregate principal amount of the debentures
remain outstanding as of the date of this prospectus. We have been
informed by the holder of the remaining $1,000,000 principal amount
of
debentures that it intends to convert the debentures into common
stock.
See “Recent Development.”
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2,542,500
shares of common stock, par value $0.10 per share. Of such number,
2,401,248 shares have been issued upon conversion of $17,000,000
aggregate
principal amount of the debentures.
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Maturity
date of debentures
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March
1, 2011, unless earlier converted, redeemed or
repurchased.
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Interest
on debentures
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7%
per annum on the principal amount, from March 3, 2006, payable
semi-annually in arrears in cash on March 1 and September 1 of each
year,
beginning September 1, 2006.
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Ranking
of debentures
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The
debentures are unsecured and subordinated in right of payment to
the prior
payment in full of all of our existing and future senior indebtedness
and
effectively subordinated to the indebtedness and all of the other
liabilities, including trade payables, of our subsidiaries. As of
December
31, 2006, we had approximately $116.4 million of senior indebtedness
outstanding, including approximately $91.5 million of indebtedness
of our
subsidiaries which we have guaranteed. The debentures will also
effectively be subordinated to all other present or future liabilities,
including our subsidiaries’ trade payables, which as of December 31, 2006,
totaled approximately $45.7 million. Therefore, as of December 31,
2006,
the debentures are effectively subordinate to a total of $162.1 million
of
senior indebtedness, including the liabilities of our subsidiaries.
Additionally, the debentures may be subordinated to approximately
$6.95
million senior unsecured debentures due 2007 which the Company owned
as of
December 31, 2006. See “Risk Factors.” Neither we nor our subsidiaries are
prohibited from incurring additional debt, including senior indebtedness,
under the indenture.
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Conversion
of debentures
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The
debentures are convertible by holders in whole or in part into shares
of
our common stock, at any time prior to their maturity on March 1,
2011.
The conversion rate of debentures for holders electing to convert
all or
any portion of a debenture prior to September 1, 2006, was 125 shares
per
$1,000 principal amount of debentures (representing a conversion
price of
$8.00 per share) and the conversation rate for the period from September
1, 2006 to February 28, 2007 was 141.25 shares per $1,000 principal
amount
of debentures (representing a conversion price of approximately $7.08
per
share). Holders of debentures electing to convert all or any portion
of a
debenture on or after March 1, 2007, and before March 1, 2009, will
obtain
the following conversion rate per
$1,000
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principal
amount of debentures during the dates indicated: March 1, 2007 to August 31,
2007, 141.04 shares (representing a conversion price of approximately $7.09
per
share); September 1, 2007 to February 29, 2008, 137.27 shares (representing
a
conversion price of approximately $7.28 per share); March 1, 2008 to August
31,
2008, 133.32 shares (representing a conversion price of approximately $7.50
per
share); and September 1, 2008 to February 28, 2009 is 129.23 shares
(representing a conversion price of approximately $7.74 per share). On March
1,
2009, the conversion rate returns to 125 shares per $1,000 principal amount
of
debentures (representing a conversion price of $8.00 per share), until their
maturity on March 1, 2011. The conversion rate is subject to adjustment. See
“Description of Debentures—Conversion of debentures.”
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If
a holder elects to convert its debentures in connection with certain
changes in control, as defined herein, which occur prior to the maturity
date, the holder will be entitled to receive additional shares of
our
common stock as a make-whole premium upon conversion under certain
circumstances. See “Description of Debentures — Conversion of
debentures.”
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Sinking
fund as to debentures
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None.
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Optional
redemption of debentures
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Beginning
March 1, 2009, we may redeem the debentures either in whole or in
part,
upon at least 30 and not more than 60 days’ notice, at a redemption price,
payable at our option in cash or, subject to certain conditions (see
“—
Payment of debentures in shares” below), shares of our common stock, equal
to 100% of the principal amount of the debentures to be redeemed,
plus
accrued and unpaid interest thereon to, but excluding, the redemption
date, if: (1) the closing sale prices of our common stock for at
least 20
of the 30 consecutive trading days ending on the trading day prior
to the
date we mail a notice of redemption, exceeds 115% of the adjusted
conversion price of the debenture; (2) our common stock is listed
on a
U.S. national securities exchange or the NASDAQ Stock Market; and
(3) a
registration statement covering resales of the debentures and the
common
stock issuable upon conversion of the debentures is effective and
expected
to remain effective and available for use during the 30 days following
the
redemption date, unless registration is no longer required. See
“Description of Debentures — Optional redemption by
LSB.”
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Payment
of debentures in shares
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We
may elect to pay the redemption price in shares of our common stock
if, on
the date of redemption: (1) our common stock is listed on a U.S.
national
securities exchange or the NASDAQ Stock Market; (2) the shares used
to pay
the redemption price are freely tradeable; and (3) we receive certain
required opinions of counsel. Payments made with shares of our common
stock will be valued at 95% of the weighted average of the closing
sale
prices of our common stock for the 20 consecutive trading days ending
on
the fifth trading day prior to the redemption date. We will publicly
announce the number of shares of our common stock to be paid as the
redemption price, per each $1,000 principal amount of debentures
to be
redeemed, not later than the fourth trading day prior to the redemption
date.
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We
may elect to pay, at maturity, up to 50% of the principal amount
of the
debentures, plus accrued and unpaid interest due thereon at maturity,
in
shares of our common stock if, on the maturity date: (1) our common
stock
continues to be listed on a U.S. national securities exchange or
the
NASDAQ Stock Market, (2) the shares used to pay the debentures and
any
interest thereon are freely tradeable, and (3) we receive certain
required
opinions of counsel. Payments made with our shares of common stock
will be
valued at 95% of the weighted average of the closing prices of our
common
stock for the 20 consecutive trading days ending on the fifth trading
day
prior to the maturity date. We will publicly announce the number
of shares
of our common stock to be paid
per
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Repurchase
of debentures at the option
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of
the holder upon a designated event
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If
a designated event (as described under “Description of Debentures —
Repurchase at option of the Holder upon a designated event”) occurs prior
to maturity, holders may require us to purchase, in cash, all or
part of
the holder’s debentures at a repurchase price equal to 101% of their
principal amount, plus accrued and unpaid interest thereon to, but
excluding, the repurchase date.
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Make-whole
premium of debentures
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If
a fundamental change occurs on or before September 1, 2009, we will
pay a
make-whole premium on the debentures converted in connection with
the
fundamental change, payable in shares of our common stock or the
consideration into which our common stock has been converted or exchanged
in connection with the fundamental change. The amount of the make-whole
premium, if any, will be based on the stock price in the fundamental
change transaction and the date of the fundamental change transaction.
A
description of how the make-whole premium will be determined and
a table
showing the make-whole premium that would apply at various stock
prices
and effective dates is set forth under “Description of Debentures -
Conversion of debentures—Make-whole
premium.”
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No
proceeds
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We
will not receive any proceeds from the sale made from time to time
under
this prospectus by the Selling Security Holders of the debentures
or our
common stock. See “No Proceeds.”
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Registration
rights
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We
entered into a registration rights agreement with each Selling Security
Holder and filed a registration statement with the SEC covering the
resale
of the debentures and the common stock issuable upon conversion of
the
debentures. The registration statement was declared effective by
the SEC
on May 26, 2006. We agreed to use commercially reasonable efforts
to keep
the registration statement effective until the earlier of the date
that
all registrable securities have ceased to be registrable securities
or
three years following the closing of the issuance of the debentures,
which
is March 3, 2009. This prospectus is part of the registration statement.
See “Description of Debentures — Registration rights of the debenture
holders.”
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Absence
of a Public Market for
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the
Debentures
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We
cannot assure you that any active or liquid market will develop for
the
debentures. See “Plan of
Distribution.”
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Trading
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We
do not intend to apply to list the debentures on any national securities
exchange or to include the debentures in any automated quotation
system.
Qualified institutional buyers may trade the debentures in the Private
Offerings, Resale and Trading through Automated Linkages Market,
commonly
referred to as the PORTAL Market. The debentures sold using this
prospectus, however, will no longer be eligible for trading in the
PORTAL
Market.
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Trustee,
Paying Agent and
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Custodian
Agent for debentures
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UMB
Bank, n.a.
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American
Stock Exchange Symbol
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for
our common stock
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Our
common stock is quoted on the American Stock Exchange under the symbol
“LXU.”
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Transfer
Agent for our common stock
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UMB
Bank, n.a.
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Risk
Factors
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You
should read the “Risk Factors” section, beginning on page 5 of
this prospectus, to understand the risks associated with an investment
in
the debentures or our common stock.
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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.
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 certain 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 29, 2007, an aggregate of
3,457,423 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 21.4%
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 29, 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:
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will
rise to the level of an investigation or proceeding,
or
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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.
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) 55,516,861 shares
of
common stock and 4,036,093 shares of preferred stock as of March 29, 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.
Risks
Related to the Debentures(1)
and Common Stock:
We
are a holding company and depend, in large part, on receiving funds from our
subsidiaries to fund our indebtedness, including our indebtedness relating
to
the debentures.
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, including the
debentures, 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, including the debentures.
The
debentures are contractually subordinated to all of our senior debt and are
effectively subordinated to all of our secured debt and to all of the debt
and
other liabilities of our subsidiaries.
The
debentures are our general unsecured obligations and are contractually
subordinated to all of our existing and future senior debt, including
obligations relating to credit facilities of our subsidiaries that we have
guaranteed. As of February 28, 2007, our senior indebtedness, including our
subsidiaries' debt which we have guaranteed totaled $113.0 million. Upon any
distribution to our creditors in a bankruptcy, liquidation, reorganization
or
similar proceeding relating to us or our property, the holders of senior debt
will be entitled to be paid in full in cash before any payment may be made
with
respect to the debentures. In addition, all payments on the debentures will
be
blocked in the event of a payment default on our senior debt and may be blocked
for up to 179 days in the event of certain non-payment defaults on designated
senior debt. Our assets remaining after payment of our senior debt may be
insufficient to repay the debentures.
The
debentures are not secured by any of our assets, and therefore will be
effectively subordinated to all of our secured debt. In addition, future debt
that we incur, including accounts payable and other liabilities incurred in
obtaining goods and services, may be secured by our assets. If we become
insolvent or are liquidated, or if payment of any of our secured debt is
accelerated, the holders of that secured debt will be entitled to exercise
the
remedies available to secured lenders under applicable law, including the
ability to foreclose on and sell the assets securing such debt to satisfy such
debt. In any such case, our remaining assets may be insufficient to repay the
debentures.
The
debentures are obligations exclusively of LSB Industries, Inc. Since most of
our
operations are conducted through our wholly owned subsidiaries, principally
ThermaClime and its subsidiaries, the cash flow and the consequent ability
to
service debt, including the debentures, are dependent upon the earnings of
such
subsidiaries and the distribution of those earnings to, or upon loans or other
payments of funds by, those subsidiaries to us. Our subsidiaries have no
obligation to pay any amounts due pursuant to the debentures or to make any
funds available therefore. Any right we have to receive assets of any of our
subsidiaries upon their liquidation or reorganization (and the consequent right
of the holders of the debentures to participate in those assets) will be
effectively subordinated to the claims of that subsidiary's creditors (including
trade creditors). As of February 28, 2007, we and our subsidiaries had
approximately $100.1 million in outstanding borrowings that would have
constituted
senior
indebtedness under the indenture governing the debentures and our subsidiaries
had other outstanding liabilities, all of which would be effectively senior
to
the debentures, of approximately $67.8 million. There are no restrictions in
the
indenture on the creation of additional senior indebtedness (or any
indebtedness).
The
amounts of our indebtedness and the indebtedness of our subsidiaries as of
February 28, 2007, are based on unaudited numbers.
There
is currently no public market for the debentures, and no active trading market
is expected to develop for the debentures. The failure of a market to develop
for the debentures could adversely affect the liquidity and value of the
debentures.
Only
$1
million aggregate principal amount of the debentures is outstanding, and there
is no existing market for the debentures. Although the
debentures are eligible for trading in The PORTAL MarketSM, if they are sold
using this prospectus, the debentures will no longer be eligible for PORTAL
trading. In addition, we have not and do not intend to apply for listing of
the
debentures on any securities exchange or for quotation of the debentures on
any
automated dealer quotation system. We do not expect a market to develop for
the
debentures, and if a market does develop, it may not be sufficiently liquid
for
your purposes. If an active, liquid market does not develop for the debentures,
the market price and liquidity of the debentures may be adversely affected.
Debentures may trade at a discount from their face amount.
The
liquidity of the trading market, if any, and future trading prices of the
debentures will depend on many factors, including, among other things, the
market price of our common stock, our ability to register the resale of the
debentures, prevailing interest rates, our operating
results,
financial performance and prospects, the market for similar securities and
the
overall securities market, and may be adversely affected by unfavorable changes
in these factors. Historically, the market for convertible debt has been subject
to disruptions that have caused volatility in prices. The market for the
debentures may be subject to disruptions, which could have a negative effect
on
the holders of the debentures, regardless of our operating results, financial
performance or prospects.
Resale
of the debentures and the common stock issuable upon conversion of the
debentures is subject to significant restrictions.
Although
we are required to register the resale by the holders of the debentures and
the
common stock into which the debentures are convertible, such registration may
not be available to holders at all times. We are not currently eligible to
register the resale of the debentures and the common stock included in this
prospectus on Form S-3, and, therefore, registered the resale of these
securities on Form S-1. As a result, under certain circumstances, we must update
the registration statement for the resale of such debentures and common stock
by
filing post-effective amendments to the registration statement that will not
be
effective until
each is
declared effective by the SEC. Between the time it is determined that the
registration statement must be updated by a post-effective amendment and the
time the SEC declares the applicable post-effective amendment effective, the
registration statement will not be available for use and the price of our common
stock could decline during that time. The SEC has broad discretion to determine
whether any registration statement (including and post-effective amendment)
will
be declared effective and may delay or deny the effectiveness of any
registration statement or post effective amendment filed by us for a variety
of
reasons. Selling Security Holders also may be subject to restrictions and
potential liability under the Securities Act. See “Description of Debentures —
Registration rights of the debenture holders.”
The
debentures do not restrict our ability to incur additional debt, repurchase
our
securities or to take other actions that could negatively impact holders of
the
debentures.
We
are
not restricted under the terms of the debentures from incurring additional
debt,
including secured debt, or repurchasing our securities. In addition, the limited
covenants applicable to the debentures do not require us to achieve or maintain
any minimum
financial results relating to our financial position or results of operations.
Our ability to recapitalize, incur additional debt and take a number of other
actions that are not limited by the terms of the debentures could have
the
effect
of
diminishing our ability to make payments on the debentures when due. Certain
of
our other debt instruments may, however, restrict these and other actions.
See
“Description of Debentures - Subordination of debentures.”
Determination
of debenture terms
The
conversion rate of the debentures ranges from 141.25 shares to 125 shares per
$1,000 principal amount of debentures, representing conversion prices of $7.08
to $8.00 per share, subject to adjustment. However,
the period during which the conversion rate was 141.25 expired on March 1,
2007,
and the current maximum conversion rate is 141.04 per $1,000 principal amount
of
debentures, representing a conversion price of $7.09 per share, subject to
adjustment. Because the market price of our common stock fluctuates,
there
can be
no assurance that the market price of our common stock will
reach or
exceed the representative price at which the debentures may be converted into
shares of common stock. In addition, our right to redeem the debentures or
pay
the debentures at maturity in our common stock is not conditioned upon the
closing sale price of our common stock exceeding the then effective conversion
price of the debentures. Because the value of the common stock will be
determined before the redemption date or the maturity date, if we specify that
we will make payment of the redemption price or the principal and accrued
interest thereon of the debentures at the maturity date in shares of our common
stock, holders of debentures bear the market risk that our common stock will
decline in value between the date of such determination and the redemption
date
or the maturity date, whichever is applicable. In addition, holders will not
know the exact number of shares of common stock to be received upon redemption
or maturity until the fourth trading day prior to the redemption date or
maturity date, whichever is applicable. See “Description of
Debentures.”
The
price of our common stock, and therefore of the debentures may fluctuate
significantly; and this may make it difficult for you to resell the debentures
and/or our common stock when you want or at prices you find
attractive.
The
price
of our common stock on the American Stock Exchange constantly changes. We expect
that the market price of our common stock will continue to fluctuate. In
addition, because the debentures are convertible into our common stock,
volatility or depressed prices for our common stock could have a similar effect
on the trading price of the debentures. This may make it difficult for you
to
resell the debentures and/or our common stock when you want or at prices you
find attractive.
Future
sales of our common stock in the public market or the issuance of securities
senior to our common stock could adversely affect the trading price of our
common stock, the value of the debentures, our ability to raise funds in new
stock offerings and may 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 the value
of
the debentures 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 or the value of the debentures. 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. Our Board
of
Directors did not declare any dividends on our outstanding preferred stock
for
the quarterly dividends payable during March 2007. As of March 29, 2007, there
were approximately $6.8 million of accrued and unpaid dividends on our
outstanding cumulative preferred stock.
We
do not
anticipate paying cash dividends on our outstanding common stock in the
foreseeable future, and until all accrued and unpaid dividends are paid on
our
outstanding cumulative preferred stock, no dividends may be paid on our common
stock. In the event of our liquidation, winding up or dissolution, there can
be
no distributions on our common stock until all of the liquidation preference
and
stated value amounts of our outstanding preferred stock and all accrued and
unpaid dividends due on our outstanding cumulative preferred stock are paid
in
full. Further, not paying all of 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.
___________________
(1) See
“Recent Development.”
This
prospectus
and the
documents incorporated by reference into this prospectus contain forward-looking
statements." All statements in this prospectus and such incorporated information
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. Such
forward-looking statements relate to statements about our business strategies,
our expected financial position and operating results, the projected size of
our
markets and our financing plans and similar matters, including but not limited
to, the following:
|
·
|
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 wastewater
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" incorporated by reference into
in this
prospectus, and
|
|
·
|
other
factors described in “Risk Factors.”
|
We
have
based these forward-looking statements largely on our current expectations
and
projections about future events and financial trends affecting the financial
condition of our business. Actual results may differ materially. All
forward-looking statements attributable to us, or to persons acting on our
behalf, are expressly qualified in their entirety by this cautionary statement.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus might not transpire.
We
have
elected to incorporate by reference certain information into this prospectus.
By
incorporating by reference, we can disclose important information to you by
referring you to another document we have filed separately with the Securities
and Exchange Commission. The information incorporated by reference is deemed
to
be part of this prospectus, except for information incorporated by reference
that is superseded by information contained in this prospectus. We incorporate
by reference the documents listed below that we previously filed with the
SEC:
|
·
|
Our
2006 Annual Report on Form 10-K, for the fiscal year ended December
31,
2006, which includes, without limitation, information with respect
to our
business, properties, legal proceedings, certain stockholder matters,
financial statements, selected financial data, supplementary financial
information, management’s discussion and analysis of financial condition
and results of operations, dividend policy, and quantitative and
qualitative disclosures about market risk;
|
|
·
|
Our
Current Reports on Form 8-K filed on January 12, January 29,
February 9,
March 6, March 13, and March 26, 2007;
and
|
|
·
|
Our
Proxy Statement, filed on February 6, 2007, relating to the Special
Meeting of Stockholders held March 6,
2007.
|
These
filings have not been included in or delivered with this prospectus. To receive
a free copy of any of the documents incorporated by reference in this
prospectus, other than exhibits, unless they are specifically incorporated
by
reference in those documents, call or write to us at the
following:
LSB
Industries, Inc.
P.O.
Box
754
Oklahoma
City, Oklahoma 73101-0754
Attention:
Secretary
(405)
235-4546
The
information relating to us contained in this prospectus does not purport to
be
comprehensive and should be read together with the information contained in
the
documents incorporated or deemed to be incorporated by reference in this
prospectus.
We
filed
with the SEC a registration statement on Form S-1 including the exhibits,
schedules and amendments to the registration statement under the Securities
Act
with respect to the debentures and shares of common stock to be sold in this
offering. This prospectus does not contain all the information set forth in
the
registration statement. For further information with respect to LSB Industries,
the debentures, and the shares of common stock to be sold in this offering,
reference is made to the registration statement. Statements contained in this
prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete, and in each instance reference is
made
to the copy of such contract, agreement or other document filed as an exhibit
to
the registration statement, each such statement being qualified in all respects
by such reference.
We
are
subject to the information and reporting requirements of the Securities Exchange
Act of 1934, as amended, and file periodic reports, proxy statements and other
information with the SEC. You may read and copy all or any portion of the
registration statement or any other information LSB Industries files at the
SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on
the
operation of the public reference rooms. Our SEC filings, including the
registration statement, are also available to you on the SEC’s Web site,
http://www.sec.gov.
Such
registration statement and other information filed by us may also be inspected
at the American Stock Exchange offices located at 86 Trinity Place, New York,
New York 10006-1872 and is available at AMEX’s website, http://www.amex.com.
We
furnish our shareholders with annual reports containing audited financial
statements and make available quarterly reports for the first three quarters
of
each year containing unaudited interim financial information.
We
make
available on, or accessible through, our Internet address, www.lsb-okc.com,
free of
charge, our annual report on Form 10-K, quarterly reports on Form l0-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable
after we electronically file such reports with, or furnish them to, the SEC.
Except
as
otherwise specifically incorporated by reference in this prospectus, information
contained in, or accessible through, our website is not a part of this
prospectus.
Our
historical consolidated ratio of earnings to fixed charges as presented below
for the periods shown.
|
Calendar
Year ended December 31,
|
||||||||||||||||
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||
|
Earnings:
|
||||||||||||||||
|
The
sum of:
|
||||||||||||||||
|
Pre-tax
income from continuing operations
|
$
|
2,739
|
$
|
2,894
|
$
|
1,238
|
$
|
5,119
|
$
|
16,263
|
||||||
|
Fixed
charges
|
13,476
|
10,882
|
11,955
|
15,936
|
16,570
|
|||||||||||
|
Amortization
of capitalized interest
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Share
of distributed income of 50% owned affiliate
|
115 |
60
|
250
|
488 |
875
|
|||||||||||
|
Adjusted
Earnings
|
$
|
16,330
|
$
|
13,836
|
$
|
13,443
|
$
|
21,543
|
$
|
33,708
|
||||||
|
Fixed
Charges(1):
|
||||||||||||||||
|
The
sum of
|
||||||||||||||||
|
(i)
Interest expensed
|
$
|
8,218
|
$
|
6,097
|
$
|
7,393
|
$
|
11,407
|
$
|
11,915
|
||||||
|
(ii)
Amortized premiums, discounts and capitalized expenses related
to
indebtedness (included in interest)
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
(iii)
Estimate of Interest inrental expense
|
5,258
|
4,785
|
4,562
|
4,529
|
4,655
|
|||||||||||
|
Fixed
Charges
|
$
|
13,476
|
$
|
10,882
|
$
|
11,955
|
$
|
15,936
|
$
|
16,570
|
||||||
|
Ratio
of earnings to fixed charges
|
1.2:1
|
1.3:1
|
1.1:1
|
1.4:1
|
2.0:1
|
|||||||||||
______________
(1) To
estimate the amount of interest expense included in rental expense, we used
various approaches, primarily the NPV approach for approximately 65% of the
actual annual rent expense.
The
debentures and shares of common stock to be offered and sold using this
prospectus will be offered and sold by the Selling Security Holders named in
this prospectus or in a supplement to this prospectus. We will not receive
any
proceeds from these sales or from conversion of the debentures into shares
of
our common stock.
Our
common stock is listed for trading on the American Stock Exchange under the
symbol “LXU.” The table below shows the high and low sale prices for our common
stock for the periods indicated.
|
Common
stock price
|
|||
|
High
|
Low
|
||
|
Fiscal
year ending December 31, 2007:
|
|||
|
First
quarter
|
$15.71
|
$11.41
|
|
|
Fiscal
year ending December 31, 2006:
|
|||
|
Fourth
quarter
|
$13.20
|
$8.50
|
|
|
Third
quarter
|
$10.25
|
$8.25
|
|
|
Second
quarter
|
$9.19
|
$6.95
|
|
|
First
quarter
|
$7.48
|
$5.87
|
|
|
Fiscal
year ended December 31, 2005:
|
|||
|
Fourth
quarter
|
$6.70
|
$4.84
|
|
|
Third
quarter
|
$7.35
|
$6.05
|
|
|
Second
quarter
|
$7.50
|
$6.00
|
|
|
First
quarter
|
$7.93
|
$5.95
|
|
On
April
4, 2007, the closing sale price of our common stock on the American Stock
Exchange was $15.15 per share. As of March 29, 2007, there were approximately
740 holders of record of our common stock.
The
following description is a summary of the material provisions of the debentures,
the indenture and the registration rights agreement relating to the debentures
and the shares of common stock issuable upon conversion of the debentures.
This
summary is subject to and is qualified by reference to all the provisions of
the
indenture and the form of debenture, including the definitions of certain terms
used in the indenture, and to all provisions of the registration rights
agreement. Wherever particular provisions or defined terms of the indenture
or
form of debenture are referred to, these provisions or defined terms are
incorporated in this prospectus by reference. We urge you to read the indenture
because it, and not this description, defines the rights of a holder of the
debentures. As of the date of this prospectus, we had outstanding $1,000,000
of
the debentures, and the holder of the remaining amount of outstanding debentures
has advised us that it intends to convert these debentures into our common
stock. See “Recent Development.”
General
The
debentures are general unsecured indebtedness of LSB. Our payment obligations
under the debentures are subordinated to our senior indebtedness and effectively
subordinated to all of the indebtedness and other liabilities of our
subsidiaries as described under “— Subordination of debentures.” The debentures
are convertible into common stock as described under “— Conversion of
debentures.” The debentures will mature on March 1, 2011, unless earlier
converted, redeemed or repurchased.
We
are
not subject to any financial covenants under the indenture; however, we may
not
create future subordinated indebtedness unless, by its terms, it is either
junior to, or pari
passu
with,
the debentures. In addition,
we
are
not restricted under the indenture from paying dividends, incurring debt or
issuing or repurchasing our securities.
Holders
of debentures are not afforded protection under the indenture in the event
of a
highly leveraged transaction of LSB, or in the event of a change in control
of
LSB except to the extent described below under “— Repurchase at option of the
holder upon a designated event” and “Make-whole premium.”
The
debentures bear interest at a rate of 7% per annum. Interest is calculated
on
the basis of a 360-day year consisting of twelve 30-day months and accrues
from
March 3, 2006, or from the most recent date to which interest has been paid
or
duly provided for. We will pay interest semiannually on March 1 and September
1
of each year, beginning on September 1, 2006, to the holders of record at the
close of business on the preceding February 15 and August 15,
respectively.
Each
payment of interest on the debentures will include interest accrued through
the
day before the applicable interest payment date (or repurchase, redemption
or,
in certain circumstances, conversion date, as the case may be). Any payment
required to be made on any day that is not a business day will be made on the
next succeeding business day. The term “interest” as used in the indenture
includes interest payable under the terms of the debentures and liquidated
damages, if any, payable under the terms of the registration rights agreement
as
described under “— Registration rights of the debenture holders.”
We
will
maintain, or cause the trustee to maintain, an office where we will pay the
principal and premium, if any, on the debentures and you may present the
debentures for conversion, registration of transfer or exchange for other
denominations, which shall initially be an office or agency of the trustee.
The
trustee currently maintains an office in Kansas City, Missouri, for such
purposes. We may pay interest by check mailed to the holder’s address as it
appears in the debenture register, provided that a holder with an aggregate
principal amount in excess of $1.0 million shall be paid, at the holder’s
written election, by wire transfer in immediately available funds. However,
payments to The Depository Trust Company, New York, New York, which we refer
to
as DTC, will be made by wire transfer of immediately available funds to the
account of DTC or its nominee.
Debentures
may be presented for conversion at the office of the Company or the conversion
agent and for exchange or registration of transfer at the office of the Company
or the registrar. The conversion agent and the registrar shall initially be
the
trustee. No service charge will be made for any registration of transfer or
exchange of debentures. However, we may require the holder to pay any tax,
assessment or other governmental charge payable as a result of such transfer
or
exchange.
Conversion
of debentures
Subject
to the provisions of the indenture, holders may convert any of their debentures,
in whole or in part, into shares of our common stock at any time prior to the
close of business on February 28, 2011, at a conversion rate per $1,000
principal amount of debentures determined as of the date of conversion under
the
conversion rate schedule below, subject to adjustment as described below
under
“—
Conversion rate adjustments.” A holder may convert debentures in part so long as
such part is $1,000 principal amount or a multiple of $1,000.
|
Conversion
Rate
(Number
of Shares Per
$1,000
Principal Amount
of
Debentures)
|
Approximate
Conversion
Price
|
Date
of Debenture Conversion
|
|
125.00
|
$8.00
|
before
September 1, 2006(1)
|
|
141.25
|
$7.08
|
on
or after September 1, 2006 and on or before February 28, 2007(1)
|
|
141.04
|
$7.09
|
on
or after March 1, 2007 and on or before August 31, 2007
|
|
137.27
|
$7.28
|
on
or after September 1, 2007 and on or before February 29,
2008
|
|
133.32
|
$7.50
|
on
or after March 1, 2008 and on or before August 31, 2008
|
|
129.23
|
$7.74
|
on
or after September 1, 2008 and on or before February 28,
2009
|
|
125.00
|
$8.00
|
on
or after March 1, 2009
|
(1)
This
conversion rate period has expired.
To
convert debentures into common stock, a holder must do the
following:
|
·
|
complete
and manually sign the conversion notice on the back of the debenture
or
facsimile of the conversion notice and deliver this notice to the
conversion agent;
|
|
·
|
surrender
the debenture to the conversion
agent;
|
|
·
|
if
required, furnish appropriate endorsements and transfer
documents;
|
|
·
|
if
required, pay all transfer or similar taxes;
and
|
|
·
|
if
required, pay funds equal to interest payable on the next interest
payment
date.
|
The
date
a holder complies with these requirements is the conversion date under the
indenture. If a holder’s interest is a beneficial interest in a global
debenture, to convert such a debenture, such holder must comply with the last
three requirements listed above and comply with the depositary’s procedures for
converting a beneficial interest in a global debenture. A certificate, or a
book-entry transfer through DTC, for the number of full shares of our common
stock into which any debentures are converted, together with a cash payment
for
any fractional shares, will be delivered through the conversion agent as soon
as
practicable, but no later than the fifth business day, following the conversion
date.
If
we
call debentures for redemption, a holder may convert its debentures only until
the close of business on the business day prior to the redemption date unless
we
fail to pay the redemption price. If a holder has submitted debentures for
repurchase upon a designated event, such holder may convert debentures only
if
it first withdraws the repurchase election in accordance with the terms of
the
indenture.
Upon
conversion, a holder will not receive any cash payment of interest. We will
not
issue fractional common shares upon conversion of debentures. Instead, we will
pay cash in lieu of fractional shares based on the closing sale price of the
common stock on the trading day prior to the conversion date. Our delivery
to
the holder of the full number of shares of our common stock into which a
debenture is convertible, together with any cash payment for such holder’s
fractional shares, will be deemed to satisfy our obligation to pay the principal
amount of the debenture and accrued but unpaid interest, attributable to the
period from the most recent interest payment date to the conversion date. As
a
result, accrued but unpaid interest, to the conversion date is deemed to be
paid
in full rather than cancelled, extinguished or forfeited. For a discussion
of a
holder’s tax treatment upon receipt of our common stock upon conversion, see
“Certain United States Federal Income Tax Considerations.”
Notwithstanding
the preceding paragraph, if debentures are converted after a record date but
prior to the next interest payment date, holders of such debentures at the
close
of business on the record date will receive the interest payable on such
debentures on the corresponding interest payment date notwithstanding the
conversion. Such debentures, upon surrender for conversion, must be accompanied
by funds equal to the amount of interest payable on the debentures so converted;
provided that no such payment need be made (1) if we have specified a redemption
date that is after a record date but on or prior to the next interest payment
date, (2) if we have specified a repurchase date following a designated event
that is after a record date but on or prior to the next interest payment date
or
(3) to the extent of any overdue interest, if any overdue interest exists at
the
time of conversion with respect to such debenture.
Conversion
rate adjustments
The
conversion rate will be subject to adjustment, without duplication, upon the
occurrence of any of the following events:
|
(1)
|
the
payment or issuance of common stock as a dividend or distribution
on our
common stock;
|
|
(2)
|
the
issuance to all holders of common stock of rights, warrants or options
to
purchase our common stock (other than pursuant to our preferred share
rights plan) for a period expiring within 45 days of the record date
for
such distribution at a price less than the average of the closing
sale
price for the 10 trading days preceding the declaration date for
such
distribution; provided that the conversion price will be readjusted
to the
extent that such rights, warrants or options are not
exercised;
|
|
(3)
|
subdivisions,
splits or combinations of our common stock;
and
|
|
(4)
|
distributions
to the holders of our common stock of a portion of our assets (including
shares of capital stock or assets of a subsidiary) or debt or other
securities issued by us or certain rights to purchase our securities
(excluding dividends or distributions covered by clauses (1) or (2)
above
or our preferred share rights plan); provided, however, that if we
distribute capital stock of, or similar equity interests in, a subsidiary
or other business unit of ours, the conversion rate will be adjusted
based
on the market value of the securities so distributed relative to
the
market value of our common stock, in each case based on the average
closing sale prices of those securities for the 10 trading days commencing
on and including the fifth trading day after the date on which
“ex-dividend trading” commences for such distribution on the NASDAQ
National Market or such other national or regional exchange or market
on
which the securities are then listed or
quoted.
|
To
the
extent that we have a rights plan in effect upon conversion of the debentures
into common stock, you will receive, in addition to the common stock, the rights
under the rights plan unless the rights have separated from the common stock
at
the time of conversion, in which case the conversion rate will be adjusted
as if
we distributed to the holders of our common stock, a portion of our assets,
or
debt or other securities or rights as set forth under clause (4) above, subject
to readjustment in the event of the expiration, termination or redemption of
such rights.
In
the
event of:
|
·
|
any
reclassification of our common
stock;
|
|
·
|
a
consolidation, merger or combination involving us;
or
|
|
·
|
a
sale or conveyance to another person or entity of all or substantially
all
of our property and assets in which holders of our common stock would
be
entitled to receive stock, other securities, other property, assets
or
cash for their common stock, upon conversion of a holder’s debentures the
holder will be entitled to receive the same type of consideration
that the
holder would have been entitled to receive if the holder had converted
the
debentures into our common stock immediately prior to any of these
events.
|
A
holder
may in certain situations be deemed to have received a distribution subject
to
U.S. federal income tax as a dividend in the event of any taxable distribution
to holders of common stock or in certain other situations requiring a conversion
rate adjustment. See “Certain United States Federal Income Tax
Considerations.”
We
may,
from time to time, increase the conversion rate if our board of directors has
made a determination that this increase would be in our best interests. Any
such
determination by our board will be conclusive. In addition, we may increase
the
conversion rate if our board of directors deems it advisable to avoid or
diminish any income tax to holders of common stock resulting from any stock
or
rights distribution. See “Certain United States Federal Income Tax
Considerations.”
Make-whole
premium
Under
certain conditions, if a fundamental change occurs as described below, and
a
holder elects to convert its debentures in connection with such a fundamental
change, we will increase the applicable conversion rate for the debentures
surrendered for conversion by a number of additional shares of our common stock
(the “make-whole premium”), as described below. A conversion of debentures will
be deemed for these purposes to be “in connection with” such a fundamental
change transaction if the notice of conversion of the debentures is received
during the period commencing thirty days prior to the fundamental change
transaction and ending forty-five days after the fundamental change
transaction.
The
number of additional shares of our common stock will be determined by reference
to the table below and is based on the date on which such fundamental change
transaction becomes effective (the “effective date”) and the price (the “stock
price”) paid per share of our common stock in such transaction. If the holders
of our common stock receive only cash in the fundamental control transaction,
the stock price shall be the cash amount paid per share of our common stock.
Otherwise, the stock price shall be the average of the closing sale prices
of
our common stock on the five consecutive trading days up to but excluding the
effective date.
If
the
Company elects to pay the make-whole premium in the same form of consideration
used to pay for the shares of the common stock in connection with the applicable
fundamental change transaction, the value of the consideration to be delivered
in respect of the make-whole premium will be calculated as follows:
|
(i)
|
securities
that are traded on a U.S. national securities exchange or approved
for
quotation on the NASDAQ National Market or any similar system of
automated
dissemination of quotations of securities prices will be based on
100% of
the arithmetic average of the Closing Price of such securities during
each
of the ten (10) Trading Days ending on the Trading Day immediately
preceding the Effective Date;
|
|
(ii)
|
other
securities, assets or property (other than cash) will be valued on
100% of
the arithmetic average of the fair market value of such securities,
assets
or property (other than cash) as determined by two independent nationally
recognized investment banks selected by the Trustee;
and
|
|
(iii)
|
100%
of any cash.
|
The
stock
prices set forth in the first row of the table (i.e., the column headers) will
be adjusted as of any date on which the conversion rate of the debentures is
adjusted (other than any increase to the conversion rate for a fundamental
change as described in this section). The adjusted stock prices will equal
the
stock prices applicable immediately prior to such adjustment multiplied by
fraction, the numerator of which is the conversion rate immediately prior to
the
adjustment giving rise to the stock price adjustment and the denominator of
which is the conversion rate as so adjusted. In addition, the make-whole premium
will be subject to adjustment in the same manner as the conversion rate as
set
forth above under “—Adjustment of Conversion Rate.”
The
following table sets forth the stock
price
and number of additional shares of our common stock to be received per $1,000
principal amount of debentures:
Make-Whole
Premium
(Number
of Additional Shares of Common Stock per $1,000 principal amount of
Debentures)
|
Stock
Price
|
LSB
Industries
Make-Whole
Premium in Additional Shares of Common Stock
|
||||||
|
$7.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
|
$7.50
|
20.53
|
17.97
|
15.16
|
11.86
|
0.00
|
0.00
|
0.00
|
|
$8.00
|
22.66
|
20.15
|
17.40
|
14.15
|
10.16
|
3.62
|
0.00
|
|
$8.50
|
19.87
|
17.44
|
14.77
|
11.62
|
7.77
|
1.68
|
0.00
|
|
$9.00
|
17.54
|
15.20
|
12.63
|
9.62
|
5.99
|
0.76
|
0.00
|
|
$10.00
|
13.94
|
11.80
|
9.46
|
6.79
|
3.70
|
0.26
|
0.00
|
|
$15.00
|
6.06
|
4.79
|
3.52
|
2.23
|
1.08
|
0.14
|
0.00
|
|
$20.00
|
3.75
|
2.95
|
2.18
|
1.44
|
0.77
|
0.11
|
0.00
|
|
$25.00
|
2.76
|
2.20
|
1.66
|
1.13
|
0.61
|
0.09
|
0.00
|
|
$30.00
or Above
|
2.23
|
1.79
|
1.36
|
0.93
|
0.51
|
0.07
|
0.00
|
|
Effective
Date
|
3/1/2006
to
8/31/2006(1)
|
9/1/2006
to
2/28/2007(1)
|
3/1/2007
to
8/31/2007
|
9/1/2007
to
2/29/2008
|
3/1/2008
to
8/31/2008
|
9/1/2008
to
2/28/2009
|
After
3/1/2009
|
(1)
This
conversion rate period has expired.
The
exact
stock prices and effective dates may not be set forth in the table, in which
case:
|
(1)
|
if
the stock price is between two stock price amounts in the table on
the
effective date and the effective date is between two dates in the
table,
the additional shares will be determined by straight-line interpolation
between the number of additional shares set forth for the higher
and lower
stock price amounts and the two dates, as applicable, based on a
365-day
year (or 366-day year, if a leap
year);
|
|
(2)
|
if
the stock price is equal to or in excess of $30.00 per share of our
common
stock (subject to adjustment), the make-whole premium will be the
shares
in the table in the stock price row “$30.00 or above”;
and
|
|
(3)
|
if
the stock price is equal to or less than $7.00 per share of our common
stock (subject to adjustment), no additional make-whole premium will
be
issued upon conversion.
|
Optional
redemption by LSB
At
any
time on or after March 1, 2009, upon at least 30 and not more than 60 days’
notice by mail to the holders of the debentures, we may, at our option, redeem
the debentures, in whole or in part, at a redemption price, payable at our
option in cash or, subject to the conditions set forth below, in shares of
our
common stock, equal to 100% of the principal amount of the debentures to be
redeemed plus accrued and unpaid interest thereon to, but excluding, the
redemption date, if the following three conditions are all satisfied on the
date
we mail the notice of redemption: (1) the closing sale prices of our common
stock for at least 20 of the 30 consecutive trading days ending on the trading
day prior to the date we mail a notice of redemption, exceeding 115% of the
adjusted conversion price of the debentures; (2) our common stock is listed
on a
U.S. national securities exchange or the NASDAQ Stock Market; and (3) a
registration statement covering resales of the debentures and the common stock
issuable upon their conversion is effective and available for use and is
expected to remain effective and available for use during the 30 days following
the redemption date, unless registration is no longer required. We will specify
in the redemption notice the type of consideration to be paid upon redemption
and the amount of each debenture to be paid by each type.
We
may
only elect to pay the redemption price in shares of our common stock, in whole
or in part, if the following three conditions are all satisfied on the date
of
redemption: (1) our common stock is listed on a U.S. national securities
exchange or the NASDAQ Stock Market; (2) the trustee has received an opinion
of
counsel (in form and substance reasonably satisfactory to the trustee) that
the
common stock to be issued in respect of the redemption price will be duly issued
in compliance with all laws and listing requirements (including any shareholder
approval requirements) and is fully paid and non-assessable; and (3) the shares
of common stock used to pay the
redemption
price are duly registered and freely tradable without time or volume
restrictions. Payments made in our common stock will be valued at 95% of the
weighted average of the closing sale prices of our common stock for the 20
consecutive trading days ending on the fifth trading day prior to the redemption
date. Not later than the fourth trading day prior to the redemption date, we
will publicly announce the number of shares of common stock to be paid as the
redemption price per each $1,000 principal amount of debentures to be
redeemed.
Our
right
to optional redemption at any time on or after March 1, 2009, is not conditioned
upon the closing sale price of our common stock exceeding the then effective
conversion price of the debentures. Because the value of the common stock will
be determined before the redemption date, if we specify that we will make
payment of the redemption price in our common stock, holders of debentures
bear
the market risk that our common stock will decline in value between the date
of
such determination and the redemption date. In addition, holders will not know
the exact number of shares of common stock to be received upon redemption until
the fourth trading day prior to the redemption date.
The
“closing sale price” of our common stock on any date means the closing per share
sale price (or if no closing sale price is reported, the average of the closing
bid and closing ask prices or, if more than one in either case, the average
of
the average closing bid and the average closing ask prices) on such date as
reported in composite transactions for the principal U.S. securities exchange
on
which our common stock is traded or, if our common stock is not listed on a
U.S.
national securities exchange, as reported by the NASDAQ National Market or
the
NASDAQ SmallCap Market or the over-the-counter bulletin board.
If
less
than all of the outstanding debentures are to be redeemed, the trustee will
select the debentures to be redeemed in principal amounts of $1,000 or multiples
of $1,000 by lot or other equitable method as determined by the trustee. If
a
portion of a holder’s debentures is selected for partial redemption and the
holder converts a portion of the holder’s debentures, the converted portion will
be deemed, to the extent practicable, to be included in the portion selected
for
redemption.
We
may
not redeem the debentures if we have failed to pay any interest on the
debentures and such failure to pay is continuing.
Optional
right of LSB to pay the debentures at maturity in LSB common
stock
At
the
maturity of the debentures, upon at least 30 and not more than 60 days’ notice
by mail to the holders of the debentures, we may, at our option, pay up to
50%
of the principal amount of the debentures, plus accrued and unpaid interest
thereon, to, but excluding, the maturity date, subject to the conditions set
forth below, in shares of our common stock. Such notice to the holders of the
debentures will state the amount of the debentures and, if applicable, accrued
and unpaid interest thereon, to be paid in cash and the amount to be paid in
common stock.
We
may
only elect to pay the debentures at maturity in shares of our common stock
if
the following three conditions are all satisfied on the maturity date: (1)
our
common stock continues to be listed on a U.S. national securities exchange
or
the NASDAQ Stock Market; (2) the trustee has received an opinion of counsel
(in
form and substance satisfactory to the trustee) that the common stock to be
issued in payment of the debentures at maturity will be duly issued in
compliance with all laws and listing requirements (including any shareholder
approval requirements) and is fully paid and non-assessable; and (3) the shares
of common stock used to pay the debentures and any interest accrued thereon
at
maturity are duly registered and freely tradable without time or volume
restrictions. Payments made in our common stock will be valued at 95% of the
weighted average of the closing sale prices of our common stock for the 20
consecutive trading days ending on the fifth trading day prior to the maturity
date. Not later than the fourth trading day prior to the maturity date, we
will
publicly announce the number of shares of common stock to be paid on the
maturity date per each $1,000 principal amount of debentures.
Our
right
to pay the debentures at the maturity date in our common stock is not
conditioned upon the closing sale price of our common stock exceeding the then
effective conversion price of the debentures. Because the value of the common
stock will be determined before the maturity date, if we specify that we will
make payment of the debentures at the maturity date in our common stock, holders
of debentures bear the market risk that our common stock will decline in value
between the date of such determination and the maturity date. In addition,
holders will
not
know
the exact number of shares of common stock to be received upon maturity until
the fourth trading day prior to the maturity date.
The
“closing sale price” of our common stock on any date means the closing per share
sale price (or if no closing sale price is reported, the average of the closing
bid and closing ask prices or, if more than one in either case, the average
of
the average closing bid and the average closing ask prices) on such date as
reported in composite transactions for the principal U.S. national securities
exchange, on which our common stock is traded or, if our common stock is not
traded on a U.S. national securities exchange, as reported by the NASDAQ
National Market or the NASDAQ SmallCap Market or the over-the-counter bulletin
board.
If
we
elect to pay a portion of the outstanding debentures at maturity using our
common stock, the trustee will select the debentures to be paid in principal
amounts of $1,000 or multiples of $1,000 by lot or other equitable means as
determined by the trustee and the remaining balance of the debentures will
be
paid in cash.
Repurchase
at option of the Holder upon a designated event
If
a
designated event (as defined below) occurs at any time prior to the maturity
of
the debentures, a holder may require us to repurchase the holder’s 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. The debentures will be repurchased only in multiples of $1,000 principal
amount.
We
will
repurchase the debentures at a cash price equal to 101% of the principal amount
to be repurchased, plus accrued and unpaid interest to, but excluding, the
repurchase date, unless the repurchase date falls after a record date and on
or
prior to the corresponding interest payment date, in which case we will pay
the
full amount of accrued and unpaid interest on such interest payment date to
the
holder of record at the close of business on the corresponding record
date.
We
will
mail to all record holders a notice of a designated event within 15 days after
it or a fundamental change has occurred. We are also required to deliver to
the
trustee a copy of the designated event notice.
Such
designated event notice shall state, among other things:
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the
events constituting a designated event or fundamental
change;
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the
date of the designated event or fundamental
change;
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the
last date on which a holder may exercise the purchase right, which
may not
be less than 45 days after the date of mailing of our notice of the
designated event;
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the
purchase price and date or repurchase, if
applicable;
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the
name and address of the paying agent and the conversion
agent;
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the
conversion rate and any adjustments to the conversion
rate;
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that
the debentures with respect to which a purchase notice has been given
by
the holder may be converted only if the holder withdraws the purchase
notice in accordance with the terms of the
indenture;
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the
procedures that holders must follow to require us to purchase their
debentures and to withdraw any surrendered debentures, if
applicable;
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the
CUSIP number or numbers of the debentures (if then generally in
use);
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in
the case of a fundamental change, the amount and availability of
the
make-whole premium of the debentures converted in connection with
a
fundamental change; and
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in
the case of a fundamental change, whether such make-whole premium
will be
paid in shares of common stock or the property into which the common
stock
was converted in such fundamental change transaction or a combination
of
both.
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If
a
holder elects to require us to repurchase the holder’s debentures, the holder
must deliver to us or our designated agent, on or before the repurchase date
specified in our designated event notice, the holder’s repurchase notice and any
debentures to be repurchased, duly endorsed for transfer. We may require
the
holder to pay any tax, assessment or other governmental charge payable as
a
result of any transfer or exchange of debentures by reason of such
repurchase.
The
repurchase notice from the holder must state:
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if
certificated debentures have been issued, the debenture certificate
numbers (or, if the holder’s debentures are not certificated, the holder’s
repurchase notice must comply with appropriate DTC
procedures);
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the
portion of the principal amount of debentures to be repurchased,
which
must be in $1,000 multiples; and
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that
the debentures are to be repurchased by us pursuant to the applicable
provisions of the debentures and the
indenture.
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A
holder
may withdraw any written repurchase notice by delivering a written notice of
withdrawal to the paying agent prior to the close of business on the business
day prior to the repurchase date. The withdrawal notice must state:
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the
principal amount of the withdrawn
debentures;
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if
certificated debentures have been issued, the certificate numbers
of the
withdrawn debentures (or, if the holder’s debentures are not certificated,
the holder’s withdrawal notice must comply with appropriate DTC
procedures); and
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the
principal amount, if any, which remains subject to the repurchase
notice.
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Payment
of the repurchase price for a debenture for which a repurchase notice has been
delivered and not withdrawn is conditioned upon book-entry transfer or delivery
of the debenture, together with necessary endorsements, to the paying agent
at
its corporate trust office in the Borough of Manhattan, The City of New York,
or
any other office of the paying agent, at any time after delivery of the
repurchase notice. Payment of the repurchase price for the debenture will be
made promptly following the later of the repurchase date and the time of
book-entry transfer or delivery of the debenture. If the paying agent holds
money sufficient to pay the repurchase price of the debenture on the business
day following the repurchase date, then, on and after the date:
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the
debenture will cease to be
outstanding;
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interest
will cease to accrue; and
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all
other rights of the holder will terminate, other than the right to
receive
the repurchase price upon delivery of the
debenture.
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This
will
be the case whether or not book-entry transfer of the debenture has been made
or
the debenture has been delivered to the paying agent.
Definition
of designated event
A
“designated event” will be deemed to have occurred upon a fundamental change or
a termination of trading.
A
“fundamental change” will be deemed to have occurred at any time after the
debentures are originally issued that any of the following occurs:
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(1)
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a
“person” or “group” within the meaning of Section 13(d) of the Exchange
Act (other than us, our subsidiaries, our employee benefit plans,
or any
of the Golsen Group), files a Schedule TO or any schedule, form or
report
under the Exchange Act disclosing that such person or group has become
the
direct or indirect “beneficial owner,” as defined in Rule 13d-3 under the
Exchange Act, of our common stock representing more than 50% of the
voting
power of our common stock entitled to vote generally in
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the
election of directors; provided, however, that the Golsen Group,
as a
whole, is only excluded if their beneficial ownership of our
voting common
stock is 70% or less.
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(2)
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consummation
of any share exchange, consolidation or merger of us pursuant
to which our
common stock is converted into cash, securities or other property,
or any
sale, lease or other transfer in one transaction or a series
of
transactions of all or substantially all of the consolidated
assets of us
and our subsidiaries, taken as a whole, to any person other than
us or one
or more of our subsidiaries; provided, however, that a transaction
where
the holders of our common stock immediately prior to such transaction
have, directly or indirectly, more than 50% of the aggregate
voting power
of the common stock of the continuing or surviving corporation
or
transferee entitled to vote generally in the election of directors
immediately after such event shall not be a fundamental change;
or
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(3)
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continuing
directors (as defined below in this section) cease to constitute
at least
a majority of our board of
directors.
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A
designated event will not be deemed to have occurred in respect of any of the
foregoing, however, if either:
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(1)
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the
last reported sale price of our common stock for any five trading
days
within the 10 consecutive trading days ending immediately before
the later
of the fundamental change or the public announcement thereof, equals
or
exceeds 105% of the applicable conversion price of the debentures
in
effect immediately before the fundamental change or the public
announcement thereof; or
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(2)
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at
least 90% of the consideration, excluding cash payments for fractional
shares, in the transaction or transactions constituting the fundamental
change consists of shares of capital stock traded on a national securities
exchange or quoted on the NASDAQ National Market or which will be
so
traded or quoted when issued or exchanged in connection with a fundamental
change (these securities being referred to as “publicly traded
securities”) and as a result of this transaction or transactions the
debentures become convertible into such publicly traded securities,
excluding cash payments for fractional
shares.
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For
purposes of the above paragraph, the term capital stock of any person means
any
and all shares, interests, participations or other equivalents however
designated of corporate stock or other equity participations, including
partnership interests, whether general or limited, of such person and any rights
(other than debt securities convertible or exchangeable into an equity
interest), warrants or options to acquire an equity interest in such
person.
A
“termination of trading” means the termination of trading in our common stock
(or other securities into which the debentures are then convertible) on the
NASDAQ National Market, the NASDAQ SmallCap Market, or any U.S. national
securities exchange, following which our common stock (or other securities
into
which the debentures are then convertible) is no longer approved for trading
on
the NASDAQ National Market, the NASDAQ SmallCap Market, or any U.S. national
securities exchange or the over-the-counter bulletin board.
“Continuing
director” means a member of our board of directors who either was a member of
our board of directors on the date of this prospectus or who becomes a member
of
our board of directors subsequent to that date and whose appointment, election
or nomination for election by our stockholders is duly approved by a majority
of
the continuing directors on our board of directors at the time of such approval,
either by a specific vote or by approval of the proxy statement issued by us
on
behalf of the board of directors in which such individual is named as nominee
for director. The two directors elected by the holders of our Series 2 Preferred
Stock from time to time shall not be deemed “continuing directors” for this
purpose.
We
will
comply with the applicable provisions of Rule 13e-4 and any other applicable
tender offer rules under the Exchange Act, as amended, in the event of a
designated event.
General
This
designated event repurchase right and the make-whole premium could discourage
a
potential acquirer of our company. However, this designated event repurchase
feature and the make-whole premium is not the result of management’s knowledge
of any specific effort to obtain control of us by means of a merger, tender
offer or
solicitation,
or part of a plan by management to adopt a series of anti-takeover provisions.
The term “fundamental change” is limited to specified transactions and may not
include other events that might adversely affect our financial condition or
business operations. Our obligation to offer to repurchase the debentures or
to
pay a make-whole premium if a holder converts the holder’s debentures in
connection upon a fundamental change would not necessarily afford the holder
protection in the event of a highly leveraged transaction, reorganization,
merger or similar transaction involving us. No debentures may be repurchased
by
us at the option of holders upon a designated event if the principal amount
of
the debentures has been accelerated, and such acceleration has not been
rescinded, on or prior to the repurchase date.
The
definition of fundamental change includes a phrase relating to the conveyance,
transfer, sale, lease or disposition of “all or substantially all” of our
consolidated assets. There is no precise, established definition of the phrase
“substantially all” under applicable law. Accordingly, the ability of a holder
of the debentures to require us to purchase its debentures as a result of the
conveyance, transfer, sale, lease or other disposition of less than all of
our
assets may be uncertain.
We
may be
unable to repurchase the debentures upon the occurrence of a designated event.
If a designated event were to occur, we may not have enough funds to pay the
repurchase price for all tendered debentures. Any future credit agreements
or
other agreements relating to our indebtedness may contain provisions prohibiting
repurchase of the debentures under certain circumstances, or expressly prohibit
our repurchase of the debentures upon a designated event or may provide that
a
designated event constitutes an event of default under that agreement. If a
designated event occurs at a time when we are prohibited from repurchasing
debentures, we could seek the consent of our lenders to repurchase the
debentures or attempt to refinance this debt. If we do not obtain consent or
refinance this debt, we would not be permitted to repurchase the debentures.
Our
failure to repurchase tendered debentures would constitute an event of default
under the indenture, which might constitute a default under the terms of our
other indebtedness. If a designated event would constitute an event of default
under our senior indebtedness, the subordination provisions of the indenture
would restrict payments to the holders of debentures.
Subordination
of debentures
Payment
on the debentures will, to the extent provided in the indenture, be subordinated
in right of payment to the prior payment in full of all of our senior
indebtedness.
Upon
any
distribution of our assets upon any dissolution, winding up, liquidation or
reorganization, the payment of the principal of, or premium, if any, and
interest, if any, on the debentures will be subordinated in right of payment
to
the prior payment in full in cash or other payment satisfactory to the holders
of senior indebtedness of all senior indebtedness. In the event of any
acceleration of the debentures because of an event of default, the holders
of
any outstanding senior indebtedness would be entitled to payment in full in
cash
or other payment satisfactory to the holders of senior indebtedness of all
senior indebtedness obligations before the holders of the debentures are
entitled to receive any payment or distribution. We are required under the
indenture to promptly notify holders of senior indebtedness, if payment of
the
debentures is accelerated because of an event of default.
We
may
not make any payment on the debentures if:
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a
default in the payment of designated senior indebtedness occurs and
is
continuing beyond any applicable period of grace (called a “payment
default”); or
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a
default, other than a payment default, on any designated senior
indebtedness occurs and is continuing (or such default would occur
as a
result of such payment, provided, in this last case that we have
notified
the trustee that such default would result from such payment prior
to the
time the trustee is required to make such payment) that permits holders
of
designated senior indebtedness to accelerate its maturity, or in
the case
of a lease, a default occurs and is continuing that permits the lessor
to
either terminate the lease or require us to make an irrevocable offer
to
terminate the lease following an event of default under the lease,
and the
trustee receives a notice of such default (called “payment blockage
notice”) from any person permitted to give such notice under the indenture
(called a “non-payment
default”).
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We
may
resume payments and distributions on the debentures:
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in
case of a default in the payment of designated senior indebtedness,
upon
the date on which such default is cured or waived or ceases to exist;
or
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in
case of a default, other than a payment default, on any designated
senior
indebtedness, the earlier of the date on which such nonpayment default
is
cured or waived or ceases to exist or 179 days after the date on
which the
payment blockage notice is received, if the maturity of the designated
senior indebtedness has not been accelerated, or in the case of any
lease,
179 days after notice is received if we have not received notice
that the
lessor under such lease has exercised its right to terminate the
lease or
require us to make an irrevocable offer to terminate the lease following
an event of default under the
lease.
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No
new
period of payment blockage may be commenced pursuant to a payment blockage
notice unless 365 days have elapsed since the initial effectiveness of the
immediately prior payment blockage notice. No non-payment default that existed
or was continuing on the date of delivery of any payment blockage notice shall
be the basis for any later payment blockage notice.
If
the
trustee or any holder of the debentures receives any payment or distribution
of
our assets in contravention of the subordination provisions on the debentures
before all senior indebtedness is paid in full in cash or other payment
satisfactory to holders of senior indebtedness, then such payment or
distribution will be held in trust for the benefit of holders of senior
indebtedness or their representatives to the extent necessary to make payment
in
full cash or payment satisfactory to the holders of senior indebtedness of
all
unpaid senior indebtedness.
Because
of the subordination provisions discussed above, in the event of our bankruptcy,
dissolution or reorganization, holders of senior indebtedness may receive more,
ratably, and holders of the debentures may receive less, ratably, than our
other
creditors. This subordination will not prevent the occurrence of any event
of
default under the indenture.
The
debentures are our exclusive obligations. We are a holding company and, as
such,
our operations are conducted through subsidiaries. As a result, our cash flow
and our ability to service our debt, including the debentures, depend upon
the
earnings of our subsidiaries and on the distribution of such earnings, loans
or
other payments from our subsidiaries. Any payment of dividends, distributions,
loans or advances by our subsidiaries to us are or may be subject to statutory
and/or contractual restrictions. Payments to us by our subsidiaries are also
contingent upon our subsidiaries’ business considerations.
Our
right
to receive any assets of any of our subsidiaries upon its liquidation or
reorganization, and therefore the right of debenture holders to participate
in
those assets, are and will be effectively subordinated to the claims of that
subsidiary’s creditors, including trade creditors. In addition, to the extent we
are now or in the future a creditor of any of our subsidiaries, our rights
as a
creditor are and would be subordinate to any security interest in the assets
of
such subsidiary and to any indebtedness of such subsidiary senior to that held
by us. The term “senior indebtedness” is defined in the indenture and includes
principal, premium, interest, rent, fees, costs, expenses and other amounts
accrued or due on our existing or future indebtedness, as defined below, or
any
existing or future indebtedness guaranteed or in effect guaranteed by us,
subject to certain exceptions. The term does not include:
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any
indebtedness that by its express terms provides that it is not senior
to
the debentures or is pari passu or junior to the debentures;
or
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any
indebtedness we owe to any of our majority-owned subsidiaries;
or
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the
debentures.
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The
term
“indebtedness” is also defined in the indenture and includes, in general terms,
our liabilities (contingent or otherwise) in respect of borrowed money, notes,
bonds, debentures, letters of credit, bank guarantees, bankers’ acceptances,
capital and certain other leases, interest rate and foreign currency derivative
contracts or similar arrangements, guarantees and certain other obligations
described in the indenture, subject to certain
exceptions.
The term does not include, for example, any account payable or other accrued
current liability or obligation incurred in the ordinary course of business
in
connection with the obtaining of goods or services.
The
term
“designated senior indebtedness” is defined in the indenture and includes
obligations under our working capital loan, our term loan, real estate
mortgages, equipment loans and certain other indebtedness guaranteed by us,
and
any senior indebtedness that by its terms expressly provides that it is
“designated senior indebtedness” for purposes of the indenture.
As
of
December 31, 2006, we had approximately $116.4 million of senior indebtedness
outstanding, all of which is designated senior indebtedness. This amount
includes $91.5 million of “indebtedness” of our subsidiaries for which we are
contingently liable by virtue of a guarantee or otherwise and which is therefore
treated as our “senior indebtedness.” The debentures will also be effectively
subordinated to all other present or future liabilities, including trade
payables, which, as of December 31, 2006, totaled approximately $45.7 million.
Therefore, as of December 31, 2006, the debentures are effectively subordinate
to a total of $162.1 of senior indebtedness, including liabilities of our
subsidiaries. Additionally, the debentures may be subordinated to approximately
$6.95 million senior unsecured debentures due 2007 which the Company owned
as of
December 31, 2006. See “Risk Factors.” Neither we nor any of our subsidiaries
are prohibited from incurring debt, including senior indebtedness, under the
indenture. We may from time to time incur additional debt, including senior
indebtedness.
We
are
obligated to pay reasonable compensation to the trustee and to indemnify the
trustee against certain losses, liabilities or expenses incurred by the trustee
in connection with its duties relating to the debentures. The trustee’s claims
for these payments will generally be senior to those of debenture holders in
respect of all funds collected or held by the trustee.
Merger
and sale of assets by LSB
The
indenture provides that we may not consolidate with or merge with or into any
other person or sell, convey, transfer or lease all or substantially all of
our
properties and assets to another person, unless among other things:
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we
are the surviving person, or the resulting, surviving or transferee
person, if other than us, is organized and existing under the laws
of the
United States, any state thereof or the District of
Columbia;
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the
successor person assumes, by supplemental indenture satisfactory
in form
and substance to the trustee, all of our obligations under the debentures
and the indenture;
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after
giving effect to such transaction, there is no event of default,
and no
event which, after notice or passage of time or both, would become
an
event of default; and
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we
have delivered to the trustee an officers’ certificate and an opinion of
counsel each stating that such consolidation, merger, sale, conveyance,
transfer or lease complies with these
requirements.
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If
we
were to sell our chemical business, based upon our current configuration, such
sale would not constitute a sale of all or substantially all of our property
and
assets (computed on a consolidated basis) for purposes of the
foregoing.
When
a
person
described above
assumes
our obligations in such circumstances, subject to certain exceptions, we shall
be discharged from all obligations under the debentures and the
indenture.
If
we are
a party to a consolidation, merger, binding share exchange or sale of all or
substantially all of our assets, in each case pursuant to which our common
stock
is converted into cash, securities, or other property, then at the effective
time of the transaction, the right to convert a debenture into our common stock
will be changed into a right to convert it into the kind and amount of cash,
securities and other property that a holder would have received if the holder
had converted its debentures immediately prior to the
transaction.
Notice
of certain events
If
we
elect to pay a dividend or other distribution to all holders of our common
stock, we must notify the holders of debentures at least 20 days prior to the
ex-dividend date for such distribution, but in no event less than 20 days before
the record date for such dividend or other distribution. The ex-dividend date
is
the first date upon which a sale of the common stock does not automatically
transfer the right to receive the relevant distribution from the seller of
the
common stock to its buyer.
Events
of default; notice and waiver
The
following will be events of default under the indenture:
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failure
to pay principal or premium, if any, when due at maturity, upon
redemption, repurchase or otherwise on the debentures, whether or
not the
payment is prohibited by subordination provisions of the
indenture;
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failure
to pay any interest, if any, on the debentures, when due and such
failure
continues for a period of 10 days, whether or not the payment is
prohibited by subordination provisions of the
indenture;
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default
in our obligation to deliver shares of our common stock or other
property
upon conversion of the debentures;
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failure
to provide notice of the occurrence of a designated event on a timely
basis;
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failure
by us to pay any indebtedness for money borrowed or other senior
indebtedness (after giving effect to any applicable grace periods)
in an
outstanding principal amount in excess of $5,000,000 at interim or
final
maturity or upon acceleration, which indebtedness is not discharged,
or
such default in payment or acceleration is not cured or rescinded,
within
10 days after written notice as provided in the
indenture;
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failure
to perform or observe any of the covenants in the indenture for 30
days
after written notice to us from the trustee (or to us and the trustee
from
(a) two or more holders holding at least 25% or (b) one holder holding
at
least 35%, in the aggregate principal amount of the debentures at
the time
outstanding); or
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certain
events involving our bankruptcy, insolvency or
reorganization.
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The
trustee may withhold notice to the holders of the debentures of any default,
except defaults in payment of principal, premium, interest, if any, on the
debentures. However, the trustee must consider it to be in the interest of
the
holders of the debentures to withhold this notice.
If
an
event of default occurs and continues, the trustee or (a) two or more holders
holding at least 25% or (b) one holder holding at least 35%, in the aggregate
principal amount of the debentures at the time outstanding may declare the
principal, premium, if any, and accrued and unpaid interest, if any, on the
outstanding debentures to be immediately due and payable. In case of certain
events of bankruptcy or insolvency involving us, the principal, premium, if
any,
accrued and unpaid interest, if any, on the debentures will automatically become
due and payable. However, if we cure all defaults, except the nonpayment of
principal, premium, if any, interest, and additional interest, if any, that
became due as a result of the acceleration, and meet certain other conditions,
with certain exceptions, this declaration may be cancelled and the holders
of a
majority of the principal amount of outstanding debentures may waive these
past
defaults.
Payments
of principal, premium, if any, and interest, if any, on the debentures that
are
not made when due will accrue interest from the required payment date at the
annual rate of 1% above the then applicable interest rate for the
debentures.
The
holders of a majority of outstanding debentures will have the right to direct
the time, method and place of any proceedings for any remedy available to the
trustee, subject to limitations specified in the indenture.
No
holder
of the debentures may pursue any remedy under the indenture, except in the
case
of an event of default in the payment of principal, premium, if any, or
interest, if any, on the debentures, unless:
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(a)
two or more holders holding at least 25% or (b) one holder holding
at
least 35%, in the aggregate principal amount of the debentures at
the time
outstanding has given the trustee written notice of an event of
default;
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(a)
two or more holders holding at least 25% or (b) one holder holding
at
least 35%, in the aggregate principal amount of the debentures at
the time
outstanding make a written request, and offer reasonable indemnity,
to the
trustee to pursue the remedy;
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the
trustee does not receive an inconsistent direction from the holders
of a
majority in principal amount of the
debentures;
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the
holder or holders have offered reasonable security or indemnity to
the
trustee against any costs, liability or expense of the trustee;
and
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the
trustee fails to comply with the request within 60 days after receipt
of
the request and offer of indemnity.
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Modification
and waiver
The
consent of the holders of a majority in principal amount of the outstanding
debentures is required to modify or amend the indenture. However, a modification
or amendment requires the consent of the holder of each outstanding debenture
affected if it would:
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extend
the fixed maturity of any
debenture;
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reduce
the rate or extend the time for payment of interest, if any, of any
debenture;
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reduce
the principal amount or premium of any
debenture;
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reduce
any amount payable upon redemption or repurchase of any
debenture;
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adversely
change our obligation to repurchase any debenture at the option of
the
holder;
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adversely
change our obligation to repurchase any debenture upon a designated
event;
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impair
the right of a holder to institute suit for payment on any
debenture;
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change
the currency in which any debenture is
payable;
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impair
the right of a holder to convert any debenture or reduce the number
of
shares of common stock or any other property receivable upon
conversion;
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adversely
modify, in any material respect, the subordination provisions of
the
indenture;
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reduce
the quorum or voting requirements under the indenture;
or
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subject
to specified exceptions, modify certain of the provisions of the
indenture
relating to modification or waiver of provisions of the
indenture.
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We
are
permitted to modify certain provisions of the indenture without the consent
of
the holders of the debentures.
Form,
denomination and registration
The
debentures will be issued:
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in
fully registered form;
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without
interest coupons; and
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in
denominations of $1,000 principal amount and multiples of
$1,000.
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Global
debenture, book-entry form
Debentures
are evidenced by one or more global debentures. We deposited the global
debenture or debentures with DTC and registered the global debentures in the
name of Cede & Co. as DTC’s nominee. Except as set forth below, a global
debenture may be transferred, in whole or in part, only to another nominee
of
DTC or to a successor of DTC or its nominee.
Beneficial
interests in a global debenture may be held through organizations that are
participants in DTC (referred to as participants). Transfers between
participants will be effected in the ordinary way in accordance with DTC rules
and will be settled in clearing house funds. The laws of some states require
that certain persons take physical delivery of securities in definitive form.
As
a result, the ability to transfer beneficial interests in the global debenture
to such persons may be limited.
Beneficial
interests in a global debenture held by DTC may be held only through
participants, or certain banks, brokers, dealers, trust companies and other
parties that clear through or maintain a custodial relationship with a
participant, either directly or indirectly (referred to as indirect
participants). So long as Cede & Co., as the nominee of DTC, is the
registered owner of a global debenture, Cede & Co. for all purposes will be
considered the sole holder of such global debenture. Except as provided below,
owners of beneficial interests in a global debenture will:
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not
be entitled to have certificates registered in their
names;
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not
receive physical delivery of certificates in definitive registered
form;
and
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not
be considered holders of the global
debenture.
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We
will
pay interest on, and the redemption price and the repurchase price of, a global
debenture to Cede & Co., as the registered owner of the global debenture, by
wire transfer of immediately available funds on each interest payment date
or
the redemption or repurchase date, as the case may be. Neither we, the trustee
nor any paying agent will be responsible or liable:
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for
the records relating to, or payments made on account of, beneficial
ownership interests in a global debenture;
or
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for
maintaining, supervising or reviewing any records relating to the
beneficial ownership interests.
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Neither
we, the trustee, registrar, paying agent nor conversion agent will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations. DTC has advised us that it will take any action
permitted to be taken by a holder of debentures, including the presentation
of
debentures for conversion, only at the direction of one or more participants
to
whose account with DTC interests in the global debenture are credited, and
only
in respect of the principal amount of the debentures represented by the global
debenture as to which the participant or participants has or have given such
direction.
DTC
has
advised us that it is:
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a
limited purpose trust company organized under the laws of the State
of New
York and a member of the Federal Reserve
System;
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“clearing
corporation” within the meaning of the Uniform Commercial Code;
and
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a
“clearing agency” registered pursuant to the provisions of Section 17A of
the Exchange Act.
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DTC
was
created to hold securities for its participants and to facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes to the accounts of its participants. Participants
include securities brokers, dealers, banks, trust companies and clearing
corporations and other organizations. Some of the participants or their
representatives, together with other entities, own DTC. Indirect access
to
the DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
DTC
has
agreed to the foregoing procedures to facilitate transfers of interests in
a
global debenture among participants. However, DTC is under no obligation to
perform or continue to perform these procedures, and may discontinue these
procedures at any time.
We
will
issue debentures in definitive certificate form only if:
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DTC
notifies us that it is unwilling or unable to continue as depositary
or
DTC ceases to be a clearing agency registered under the Securities
and
Exchange Act of 1934, as amended, and a successor depositary is not
appointed by us within 90 days;
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an
event of default shall have occurred and the maturity of the debentures
shall have been accelerated in accordance with the terms of the debentures
and any holder shall have requested in writing the issuance of definitive
certificated debentures; or
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we
have determined in our sole discretion that debentures shall no longer
be
represented by global debentures.
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Restrictions
on transfer; legends
The
debentures will be subject to transfer restrictions as described below under
“Notice to Investors” and certificates for the debentures will bear a legend to
this effect.
Registration
rights of the debenture holders
We
entered into a registration rights agreement with the Selling Security Holders
and filed a registration statement with the SEC covering the resale of the
debentures and the common stock issuable upon conversion of the debentures.
The
registration statement was declared effective by the SEC on May 26, 2006. We
will use commercially reasonable efforts to keep the registration statement
effective until the earlier of: (i) the date there are no longer any registrable
securities or (ii) three years following the closing of the debenture offering,
which is March 3, 2009.
When
we
use the term “registrable securities” in this section, we are referring to the
debentures and the common stock issuable upon conversion of the debentures
until
the earlier of (1) the transfer pursuant to Rule 144 under the Securities Act
or
the registration statement of all registrable securities, or (2) the expiration
of the holding period that would be applicable to such securities if they were
held by persons that are not affiliates of LSB under Rule 144(k) under the
Securities Act or any successor provision.
We
may,
on one or more occasions, suspend the use of this prospectus, as may be amended
and supplemented, under certain circumstances relating to pending corporate
developments, public filings with the SEC and similar events. Any suspension
periods shall not exceed an aggregate of 90 days for all periods in any 12-month
period.
A
holder
who elects to sell registrable securities pursuant to the registration statement
will be required to:
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be
named as a Selling Security Holder in the
prospectus;
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deliver
a prospectus to purchasers; and
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be
subject to the provisions of the registration rights agreement, including
indemnification provisions.
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We
will
give notice to all holders of the filing and effectiveness of any post effective
amendment to the registration statement by issuing a press release to two of
Reuters Economic Services, Bloomberg Business News or Business Wire.
This
summary of the registration rights agreement is not complete. This summary
is
subject to, and is qualified in its entirety by reference to, all the provisions
of the registration rights agreement.
Information
Concerning the Trustee
We
have
appointed UMB Bank, n.a., the trustee under the indenture, as paying agent,
conversion agent, debenture registrar and custodian for the
debentures.
The
trustee or its affiliates may also provide other services to us in the ordinary
course of their business. The indenture contains certain limitations on the
rights of the trustee, if it or any of its affiliates is then our creditor,
to
obtain payment of claims in certain cases or to realize on certain property
received on any claim as security or otherwise. The trustee and its affiliates
will be permitted to engage in other transactions with us. However, if the
trustee or any affiliate continues to have any conflicting interest and a
default occurs with respect to the debentures, the trustee must eliminate such
conflict or resign.
Governing
Law
The
debentures and the indenture shall be governed by, and construed in accordance
with, the laws of the State of New York.
Authorized
capital stock
Our
authorized capital stock consists of 75,000,000 shares of common stock, $.10
par
value per share, and 250,000 shares of preferred stock, $100 par value per
share
(“Preferred Stock”), and 5,000,000 shares of Class C Preferred Stock, no par
value (“Class C Preferred Stock”).
Common
stock
As
of
March 29, 2007, we had issued and outstanding 19,483,139 shares of our common
stock (excluding 3,447,754 shares held in treasury). The shares of common stock
currently outstanding are validly issued, fully paid and non-assessable. Subject
to the rights of the holders of shares of preferred stock outstanding, if any,
holders of shares of our common stock:
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are
entitled to receive dividends, when and as declared by the board
of
directors, from legally available
funds;
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are
entitled, upon our liquidation, dissolution or winding up, to a pro
rata
distribution of the assets and funds available for distribution to
stockholders;
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are
entitled to one vote per share on all matters on which stockholders
generally are entitled to vote; and
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do
not have preemptive rights to subscribe for additional shares of
common
stock or securities convertible into shares of common
stock.
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Holders
of common stock vote on all matters brought for the stockholders’ approval,
except as otherwise required by law and subject to the voting rights of the
holders of any outstanding shares of preferred stock. As of March 29, 2007,
we
had outstanding three series of voting preferred stock that vote together with
our common stock as a single class, as described below.
Preferred
Stock
The
Preferred Stock and Class C Preferred Stock are issuable in one or more series,
each with such designations, preferences, rights, qualifications, limitations
and restrictions as our board of directors may determine in resolutions
providing for their issuance. As of March 29, 2007, the following shares of
Preferred Stock and Series C Preferred Stock are authorized:
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4,662
shares of our convertible, noncumulative preferred stock, $100
par value
(“Noncumulative Preferred”), of which 611.5 shares are issued and
outstanding;
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20,000
shares of our Series B 12% cumulative, convertible preferred stock,
$100
par value (“Series B Preferred”), of which 20,000 shares are issued and
outstanding;
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920,000
shares of our Series 2 $3.25 convertible, exchangeable Class C preferred
stock, no par value (“Series 2 Class C Preferred”) (excluding 18,300
shares held in treasury) of which 193,295
shares
are issued and outstanding; and
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1,000,000
shares of our Series D 6% cumulative, convertible Class C preferred
stock
no par value (“Series D Class C Preferred”), of which 1,000,000 shares are
issued and outstanding.
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The
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of us without further action by the stockholders
and may adversely affect the voting and other rights of the holders of our
common stock. The issuance of preferred stock with voting and conversion rights
may adversely affect the voting power of the holders of common stock, including
loss of voting control to others. As of March 29, 2007, we had outstanding
the
following series of Preferred Stock and Class C Preferred Stock:
Outstanding
Preferred Stock:
Noncumulative
Preferred, par value $100.
Each
outstanding share of Noncumulative Preferred:
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is
entitled to receive noncumulative cash dividends, when and as declared
by
our board of directors, at the rate of 10% per year of the par
value;
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is
entitled to one vote for each outstanding share (or one-half of one
vote
for each fractional one-half share) on all matters submitted to a
vote of
the shareholders and votes together with the common stock and each
series
of voting preferred stock as a single class or as otherwise required
by
law;
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is
convertible, at anytime and at the option of the holder, into 40
shares of
our common stock (or each fractional one-half share is convertible
into 20
shares of our common stock), subject to adjustment under certain
conditions;
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is
redeemable by us at par value (or each fractional one-half share
at
one-half of the par value) at the option of the holder to the extent
we
earn net income (as determined under GAAP) after all debt owed by
us to
our senior lenders (as defined) has been paid in
full;
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is
redeemable by us, in whole or in part, by paying the holders in cash
the
par value (one-half of par value for a fractional share);
and
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in
the event of our liquidation or dissolution, will be entitled to
be paid
the par value (for each fractional share, one-half of par value)
to the
extent funds are available before any payment is made to the holders
of
our common stock, but will not be entitled to participate any further
in
our assets.
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Series
B Preferred, par value $100. All
of
the Series B Preferred are owned by the Golsen Group. Each share of the Series
B
Preferred:
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is
entitled to receive cumulative cash dividends, when and as declared
by our
board of directors, at the annual rate of 12% of the par value of
each
outstanding share;
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is
entitled to one vote for each outstanding share on all matters submitted
to a vote of shareholders and votes together with our common stock
and
each series of voting preferred stock as a single class or as otherwise
required by law;
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is
convertible, at any time and at the option of the holder, into 33.3333
shares of our common stock, subject to adjustment under certain
conditions; and
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in
the event of our liquidation each outstanding share, will be entitled
to
be paid its par value, plus accrued and unpaid dividends, before
any
payment is made to holders of our common stock, but will not be entitled
to participate any further in our
assets.
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Outstanding
Class C Preferred Stock:
Series
2 Class C Preferred, no par value.
Each
outstanding share of Series 2 Class C Preferred:
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has
a stated value of $50 per share;
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is
entitled to receive cumulative cash dividends, when and as declared
by our
board of directors, at the rate of $3.25 per
annum;
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does
not have any voting rights, except as otherwise required by law or
if
dividends are in arrears and unpaid, whether or not declared, in
an amount
equal to at least six quarterly dividends elect (voting separately
as
class with all other affected classes or series of parity stock upon
which
like voting rights have been conferred) two additional directors
to our
board of directors, if and as long as at least 140,000 shares of
the
Series 2 Class C Preferred remain
outstanding;
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is
convertible into that number of shares of our common stock, obtained
by
dividing the stated value by the conversion price then in effect,
with the
initial conversion price set at $11.55 per share, subject to adjustment
under certain conditions;
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is
subject to special conversion rights upon a change in control or
ownership
change (as such terms are defined in the terms of the Series 2 Class
C
Preferred);
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in
the event of our liquidation, dissolution or winding up, is entitled
to be
paid its stated value plus accrued and unpaid dividends, before any
payment shall be made on our common
stock;
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in
addition, the terms of the Series 2 Preferred permit us to purchase
or
otherwise acquire shares of our common stock for a five year period,
commencing March 13, 2007, even though cumulative accrued and unpaid
dividends exist on the Series 2
Preferred;
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is
redeemable by us at its stated value plus all accrued and unpaid
dividends; and
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is
exchangeable at our option in whole, but not in part, for our 6.50%
convertible subordinated
debentures.
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Series
D Class C Preferred, no par value.
All
outstanding shares of Series D Class C Preferred are owned by the Golsen Group.
Each outstanding share of Series D Class C Preferred:
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has
a liquidation preference of $1.00 per
share;
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is
to receive cumulative cash dividends, when and if declared by our
board of
directors, at the rate of 6% per annum of the liquidation preferences,
except if the dividends on the Series 2 Class C Preferred are in
default,
in whole or in part, no dividends shall be paid on this stock until
all
accrued and unpaid dividends on the Series 2 Class C Preferred have
been
paid;
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shall
be entitled to .875 votes on all matters submitted to a vote of
shareholders and vote together with our common stock and each series
of
voting preferred stock as a single class or as otherwise required
by
law;
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shall
have the right to convert four shares of Series D Class C Preferred
into
one share of our common stock (equivalent to a conversion price of
$4 per
share of our common stock), subject to adjustment under certain
conditions;
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in
the event of our liquidation, dissolution or winding up or any reduction
in our capital resulting from any distribution of assets to our
shareholders, shall receive the sum $1.00, plus all accrued and unpaid
dividends, before any amount is paid to holders of our common stock;
and
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there
shall be no mandatory or optional redemption of these
shares.
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As
of
March 29, 2007, there were approximately $6.8 million of accrued and unpaid
dividends on our outstanding cumulative preferred stock. See “Risk Factors.”
Until all accrued and unpaid dividends are paid on our outstanding cumulative
preferred stock, no dividends may be paid on our common stock. Not paying
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.
The
terms
of our Series 2 Class C Preferred provide that whenever dividends in the Series
2 Class C Preferred are in arrears and unpaid in an amount equal to at least
six
quarterly dividends, the Series 2 Class C Preferred may elect 2 additional
directors to our board of directors to serve until all accrued and unpaid
dividends are paid, if and so long as at least 140,000 shares of Series 2 Class
C Preferred remain outstanding. In 2002, the holders of our cumulative preferred
stock elected Grant J. Donovan and N. Allen Ford to serve on our board of
directors, and they are currently serving as members of our board of
directors.
Preferred
share purchase rights
We
have
adopted a preferred share rights plan (the “Rights Plan”), which Rights Plan
became effective as of February 27, 1999. The Rights Plan replaced and renewed
a
rights plan that was terminating as of that date. Under the Rights Plan, we
declared a dividend distribution of one Renewed Preferred Share Purchase Right
(the “Renewed Preferred Right”) for each outstanding share of our common stock
outstanding as of February 27, 1999 and all further issuances of our common
stock would carry the rights. The Rights Plan has a term of ten years from
its
effective date. The Renewal 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, and his
affiliates, our company or any of our subsidiaries, our employee benefit 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 (Series 3 Participating Class C
Preferred Stock, no par value [“Series 3 Preferred”]) at an exercise price of
$20. Following the acquisition by the Acquirer of beneficial ownership of 20%
or
more of our common stock, and prior to the acquisition of 50% or more of our
common stock by the Acquirer, our board of directors may exchange all or a
portion of the Renewed Preferred Rights (other than Renewed Preferred Rights
owned by the Acquirer) for our common stock at the rate of one share of common
stock per Renewed Preferred Right. Following acquisition by the Acquirer of
20%
or more of our common stock, each Renewed Preferred Right (other than the
Renewed Preferred Rights owned by the Acquirer) will entitle its holder to
purchase a number of our common shares having a market value of two times the
Renewed Preferred Right’s exercise price in lieu of the Series 3 Preferred.
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.
Warrants
and options; other agreements
On
March
25, 2003, we issued warrants (the “Jayhawk Warrants”) for the purchase up to
112,500 shares of our common stock. The exercise price of such warrants is
$3.49
per share, and the warrants expire on March 24, 2008. The Jayhawk Warrants
are
subject to certain anti-dilution adjustments.
In
May
2002, we issued warrants to certain of our lenders (“Lender Warrants”) entitling
the holders to purchase up to an aggregate of 595,585 shares of our common
stock. The exercise price under each Lender Warrant was set at the par value
of
our common stock and payable, at the option of the holder, by:
|
·
|
cash
or cashier’s certified check; or
|
|
·
|
holder
surrendering to us that number of shares of common stock issuable
upon
exercise of the Lender Warrant having an aggregate market value equal
to
the aggregate exercise price; or
|
|
·
|
a
combination thereof.
|
All
of
the Lender Warrants were exercised during the first half of 2005, pursuant
to
the cashless exercise provisions of the warrants, which reduced the total number
of shares of our common stock issued to the holders as a result of the exercise
of the Lender Warrants to 586,140 shares.
The
following sets forth certain summary information as of March 29, 2007, with
respect to our stockholder approved equity compensation plans.
|
·
|
1993
Stock Option and Incentive Plan (the “1993 Plan”) and 1998 Stock Option
Plan (the “1998 Plan”). As of March 29, 2007, 38,000 shares are issuable
under outstanding options granted under the 1993 Plan, and no additional
shares are available for future issuance. As of March 29, 2007,
468,304
shares are issuable under outstanding options granted under the 1998
Plan,
and 8,000
additional shares are available for future issuance. The 1993 Plan
and
1998 Plan each authorize us to grant options to purchase common stock
to
our employees. All outstanding options granted to employees under
these
plans have a term of ten years and become exercisable as to 20% of
the
underlying shares after one year from date of grant, 40% after two
years,
70% after three years, and 100% after four years. However, our board
of
directors accelerated the vesting of all options outstanding as of
December 31, 2005, and outstanding options under the 1993 Plan and
1998
Plan are fully exercisable. The exercise price of outstanding options
granted under these plans is equal to the market value of our common
stock
at the date of grant. However, with respect to participants who own
10% or
more of our common stock at the date of grant, the options have a
term of
five years, and the exercise price is 110% of the market value at
the date
of grant.
|
|
·
|
Outside
Directors Stock Option Plan (the “Outside Directors Plan”). As of March
29, 2007, 90,000 shares are issuable under outstanding options granted
under the Outside Directors Plan and 295,000 additional shares are
available for future issuance. The Outside Directors Plan authorizes
us to
grant options to purchase common stock to each member of our board
of
directors who is not an officer or employee of ours or our subsidiaries.
These options become fully exercisable after six months and one day
from
the date of grant and lapse at the end of ten years. The exercise
price of
options granted under the Outside Directors Plan is equal to the
market
value of our common stock at the date of grant.
|
See
footnote (1) to the Equity Compensation Plan Information table for certain
summary information as of December 31, 2006, with respect to our non-stockholder
approved equity compensation plans.
Registration
rights
We
entered into a Registration Rights Agreement, dated March 25, 2003, with Kent
C.
McCarthy, Jayhawk Capital Management Company, LLC, a Delaware limited liability
company, Jayhawk Investments Company, L.P., a Delaware limited partnership,
and
Jayhawk Institutional Partners, L.P., a Delaware limited partnership
(collectively, the “Jayhawk Group”). The agreement covers 1,248,500 shares of
common stock owned the Jayhawk Group, 112,500 shares issuable upon the exercise
of the Jayhawk Warrants, and 1,401,081 shares of common stock issuable to the
Jayhawk Group upon conversion of 323,650 shares of our $3.25 Convertible
Exchangeable Class C Preferred
Stock,
Series 2, owned by the Jayhawk Group. We are required to use our reasonable
efforts to affect the registration of the securities upon the written request
of
the holders of at least 50% of such securities. We are not required to affect
more than two registrations pursuant to such demand rights of the Jayhawk Group.
In addition, the agreement entitles the Jayhawk Group to certain piggyback
registration rights if, at any time, we propose to register any of our common
stock, whether or not for our own account, subject to certain limitations.
The
Jayhawk Group did not exercise their rights to include such shares in the
registration statement, of which this prospectus is a part.
Certificate
of incorporation, by-laws and Delaware law
Our
certificate of incorporation provides for three classes of directors having
staggered terms and, except in limited circumstances, a two-thirds vote of
outstanding shares to approve a merger, consolidation, sale of all or
substantially all of our assets, amend certain provisions of our certificate
of
incorporation or amend our bylaws. The term of office of each class is for
three
years. Under the Delaware General Corporation Law, if a board of directors
is
classified, a director on such a board may be removed by shareholders only
for
cause, unless the certificate of incorporation otherwise provides. Our
certificate of incorporation does not provide otherwise. In this regard, our
bylaws add a definition of “cause” for the purpose of removal of a director.
“Cause” is defined to exist only if the director whose removal is proposed has
been convicted of a felony by a court of competent jurisdiction or has been
adjudged by a court of competent jurisdiction to be liable for intentional
misconduct or knowing violation of law in the performance of such director’s
duty to us and, in each case, only after such adjudication is no longer subject
to direct appeal.
Pursuant
to
our certificate of incorporation, we also have authorized and unissued
(including shares held in treasury) 55,516,861
shares
of common stock and 4,036,093
shares of preferred stock as of March
29,
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.
In
addition, our bylaws provide a procedure for filling a vacancy on our board
of
directors resulting from a newly-created directorship, removal or resignation
of
a director. Pursuant to those procedures, such a vacancy shall be filled only
by
the affirmative vote of a majority of the directors then in office. Therefore,
shareholders would not have the power to elect any
director to fill such vacancy.
Further,
our bylaws provide for certain procedures to be followed in order to obtain
a
consent of our shareholders in lieu of a meeting, the business that may be
conducted at a meeting of our shareholders and who may be eligible for election
as a director. Our bylaws further provide that they may only be amended by
a
vote of a majority of the directors then in office or by a vote of the holders
of two-thirds of the issued and outstanding shares of our stock entitled to
vote.
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 certain 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 shareholders decide
to opt out of the statute.
As
of
March 29, 2007, the Golsen Group owned an aggregate of 3,457,423 shares of
our
common stock and 1,020,000 shares of our voting preferred stock (of which
1,000,000 shares have .875 votes per share, or 875,000 votes), which together
represented approximately 21.4% 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 29, 2007. If the Golsen Group were to acquire
the
additional 392,926 shares of common stock, the Golsen Group would, in the
aggregate, beneficially own approximately 22.8% of the voting power of our
issued and outstanding shares of our voting securities (common and preferred).
Thus, the Golsen Group may be considered to effectively control us. See “Risk
Factors.”
The
foregoing
preferred share rights plan, the provisions of our certificate of incorporation
and bylaws, the laws of Delaware, and the Golsen Group’s ownership of our voting
capital stock could render more difficult or
discourage
a tender offer or proxy contest for control of us and could have the effect
of
making it more difficult to remove incumbent management in such
situations.
Transfer
agent and registrar
The
transfer agent and registrar for our common stock is UMB Bank, n.a. Its address
is P.O. Box 410064, Kansas City, Missouri 64141, and its telephone number is
(800) 821-2171.
On
March
14, 2006, we issued and sold to the Selling Security Holders listed in the
following table a total of $18,000,000 aggregate principal amount of the
debentures, effective as of March 3, 2006, in a private placement transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder. Of the original debentures issued, $17,000,000 aggregate principal
amount of the debentures have been previously converted into 2,401,248 shares
of
common stock in accordance with the terms of the debentures. In addition, the
holder of the remaining debentures has indicated its intent to convert all
such
debentures. See “Recent Development.” The Selling Security Holders, which term
includes their transferees, pledgees, donees and successors, may from time
to
time offer and sell pursuant to this prospectus any and all of the debentures
and the shares of our common stock issuable upon conversion of the debentures.
The
debentures and our shares of common stock to be issued upon conversion of the
debentures were registered under a registration statement filed pursuant to
a
registration rights agreement between us and the Selling Security Holders.
In
that agreement, we undertook, subject to certain exceptions, to keep that
registration statement effective for up to three years. The registration
statement to which this prospectus relates is intended to satisfy our
obligations under that agreement.
The
Selling Security Holders named below represented to us that each was a qualified
institutional buyer, and each has advised us that they currently intend to
sell
pursuant to this prospectus the debentures and our shares of common stock set
forth below. Additional Selling Security Holders may choose to sell debentures
and our shares of common stock from time to time upon notice to us. None of
the
Selling Security Holders named below has, within the past three years, held
any
position or office with us or any of our predecessors or affiliates, or had
any
other material relationship with us or any of our predecessors or affiliates,
except as noted below with respect to Jayhawk Institutional Partners, L.P.
(“Jayhawk Institutional”).
The
following table sets forth information, as of March 29, 2007, with respect
to
the Selling Security Holders, the principal amounts of debentures and common
stock issuable upon conversion of the debentures which are beneficially owned
by
each Selling Security Holder that may be resold pursuant to this prospectus.
The
information is based on information provided by or on behalf of the Selling
Security Holders.
Prior
to
the initial sale of the debentures to the Selling Security Holders, Jayhawk
Institutional Partners, L.P. and its affiliates, Kent C. McCarthy, Jayhawk
Capital Management, LLC, and Jayhawk Investments, L.P. (collectively, the
“Jayhawk Group”) beneficially owned 2,802,042 shares of our common stock,
representing 18.1% of our then issued and outstanding common stock and 328,850
shares of our Series 2 Preferred, representing 54.3% of our then issued and
outstanding Series 2 Preferred. The Jayhawk Group exchanged 180,450 shares
of
Series 2 Preferred Stock for 1,335,330 shares of common stock in accordance
with
our tender offer completed on March 13, 2007. Also, the Jayhawk Group owned
$1
million of ThermaClime’s 10¾% senior subordinated debentures, due 2007. As a
holder of Series 2 Preferred Stock, the Jayhawk Group participated in the
nomination and election of two individuals to serve on our Board of Directors
in
accordance with the terms of the Series 2 Preferred. See “Description of Capital
Stock — Preferred Stock.” In addition, Jayhawk Institutional was an initial
purchaser of our debentures, acquiring $1 million in principal amount of our
debentures. In April 2007, the Jayhawk Group offered to convert such debentures
into 141,040 shares of our common stock, at the conversion rate of 141.04 shares
per $1,000 principal amount of debentures (representing a conversion price
of
$7.09 per share). See “Recent Development” below. The aggregate beneficial
ownership of our securities held by the Jayhawk Group as of March 29, 2007,
is set forth in the table below.
The
Selling Security Holders may offer all, some or none of the debentures or the
common stock issuable upon conversion of the debentures. Because the Selling
Security Holders may offer all or some portion of the debentures or the common
stock, we cannot estimate the amount of the debentures or the common stock
that
will be held by the Selling Security Holders upon termination of any of these
sales. In addition, the Selling Security Holders identified below may have
sold,
transferred or otherwise disposed of all or a portion of their debentures since
the date on which they provided the information regarding their debentures
in
transactions exempt from the registration requirements of the Securities Act.
The
percentage of outstanding debentures beneficially owned by each Selling Security
Holder is based the aggregate principal amount of debentures outstanding as
of
March 29, 2007. The number of shares of common stock beneficially owned includes
the number of shares of common stock issued previously upon conversion of the
debentures (all of which were issued based on the conversion rate in effect
on
the date hereof of 141.04 shares per $1,000 principal amount of debentures
(representing a conversion price of $7.09)), and the number of shares of common
stock issuable upon conversion of the debentures and a cash payment in lieu
of
any fractional share. The number of shares issuable upon conversion of the
debentures is subject to change based upon the terms of our debentures, which
provide that (a) at any time on or after March 1, 2009, the conversion rate
is
125 shares per $1,000 principal amount of debentures, and (b) during the period
from March 1, 2007 to August 31, 2009, the conversion rate declines every six
months, starting at 141.04 shares and ending at 129.23 shares per $1,000
principal amount of the debentures. See “Description of Debentures ំ Conversion
of debentures.”
Because
each Selling Security Holder may sell pursuant to this prospectus all or a
portion of the offered debentures and common stock issuable upon conversion
of
the debentures, we cannot know or estimate number or percentage of debentures
and common stock that the Selling Security Holder will hold upon the termination
of this offering. Please refer to the “Plan of Distribution” beginning on page
43 of
this
prospectus. The information presented below assumes that all of the Selling
Security Holders will fully convert the debentures into shares of our common
stock and that the Selling Security Holders will sell all shares of our common
stock that they receive pursuant to such conversion.
|
Name
of Selling
Security Holder |
Amount
of Debentures Beneficially
Owned ($) |
Percentage
of Debentures
Beneficially Owned |
Amount
of Debentures
Offered |
Shares
of
Common Stock Beneficially Owned |
Shares
of
Common Stock Offered |
Shares
of
Common Stock Owned After Offering |
|
Alexandra
Global
Master Fund Ltd.(2) |
*
|
0%
|
*
|
279,539
|
279,539
|
0
|
|
Bancroft
Fund Ltd.(3)
|
*
|
0%
|
*
|
150,000
|
150,000
|
0
|
|
Context
Advantage
Master Fund, L.P.(4) |
*
|
0%
|
*
|
305,625
|
305,625
|
0
|
|
Ellsworth
Fund Ltd.(3)
|
*
|
0%
|
*
|
150,000
|
150,000
|
0
|
|
Highbridge
International, LLC(5) |
*
|
0%
|
*
|
706,250
|
706,250
|
0
|
|
Jayhawk
Institutional
Partners, L.P. (Kent C. McCarthy)(6) |
$
1,000,000
|
100%
|
$
1,000,000
|
3,444,617(1)
(6)
|
141,040
|
3,303,577(6)
|
|
Technology
Yield Fund(7)
|
*
|
0%
|
*
|
35,313
|
35,313
|
0
|
* The
Debentures originally purchased by the Selling Security Holder were converted
into shares of common stock prior to the date of this prospectus at the
conversion rate of 141.25 shares of common stock per $1,000
principal
amount of debentures, representing a conversion price of $7.08 per share, and
the Selling Security Holder no longer owns any Debentures.
|
(1)
|
Assumes
conversion of the debentures at a conversion rate of 141.04 shares
per
$1,000 principal amount of debentures, representing a conversion
price of
approximately $7.09 per share. The actual conversion rate will vary
from
141.04 to 125 per $1,000 principal amount of debentures, based on
the date
on which conversion occurs. See “Description of debentures—Conversion of
debentures.”
|
|
(2)
|
Alexandra
Investment Management, LLC, a Delaware limited liability company
(“Alexandra”), as the investment adviser to Alexandra Global Master Fund
Ltd., a British Virgin Islands company (“Master Fund”), may be deemed to
share dispositive power over the debentures and shares of common
stock
stated as beneficially owned by Master Fund and to share voting power
over
such shares of common stock. Alexandra disclaims beneficial ownership
of
such debentures and shares of common stock. Messrs. Mikhail A. Filimonov
(“Filimonov”) and Dimitri Sogoloff (“Sogoloff”), as the managing members
of Alexandra, may be deemed to share dispositive power over the debentures
and shares of common stock beneficially owned by Master Fund and
to share
voting power over such shares of common stock. Filimonov and Sogoloff
disclaim beneficial ownership of such debentures and shares of common
stock. This amount does not include 144,211 shares of common stock
sold
previously pursuant to our prospectus, dated May 26, 2006. The address
of
Master Fund is 767 Third Avenue, 39th
Floor, New York, NY 10017.
|
|
(3)
|
Thomas
H. Dinsmore has sole voting and dispositive power over the securities
held
by Bancroft Convertible Fund (“Bancroft”) and Ellsworth Fund Ltd.
(“Ellsworth”). The amount shown does not include 54,812 shares of common
stock sold previously by Bancroft and 54,812 shares of common stock
sold
previously by Ellsworth pursuant to our prospectus, dated May 26,
2006.
The address of Bancroft and Ellsworth is 65 Madison Avenue, Morristown,
New Jersey 07960.
|
|
(4)
|
Context
Capital Management LLC, as investment advisor, has sole voting and
dispositive power over the securities held by Context Advantage Fund
Master, L.P. (“Context Master”). The amount shown does not include 400,625
shares of common stock sold previously by Context Master’s affiliates,
Context Advantage Fund, Ltd. and Context Advantage Fund Offshore,
Ltd.,
pursuant to our prospectus, dated May 26, 2006. The address of Context
Master is 12626 High Bluff Drive, Suite 440, San Diego, California
92130.
|
|
(5)
|
Highbridge
Capital Management, LLC (“Highbridge”), is the trading manager of
Highbridge International LLC (“HIC”), and consequently has voting control
and investment discretion over securities held by HIC. Glenn Dubin
and
Henry Swieca control Highbridge. Each of Highbridge, Glenn Dubin
and Henry
Swieca disclaims beneficial ownership of the securities held by HIC.
The
address of HIC is 9 West 57th
Street, New York, NY 10019.
|
|
(6)
|
Jayhawk
Institutional Partners, L.P. (“Jayhawk Institutional”), Kent C. McCarthy,
Jayhawk Capital Management Company, LLC (“Jayhawk Capital”), and Jayhawk
Investments, L.P. (“Jayhawk Investments”) (collectively, the “Jayhawk
Group”) as a group beneficially own 3,444,617 shares of our common stock,
which includes 671,047 shares of common stock receivable upon conversion
of 155,012 shares of Series 2 Preferred, 112,500 shares of common
stock
that may be acquired upon exercise of warrants, and 141,040 shares
of
common stock that may be acquired upon conversion of $1 million principal
amount of the debentures. See “Recent Development” for a discussion of the
Jayhawk Group’ intent to convert such debentures. The common stock
beneficially owned by the Jayhawk Group includes (a) 2,327,788 shares
of
common stock that Jayhawk Institutional owns or has the right to
acquire,
including (i) 349,220 shares of common stock receivable upon the
conversion of 80,670 shares of Series 2 Preferred, (ii) 112,500 shares
of
common stock receivable upon the exercise of warrants, and (iii)
141,040
shares of common stock receivable upon the conversion of $1 million
principal amount of the debentures (See “Recent Development”), (b) 892,589
shares of common stock that Jayhawk Investments owns or has the right
to
acquire, including 321,827 shares of common stock receivable by Jayhawk
Investments upon conversion of 74,342 shares of Series 2 Preferred,
and
(c) 224,240 shares Mr. McCarthy holds through a revocable trust.
The
3,444,617 shares of common stock owned represents 16.9% of our issued
and
outstanding common stock, based on 19,483,139 shares outstanding
on March
29, 2007 (excluding 3,447,754 shares held in treasury), calculated
pursuant to Rule 13d-3 of the Securities Act of 1934, as amended.
Jayhawk
Capital, as the investment advisor and manager of Jayhawk Institutional
and the investment advisor and general partner of Jayhawk Investments,
is
deemed to beneficially own the securities held by Jayhawk Institutional
and Jayhawk Investments. Mr. McCarthy, as the manager and sole member
of
Jayhawk Capital, has sole voting and dispositive power over
|
|
|
our
securities held by Jayhawk Capital, Jayhawk Institutional and
Jayhawk
Investments. Mr. McCarthy disclaims beneficial ownership of all
such
shares and debentures other than his personal holdings. Mr. McCarthy’s
address is 5410 West 61st Place, Suite 100, Mission, Kansas
66205.
|
|
(7)
|
James
A. Bitzer, Michael I. Mahoney, and William E. Grayson, as the general
partners of EGM Capital, LLC, the general partner of Technology Yield
Fund
(“Technology”), have shared voting and dispositive power over the
securities held by Technology Yield Fund. The amount shown does not
include 105,937 shares of common stock sold previously pursuant to
our
prospectus, dated May 26, 2006. The address of Technology Yield Fund
is 2
Embarcadero Centre, Suite 1300, San Francisco, California
94111.
|
Information
concerning other Selling Security Holders will be set forth in prospectus
supplements or post-effective amendments from time to time, if required.
Information concerning the Selling Security Holders may change from time to
time
and any changed information will be set forth in prospectus supplements or
post-effective amendments if and when necessary. In addition, the conversion
price, and therefore, the number of shares of common stock issuable upon
conversion of the notes, is subject to adjustment under certain circumstances.
Accordingly, the number of shares of common stock into which the notes are
convertible may increase or decrease.
The
securities to be offered and sold using this prospectus are being registered
to
permit secondary public trading of the securities by the Selling Security
Holders. We will not receive any of the proceeds from the sale by the Selling
Security Holders of the securities. The aggregate proceeds to the Selling
Security Holders from the sale of the debentures will be the purchase price
of
the debentures or common stock less any discounts, concessions or commissions.
Each Selling Security Holder reserves the right to accept and, together with
its
agents, to reject, any proposed purchases of debentures or common stock to
be
made directly or through agents.
The
debentures and the common stock issuable upon conversion of the debentures
may
be sold from time to time to purchasers directly by the Selling Security Holders
and their successors, which includes their transferees, pledges or donees and
their successors, or, alternatively, through underwriters, broker-dealers or
agents. If the debentures or common stock issuable upon conversion of the
debentures are sold through underwriters, broker-dealers or agents, the Selling
Security Holders will be responsible for any discounts, concessions or
commissions. These discounts, concessions or commissions may be greater than
those customary in the types of transactions involved.
The
debentures and the common stock issuable upon conversion of the debentures
may
be sold or otherwise distributed in one or more transactions at fixed prices,
at
prevailing market prices at the time of sale, at varying prices determined
at
the time of sale or at negotiated prices. The sales or other distributions
may
be completed in transactions (which may involve block or cross transactions):
|
|
•
|
|
on
any national securities exchange or quotation service on which the
debentures or the common stock issuable upon conversion of the debentures
are listed or quoted at the time of sale;
|
|
|
•
|
|
in
the over-the-counter market;
|
|
|
•
|
|
in
ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
|
|
|
•
|
|
in
purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
|
|
|
•
|
|
in
an exchange distribution in accordance with the rules of the applicable
exchange;
|
|
|
•
|
|
through
the writing of options (including the issuance by the Selling Security
Holders of derivative securities);
|
|
|
•
|
|
through
the settlement of short sales;
|
|
|
•
|
|
pursuant
to Rule 144;
|
|
|
•
|
|
in
a combination of any such methods of sale; or
|
|
|
•
|
|
in
any other method permitted pursuant to applicable law.
|
In
connection with sales of the debentures and the common stock issuable upon
conversion of the debentures, the Selling Security Holders may:
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enter
into hedging transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the securities
in
the course of hedging positions they assume;
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sell
the securities short;
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loan
or pledge the securities to broker-dealers or other financial institutions
that in turn may sell the securities;
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•
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enter
into option or other transactions with broker-dealers or other financial
institutions that require the delivery by the Selling Security Holders
of
debentures or the common stock issuable upon conversion of the debentures,
which the broker-dealer or other financial institution may resell
pursuant
to this prospectus; or
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enter
into transactions in which a broker-dealer makes purchases as a principal
for resale for its own account or through other types of
transactions.
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The
Selling Security Holders and any underwriters, broker-dealers or agents who
participate in the distribution of the debentures and the common stock issuable
upon conversion of the debentures may be deemed to be “underwriters” within the
meaning of the Securities Act. As a result, any profits on the sale of the
debentures and the common stock issuable upon conversion of the debentures
by
Selling Security Holders and any discounts, concessions or commissions received
by any such broker-dealers or agents may be deemed to be “underwriting
discounts” within the meaning of the Securities Act. Selling security holders
who are deemed to be underwriters might be subject to certain statutory
liabilities under the Securities Act and the Securities Exchange Act. In
addition, underwriters will be subject to prospectus delivery requirements
of
the Securities Act. Accordingly, each is deemed to be, under the interpretations
of the SEC, an “underwriter” within the meaning of the Securities Act. For
details about the amount of debentures and number of shares of common stock
beneficially owned and being offered by these Selling Security Holders, see
the
table under “Selling Security Holders” beginning on page 40 .
Some
of
the Selling Security Holders own shares of our common stock. For information
about these holdings, see the table under “Selling Security Holders” above.
The
following is a general discussion of certain U.S. federal income tax
considerations relevant to holders of the debentures and common stock into
which
the debentures may be converted. This discussion is based upon the Internal
Revenue Code of 1986, as amended, which we refer to as the Code, Treasury
regulations, Internal Revenue Service (the “IRS”) rulings and judicial decisions
now in effect, all of which are subject to change (possibly with retroactive
effect) or different interpretations. There can be no assurance that the IRS
will not challenge one or more of the tax consequences described herein, and
we
have not obtained, nor do we intend to obtain, a ruling from the IRS with
respect to the U.S. federal income tax consequences of acquiring or holding
debentures or common stock.
This
discussion does not purport to deal with all aspects of U.S. federal income
taxation that may be relevant to a particular holder in light of the holder’s
circumstances (for example, persons subject to the alternative minimum tax
provisions of the Code or a Holder (as defined below) whose “functional
currency” is not the U.S. dollar). Also, it is not intended to be wholly
applicable to all categories of investors, some of which (such as dealers in
securities or currencies, traders in securities that elect to use a
mark-to-market method of accounting, banks, thrifts, regulated investment
companies, insurance companies, tax-exempt organizations and persons holding
debentures or common stock as part of a hedging or conversion transaction or
straddle or persons deemed to sell debentures or common stock under the
constructive sale provisions of the Code) may be subject to special rules.
The
discussion also does not discuss any aspect of state, local or foreign law
or
U.S. federal estate and gift tax law that may be applicable to the holders
of
the debentures and common stock into which the debentures may be converted.
In
addition, this discussion is limited to the purchasers of debentures in this
offering who acquire the debentures at their original issue price within the
meaning of Section 1273 of the Code, and who will hold the debentures and common
stock as “capital
assets” within the meaning of Section 1221 of the Code. This summary also
assumes that the IRS will respect the classification of the debentures as
indebtedness for federal income tax purposes.
All
prospective purchasers of the debentures are advised to consult their own tax
advisors regarding the federal, state, local and foreign tax consequences of
the
purchase, ownership and disposition of the debentures and the common stock
in
their particular situations.
As
used
herein, the term “Holder” means a beneficial holder of a debenture or of common
stock that for United States federal income tax purposes is (a) a citizen or
resident (as defined in Section 7701(b) of the Code) of the United States,
(b) a
corporation formed under the laws of the United States or any political
subdivision of the United States, (c) an estate the income of which is subject
to U.S. federal income taxation regardless of its source and (d) in general,
a
trust subject to the primary supervision of a court within the United States
and
the control of a United States person as described in Section 7701(a)(30) of
the
Code.
If
a
partnership (including for this purpose any entity, domestic or foreign, treated
as a partnership for U.S. tax purposes) is a beneficial owner of the debentures
or common stock into which the debentures may be converted, the U.S. federal
income tax treatment of a partner in the partnership will generally depend
on
the status of the partner and the activities of the partnership. As a general
matter, income earned through a foreign or domestic partnership is attributed
to
its owners. A holder of the debentures or common stock into which the debentures
may be converted that is a partnership and partners in such partnership should
consult their individual tax advisors about the U.S. federal income tax
consequences of holding and disposing of the debentures and the common stock
into which the debentures may be converted.
Interest
Interest
on the debentures will generally be included in a Holder’s gross income as
ordinary income for U.S. federal income tax purposes at the time it is paid
or
accrued in accordance with the Holder’s regular method of accounting. It is
expected, and this discussion assumes, that the debentures will be issued at
their principal amount for U.S. federal income tax purposes. However, if the
issue price of the debentures is less than their principal amount by more than
a
de minimis amount, a Holder will be required to include such difference in
gross
income as original issue discount, as it accrues, using a constant-yield
method.
In
general, if the terms of a debt instrument entitle a Holder to receive payments
other than fixed periodic interest, the debenture could be subject to special
rules that apply to debt instruments with original issue discount or “contingent
payment debt instruments.” These rules generally require a Holder to accrue
interest income at a rate higher than the stated interest rate on the debenture
and to treat as ordinary income, rather than capital gain, any gain recognized
on a sale, exchange or retirement of a debenture before the resolution of the
contingencies. In certain circumstances, holders of our debentures could receive
payments in excess of stated principal or interest. For example, if we do not
comply with our obligations under the registration rights agreement, such
non-compliance may result in the payment of predetermined additional amounts
in
the manner described in the section “Description of Debentures — Registration
Rights of the Debenture Holders.” Based on our belief that the possibility for
us to make such additional payments is “remote,” we do not believe that the
debentures should be treated as contingent payment debt instruments or as having
original issue discount because of these potential additional payments.
Therefore, for purposes of filing tax or information returns with the IRS,
we
will not treat the debentures as contingent payment debt instruments or as
having original issue discount. Our position in this regard is binding on
Holders unless they disclose their contrary position. In the event that we
pay
additional interest as liquidated damages, Holders would be required to
recognize additional ordinary income.
Certain
matters relating to contingencies
As
discussed in “Description of Debentures - Make-whole premiums,” if a fundamental
change occurs on or before September 1, 2009, we will pay a make-whole premium
on the debentures converted in connection with the fundamental change, payable
in shares of our common stock or the consideration into which our common stock
has been converted or exchanged in connection with the fundamental change.
As a
consequence of the possibility of a make-whole premium payment, the debentures
may be subject to Treasury regulations applicable to debt instruments providing
for one or more contingent payments (the “contingent payment debt instrument
regulations”). For purposes of determining whether the debentures are issued
with “original issue discount” for U.S. federal income tax purposes, we intend
to take the position that as of the issue date, the debentures do not represent
“contingent
payment debt instruments” because we believe that, both separately and in the
aggregate, the likelihood of our making any make-whole premium payments is
remote. Therefore, we intend to take the position that the debentures will
not
be issued with original issue discount. Although the treatment of the make-whole
premium is not entirely clear, we intend to take the position that if we become
obligated to make any make-whole premium payments, such payments will be
includible in a holder’s income in accordance with the holder’s method of
accounting.
If
the
IRS were successfully to assert a contrary position, then the debentures would
be subject to the contingent payment debt instrument regulations, and holders
may be required to include in gross income interest in excess of the coupon
amount of interest received periodically over the term of the debentures as
it
accrues, regardless of the holder’s method of tax accounting, which may result
in the recognition of interest income before the receipt of cash in respect
of
such interest income. In addition, in such event, any gain on the sale,
exchange, redemption, retirement or other taxable disposition of a debenture
(including any gain realized on the conversion of a debenture) may be
recharacterized as ordinary income. Holders should consult their tax advisors
regarding the tax consequences of the debentures being treated as contingent
payment debt instruments.
The
remainder of this discussion assumes that the debentures do not represent
“contingent payment debt instruments.”
Conversions
of debentures into common stock
A
Holder
generally will not recognize any income, gain or loss upon conversion of a
debenture into common stock except that the fair market value of common stock
received with respect to accrued interest will be taxed as a payment of interest
as described above under “Interest,” and except with respect to cash received in
lieu of a fractional share of common stock. Cash received in lieu of a
fractional share of common stock should generally be treated as a payment in
exchange for such fractional share rather than as a dividend. Gain or loss
recognized on the receipt of cash paid in lieu of such fractional share
generally will equal the difference between the amount of cash received and
the
amount of tax basis allocable to the fractional share. The adjusted tax basis
of
shares of common stock received on conversion will equal the adjusted tax basis
of the debenture converted (increased by the amount of income recognized upon
conversion with respect to accrued interest, and reduced by the portion of
adjusted tax basis allocated to any fractional share of common stock exchanged
for cash). The holding period of such common stock received on conversion will
generally include the period during which the converted debentures were held
prior to conversion, except that the holding period of any common stock received
with respect to accrued interest will commence on the date after
conversion.
If
a
Holder surrenders a debenture for conversion and we deliver a combination of
shares of common stock and cash, the tax treatment to the Holder is uncertain.
A
Holder may be required to recognize any gain (but not loss) realized, but only
to the extent such gain does not exceed the amount of cash received (other
than
any cash received in lieu of a fractional share or attributable to accrued
but
unpaid interest, as discussed above). In such case, a Holder’s basis in the
common stock received in the conversion (excluding any shares of common stock
attributable to accrued but unpaid interest) would be equal to such holder’s
adjusted tax basis in the debenture, reduced by any cash received in the
conversion (other than any cash received in lieu of a fractional share or
attributable to accrued but unpaid interest) and increased by the amount of
any
gain recognized on the conversion (other than gain with respect to a fractional
share). Holders should consult their tax advisors regarding the proper treatment
to them of the receipt of a combination of cash and common stock upon a
conversion of a debenture.
Adjustments
to the conversion price
The
conversion price of the debentures is subject to adjustment under certain
circumstances. Section 305 of the Code and the Treasury regulations issued
thereunder may treat the holders of the debentures as having received a
constructive distribution, resulting in ordinary income to the extent of our
current and/or accumulated earnings and profits, if, and to the extent that,
certain adjustments in the conversion price (particularly an adjustment to
reflect a taxable dividend to holders of common stock) increase the
proportionate interests of the holders of debentures in our assets or earnings
and profits, whether or not such Holder ever exercises its conversion privilege.
Therefore, Holders may recognize income in the event of a deemed distribution
even though they may not receive any cash or property. Moreover, if there is
not
a full adjustment to the conversion ratio of the debentures to reflect a stock
dividend
or other event increasing the proportionate interest of the holders of
outstanding common stock in our assets or earnings and profits, then such
increase in the proportionate interest of the holders of outstanding common
stock generally will be treated as a taxable distribution to such holders to
the
extent of our current and/or accumulated earnings and profits. Adjustments
to
the conversion price made pursuant to a bona fide reasonable adjustment formula
that has the effect of preventing dilution in the interest of the holders of
the
debt instruments, however, will generally not be considered to result in a
constructive dividend distribution. It is unclear how the adjustment to the
conversion price for conversions made on or after September 1, 2006 and before
March 1, 2009 should be treated for purposes of determining whether there is
a
constructive distribution pursuant to Section 305 as described above. It is
also
unclear whether any constructive distribution would be eligible for the
preferential rates of U.S. federal income tax applicable to certain dividends
received by non-corporate holders. It is also unclear whether a corporate holder
would be entitled to claim the dividends received deduction with respect to
a
constructive dividend.
Sale,
exchange or other taxable disposition of the debentures
Each
Holder generally will recognize gain or loss upon the sale, exchange (other
than
by exercise of the conversion privilege) or other taxable disposition of
debentures measured by the difference (if any) between (a) the amount of cash
and the fair market value of any property received (except to the extent that
such cash or other property is attributable to the payment of accrued interest
not previously included in gross income, which amount will be taxable as
ordinary income) and (b) such holder’s adjusted tax basis in the debentures. Any
such gain or loss recognized on the sale, exchange or other taxable disposition
of a debenture generally will be capital gain or loss and will be long-term
capital gain or loss if the debenture has been held for more than one year
at
the time of the sale or exchange. In general, the maximum U.S. federal income
tax rate for non-corporate taxpayers is currently 15% for long-term capital
gain
that is recognized before January 1, 2009 and 35% for short-term capital gain.
For corporate taxpayers, both long-term and short-term capital gains are subject
to a maximum tax rate of 35%. For both corporate and non-corporate taxpayers,
the deductibility of capital losses is subject to certain
limitations.
Dividends
Distributions,
if any, paid on the common stock, to the extent made from our current and/or
accumulated earnings and profits, as determined under U.S. federal income tax
principles, will be included in a Holder’s gross income as dividends taxable as
ordinary income (subject to a possible dividends received deduction in the
case
of corporate holders) when received. In general, dividends paid to a
non-corporate Holder in taxable years beginning before January 1, 2009 are
taxable at a maximum rate of 15% provided that such holder (a) holds the shares
for more than 60 days during the 120 day period beginning 60 days before the
ex-dividend date and (b) meets other holding period requirements. To the extent,
if any, that a Holder receives distributions on shares of common stock that
would otherwise constitute dividends for U.S. federal income tax purposes but
that exceed our current and accumulated earnings and profits, such distributions
will be treated first as a non-taxable return of capital, reducing the Holder’s
basis in the shares of common stock. Any distributions in excess of the Holder’s
basis in the shares of common stock generally will be treated as capital
gains.
Sales
of common stock
Gain
or
loss realized on the sale, exchange or other taxable disposition of common
stock
will equal the difference between (a) the amount realized on such sale, exchange
or other taxable disposition and (b) the Holder’s adjusted tax basis in such
common stock. Such gain or loss generally will be capital gain or loss, and
will
be long-term capital gain or loss if the Holder has held the common stock for
more than one year. In general, the maximum U.S. federal income tax rate for
non-corporate taxpayers is currently 15% for long-term capital gain that is
recognized before January 1, 2009 and 35% for short-term capital gain. For
corporate taxpayers, both long-term and short-term capital gains are subject
to
a maximum tax rate of 35%. For both corporate and non-corporate taxpayers,
the
deductibility of capital losses is subject to certain limitations.
Information
reporting and backup withholding
A
Holder
of debentures or common stock may be subject to “backup withholding” at a rate
currently of 28% with respect to certain “reportable payments,” including
interest payments, dividend payments, proceeds from the
disposition
of the debentures or common stock to or through a broker and, under certain
circumstances, principal payments of the debentures. These backup withholding
rules apply if the Holder, among other things, (a) fails to furnish a social
security number or other taxpayer identification number (TIN) certified under
penalties of perjury within a reasonable time after the request therefor, (b)
fails to report properly interest or dividends, (c) under certain circumstances,
fails to provide a certified statement, signed under penalties of perjury,
that
the TIN furnished is the correct number and that such holder is not subject
to
backup withholding or if (d) the IRS provides notification that the Holder
has
furnished us with an incorrect TIN. Any amount withheld from a payment to a
Holder under the backup withholding rules is creditable against the Holder’s
U.S. federal income tax liability, provided that the required information is
furnished to the IRS. Backup withholding will not apply, however, with respect
to payments made to certain Holders, including corporations and tax-exempt
organizations, provided their exemptions from backup withholding are properly
established.
We
will
report to the Holders of debentures and common stock and to the IRS the amount
of our “reportable payments” for each calendar year and the amount of tax
withheld, if any, with respect to such payments.
The
preceding discussion of certain U.S. federal income tax consequences is intended
for general information only and does not constitute tax advice. Accordingly,
each investor should consult its own tax adviser as to particular tax
consequences to it of purchasing, holding and disposing of the debentures and
the common stock, including the applicability and effect of any state, local
or
foreign tax laws, and of any proposed changes in applicable
laws.
Prospective
investors are hereby notified that: (a) any discussion of U.S. federal tax
issues in this confidential private prospectus is not intended or written to
be
relied upon, and cannot be relied upon for the purpose of avoiding penalties
that may be imposed under the code; (b) such discussion is included in this
confidential private prospectus in connection with the promotion or marketing
(within the meaning of circular 230) of the sale of debentures; and (c)
prospective investors should seek advice based on their particular circumstances
from an independent tax advisor.
General
The
Certificate of Incorporation and By-laws of the Company provide for the division
of the Board of Directors into three classes, each class consisting as nearly
as
possible of one-third of the whole. The term of office of one class of directors
expires each year; with each class of directors elected for a term of three
years and until the shareholders elect their qualified successors.
The
Company’s By-laws provide that the Board of Directors, by resolution from time
to time, may fix the number of directors that shall constitute the whole Board
of Directors. The By-laws presently provide that the number of directors may
consist of not less than 3 nor more than 13. The Board of Directors currently
has set the number of directors at 13.
Series
2 Preferred
The
terms
of the Series 2 Preferred provide that if and so long as at least 140,000 shares
of Series 2 Preferred are outstanding, whenever dividends on the Series 2
Preferred are in arrears and unpaid in an amount equal to at least six quarterly
dividends:
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the
number of members of the Board of Directors of the Company shall
be
increased by two effective as of the time of election of such directors;
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the
Company shall, upon the written request of the record holder of 10%
of the
shares of Series 2 Preferred, call a special meeting of the Series
2
Preferred holders for the purpose of electing such two additional
directors; and
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the Series 2 Preferred holders have the exclusive right to vote for and elect such two additional directors. |
In
March
2002, the holders of the Series 2 Preferred elected Mr. Allen Ford and Mr.
Grant
Donovan to serve as members of the Board of Directors pursuant to the terms
of
the Series 2 Preferred.
The
terms
of the Series 2 Preferred provide that the right of the holders of the Series
2
Preferred to vote for such two additional directors shall terminate, subject
to
re-vesting in the event of a subsequent similar arrearage, when all cumulative
and unpaid dividends on the Series 2 Preferred have been declared and set apart
for payment. Also, pursuant to the terms of the Series 2 Preferred, the term
of
office for such directors will terminate immediately upon the termination of
the
right of the Series 2 Preferred holders to vote for such directors, subject
to
the requirements of Delaware law. The Series 2 Preferred holders have the right
to remove without cause at any time and replace either of the two directors
that
the Series 2 Preferred holders have elected.
Directors
Elected by the Holders of Common Stock and Voting Preferred
Stock
Raymond
B. Ackerman,
age 84.
Mr. Ackerman first became a director in 1993. His term will expire in 2008.
From
1972 until his retirement in 1992, Mr. Ackerman served as Chairman of the Board
and President of Ackerman McQueen, Inc., the largest advertising and public
relations firm headquartered in Oklahoma. He currently serves as Chairman
Emeritus of the firm. He retired as a Rear Admiral in the United States Naval
Reserve. He is a graduate of Oklahoma City University, and in 1996, was awarded
an honorary doctorate from the school. He was elected to the Oklahoma Commerce
and Industry Hall of Fame in 1993.
Robert
C. Brown, M.D.,
age 75.
Dr. Brown first became a director in 1969. His term will expire in 2009. Dr.
Brown has practiced medicine for many years and is Vice President and Treasurer
of Plaza Medical Group, P.C. and President and Chief Executive Officer of
ClaimLogic L.L.C. Dr. Brown received both his undergraduate and medical degrees
from Tufts University after which he spent two years in the United States Navy
as a doctor and over three years at the Mayo Clinic. Dr. Brown is also an
adjunct professor at University of Oklahoma Medical School.
Charles
A. Burtch,
age 71.
Mr. Burtch first became a director in 1999. His term will expire in 2007. Mr.
Burtch was formerly Executive Vice-President and West Division Manager of
BankAmerica, where he managed BankAmerica’s asset-based lending division for the
western third of the United States. He retired in 1998 and has since been
engaged as a private investor. Mr. Burtch is a graduate of Arizona State
University.
Barry
H. Golsen, J.D.,
age 56.
Mr. Golsen first became a director in 1981. His term will expire in 2009. Mr.
Golsen was elected President of the Company in 2004. Mr. Golsen has served
as
our Vice Chairman of the Board of Directors since August 1994, and has been
the
President of our Climate Control Business for more than five years. Mr. Golsen
also serves as a director of the Oklahoma branch of the Federal Reserve Bank.
Mr. Golsen has both his undergraduate and law degrees from the University of
Oklahoma.
Jack
E. Golsen,
age 78.
Mr. Golsen first became a director in 1969. His term will expire in 2007. Mr.
Golsen, founder of the Company, is our Chairman of the Board of Directors and
Chief Executive Officer and has served in that capacity since our inception
in
1969. Mr. Golsen served as our President from 1969 until 2004. During 1996,
he
was inducted into the Oklahoma Commerce and Industry Hall of Honor as one of
Oklahoma’s leading industrialists. Mr. Golsen has a Bachelor of Science degree
from the University of New Mexico in biochemistry. Mr. Golsen is a Trustee
of
Oklahoma City University.
David
R. Goss,
age 66.
Mr. Goss first became a director in 1971. His term will expire in 2009. Mr.
Goss, a certified public accountant, is our Executive Vice President of
Operations and has served in substantially the same capacity for more than
five
years. Mr. Goss is a graduate of Rutgers University.
Bernard
G. Ille, age
80.
Mr. Ille first became a director in 1971. His term will expire in 2008. Mr.
Ille
served as President and Chief Executive Officer of United Founders Life from
1966 to 1988. He served as President and Chief Executive Officer of First Life
Assurance Company from 1988, until it was acquired by another company in 1994.
During his tenure as President of these two companies, he served as Chairman
of
the Oklahoma Guaranty Association for ten years and was President of the
Oklahoma Association of Life Insurance Companies for two terms. He is a director
of Landmark Land Company, Inc., which was the parent company of First Life.
He
is also a director
for Quail Creek Bank, N.A. Mr. Ille is currently President of BML Consultants
and a private investor. He is a graduate of the University of
Oklahoma.
Donald
W. Munson, age
74.
Mr. Munson first became a director in 1997. His term will expire in 2008. From
1988, until his retirement in 1992, Mr. Munson served as President and Chief
Operating Officer of Lennox Industries. Prior to 1998, he served as Executive
Vice President of Lennox Industries’ Division Operations, President of Lennox
Canada and Managing Director of Lennox Industries’ European Operations. Prior to
joining Lennox Industries, Mr. Munson served in various capacities with the
Howden Group, a company located in Scotland, and The Trane Company, including
serving as the managing director of various companies within the Howden Group
and Vice President Europe for The Trane Company. He is currently a consultant.
Mr. Munson is a resident of England. He has degrees in mechanical engineering
and business administration from the University of Minnesota.
Horace
G. Rhodes,
age 79.
Mr. Rhodes first became a director in 1996. His term will expire in 2007. Mr.
Rhodes is the Chairman of the law firm of Kerr, Irvine, Rhodes & Ables and
has served in such capacity and has practiced law for many years. From 1972
until 2001, he served as Executive Vice President and General Counsel for the
Association of Oklahoma Life Insurance Companies and since 1982 served as
Executive Vice President and General Counsel for the Oklahoma Life and Health
Insurance Guaranty Association. Mr. Rhodes received his undergraduate and law
degrees from the University of Oklahoma.
Tony
M. Shelby, age
65.
Mr. Shelby first became a director in 1971. His term will expire in 2008. Mr.
Shelby, a certified public accountant, is our Executive Vice President of
Finance and Chief Financial Officer, a position he has held for more than five
years. Prior to becoming our Executive Vice President of Finance and Chief
Financial Officer, he served as Chief Financial Officer of a subsidiary of
the
Company and was with the accounting firm of Arthur Young & Co., a
predecessor to Ernst & Young LLP. Mr. Shelby is a graduate of Oklahoma City
University.
John
A. Shelley,
age 55.
Mr. Shelley first became a director in 2005. His term will expire in 2009.
Mr.
Shelley is the President and Chief Executive Officer of The Bank of Union (“Bank
of Union”) located in Oklahoma. He has held this position since 1997. Prior to
1997, Mr. Shelley held various senior level positions in financial institutions
in Oklahoma including the position of President of Equity Bank for Savings,
N.A., a savings and loan that was owned by the Company prior to 1994. Mr.
Shelley is a graduate of the University of Oklahoma.
Directors
Elected by the Holders of Series 2 Preferred
Grant
J. Donovan,
age 50.
Mr. Donovan first became a director in 2002. Mr. Donovan is President and
founder of Galehead, Inc., a company specializing on the collections of accounts
receivable in the international maritime trade business. Prior to forming
Galehead, Inc., Mr. Donovan was a partner in a real estate development firm
specializing in revitalizing functionally obsolete industrial buildings. Mr.
Donovan received his MBA from Stanford University and his undergraduate degree
in Civil Engineering from the University of Vermont. He currently is on the
board of directors of EngenderHealth, an international aid organization
(established over 50 years ago), focused on improving women’s
healthcare.
N.
Allen Ford,
age 64.
Mr. Ford first became a director in 2002. Mr. Ford joined the University of
Kansas in 1976 where his teaching and research duties focus mainly on taxation.
At the University of Kansas, he has won several teaching awards and is the
Larry
D. Horner/KPMG Peat Marwick Distinguished Professor of Accounting. Mr. Ford
teaches the following courses in taxation: individual, corporate, partnership,
S
corporation, gift and estate tax. He is active in professional organizations
such as the American Taxation Association and the American Accounting
Association. He received his Ph.D. in Accounting from the University of
Arkansas.
Family
Relationships
Jack
E.
Golsen is the father of Barry H. Golsen and the brother-in-law of Dr. Robert
C.
Brown. Dr. Robert C. Brown is the uncle of Barry H. Golsen. David M. Shear
is
the nephew by marriage to Jack E. Golsen and son-in-law of Dr. Robert C.
Brown.
Section
16(a) Beneficial Ownership Reporting Compliance
Based
solely on a review of copies of the Forms 3, 4 and 5 and amendments thereto
furnished to the Company with respect to 2006, or written representations that
no such reports were required to be filed with the Securities and Exchange
Commission (“SEC”), the Company believes that during 2006 all directors and
officers of the Company and beneficial owners of more than 10% of any class
of
equity securities of the Company registered pursuant to Section 12 of the
Exchange Act filed their required Forms 3, 4, or 5, as required by Section
16(a)
of the Exchange Act of 1934, as amended (the “Exchange Act”), on a timely basis,
except for Mr. Mike Tepper, who inadvertently filed one late Form 5 to report
12
transactions that were completed in 2005, and one late Form 4 to report 13
transactions completed in 2006.
Code
of Ethics
The
Chief
Executive Officer, the Chief Financial Officer, the principal accounting
officer, and the controller of the Company and each of the our subsidiaries,
or
persons performing similar functions, are subject to our Code of Ethics.
We
and
each of our subsidiary companies have adopted a Statement of Policy Concerning
Business Conduct applicable to our employees. Our
Code
of Ethics and Amended Statement of Policy Concerning Business Conduct are
available on our website at http://www.lsb-okc.com. We will post any amendments
to these documents, as well as any waivers that are required to be disclosed
pursuant to the rules of either the Securities and Exchange Commission or the
AMEX, on our website.
Audit
Committee
The
Company has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the
Audit Committee are Messrs. Bernard Ille (Chairman), Charles Burtch, Horace
Rhodes, and Ray Ackerman. The Board has determined that each member of the
Audit
Committee is independent, as defined in the listing standards of the AMEX as
of
the Company’s fiscal year end. During 2006, the Audit Committee had five
meetings.
Audit
Committee Financial Expert
While
the
Board of Directors endorses the
effectiveness of our Audit
Committee, its membership does not presently include a director that qualifies
for designation as an “Audit Committee Financial Expert.” However, each of the
current members of the Audit Committee is
able to
read and understand fundamental
financial statements and at least one of its members is “financially
sophisticated” as defined by applicable AMEX rules. The Board of Directors
believes that the background and experience of each member of the Audit
Committee is sufficient to fulfill the duties of the Audit Committee. For these
reasons, although members of our Audit Committee are not professionally engaged
in the practice of accounting or auditing, our Board of Directors has concluded
that the ability of our Audit Committee to perform its duties is not impaired
by
the absence of an “Audit Committee Financial Expert.”
Compensation
and Stock Option Committee
The
Compensation and Stock Option Committee (the “Committee”) has two members and
met four times during 2006. The Committee is comprised of non-employee,
independent directors in accordance with the rules of the AMEX. The Board has
adopted a Compensation and Stock Option Committee Charter which governs the
responsibilities of the Committee. This charter is available on the Company’s
website at www.lsb-okc.com,
and is
also available from the Company upon request.
The
Committee’s responsibilities include, among other duties, the responsibility
to:
|
·
|
establish
the base salary, incentive compensation and any other compensation
for the
Company’s executive officers;
|
|
·
|
administer the Company’s management incentive and stock-based compensation plans, non-qualified death benefits, salary continuation and welfare plans, and discharge the duties imposed on the Committee by the terms of those plans; and |
|
·
|
perform
other functions or duties deemed appropriate by the
Board.
|
Decisions
regarding non-equity compensation of non-executive officers of the Company
and
the executive officers of the Company named in the Summary Compensation Table
(the “named executive officers”) other than the Chief Executive Officer and the
President, are made by the Company’s Chief Executive Officer and presented for
approval or modification by the Committee.
The
agenda for meetings of the Committee is determined by its Chairman with the
assistance of the Company’s Chief Executive Officer. Committee meetings are
regularly attended by the Chief Executive Officer. At each Committee meeting,
the Committee also meets in executive session without the Chief Executive
Officer. The Committee’s Chairman reports to the Board the Committee’s
recommendations on compensation for the Chief Executive Officer and the
President. The Chief Executive Officer may be delegated authority to fulfill
certain administrative duties regarding the compensation programs.
The
Committee has authority under its charter to retain, approve fees for, and
terminate advisors, consultants and agents as it deems necessary to assist
in
the fulfillment of its responsibilities. If an outside consultant is engaged,
the Committee reviews the total fees paid to such outside consultant by the
Company to ensure that the consultant maintains its objectivity and independence
when rendering advice to the Committee. For 2006, no outside consultants were
engaged by the Committee.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Overview
of Compensation Program
The
Company’s long-term success depends on our ability to efficiently operate our
facilities, to continue to develop our product lines and technologies, and
to
focus on developing our product markets. To achieve these goals, it is important
that we be able to attract, motivate, and retain highly talented individuals
who
are committed to the Company’s values and goals.
The
Committee of the Board has responsibility for the establishment in consultation
with management, of the Company’s compensation philosophy for its senior
executive officers and the implementation and oversight of a compensation
program consistent with the philosophy. This group of senior executive officers
includes the named executive officers, as well as other executives of the
Company.
A
primary
objective of the Committee is to ensure that the compensation paid to the senior
executive officers is fair, reasonable, and competitive and provides incentives
for superior performance. The Committee is responsible for approval of all
decisions for the direct compensation, including the base salary and bonuses,
stock options and other benefit programs for the Company’s senior executive
officers, including the named executive officers.
In
general, the day to day administration of savings, health and welfare plans
and
policies are handled by a team of the legal and finance department employees.
The Committee (or Board) remains responsible for key policy changes outside
of
the day to day requirements necessary to maintain these plans and
policies.
Compensation
Philosophy and Objectives
The
Committee believes that the most effective executive compensation program
rewards the executive’s achievements and contribution towards the Company
achieving its long-term strategic goals. The Committee values both personal
contribution and teamwork as factors to be rewarded. The Committee believes
that
it is important to align executives’ interests with those of stockholders
through the use of stock option incentive programs. The Committee does not
believe that executive compensation should be tied to specific numeric or
formulaic financial goals or stock price achievement by the Company. The
Committee recognizes that, given the volatility of the
market
in
which we do business, the economic performance of the Company in any given
time
frame may not be an accurate measurement of the senior executive officer’s
performance for the Company. The Committee evaluates both performance and
compensation to ensure that the Company maintains its ability to attract and
retain highly talented employees in key positions, and that compensation
provided to key employees will remain competitive relative to the other senior
executive officers within the Company. The Company does not have a defined
benefit or retirement plan for its executives. This factor is considered when
setting the base compensation for senior executive officers. The Committee
believes that executive compensation packages should include both cash and
stock-based compensation, as well as other benefit programs to encourage senior
executive officers to remain with the Company and have interests aligned with
those of the Company. Based on the foregoing, the Committee bases it executive
compensation program on the following criteria:
|
·
|
Compensation
should be based on the level of job responsibility, executive performance,
and Company performance.
|
|
·
|
Compensation
should enable the Company to attract and retain key
talent.
|
|
·
|
Compensation
should be competitive with compensation offered by other companies
that
compete with us for talented
individuals.
|
|
·
|
Compensation
should reward performance.
|
|
·
|
Compensation
should motivate executives to achieve the Company’s strategic and
operational goals.
|
Setting
Executive Compensation
The
Committee sets annual cash and non-cash executive compensation to reward the
named executive officers for achievement and to motivate the named executive
officers to achieve long-term business objectives. The Committee is unable
to
use peer group comparisons in determining the compensation package because
of
the diverse nature of the Company’s lines of business. Although the Committee
has not engaged outside consultants to assist in conducting its annual review
of
the total compensation program, it may do so in the future.
Role
of Executive Officers in Compensation Decisions
The
Chief
Executive Officer annually reviews the performance of each of the named
executive officers of the Company (other than the Chief Executive Officer and
the President) and presents to the Committee recommendations with respect to
salary, bonuses and other benefit items. The Committee considers and reviews
such recommendations and exercises its discretion in accepting or modifying
the
recommended compensation. In determining compensation for the Chief Executive
Officer and the President of the Company, the Committee reviews the
responsibilities and performance of each of them. Such review includes
interviewing both the Chief Executive Officer and the President and
consideration of the Committee’s interaction with the Chief Executive Officer
and the President during the applicable year.
2006
Executive Compensation Components
For
the
fiscal year ended December 31, 2006, the principal components of
compensation for the named executive officers were:
|
·
|
base
salary;
|
|
·
|
cash
bonus;
|
|
·
|
salary
continuation and death benefit programs;
and
|
|
·
|
perquisites
and other personal benefits.
|
Base
Salary
The
Company provides the named executive officers and other senior executive
officers with base salary to compensate them for services rendered during the
year. Base salaries are determined for the named executive officers in the
discretion of the Committee based upon the recommendations of the Chief
Executive Officer’s assessment of the executive’s compensation, both
individually and relative to other senior executive officers of the Company
and
based upon an assessment of the individual performance of the executive. In
determining the base salary for the Chief Executive Officer and the President,
the Committee exercises its judgment based on its
interactions
with such senior executive officers and the Committee’s assessment of such
officers’ contribution to the Company’s performance and other leadership
achievements.
Bonuses
The
Committee may award cash bonuses to the named executive officers to reward
outstanding performance and the achievement of individual and Company goals.
No
bonus is guaranteed and there is no defined range of bonus amounts that the
Committee may award. Bonus awards are made at the Committee’s discretion based
upon an assessment of an individual’s overall contribution to the Company.
Death
Benefit and Salary Continuation Plans
The
Company sponsors non-qualified arrangements to provide a death benefit to the
designated beneficiary of certain key employees (including certain of the named
executive officers) in the event of such executive’s death. The Company also has
a non-qualified arrangement with certain key employees (including certain of
the
named executive officers) of the Company and its subsidiaries to provide
compensation to such individuals in the event that they are employed by the
Company or a subsidiary of the Company at age 65.
Attributed
costs of the personal benefits described above for the named executive officers
for the fiscal year ended December 31, 2006, are discussed in footnote (1)
and
included in column (i) of the “Summary Compensation Table.”
The
Committee believes that the Death Benefit and Salary Continuation Plans are
significant factors in:
|
·
|
enabling
the Company to retain its named executive
officers;
|
|
·
|
encouraging
our named executive officers to render outstanding service; and
|
|
·
|
maintaining
competitive levels of total compensation.
|
Employment
Agreement
We
have
no employment agreements with our named executive officers, except with Jack
E.
Golsen, our Chief Executive Officer. The terms of Mr. Golsen’s employment
agreement are described under “Employment Agreement” beginning on page 56 of
this prospectus. We believe that Mr. Golsen’s employment agreement promotes
stability in our senior management and encourages Mr. Golsen to provide superior
service to us. The Committee did not issue a notice of termination under the
employment agreement prior to March 21, 2007, and as a result, the term of
the
employment agreement was automatically extended from March 21, 2008, to March
21, 2011.
Perquisites
and Other Personal Benefits
The
Company and the Committee believe that perquisites are necessary and appropriate
to enable the Company to attract and retain superior executives as part of
total
compensation. Accordingly, the Company and the Committee provide perquisites
that are reasonable and consistent with the Company’s overall compensation
program. The Committee periodically reviews the levels of perquisites provided
to the named executive officers. The Company currently provides the named
executive officers with the use of the Company’s automobiles, cell phones that
are used primarily for business purposes, and pays the country club dues for
certain of its executive officers. The executive officers are expected to use
the country club in large part for business purposes.
The
Company has entered into Change of Control Severance Agreements with certain
key
employees, including the named executive officers. The Severance Agreements
are
designed to promote stability and continuity of senior management. Information
regarding applicable payments under such agreements for the named executive
officers is provided under the heading “Potential Payments Upon Termination or
Change-In-Control.”
Tax
and Accounting Implications
Deductibility
of Executive Compensation - As part of its role, the Committee reviews and
considers the deductibility of executive compensation under Section 162(m)
of
the Internal Revenue Code, which provides that
the
Company may not deduct compensation of more than $1,000,000 that is paid to
certain individuals. The Company believes that compensation paid is fully
deductible for federal income tax purposes. For 2006, there was no payment
of
compensation in excess of $1,000,000 for any named executive
officer.
Accounting
for Stock-Based Compensation - Beginning on January 1, 2006, the Company began
accounting for stock-based payments, including its incentive and nonqualifed
stock options in accordance with the requirements of FASB Statement
123(R).
The
Compensation and Stock Option Committee of the Company has reviewed and
discussed the Compensation Discussion and Analysis with management and, based
on
such review and discussions, the Compensation and Stock Option Committee
recommended to the Board that the Compensation Discussion and Analysis be
included herein.
Submitted
by the Compensation and Stock Option Committee of the Company’s Board of
Directors.
Bernard
G. Ille
Horace
G.
Rhodes
Summary
Compensation Table
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|||||||||
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan Compensation
($)
|
Change
in
Pension
Value
and Nonqualified Deferred Compensation Earnings
($)
|
All
Other Compensation
($) (1) |
Total
($)
|
|||||||||
|
Jack
E. Golsen,
Chairman
of the Board
of
Directors and
Chief
Executive Officer
|
2006
|
497,400
|
-
|
-
|
-
|
-
|
-
|
615,168
|
1,112,568
|
|||||||||
|
Tony
M. Shelby,
Executive
Vice President
of
Finance and Chief Financial Officer
|
2006
|
245,000
|
40,000
|
-
|
-
|
-
|
-
|
22,428
|
307,428
|
|||||||||
|
Barry
H. Golsen,
Vice
Chairman of the Board of Directors, President, and President of the
Climate Control Business
|
2006
|
413,600
|
40,000
|
-
|
-
|
-
|
-
|
9,515
|
463,115
|
|||||||||
|
David
R. Goss,
Executive
Vice President
of
Operations
|
2006
|
233,000
|
35,000
|
-
|
-
|
-
|
-
|
14,146
|
282,146
|
|||||||||
|
David
M. Shear,
Senior
Vice President and General Counsel
|
2006
|
225,000
|
35,000
|
-
|
-
|
-
|
-
|
4,628
|
264,628
|
(1)
As
discussed below under “1981 Agreements and 2005 Agreement,” the Company entered
into individual death benefit agreements in 1981 and a death benefit agreement
in 2005. Compensation for the death benefit is the greater of:
| · |
the
expense incurred associated with our accrued death benefit liability
or
|
| · |
the
prorata portion of life insurance premium expense to fund the undiscounted
death benefit.
|
Amounts
accrued under these agreements are not paid until the death of the named
executive officer.
As
discussed below under “1992 Agreements”, the Company entered into benefit
agreements in 1992 which include a death benefit until the employee reaches
age
65 or benefits for life commencing when the employee reaches age 65.
Compensation for these benefits is the greater of:
|
·
|
the
expense incurred associated with our accrued benefit liability
or
|
|
·
|
the
prorata portion of life insurance premium expense to fund the undiscounted
death benefit.
|
All
other
compensation includes compensation relating to these agreements and perquisites,
as follows:
|
1981
Agreements |
1992
Agreements |
2005
Agreements |
Automobiles
|
Country
Club Dues |
Cell
Phones |
Total
|
|
|
Jack
E. Golsen
|
$185,584
|
$-
|
$422,645
|
$4,875
|
$1,618
|
$446
|
$615,168
|
|
Tony
M. Shelby
|
$6,416
|
$9,825
|
$-
|
$3,175
|
$2,667
|
$345
|
$22,428
|
|
Barry
H. Golsen
|
$477
|
$3,951
|
$-
|
$4,375
|
$-
|
$712
|
$9,515
|
|
David
R. Goss
|
$868
|
$9,953
|
$-
|
$2,925
|
$-
|
$400
|
$14,146
|
|
David
M. Shear
|
$-
|
$1,146
|
$-
|
$2,925
|
$-
|
$557
|
$4,628
|
The
Company did not grant plan-based awards to the named executive officers during
2006.
Employment
Agreement
We
have
an employment agreement with Jack E. Golsen, which requires the Company to
employ Mr. Golsen as an executive officer of the Company. Pursuant to an
amendment to the employment agreement approved by the Board of Directors, the
term will be automatically renewed for up to three additional three-year
periods. The employment agreement may be terminated by either party by written
notice at least one year prior to the expiration of the then current term.
Since
a notice of termination under the employment agreement was not issued prior
to
March 21, 2007, the term of the employment agreement was automatically extended
from March 21, 2008 to March 21, 2011. Under the terms of such employment
agreement, Mr. Golsen shall:
|
·
|
be
paid an annual base salary at his 1995 base rate, as adjusted from
time to
time by the Compensation and Stock Option Committee, but such shall
never
be adjusted to an amount less than Mr. Golsen’s 1995 base salary,
|
|
·
|
be
paid an annual bonus in an amount as determined by the Compensation
and
Stock Option Committee, and
|
|
·
|
receive
from the Company certain other fringe benefits (vacation; health
and
disability insurance).
|
The
employment agreement provides that Mr. Golsen’s employment may not be
terminated, except:
|
·
|
upon
conviction of a felony involving moral turpitude after all appeals
have
been exhausted (“Conviction”),
|
|
·
|
Mr.
Golsen’s serious, willful, gross misconduct or willful, gross negligence
of duties resulting in material damage to the Company and its
subsidiaries, taken as a whole, unless Mr. Golsen believed, in good
faith,
that such action or failure to act was in the Company’s or its
subsidiaries’ best interest (“Misconduct”), and
|
|
·
|
Mr.
Golsen’s death.
|
However,
no termination for a Conviction or Misconduct may occur unless and until the
Company has delivered to Mr. Golsen a resolution duly adopted by an affirmative
vote of three-fourths of the entire membership of the Board of Directors at
a
meeting called for such purpose after reasonable notice given to Mr. Golsen
finding, in good faith, that Mr. Golsen violated such item.
If
Mr.
Golsen’s employment is terminated for reasons other than due to a Conviction or
Misconduct, then he shall, pursuant to the employment agreement, in addition
to
his other rights and remedies, receive and the Company shall pay to Mr.
Golsen:
|
·
|
a
cash payment, on the date of termination, a sum equal to the amount
of Mr.
Golsen’s annual base salary at the time of such termination and the amount
of the last bonus paid to Mr. Golsen prior to such termination times
the
number of years remaining under the then current term of the employment
agreement, and
|
|
·
|
provide
to Mr. Golsen all of the fringe benefits that the Company was obligated
to
provide during his employment under the employment agreement for
the
remainder of the term of the employment agreement.
|
If
there
is a change in control (as defined in the severance agreement between Mr. Golsen
and the Company as discussed below under “Severance Agreements”) and within 24
months after such change in control Mr. Golsen is terminated, other than for
Cause (as defined in the severance agreement), then in such event, the severance
agreement between Mr. Golsen and the Company shall be controlling.
In
the
event Mr. Golsen becomes disabled and is not able to perform his duties under
the employment agreement as a result thereof for a period of 12 consecutive
months within any two-year period, the Company shall pay Mr. Golsen his full
salary for the remainder of the term of the employment agreement and thereafter
60% of such salary until Mr. Golsen’s death.
1981
Agreements
During
1981, the Company entered into individual death benefit agreements (the “1981
Agreements”) with certain key employees (including certain of the named
executive officers). As relating to the named executive officers, under the
1981
Agreements, the designated beneficiary of the officer will receive a monthly
benefit for a period of ten years if the officer dies while in the employment
of
the Company or a wholly-owned subsidiary of the Company. The 1981 Agreements
provide that the Company may terminate the agreement as to any officer at
anytime prior to the officer’s death. The Company has purchased life insurance
on the life of each officer covered under the 1981 Agreements to provide a
source of funds for the Company’s obligations under the 1981 Agreements. The
Company is the owner and sole beneficiary of each of the insurance policies
and
the proceeds are payable to the Company upon the death of the
officer.
The
following table sets forth the amounts of annual benefits payable to the
designated beneficiary or beneficiaries of the named executive officer’s under
the 1981 Agreements.
|
Name
of Individual
|
Amount
of Annual
Payment
|
|
Jack
E. Golsen
|
$
|
175,000
|
||
|
Tony
M. Shelby
|
$
|
35,000
|
||
|
Barry
H. Golsen
|
$
|
30,000
|
||
|
David
R. Goss
|
$
|
35,000
|
1992
Agreements
During
1992, the Company entered into individual benefit agreements with certain key
employees of the Company and its subsidiaries (including certain of the named
executive officers) to provide compensation to such individuals in the event
that they are employed by the Company or a subsidiary of the Company at age
65
(the “1992 Agreements”). As relating to the named executive officers, under the
1992 Agreements, the officer is eligible to receive a designated benefit
(“Benefit”) as set forth in the 1992 Agreements. The officer will receive the
Benefit beginning at the age 65 for the remainder of the officer’s life. If
prior to attaining the age 65, the officer dies while in the employment of
the
Company or a subsidiary of the Company, the designated beneficiary of the
officer will receive a monthly benefit (“Death Benefit”) for a period of ten
years. The 1992 Agreements provide that the Company may terminate the agreement
as to any officer at any time and for any reason prior to the death of the
officer. The Company has purchased insurance on the life of each officer covered
under the 1992 Agreements. The
Company
is the owner and sole beneficiary of each insurance policy, and the proceeds
are
payable to the Company to provide a source of funds for the Company’s
obligations under the 1992 Agreements. Under the terms of the 1992 Agreements,
if the officer becomes incapacitated prior to retirement or prior to reaching
age 65, the officer may request the Company to cash-in any life insurance on
the
life of such officer purchased to fund the Company’s obligations under the 1992
Agreements. Jack E. Golsen does not participate in the 1992 Agreements. The
following table sets forth the amounts of annual benefits payable to the named
executive officers under the 1992 Agreements and the net cash surrender value
of
the associated life insurance policies at December 31, 2006.
|
|
Name of Individual |
Amount
of
Annual
Benefit
|
Amount
of
Annual
Death
Benefit
|
Amount
of
Net
Cash
Surrender
Value
|
|
Jack
E. Golsen
|
N/A
|
N/A
|
N/A
|
|||||||
|
Tony
M. Shelby
|
$
|
15,605
|
N/A
|
$
|
43,119
|
|||||
|
Barry
H. Golsen
|
$
|
17,480
|
$
|
11,596
|
$
|
18,201
|
||||
|
David
R. Goss
|
$
|
17,403
|
N/A
|
$
|
43,713
|
|||||
|
David
M. Shear
|
$
|
17,822
|
$
|
7,957
|
$
|
8,023
|
2005
Agreement
During
2005, the Company entered into a death benefit agreement (“2005 Agreement”) with
Jack E. Golsen. This agreement replaced existing benefits that were payable
to
Mr. Golsen under a split dollar insurance policy purchased by the Company on
Mr.
Golsen’s life in 1996 and a second policy purchased in 2002. The 2005 Agreement
provides that, upon Mr. Golsen’s death, the Company will pay to Mr. Golsen’s
family or designated beneficiary $2.5 million to be funded from the net proceeds
received by the Company under certain life insurance policies on Mr. Golsen’s
life that were purchased and are owned by the Company. The life insurance
policies provide an aggregate stated death benefit to the Company, as
beneficiary, of $7 million. The Company is obligated to keep in existence no
less than $2.5 million of the stated death benefit.
401(k)
Plan
The
Board
of Directors adopted an LSB Industries, Inc., Employee Savings Plan (the “401(k)
Plan”) for the employees (including the named executive officers) of the Company
and its subsidiaries, excluding employees covered under union agreements and
certain other employees. As relating to the named executive officers, the 401(k)
Plan is funded by the officer’s contributions. The Company and its subsidiaries
make no contributions to the 401(k) Plan. The amount that an officer may
contribute to the 401(k) Plan equals a certain percentage of the employee’s
compensation, with the percentage based on the officer’s income and certain
other criteria as required under Section 401(k) of the Internal Revenue Code.
The Company or subsidiary deducts the amounts contributed to the 401(k) Plan
from the officer’s compensation each pay period, in accordance with the
officer’s instructions, and pays the amount into the 401(k) Plan for the
officer’s benefit. The salary and bonus set forth in the Summary Compensation
Table above include any amounts contributed during the 2006 fiscal year pursuant
to the 401(k) Plan by the named executive officers.
Outstanding
Equity Awards At December 31, 2006
|
Options
Awards
|
Stock
Awards
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|
Name
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable(1)
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
Option
Exercise Price
($)
|
Option
Expiration Date(1)
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
Market
Value of Shares or Units of Stock That HaveNot Vested
($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested
(#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested
($)
|
|
Jack
E. Golsen
|
176,500
|
-
|
-
|
1.25
|
7/8/2009
|
-
|
-
|
-
|
-
|
|
Tony
M. Shelby
|
100,000
15,000
|
-
-
|
-
-
|
1.25
2.73
|
7/8/2009
11/29/2011
|
-
-
|
-
-
|
-
-
|
-
-
|
|
Barry
H. Golsen
|
55,000
11,250
|
-
-
|
-
-
|
1.25
2.73
|
7/8/2009
11/29/2011
|
-
-
|
-
-
|
-
-
|
-
-
|
|
David
R. Goss
|
100,000
15,000
|
-
-
|
-
-
|
1.25
2.73
|
7/8/2009
11/26/2011
|
-
-
|
-
-
|
-
-
|
-
-
|
|
David
M. Shear
|
85,544
15,000
|
-
-
|
-
-
|
1.25
2.73
|
7/8/2009
11/29/2011
|
-
-
|
-
-
|
-
-
|
-
-
|
(1)
Options expiring on July 8, 2009 were granted on July 8, 1999, and were fully
vested on July 7, 2003. Options expiring on November 29, 2011, were granted
on
November 29, 2001 and were fully vested on November 28, 2005.
|
Option
Exercises and Stock Vested in 2006
|
||||||||
|
Option
Awards
|
Stock
Awards
|
|||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
||||
|
Name
|
Number
of
Shares
Acquired
on
Exercise
(#)
|
Value
Realized
on
Exercise
($)
|
Number
of
Shares
Acquired
on
Vesting
(#)
|
Value
Realized
on
Vesting
($)
|
||||
|
Jack
E. Golsen
|
-
|
-
|
-
|
-
|
||||
|
Tony
M. Shelby
|
85,000
|
410,125
|
-
|
-
|
||||
|
Barry
H. Golsen
|
8,750
|
63,000
|
-
|
-
|
||||
|
David
R. Goss
|
85,000
|
410,325
|
-
|
-
|
||||
|
David
M. Shear
|
64,000
|
351,671
|
-
|
-
|
||||
Potential
Payments Upon Termination or Change-In-Control(1)
The
following table reflects the amount payable to each of the named executive
officers should an event occur as described in the table. The amounts shown
assume that such event occurred as of December 31, 2006.
|
Name and Executive
Benefit
and
Payments
Upon
Separation
|
Voluntary Termination ($)
|
Involuntary Other Than
For
Cause
Termination
($)
|
Involuntary For
Cause Termination
($)
|
Involuntary
Other
Than
For
Cause
Termination
-
Change of
Control
($)
|
Voluntary
For
Good
Reason
Termination
-
Change of Control
($)
|
Disability/ Incapacitation
($)
|
Death ($)
|
|
Jack
E. Golsen:
|
|||||||
|
Salary
|
-
|
621,750
|
-
|
1,464,830
|
1,464,830
|
2,845,128
|
-
|
|
Bonus
|
-
|
125,000
|
-
|
-
|
-
|
-
|
-
|
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
4,250,000
|
|
Other
|
-
|
44,336
|
-
|
-
|
-
|
-
|
44,336
|
|
Tony
M. Shelby:
|
|||||||
|
Salary
|
-
|
-
|
-
|
778,347
|
778,347
|
-
|
-
|
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
350,000
|
|
Other
|
259,043
|
-
|
-
|
-
|
-
|
-
|
|
|
Barry
H. Golsen:
|
|||||||
|
Salary
|
-
|
-
|
-
|
1,253,344
|
1,253,344
|
-
|
-
|
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
415,962
|
|
David
R. Goss:
|
|||||||
|
Salary
|
-
|
-
|
-
|
756,847
|
756,847
|
-
|
-
|
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
350,000
|
|
Other
|
276,708
|
-
|
-
|
-
|
-
|
-
|
-
|
|
David
M. Shear:
|
|||||||
|
Salary
|
-
|
-
|
-
|
669,177
|
669,177
|
-
|
-
|
|
Death
Benefits
|
-
|
-
|
-
|
-
|
-
|
-
|
79,567
|
(1)
This
amount does not include the amount realizable under stock options granted to
the
named executive officers, all of which will be deemed to be fully vested upon
termination or a change in control. See “Outstanding Equity Awards at December
31, 2006.”
Severance
Agreements
We
have
entered into severance agreements with each of the named executive officers
and
certain other officers. Each severance agreement provides (among other things)
that if, within 24 months after the occurrence of a change in control (as
defined) of the Company, the Company terminates the officer’s employment other
than for cause (as defined), or the officer terminates his employment for good
reason (as defined), the Company must pay the officer an amount equal to 2.9
times the officer’s base amount (as defined). The phrase “base amount” means the
average annual gross compensation paid by the Company to the officer and
includable in the officer’s gross income during the most recent five year period
immediately preceding the change in control. If the officer has been employed
by
the Company for less than five years, the base amount is calculated with respect
to the most recent number of taxable years ending before the change in control
that the officer worked for the Company.
The
severance agreements provide that a “change in control” means a change in
control of the Company of a nature that would require the filing of a Form
8-K
with the SEC and, in any event, would mean when:
|
·
|
any
individual, firm, corporation, entity, or group (as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended) becomes
the
beneficial owner, directly or indirectly, of 30% or
more
|
|
of
the combined voting power of the Company’s outstanding voting securities
having the right to vote for the election of directors, except
acquisitions by:
|
| · |
any
person, firm, corporation, entity, or group which, as of the date
of the
severance agreement, has that ownership, or
|
| · |
Jack
E. Golsen, his wife; his children and the spouses of his children;
his
estate; executor or administrator of any estate, guardian or custodian
for
Jack E. Golsen, his wife, his children, or the spouses of his children,
any corporation, trust, partnership, or other entity of which Jack
E.
Golsen, his wife, children, or the spouses of his children own at
least
80% of the outstanding beneficial voting or equity interests, directly
or
indirectly, either by any one or more of the above-described persons,
entities, or estates; and certain affiliates and associates of any
of the
above-described persons, entities, or estates;
|
| · |
individuals
who, as of the date of the severance agreement, constitute the Board
of
Directors of the Company (the “Incumbent Board”) and who cease for any
reason to constitute a majority of the Board of Directors except
that any
person becoming a director subsequent to the date of the severance
agreement, whose election or nomination for election is approved
by a
majority of the Incumbent Board (with certain limited exceptions),
will
constitute a member of the Incumbent Board; or
|
| · |
the
sale by the Company of all or substantially all of its
assets.
|
Except
for the severance agreement with Jack E. Golsen, the termination of an officer’s
employment with the Company “for cause” means termination because of:
| · |
the
mental or physical disability from performing the officer’s duties for a
period of 120 consecutive days or one hundred eighty days (even though
not
consecutive) within a 360 day period;
|
| · |
the
conviction of a felony;
|
| · |
the
embezzlement by the officer of Company assets resulting in substantial
personal enrichment of the officer at the expense of the Company;
or
|
| · |
the
willful failure (when not mentally or physically disabled) to follow
a
direct written order from the Company’s Board of Directors within the
reasonable scope of the officer’s duties performed during the 60 day
period prior to the change in control.
|
The
definition of “Cause” contained in the severance agreement with Jack E. Golsen
means termination because of:
| · |
the
conviction of Mr. Golsen of a felony involving moral turpitude after
all
appeals have been completed; or
|
| · |
if
due to Mr. Golsen’s serious, willful, gross misconduct or willful, gross
neglect of his duties has resulted in material damages to the Company
and
its subsidiaries, taken as a whole, provided that:
|
| · |
no
action or failure to act by Mr. Golsen will constitute a reason for
termination if he believed, in good faith, that such action or failure
to
act was in the Company’s or its subsidiaries’ best interest, and
|
| · |
failure
of Mr. Golsen to perform his duties hereunder due to disability shall
not
be considered willful, gross misconduct or willful, gross negligence
of
his duties for any purpose.
|
The
termination of an officer’s employment with the Company for “good reason” means
termination because of:
| · |
the
assignment to the officer of duties inconsistent with the officer’s
position, authority, duties, or responsibilities during the 60 day
period
immediately preceding the change in control of the Company or any
other
action which results in the diminishment of those duties, position,
authority, or responsibilities;
|
| · |
the
relocation of the officer;
|
| · |
any
purported termination by the Company of the officer’s employment with the
Company otherwise than as permitted by the severance agreement; or
|
| · |
in
the event of a change in control of the Company, the failure of the
successor or parent company to agree, in form and substance satisfactory
to the officer, to assume (as to a successor) or guarantee (as to
a
parent) the severance agreement as if no change in control had
occurred.
|
Except
for the severance agreement with Jack E. Golsen, each severance agreement runs
until the earlier of: (a) three years after the date of the severance agreement,
or (b) the officer’s normal retirement date from the Company; however, beginning
on the first anniversary of the severance agreement and on each annual
anniversary thereafter, the term of the severance agreement automatically
extends for an additional one-year period, unless the Company
gives
notice otherwise at least 60 days prior to the anniversary date. The severance
agreement with Jack E. Golsen is effective for a period of three years from
the
date of the severance agreement; except that, commencing on the date one year
after the date of such severance agreement and on each annual anniversary
thereafter, the term of such severance agreement shall be automatically extended
so as to terminate three years from such renewal date, unless the Company gives
notices otherwise at least one year prior to the renewal date.
Compensation
of Directors
In
2006,
we compensated our non-employee directors for their services as directors on
our
Board. Certain non-employee directors also served on the Board of Directors
of
our subsidiary, ThermaClime, without additional compensation. Directors who
are
employees of the Company receive no compensation for their services as
directors.
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|
Name
|
Fees
Earned
or
Paid
in
Cash
($)
(1)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Chane
in
Pension Value and Nonqualified Deferred Compensation Earnings ($) |
All
Other Compensation
($)
|
Total
($)
|
|
Raymond
B. Ackerman
|
32,500
|
-
|
-
|
-
|
-
|
-
|
32,500
|
|
Robert
C. Brown, M.D.
|
32,000
|
-
|
-
|
-
|
-
|
-
|
32,000
|
|
Charles
A. Burtch
|
32,500
|
-
|
-
|
-
|
-
|
-
|
32,500
|
|
Grant
J. Donovan
|
12,500
|
-
|
-
|
-
|
-
|
-
|
12,500
|
|
N.
Allen Ford
|
12,000
|
-
|
-
|
-
|
-
|
-
|
12,000
|
|
Bernard
G. Ille
|
32,000
|
-
|
-
|
-
|
-
|
-
|
32,000
|
|
Donald
W. Munson
|
55,833
|
-
|
-
|
-
|
-
|
-
|
55,833
|
|
Horace
G. Rhodes
|
32,500
|
-
|
-
|
-
|
-
|
-
|
32,500
|
|
John
A. Shelley
|
32,500
|
- |
-
|
-
|
-
|
-
|
32,500
|
(1)
This
amount includes as to each director, an annual fee of $10,000 for services
as a
director and $500 for each Board meeting attended during 2006. This amount
also
includes the following fees earned during 2006: Mr. Ackerman received $20,000
for his services on the Audit Committee and Public Relations and Marketing
Committee. Dr. Brown received $20,000 for his services on the Benefits and
Programs Committee. Mr. Burtch received $20,000 for his services on the Audit
Committee. Mr. Ille received $20,000 for his services on the Audit Committee
and
Compensation and Stock Option Committee. Mr. Munson received $43,333 for his
services on the Business Development Committee, including $23,333 for services
provided prior to 2006. Mr. Rhodes received $20,000 for his services on the
Audit Committee and Compensation and Stock Option Committee. Mr. Shelley
received $20,000 for his services on the Public Relations and Marketing
Committee.
Compensation
Committee Interlocks and Insider Participation
Our
Compensation and Stock Option Committee has the authority to set the
compensation of all our officers. This Committee generally considers and
approves the recommendations of the Chief Executive Officer. The Chief Executive
Officer does not make a recommendation regarding his own salary, and did not
make any recommendation as to the President’s salary for 2007. The members of
the Compensation and Stock Option Committee are the following non-employee
directors: Bernard G. Ille and Horace G. Rhodes. Neither Mr. Ille nor Mr. Rhodes
is, or ever has been, an officer or employee of the Company or any of its
subsidiaries.
AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth the information as of December 31, 2006, with respect
to our equity compensation plans.
|
Equity
Compensation Plan
Information
|
|
Plan Category |
Number of securities to
be issued upon
exercise
of outstanding
options, warrants and
rights
(a)
|
Weighted-average exercise
price of
outstanding options, warrants and rights (b)
|
Number
of securities
remaining
available
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column (a))
(c)
|
||
|
Equity
compensation plans approved by stockholders
|
615,304
|
$
|
1.86
|
303,000
|
||||
|
Equity
compensation plans not approved by stockholders (1)
|
890,600
|
$
|
2.06
|
-
|
||||
|
Total
|
1,505,904
|
$
|
1.98
|
303,000
|
(1)
Non-Stockholder
Approved Plans
From
time to time, our Board of Directors has approved the grants of certain
nonqualified stock options as the Board has determined to be in our best
interest to compensate directors, officers, or employees for service to the
Company. Unless otherwise indicated below, the price of each such option is
equal to the market value of our common stock at the date of grant and each
option expires ten years from the grant date. All outstanding options under
these plans were exercisable at December 31, 2006.
Our
equity compensation plans, which have not been approved by the stockholders,
are
the following:
|
·
|
Effective
December 1, 2002, we granted nonqualified options to purchase up
to an
aggregate 112,000 shares of common stock to former employees of two
former
subsidiaries. These options were part of the employees’ severance
compensation arising from the sale of the former subsidiaries’ assets.
Each recipient of a grant received options for the same number of
shares
and having the same exercise price as under the recipient’s vested
incentive stock options which expired upon the sale. Each nonqualified
option was exercisable as of the date of grant and has a term of
ten years
from the original date of grant. As of December 31, 2006, 7,000 shares
are
issuable under the following options: 3,000 have an exercise price
of
$4.188 per share and expire April 22, 2008 and 4,000 have an exercise
price of $2.73 per share and expire November 21, 2011.
|
|
·
|
On
November 7, 2002, we granted to an employee of the Company a nonqualified
stock option to acquire 50,000 shares of common stock in consideration
of
services rendered to the Company. As of December 31, 2006, 20,000
shares
are issuable at an exercise price of $2.62 per
share.
|
|
·
|
On
November 29, 2001, we granted to employees of the Company nonqualified
stock options to acquire 102,500 shares of common stock in consideration
of services to the Company. As of December 31, 2006, 62,500 shares
are
issuable at an exercise price of $2.73 per
share.
|
|
·
|
On
July 20, 2000, we granted nonqualified options to a former employee
of the
Company to acquire 185,000 shares of common stock in consideration
of
services to the Company. As of December 31, 2006, 185,000 shares
are
issuable under the following options: 5,000 shares
at
|
|
·
|
|
|
$5.362; 80,000 shares at $4.538; 60,000 shares at $1.375; and 40,000 shares at $1.25. These options were for the same number of shares and the same exercise prices as under the stock options held by the former employee prior to leaving the Company. These options were fully vested at the date of grant and expire, as to 100,000 shares, nine years from the date of grant and as to the remaining 85,000 shares, seven years from the date of grant. |
|
·
|
On
July 8, 1999, in consideration of services to the Company, we granted
nonqualified stock options to acquire 371,500 shares of common stock
at an
exercise price of $1.25 per share to Jack E. Golsen (176,500 shares),
Barry H. Golsen (55,000 shares) and Steven J. Golsen (35,000 shares),
David R. Goss (35,000 shares), Tony M. Shelby (35,000 shares), and
David
M. Shear (35,000 shares) and also granted to certain other employees
nonqualified stock options to acquire a total of 165,000 shares of
common
stock at an exercise price of $1.25 per share in consideration of
services
to the Company. As of December 31, 2006, 516,500 shares are
issuable.
|
|
·
|
On
April 22, 1998, we granted to certain employees nonqualified stock
options
to acquire shares of common stock at an exercise price of $4.1875
per
share in consideration of services to the Company. As of December
31,
2006, 99,600 shares are issuable under outstanding options under
these
agreements.
|
On
June
19, 2006, the Compensation and Stock Option Committee granted 450,000 shares
of
non-qualified stock options to two employees in our Climate Control Business,
which are subject to shareholders’ approval. The option price of these options
is $8.01 per share which was the fair market value of our common stock on 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 shareholder approval. We intend
to seek shareholder approval of these options at 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.
Security
Ownership of Certain Beneficial Owners
The
following table sets forth certain information as of March 29, 2007, regarding
the ownership of our voting common stock and voting preferred stock by each
person (including any “group” as used in Section 13(d)(3) of the Securities Act
of 1934, as amended) that we know to be beneficial owner of more than 5% of
our
voting common stock and voting preferred stock. A person is deemed to be the
beneficial owner of shares of the Company which he or she could acquire within
60 days of March 29, 2007.
|
Name
and Address
of
Beneficial
Owner
|
Title
of
Class
|
Amounts
of
Shares
Beneficially
owned
(1)
|
Percent
of
Class+
|
|
Jack
E. Golsen and certain
members
of his family (2)
|
Common
Voting
Preferred
|
4,767,015
1,020,000
|
(3)
(4) (6)
(5)
(6)
|
22.9%
99.9%
|
||
|
Kent
C. McCarthy & affiliates (7)
|
Common
|
3,444,617
|
(8)
|
16.9%
|
||
|
Paul
J. Denby (9)
|
Common
|
1,270,400
|
(9)
|
6.5%
|
||
|
James
W. Sight (10)
|
Common
|
966,320
|
(10)
|
5.0%
|
+
Because
of the requirements of the SEC as to the method of determining the amount of
shares an individual or entity may own beneficially, the amount shown for an
individual may include shares also considered beneficially owned by others.
Any
shares of stock which a person does not own, but which he
or
she
has the right to acquire within 60 days of March 29, 2007 are deemed to be
outstanding for the purpose of computing the percentage of outstanding stock
of
the class owned by such person but are not deemed to be outstanding for the
purpose of computing the percentage of the class owned by any other
person.
(1)
We
based the information with respect to beneficial ownership on information
furnished by the above-named individuals or entities or contained in filings
made with the Securities and Exchange Commission or the Company’s
records.
(2)
Includes Jack E. Golsen (“J. Golsen”) and the following members of his family:
wife, Sylvia H. Golsen; son, Barry H. Golsen (“B. Golsen”) (a director, Vice
Chairman of the Board of Directors, and President of the Company and its Climate
Control Business); son, Steven J. Golsen (“S. Golsen”) (executive officer of
several subsidiaries of the Company), and SBL Corporation (“SBL”) which is
wholly-owned by Sylvia H. Golsen (40% owner), B. Golsen (20% owner), S. Golsen
(20% owner), and Linda F. Rappaport (20% owner and daughter of Jack E. Golsen
(“L. Rappaport”)). J. Golsen as the sole director and officer of SBL shares
the voting and dispositive power of the shares beneficially owned by SBL and
its
wholly owned subsidiary, Golsen Petroleum Corp (“GPC”). The address of Jack E.
Golsen, Sylvia H. Golsen, and Barry H. Golsen is 16 South Pennsylvania Avenue,
Oklahoma City, Oklahoma 73107; and Steven J. Golsen’s address is 7300 SW 44th
Street, Oklahoma City, Oklahoma 73179. SBL’s address is 16 South Pennsylvania
Avenue, Oklahoma City, Oklahoma 73107.
(3)
Includes (a) the following shares over which J. Golsen has the sole voting
and
dispositive power: (i) 4,000 shares that he has the right to acquire upon
conversion of a promissory note, (ii) 133,333 shares that he has the right
to
acquire upon the conversion of 4,000 shares of the Series B Preferred owned
of
record by a trust, of which he is the sole trustee, (iii) 68,529 shares owned
of
record by a trust, of which he is the sole trustee, and (iv) 176,500 shares
that
he has the right to acquire within the next 60 days under the Company’s stock
option plans; (b) 838,747 shares owned of record by a trust, of which Sylvia
H.
Golsen is the sole trustee, over which she and her husband, J. Golsen share
voting and dispositive power; (c) 311,639 shares over which B. Golsen has the
sole voting and dispositive power, 533 shares owned of record by B. Golsen’s
wife, over which he shares the voting and dispositive power, and 66,250 shares
that he has the right to acquire within the next 60 days under the Company’s
stock option plans; (d) 248,915 shares over which S. Golsen has the sole voting
and dispositive power and 46,250 shares that he has the right to acquire within
the next 60 days under the Company’s stock option plans; (e) 195,406 shares held
in trust for the grandchildren and great grandchild of J. Golsen and Sylvia
H.
Golsen of which B. Golsen, S. Golsen and L. Rappaport jointly share voting
and
dispositive power; (f) 1,512,099 shares owned of record by SBL, 39,177 shares
that SBL has the right to acquire upon conversion of 9,050 shares of the
Company’s non-voting Series 2 Preferred, 400,000 shares that SBL has the right
to acquire upon conversion of 12,000 shares of Series B Preferred owned of
record by SBL, and 250,000 shares that SBL has to right to acquire upon
conversion of 1,000,000 shares of the Series D Preferred owned of record by
SBL
and (g) 283,955 shares owned of record by GPC, which is a wholly-owned
subsidiary of SBL, 133,333 shares that GPC has the right to acquire upon
conversion of 4,000 shares of Series B Preferred owned of record by GPC and
60,749 shares that GPC has the right to acquire upon conversion of 14,033 shares
of Series 2 Preferred owned of record by GPC.
(4)
Does
not include 173,880 shares of common stock owned of record by certain trusts
for
the benefit of B. Golsen and S. Golsen over which B. Golsen and S. Golsen have
no voting or dispositive power. Heidi Brown Shear, our Vice President and
Managing Counsel, the niece of J. Golsen, the wife of David M. Shear, our Senior
Vice President and General Counsel, and daughter of Dr. Robert C. Brown, a
director of our Company, is the Trustee of each of these trusts.
(5)
Includes: (a) 4,000 shares of Series B Preferred owned of record by a trust,
of
which J. Golsen is the sole trustee, over which he has the sole voting and
dispositive power; (b) 12,000 shares of Series B Preferred owned of record
by
SBL; (c) 4,000 shares Series B Preferred owned of record by SBL’s wholly-owned
subsidiary, GPC, over which SBL, J. Golsen, and B. Golsen share the voting
and
dispositive power and (d) 1,000,000 shares of Series D Preferred owned of record
by SBL.
(6)
J.
Golsen disclaims beneficial ownership of the shares that B. Golsen and S. Golsen
each have the sole voting and investment power over as noted in footnote (3)
above. B. Golsen and S. Golsen disclaim beneficial ownership of the shares
that
J. Golsen has the sole voting and investment power over as noted in footnotes
(3) and (5) and the shares owned of record by Sylvia H. Golsen. Sylvia H. Golsen
disclaims beneficial ownership of the shares that J. Golsen has the sole voting
and dispositive power over as noted in footnotes (3) and (5) above.
(7)
Kent
C. McCarthy, as the manager and sole member of Jayhawk Capital Management,
L.L.C. (“Jayhawk Capital”), a Delaware limited liability company, and as Jayhawk
Capital’s investment advisor, is deemed to beneficially own, and has sole voting
and dispositive power over, the shares of our Series 2 Preferred and common
stock beneficially owned by Jayhawk Capital, as well as the shares that Mr.
McCarthy personally owns. Jayhawk Capital is deemed to have beneficial ownership
of our Series 2 Preferred and common stock held in the portfolios of (a) Jayhawk
Institutional Partners, L.P. (“Jayhawk Institutional”), a Delaware limited
partnership, and (b) Jayhawk Investments, L.P. (“Jayhawk Investments”), a
Delaware limited partnership. Jayhawk Capital is the general partner and manager
of Jayhawk Institutional and Jayhawk Capital Investments and, as such, has
sole
voting and dispositive power over such shares. Mr. McCarthy disclaims beneficial
ownership of all such shares other than his personal holdings. Mr. McCarthy’s
address is 5410 West 61st
Place,
Suite 100, Mission, Kansas 66205.
(8)
Includes 224,240 shares of common stock that Mr. McCarthy holds through a
revocable trust. The portfolio of Jayhawk Institutional includes 1,725,028
shares of common stock, 349,220 shares of common stock receivable upon the
conversion of 80,670 shares of our Series 2 Preferred, 112,500 shares of common
stock that may be acquired upon exercise of warrants, and 141,040 shares of
common stock that may be acquired upon conversion of $1.0 million principal
amount of the debentures. See “Recent Development” regarding Jayhawk
Institutional current intention to convert all such debentures into 141,040
shares of common stock. The portfolio of Jayhawk Investments includes 570,762
shares of common stock and 321,827 shares of common stock receivable upon the
conversion of 74,342 shares of our Series 2 Preferred.
(9)
Includes 53,400 shares held by Mr. Denby’s wife, with whom he shares voting and
dispositve power over such shares of common stock. Mr. Denby’s address is 4613
Redwood Court, Irving, Texas 75038.
(10)
Mr.
Sight has sole voting and dispositive power over such shares of common stock.
Mr. Sight’s address is 2100 Brookwood, Mission Hill, Kansas 66208.
Security
Ownership of Management
The
following table sets forth certain information obtained from our directors
and
our directors and executive officers as a group as to their beneficial ownership
of our voting common stock and voting preferred stock as of March 29,
2007.
|
Name
of
Beneficial
Owner
|
Title
of Class
|
Amount
of Shares
Beneficially
Owned (1)
|
Percent
of Class+
|
|
Raymond
B. Ackerman
|
Common
|
21,000
|
(2)
|
*
|
||||
|
Robert
C. Brown, M.D.
|
Common
|
208,329
|
(3)
|
1.1
|
%
|
|||
|
Charles
A. Burtch
|
Common
|
15,000
|
(4)
|
*
|
||||
|
Grant
J. Donovan
|
Common
|
63,911
|
(5)
|
*
|
||||
|
N.
Allen Ford
|
Common
|
1,740
|
(6)
|
*
|
||||
|
Barry
H. Golsen
|
Common
Voting
Preferred
|
3,250,741
1,016,000
|
(7)
(17)
(7)
|
15.9
99.5
|
%
%
|
|||
|
Jack
E. Golsen
|
Common
Voting
Preferred
|
3,900,422
1,020,000
|
(8)
(17)
(8)
|
18.9
99.9
|
%
%
|
|||
|
|
||||||||
|
David
R. Goss
|
Common
|
263,641
|
(9)
|
1.3
|
%
|
|||
|
Bernard
G. Ille
|
Common
|
45,000
|
(10)
|
*
|
||||
|
Jim
D. Jones
|
Common
|
186,352
|
(11)
|
1.0
|
%
|
|||
|
Donald
W. Munson
|
Common
|
16,740
|
(12)
|
*
|
||||
|
Horace
G. Rhodes
|
Common
|
20,000
|
(13)
|
*
|
||||
|
David
M. Shear
|
Common
|
165,756
|
(14)
|
*
|
||||
|
Tony
M. Shelby
|
Common
|
316,910
|
(15)
|
1.6
|
%
|
|||
|
John
A. Shelley
|
Common
|
-
|
-
|
|||||
|
Directors
and Executive Officers as
a group number (15 persons) |
Common
Voting
Preferred
|
5,796,229
1,020,000
|
(16)
|
27.2
99.9
|
%
%
|
*
Less
than 1%.
+
See
footnote “+” to the table under “Security Ownership of Certain Beneficial
Owners.”
(1)
We
based the information, with respect to beneficial ownership, on information
furnished by each director or officer, contained in filings made with the SEC,
or contained in the our records.
(2)
This
amount includes the following shares over which Mr. Ackerman shares voting
and
dispositive power: (a) 2,000 shares held by Mr. Ackerman’s trust, and (b) 4,000
shares held by the trust of Mr. Ackerman’s wife. The remaining 15,000 shares of
common stock included herein are shares that Mr. Ackerman may acquire pursuant
to currently exercisable non-qualified stock options granted to him by the
Company.
(3)
The
amount shown includes 15,000 shares of common stock that Dr. Brown may acquire
pursuant to currently exercisable non-qualified stock options granted to him
by
the Company. The shares, with respect to which Dr. Brown shares the voting
and
dispositive power, consists of 122,516 shares owned by Dr. Brown’s wife, 50,727
shares owned by Robert C. Brown, M.D., Inc., a corporation wholly-owned by
Dr.
Brown, and 20,086 shares held by the Robert C. Brown M.D., Inc. Employee Profit
Sharing Plan, of which
Dr.
Brown
serves as the trustee. The amount shown does not include shares owned directly,
or through trusts, by the children of Dr. Brown and the son-in-law of Dr. Brown,
David M. Shear, all of which Dr. Brown disclaims beneficial
ownership.
(4)
Mr.
Burtch has sole voting and dispositive power over these shares, which may be
acquired by Mr. Burtch pursuant to currently exercisable non-qualified stock
options granted to him by the Company.
(5)
The
amount includes (a) 63,411 shares of common stock, which Mr. Donovan has the
sole voting and dispositive power, and (b) 500 shares owned of record by Mr.
Donovan’s wife, voting and dispositive power of which are shared by Mr. Donovan
and his wife.
(6)
Mr.
Ford and his wife share voting and dispositive power over these
shares.
(7)
See
footnotes (3), (4), (5), and (6) of the table under “Security Ownership of
Certain Beneficial Owners” for a description of the amount and nature of the
shares beneficially owned by B. Golsen.
(8)
See
footnotes (3), (4), (5), and (6) of the table under “Security Ownership of
Certain Beneficial Owners” for a description of the amount and nature of the
shares beneficially owned by J. Golsen.
(9)
Mr.
Goss has the sole voting and dispositive power over these shares, which include
600 shares held in a trust of which Mr. Goss is trustee and 115,000 shares
that
Mr. Goss has the right to acquire within 60 days pursuant to options granted
under the Company’s stock option plans.
(10)
The
amount includes (a) 25,000 shares of common stock, including 15,000 shares
that
Mr. Ille may purchase pursuant to currently exercisable non-qualified stock
options, over which Mr. Ille has the sole voting and dispositive power, and
(b)
20,000 shares owned of record by Mr. Ille’s wife, voting and dispositive power
of which are shared by Mr. Ille and his wife.
(11)
Mr.
Jones and his wife share voting and dispositive power over these shares which
includes 115,000 shares that Mr. Jones has the right to acquire within 60 days
pursuant to options granted under our stock option plans.
(12)
Mr.
Munson has the sole voting and dispositive power over these shares, which 15,000
shares that Mr. Munson may purchase pursuant to currently exercisable
non-qualified stock options.
(13)
Mr.
Rhodes has sole voting and dispositive power over these shares, which include
15,000 shares that may be acquired by Mr. Rhodes pursuant to currently
exercisable non-qualified stock options granted to him by the
Company.
(14)
Includes 100,544 shares that Mr. Shear has the right to acquire within 60 days
pursuant to options granted under the Company’s stock option plans and over
which he has the sole voting and dispositive power and 65,212 shares in which
his revocable trust shares voting and dispositive powers with his wife’s
revocable trust. This amount does not include, and Mr. Shear disclaims
beneficial ownership of, the shares beneficially owned by Mr. Shear’s wife,
which consist of 22,760 shares that she has the right to acquire within 60
days
pursuant to options granted under the Company’s stock option plans and 291,308
shares, the beneficial ownership of which is disclaimed by her, that are held
by
trusts of which she is the trustee.
(15)
Mr.
Shelby has the sole voting and dispositive power over these shares, which
include 115,000 shares that Mr. Shelby has the right to acquire within 60 days
pursuant to options granted under the Company’s stock option plans.
(16)
The
shares of common stock include 778,294 shares of common stock that executive
officers and directors have the right to acquire within 60 days under our stock
option plans and 1,020,592 shares of common stock that executive officers,
directors, or entities controlled by our executive officers and directors,
have
the right to acquire within 60 days under other rights, warrants and convertible
securities.
(17)
Of
these shares of common stock, 1,000,102 shares have been pledged to two banks
to
secure loans made to certain members of the Golsen Group.
AND
DIRECTOR INDEPENDENCE
Policy
as to Related Party Transaction
Pursuant
to the Audit Committee Charter, adopted in 2003, our Audit Committee is to
review any Related Party transactions involving any of our directors and
executive officers.
Jayhawk
During
2006, Jayhawk Capital and its affiliates (together “Jayhawk”) purchased $1.0
million principal amount of the 7% convertible debentures. In addition, we
purchased $1.0 million principal amount of the 10 3/4% Senior Unsecured Notes
held by Jayhawk. Jayhawk earned interest of $117,000 relating to these debt
instruments in 2006.
Jayhawk
Agreement
During
November 2006, we entered into an agreement (the “Jayhawk Agreement”) with
Jayhawk Capital and certain of its affiliates (collectively, the “Jayhawk
Group”). Under the Jayhawk Agreement, the Jayhawk Group agreed, if we made an
exchange or tender offer for the Series 2 Preferred, to tender 180,450 shares
of
the 346,662 shares of Series 2 Preferred owned by the Jayhawk Group, Upon
certain conditions being met, one of the conditions to the Jayhawk Group’s
obligation to tender the shares of Series 2 Preferred in an exchange or tender
offer, the Jayhawk Agreement further provided that the Golsen Group would
exchange or tender 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 Jack E. Golsen, members of his
immediate family, and/or entities in which Mr. Golsen and his immediate family
own or control (the “Golsen Group”) tendered 180,450 and 26,467 shares,
respectively, of Series 2 Preferred for 1,335,330 and 195,855 shares,
respectively, of our common stock in our tender offer 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 GPC waiving a total of $0.63
million.
Significant
Shareholders
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 J.
Denby and James W. Sight (“Significant Shareholders”), respectively, or to
entities controlled by the Significant Shareholders. The Significant
Shareholders waived a total of approximately $1.78 million in accrued and unpaid
dividends.
Cash
Dividends
During
2006, we paid nominal cash dividends to holders of certain series of our
preferred stock. These dividend payments included $91,000 and $133,000 to the
Golsen Group and the Jayhawk Group, respectively. Additionally, the dividend
payments included $23,000 collectively to the Significant Shareholders.
Northwest
Northwest
Internal Medicine Associates (“Northwest”), a division of Plaza Medical Group,
P.C., has an agreement with the Company to perform medical examinations of
the
management and supervisory
personnel
of the Company and its subsidiaries. Under such agreement, Northwest is paid
$2,000 a month to perform all such examinations. Dr. Robert C. Brown (a director
of the Company) is Vice President and Treasurer of Plaza Medical Group,
P.C.
Quail
Creek Bank
Bernard
Ille, a member of our board of directors, is a director of Quail Creek Bank,
N.A. (the “Bank”). The Bank is a lender to one of our subsidiaries. During 2006,
the subsidiary made interest and principal payments on outstanding debt owed
to
the Bank in the amount of $.3 million and $1.6 million, respectively. At March
31, 2007 and December 31, 2006, the subsidiary’s loan payable to the Bank was
approximately $2.9 million and $3.3 million, respectively, and bears interest
at
an annual interest rate of 8.25%. The loan is secured by certain of the
subsidiary’s property, plant and equipment.
Board
Independence
The
Board
of Directors has determined that each of Messrs. Ackerman, Burtch, Donovan,
Ford, Ille, Munson and Rhodes is an “independent director” in accordance with
the current listing standards of the AMEX. In connection with the Board’s
determination that John A. Shelley is not independent, the Board considered
that
the Bank of Union, of which Mr. Shelley is President and Chief Executive
Officer, has substantial
outstanding loans to the Golsen Group, which are secured in part by shares
of
our common stock beneficially owned by certain members of the Golsen
Group.
Proposed
Conversion.
In
April
2007, the Jayhawk Group offered to convert the $1 million principal amount
of
debentures owned by it, based on our agreement to pay $35,000, representing
interest that would be due in September 2007 on such debentures. If the
conversion is completed by Jayhawk, we will issue to Jayhawk 141,040 shares
of
common stock in accordance with the debentures’ applicable conversion rate of
141.04 shares of common stock for each $1,000 principal amount of converted
debentures. The proposed conversion was solicited by the Jayhawk Group and
negotiated by us with them. Neither we nor any of members of the Jayhawk Group
has paid or given, or agreed to pay or give, directly or indirectly, any
commission or other remuneration in connection with the conversion. The issuance
of the common stock upon conversion of the debentures would be made in reliance
on the exemption from the registration requirements of the Securities Act of
1933, as amended (the “Act”), by virtue of Section 3(a)(9) of the Act, and such
shares of common stock would be eligible for resale by the Jayhawk Group
pursuant to the terms of the prospectus included in this registration
statement.
If
the
proposed conversion is completed, no debentures would remain outstanding
following the proposed conversion, our debt will be reduced by $1.0 million,
and
our stockholders’ equity will increase by the same amount.
As
noted
in the table and footnotes under “Security Ownership of Certain Beneficial
Owners,” as of March 29, 2007, the Jayhawk Group beneficially owned 3,444,617
shares of the our common stock, representing approximately 16.9% of the
Company’s issued and outstanding common stock, as calculated in accordance with
Rule 13d-3 of the Exchange Act. Those shares include 2,520,030 shares owned
of
record, 671,047 shares issuable upon conversion of 155,012 shares of Series
2
Preferred, the 141,040 shares currently issuable upon conversion of the
debentures, and 112,500 shares of common stock issuable under our other
securities owned by Jayhawk. If the proposed conversion is completed, the
Jayhawk Group’s beneficial ownership percentage would not change, assuming the
Jayhawk Group does acquire or dispose of beneficial ownership of any other
shares of our common stock.
Disclosure
of Commission Position in Indemnification for Securities Act
Liabilities
Insofar
as indemnification for liabilities arising under the Securities Act of 1933,
or
the Securities Act, may be permitted to our directors, officers and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been advised
that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act, and is, therefore,
unenforceable.
Selected
legal matters in connection with the common stock being offered by this
prospectus are being passed upon for us by Conner & Winters, LLP, Oklahoma
City, Oklahoma.
Ernst
& Young LLP, independent registered public accounting firm, has audited our
consolidated financial statements and schedules included in our Annual Report
on
Form 10-K for the year ended December 31, 2006 as set forth in their report,
which is incorporated by reference in this prospectus and elsewhere in the
registration statement. Our financial statements and schedules are incorporated
by reference in reliance on Ernst & Young LLP’s report, given on their
authority as experts in accounting and auditing.
LSB
INDUSTRIES, INC.
7%
Convertible Senior
Subordinated
Debentures Due 2011
2,542,500
Shares of Common Stock
_________________
PROSPECTUS
April 18,
2007
_________________