Rentech 10-Q 2007
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-19260
(Exact name of registrant as specified in its charter)
Wilshire Boulevard, Suite 710
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the Registrants common stock outstanding as of May 7, 2007 was 162,753,880.
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See Notes to Consolidated Financial Statements
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See Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements
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See Notes to Consolidated Financial Statements
Statements of Cash Flows
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For the six months ended March 31, 2007 and 2006, the Company made cash interest payments of $1,188 and $300. Excluded from the statements of cash flows for the six months ended March 31, 2007 and 2006 were the effects of certain non-cash investing and financing activities as follows:
See Notes to Consolidated Financial Statements
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Rentech, Inc. and its wholly owned subsidiaries (the Company, Rentech, we, us, or our). All significant intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited consolidated financial statements should be read in conjunction with the financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended September 30, 2006.
Certain prior period amounts have been reclassified to conform to the fiscal 2007 presentation.
Results of operations for the interim periods presented are not necessarily indicative of results to be expected for the year primarily due to the impact of seasonality on our business.
Our nitrogen product manufacturing segment and our customers businesses are seasonal, based upon the planting, growing, and harvesting cycles. Based on a prior three year average (including periods prior to our acquisition of the East Dubuque Plant and its business in April 2006), 13.2% of our product sales tonnage occurs during the second quarter of each fiscal year. Net product sales tonnage for the three months ended March 31, 2007 was 14.4% of the prior three year annual average. Based on a prior three year average, 36.3% of our product sales tonnage occurs during the first six months of each fiscal year because of fall fertilizer application and inventory management. Net product sales tonnage for the six months ended March 31, 2007 was 43.9% of the prior three year annual average, which is up due to higher fall fertilizer application and greater outside storage availability as a result of favorable weather conditions. As a result of the seasonality of sales, we experience significant fluctuations in our revenues, income and net working capital levels. In addition, weather conditions can significantly vary quarterly results. Also, our receivables are seasonal since customers operate on a crop year and payments are cyclical throughout the year.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company invests a portion of its cash in investment-grade marketable securities which are subject to market fluctuations. These investments are custodied with major financial institutions and are comprised of U.S. government, agency and municipal notes and bonds, corporate bonds, asset-backed securities, commercial paper, special auction variable rate securities and other investment-grade marketable debt securities.
In addition to the securities market risk, the Company is impacted by a number of other market risk factors, including the prevailing prices for natural gas which is the primary raw material component of nitrogen products.
On April 26, 2006, the Companys subsidiary, Rentech Development Corporation (RDC), entered into a Distribution Agreement with Royster-Clark Resources, LLC, who has assigned the agreement to Agrium U.S.A. Inc. (Agrium), pursuant to which Agrium is obligated to use commercially reasonable efforts to promote the sale of, and to solicit and secure orders from its customers for nitrogen fertilizer products comprised of anhydrous ammonia, granular urea, urea ammonium nitrate solutions and nitric acid and related nitrogen-based products manufactured at the Companys facility in East Dubuque, Illinois (the East Dubuque Plant) and to purchase from the Companys subsidiary, Rentech Midwest Energy Corporation (REMC) all nitrogen fertilizer products manufactured at the facility for prices to be negotiated in good faith from time to time. For the six months ended March 31, 2007, the Companys distribution agreement with Agrium accounted for 74% of net revenues from continuing operations. This same distributor had an outstanding accounts receivable balance which equaled 69% and 65% of the total of consolidated accounts receivable balance as March 31, 2007 and September 30, 2006, respectively. Our activity with Agrium is included in our nitrogen products manufacturing segment. For the six months ended March 31, 2006, prior to our acquisition of REMC, sales by the Companys former subsidiary, Petroleum Mud Logging LLC (PML) accounted for 98% of the Companys consolidated net revenue. PMLs activity is included in our discontinued oil and gas field service segment. As of September 30, 2006, the Company deemed that the net assets of PML were held for sale and on November 15, 2006 the Company sold all of its interests in PML (refer to Note 3 of the Notes to the Consolidated Financial Statements).
The Company employs certain workers that are members of the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) Local No. 1391. At March 31, 2007, approximately 71% of REMCs employees were subject to a collective bargaining agreement. On October 17, 2006 members of the UAW Local No. 1391 ratified a six year agreement that is effective until October 17, 2012.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Fair values of receivables, other current assets, accounts payable, accrued liabilities and other current liabilities are assumed to approximate carrying values for these financial instruments since they are short term in nature and their carrying amounts approximate fair value or they are receivable or payable on demand.
The carrying amount of convertible debt and other debt outstanding also approximates their fair value as of March 31, 2007 and September 30, 2006 because interest rates on these instruments approximate the interest rate on debt with similar terms available to the Company.
Cash and Cash Equivalents
The Company considers highly liquid investments purchased with original maturities of three months or less, money market accounts and deposits in financial institutions (including deposits made pursuant to the Companys revolving credit facility that are in excess of aggregate borrowings) that bear minimal risk to be cash equivalents. Cash equivalents are recorded at cost, which approximates fair value.
Restricted cash is comprised of cash that has been pledged as collateral to secure an outstanding letter of credit which backs the Companys obligations under its lease for office space. Restricted cash pledged for over one year is classified as a long term asset and restricted cash that has been pledged as collateral for less than one year has been classified as a short term asset.
The Company classifies its marketable securities as available for sale in accordance with the Statement of Financial Accounting Standards 115, Accounting for Certain Investments in Debt and Equity Securities. These investments are comprised of U.S. government, agency and municipal notes and bonds, corporate bonds, asset-backed securities, commercial paper, special auction variable rate securities and other investment-grade marketable debt securities. Even though a portion of these securities may have stated maturities beyond one year, they are classified as short-term because it is the Companys intent to have these investments readily available to redeem into cash for current operations. The Company reports its marketable securities at fair value with the unrealized gains and losses reported in other comprehensive income and excluded from earnings. The specific identification method is used to determine the cost of notes and bonds disposed of. The Company recognizes an impairment charge when there is a decline in the fair value of its investments, below the cost basis, which is judged to be other-than-temporary (refer to Note 4 of the Notes to the Consolidated Financial Statements).
Our accounts receivable balance includes both trade receivables and product prepayment contract receivables. Trade receivables are initially recorded at fair value based upon the sale of goods to customers and they are stated net of allowances. As of March 31, 2007 and September 30, 2006 our net trade receivable balances were $7,807,000 and $4,791,000, respectively. Product prepayment contract receivables are recorded upon execution of product prepayment contracts which create an obligation for delivery of a product within a specified period of time in the future. The terms of these product prepayment contracts require payment in advance of delivery. A deferred revenue liability is recorded upon execution of product prepayment contracts. When the products are shipped and the customer takes ownership, the deferred revenue is recognized as revenue. Product prepayment contract receivables that are deemed uncollectible, based on our allowance for doubtful accounts policy, are written off against the deferred liability. As of March 31, 2007 and September 30, 2006 our product prepayment contract receivable balances were $185,000 and $417,000, respectively.
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects the Companys best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts, historical experience, and other currently available information. The Company reviews its allowance for doubtful accounts quarterly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventories are stated at the lower of cost or estimated net realizable value. The cost of inventories is determined using the first-in first-out method. The estimated net realizable value is based on customer orders, market trends and historical pricing. The Company performs a quarterly analysis of its inventory balances to determine if the carrying amount of inventories exceeds their net realizable value. If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value. Inventories are periodically reviewed to determine if a reserve for obsolete, deteriorated, excess or slow moving items is required, and as of March 31, 2007 and September 30, 2006 no such inventory reserve was necessary. The Company allocates fixed production overhead costs based on the normal capacity of its production facilities and unallocated overhead costs are recognized as expense in the period incurred.
Assets Held for Sale
For the fiscal year ended September 30, 2006 the Company deemed its subsidiary PML to be a discontinued operation and the PML assets and liabilities were segregated as current and non-current held for sale assets and liabilities on our balance sheet. On November 15, 2006, the Company sold all of its interest in PML, and therefore we no longer present PML on our balance sheet as of March 31, 2007. In addition, PMLs results of its operations were segregated from continuing operations for periods ended March 31, 2007 and 2006. The Companys gain from its sale of PML was also segregated from continuing operations for the six month period ended March 31, 2007 (refer to Note 3 of the Notes to the Consolidated Financial Statements).
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense are computed using the straight-line method over the estimated useful lives of the assets, as follows:
Significant renewals and betterments are capitalized and costs of maintenance and repairs are expensed as incurred. When property and equipment is retired or otherwise disposed of, the assets and accumulated depreciation or amortization are removed from the accounts and the resulting gain or loss is reflected in operations.
We are in the initial stages of converting the existing nitrogen fertilizer plant at our East Dubuque facility from natural gas to an integrated fertilizer and FT fuels production facility using coal gasification and are capitalizing those costs. As of March 31, 2007 and September 30, 2006, construction in progress totaled approximately $19.4 million and $3.9 million, which included approximately $218,000 and $29,000 of capitalized interest costs, respectively. We do not depreciate construction in progress costs until the underlying assets are placed into service.
Spare parts are maintained by REMC to reduce the length of possible interruptions in plant operations from an infrastructure breakdown. The spare parts may be held for use for many years before the spare parts are actually used. As a result, they are capitalized as fixed assets at cost and are depreciated on a straight-line basis over on the useful life of the related equipment until the spare parts are utilized (i.e., installed in the plant). When spare parts are utilized, the net book values of the assets are charged to earnings. Periodically, the spare parts are evaluated for obsolescence and impairment and if the value of the spare parts is impaired it is charged against earnings.
In accordance with American Institute of Certified Public Accountants Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, the Company capitalizes certain direct development costs associated with internal-use software, including external direct costs of material and services, and payroll costs for employees devoting time to software implementation projects. These costs are then amortized when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred.
Grants are recognized when there is reasonable assurance that the Company will comply with the conditions attaching to them, and the grants are receivable. Grants that compensate the Company for the cost of property, plant and equipment are recorded as a reduction of the cost of the related asset and are recognized over the useful life of the asset by way of reduced depreciation expense.
Licensed technology represents costs incurred by the Company primarily for the retrofit of a plant used for the purpose of demonstrating the Companys proprietary technology to prospective licensees, which it licenses to third parties under various fee arrangements. The Company originally capitalized approximately $3.4 million which was comprised of approximately $2.7 million of retrofitting costs and approximately $0.7 million in costs related to a three week demonstration run at the plant. These capitalized costs are carried at the lower of amortized cost or net realizable value and are being amortized using the straight-line method over fifteen years.
Technology rights are recorded at cost and are being amortized using the straight-line method over a ten-year estimated life. The technology rights represent certain rights and interests in Rentechs licensed technology that were repurchased by Rentech in November 1997 from a company for consideration consisting of 200,000 shares of common stock and 200,000 warrants, which were valued approximately at $288,000.
Long-lived assets and identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the expected future cash flow from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized and measured using the assets fair value.
The Company accrues significant expenses that occur during the year in order to match expenses to the appropriate period. These include audit and legal fees, as well as payroll expenses such as bonuses and vacation, among other expenses.
The Company records a liability for deferred revenue upon execution of product prepayment contracts which creates an obligation for delivery of a product within a specified period of time in the future. The terms of these product prepayment contracts require payment in advance of delivery. The Company also records a product prepayment contract receivable upon execution of the contract until the related cash payment is received. The Company recognizes revenue related to the product prepayment contracts and relieves the liability for deferred revenue when products are shipped and the customer takes ownership. As of March 31, 2007 and September 30, 2006, deferred revenue was $28.6 million and $4.4 million, respectively.
The Company enters into short-term contracts to purchase physical supplies of natural gas in fixed quantities at both fixed and indexed prices. When these contracts are entered into, we anticipate that we will receive the contract quantities and use them in the production of fertilizer and industrial products and believe it probable that the counterparties will fulfill their contractual obligations. Natural gas purchases are recorded at the point of delivery into the pipeline system and we then pay the interstate pipeline company and, where applicable, the local distribution company to transport the natural gas to our facility. Natural gas is not purchased for the purpose of resale, but is occasionally sold when contracted quantities received are in excess of production and storage capacities. When sold, the natural gas sales price is recorded in product sales and the related cost is recorded in cost of sales.
For all of our operating segments, revenue is only recognized when there are no uncertainties regarding customer acceptance; persuasive evidence of an agreement exists documenting the specific terms of the transaction; the sales price is fixed or determinable; and collectibility is reasonably assured. Management assesses the business environment, the customers financial condition, historical collection experience, accounts receivable aging and customer disputes to determine whether collectibility is reasonably assured. If collectibility is not considered reasonably assured at the time of sale, the Company does not recognize revenue until collection occurs.
Product sales revenues from our nitrogen products manufacturing segment are recognized when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.
Technical services revenues from our alternative fuels segment are recognized as the services are provided during each month. Revenues from feasibility studies are recognized based on the percentage-of-completion method of accounting and per the terms of the contract.
License fees and royalty fees from our alternative fuels segment are recognized when the revenue earning activities that are to be provided by the Company have been performed and no future obligation to perform services exists.
Rental income from our alternative fuels segment is recognized monthly as per the lease agreement, and is included in the alternative fuels segment as a part of service revenues.
Service revenues from oil and gas field services had been historically recognized based upon services provided during each month. Revenues were based upon the number of days worked on a well multiplied by the agreed upon daily rate. For jobs that were completed within the same month, revenue was recognized in that month. For jobs that take place over two or more months, revenue was recognized based on the number of days worked in that month.
Cost of Sales
Cost of sales are primarily related to manufacturing costs related to the Companys nitrogen fertilizer products and technical services. Cost of sales expenses include: direct materials, direct labor, indirect labor, employee fringe benefits and other miscellaneous costs, including shipping and handling charges incurred to move products sold to the Companys customers.
General and Administrative Expenses
General and administrative expenses include salaries and fringe benefits, travel, consulting, occupancy, legal, public relations and other costs incurred in each operating segment.
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued a revision to Statement of Financial Accounting Standards 123, Share-Based Payment (SFAS 123(R)). The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees and directors. SFAS 123(R) eliminates the alternative method of accounting for employee share-based payments previously available under Accounting Principles Board Opinion No. 25 (APB 25). Effective October 1, 2005, the Company adopted the provisions of SFAS 123(R) using the modified-prospective transition method. Under this transition method, stock-based compensation expense for the year ended September 30, 2006 includes compensation expense for all stock-based compensation awards granted subsequent to September 30, 2005 based on grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Refer to footnote 11 in the Notes to Consolidated Financial Statements.
The Company recognizes advertising expense when incurred. Advertising expense was not significant for the six months ended March 31, 2007 and 2006, respectively.
Research and Development Expenses
Research and development expenses include direct materials, direct labor, indirect labor, fringe benefits and other miscellaneous costs incurred to develop and refine certain technologies employed in each respective operating segment. These costs are expensed as incurred.
In addition to the research and development expenses noted above, the Company has commenced construction of equipment and plans to build and operate, what the Company believes to be, the United States first fully integrated Fischer-Tropsch, coal-to-liquids (CTL) Product Development Unit facility at our Sand Creek site in the Denver, Colorado, metropolitan area (the PDU). This plant will produce ultra-clean diesel and aviation fuels and naphtha using various domestic coals, petroleum coke and biomass feedstocks on a demonstration scale, utilizing coal gasification technology. With the PDU in operation, the Company will be able to define and develop operating parameters of diverse hydrocarbon feedstocks under varying conditions. Since the PDU will not be producing diesel fuel on a commercial scale, and the fuel will not initially be sold at a profit, the Company is expensing the costs associated with PDU to research and development expense. For the six month periods ended March 31, 2007 and 2006, the Company incurred research and development expenses of approximately $15.1 million and $3.6 million, respectively, related to the PDU project.
The Company accounts for income taxes under the liability method, which requires an entity to recognize deferred tax assets and liabilities. Temporary differences are variances between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. An income tax valuation allowance has been established to reduce the Companys deferred tax asset to the amount that is expected to be realized in the future.
Comprehensive loss is comprised of two components: net loss and other comprehensive loss which includes all changes to the consolidated statement of stockholders equity, except those changes made due to investments by stockholders, changes in paid-in capital and distributions to stockholders. As of March 31, 2007, the Companys other comprehensive loss consisted of an accumulated unrealized loss that was not significant, resulting from adjusting the valuation of its marketable securities to fair market value. There were no other accumulated comprehensive loss items as of March 31, 2006. For the six months ended March 31, 2007 and 2006, the Company had total comprehensive losses of approximately $25.9 million and $18.2 million, respectively.
Net Loss Per Common Share
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128) provides for the calculation of Basic and Diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income (loss) applicable to common stock by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share.
As of March 31, 2007 and September 30, 2006, stock options for a total of 4.5 million and 4.4 million shares, stock warrants for a total of 11.0 million and 11.2 million shares, restricted stock units for a total of 1.8 million and 1.6 million shares and total convertible debt which is convertible into 14.7 million and 14.7 million shares were excluded in the computation of diluted loss per share because their effect was anti-dilutive.
Recent Accounting Pronouncements
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with the objective of improving financial reporting by mitigating volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of FAS 159 are effective for the Companys year ending December 31, 2008. The Company is currently evaluating the impact that the adoption of this statement will have on the Companys consolidated financial position, results of operations and disclosures.
Petroleum Mud Logging, LLC
The Company committed to a plan to sell PML which was a wholly owned subsidiary of Rentech and represented our oil and gas field services segment. Effective with the fourth quarter of fiscal year 2006, this business has been shown as a discontinued operation in the Companys consolidated statements of operations. The results have been reclassified to reflect this presentation. The assets and liabilities components attributable to this business as of September 30, 2006 are shown on the consolidated balance sheets as current and non current held for sale assets and liabilities. On November 15, 2006, the Company sold all of its interest in PML, including its net assets.
The assets and liabilities of PML that were held for sale as of September 30, 2006 are as follows:
The components of revenue, cost of sales and operating expense attributable to this business for the three and six month periods ended March 31, 2007 and 2006 are not shown on the consolidated statement of earnings for these periods. Operating results of the discontinued operations from PML are as follows:
On November 15, 2006, Rentech entered into an Equity Purchase Agreement (Purchase Agreement) with PML Exploration Services, LLC, a Delaware limited liability company (PML Exploration), pursuant to which Rentech sold all of the equity securities of PML to PML Exploration. PML Exploration paid approximately $5.4 million in cash to Rentech for the equity of PML. The Purchase Agreement contained customary representations and warranties of Rentech relating to PML, and provisions relating to the indemnification of PML Exploration by Rentech for breaches of such representations and warranties.
PML, a provider of well logging services to the oil and gas industry was not part of Rentechs core business or its strategic focus. The sale of PML completed Rentechs divestiture of its non-core subsidiaries, as the Company focuses its efforts and resources on its long-term business plan to commercialize Rentechs Fischer-Tropsch technology. The sale of PMLs net assets excluded approximately $500,000 of cash on hand which was retained by Rentech at the close of the transaction. Also excluded was an intercompany receivable from Rentech of approximately $1.7 million which was forgiven by PML. In connection with the closing of the transaction, Rentech incurred approximately $100,000 in non-recurring incentive payments to PML executives, as well as approximately $49,000 in legal fees.
The approximate net sales price and the net gain on its sale of PML are shown as follows:
The Company classifies its marketable securities as available for sale as prescribed by SFAS No 115, Accounting for Certain Investments in Debt and Equity Securities. These investments are comprised of U.S. government, agency and municipal notes and bonds, corporate bonds, asset-backed securities, commercial paper, special auction variable rate securities and other investment-grade marketable debt securities. Even though a portion of these securities may have stated maturities beyond one year, they are classified as short-term because it is the Companys intent to have these investments readily available to redeem into cash for current operations. The Company reports its marketable securities at fair value with the unrealized gains and losses reported in other comprehensive income and excluded from earnings.
The amortized cost and fair values of investments in debt securities at March 31, 2007 and September 30, 2006, were as follows:
The Company considers the unrealized losses arising from increased interest rates indicated above to be temporary in nature. The amortized cost and estimated fair values of investments by contractual maturity at March 31, 2007 and September 30, 2006, are shown below. Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The Companys marketable securities, available for sale are principally auction rate securities. The company invests in municipal bonds and student obligations and purchases these securities at par. Though the underlying security is issued as a long-term investment, the auction rate securities are classified as short-term investments because they typically can be purchased and sold in 7, 28 and 35 day cycles. The trading of auction rate securities takes place through a descending price auction with the interest rate reset at the beginning of each holding period. At the end of each holding period the interest is paid to the investor. We record the interest when earned as interest income in the accompanying consolidated statements of operations.
Realized gains from sales of available for sale securities for the three and six months ended March 31, 2007 were insignificant. There were no sales of securities for the three and six months ended March 31, 2006.
Proceeds from the sale of available for sale securities were $22,645,000 and $22,653,000 for the three and six months ended March 31, 2007. There were no sales of available for sale securities for the three and six months ended September 30, 2006, respectively.
Inventories consisted of the following:
Long-term debt consists of the following:
(1) Various promissory notes; monthly principal and interest payments of approximately $7,000 at September 30, 2006, with interest of 0% to 9.6%, unpaid principal and interest maturing from August 2006 through August 2010; collateralized by certain fixed assets of the Company. These liabilities were either settled or assumed in connection with the sale of PML that occurred in the fiscal quarter ended December 31, 2006.
At March 31, 2007 and September 30, 2006, the Company had an outstanding aggregate principal amount of $57.5 million of its 4.00% Convertible Senior Notes Due 2013 (the Notes). The issuance of the Notes resulted in a beneficial conversion feature of $875,000, which is amortized to interest expense over the term of the Notes. The balances of the Notes at March 31, 2007 and September 30, 2006 are shown net of unamortized deferred financing charges related to the beneficial conversion feature of approximately $758,000 and $821,000 for a total of approximately $56,742,000 and $56,679,000, respectively. In connection with the Notes, the Company has recognized approximately $3,996,000 and $4,326,000, as of March 31, 2007 and September 30, 2006, respectively, of prepaid debt issuance costs which is the largest component of deposits and other assets.
Note 8 Lines of Credit
On April 26, 2006, REMC entered into a Financing Agreement (the Revolving Credit Facility) with The CIT Group/Business Credit, Inc. to support the working capital needs of REMCs nitrogen fertilizer plant. The Revolving Credit Facility has a maximum availability of $30.0 million, subject to borrowing base limitations, and bears interest at the Chase Bank Rate plus a margin of 0.25% for Chase Bank Rate Loans or LIBOR plus a margin of 2.50% for LIBOR Loans. Subject to the conditions and limitations stipulated in the agreement, we may elect that borrowings under the Revolving Credit Facility will be Chase Bank Rate Loans, LIBOR Loans, or a combination of both. The interest rate applicable at March 31, 2007 was 8.50%. The Revolving Credit Facility is guaranteed by RDC, and is secured by a first priority security interest in all of REMCs current assets. The Revolving Credit Facility imposes various restrictions and covenants on REMC and the facility provides that CIT may also issue letters of credit for REMC and the face amounts of such letters of credit (if any) would be deducted from the $30.0 million maximum availability for borrowing. As of March 31, 2007 and September 30, 2006, REMC had neither aggregate borrowings nor letters of credit issued under the facility.
Note 9 Commitments and Contingencies
The Company has entered into various employment agreements with its officers that extend to May 15, 2009. The employment agreements set forth annual compensation to the officers that range from approximately $150,000 to $385,000. Certain of the employment agreements also provide for severance payments upon terminations other than for cause ranging from salary for the remaining term of the agreement to two years of salary and a specified bonus. The Companys total future obligations under employment agreements as of March 31, 2007, for the twelve months ended 2007, 2008 and 2009 are approximately $1,776,000, $1,584,000, and $268,000, respectively. Certain of the employment agreements provide for compensation to be adjusted annually based on the cost of living index as well as for certain performance criteria.
In the normal course of business, the Company is party to litigation from time to time. The Company maintains insurance to cover certain actions and believe that resolution of such litigation will not have a material adverse effect on the Company.
In the normal course of business, the Company has entered into various contracts as of and subsequent to March 31, 2007.
On April 26, 2006, RDC entered into a Distribution Agreement with Royster-Clark Resources, LLC, a subsidiary of Royster-Clark, Inc. (RCR), pursuant to which RCR is obligated to use commercially reasonable efforts to promote the sale of, and to solicit and secure orders from its customers for nitrogen fertilizer products comprising anhydrous ammonia, granular urea, UAN solutions and nitric acid and related nitrogen-based products manufactured at the East Dubuque Plant and to purchase from REMC all nitrogen fertilizer products manufactured at the facility for prices to be negotiated in good faith from time to time. RDC must pay RCR a commission for these services. RDCs rights under the Distribution Agreement include the right to store specified amounts of its ammonia at RCRs ammonia terminal in Niota, Illinois for a monthly fee.
We have entered into multiple fixed quantity natural gas supply contracts for various delivery dates through April 30, 2007. As of March 31, 2007, the Company had 954,000 MMBTUs of index priced natural gas under contract and no fixed price natural gas under contract. The Company had commitments to purchase natural gas under these contracts in an aggregate amount of approximately $6,762,000 as of March 31, 2007, based on the index applicable to each contract as of the balance sheet date. As of September 30, 2006, the Company had 986,000 MMBTUs of natural gas under contract. These contracts included fixed price contracts at a weighted average rate of $5.22 per MMBTU as well as index priced natural gas contracts based on the index applicable to each contract. Total aggregate commitments to purchase natural gas under these contracts were approximately $4,981,000 as of September 30, 2006.
During the quarter ended March 31, 2007, the Company issued 165,000 shares of its common stock upon the exercise of stock options and warrants for cash proceeds of approximately $267,000. In addition, the Company issued 159,243 shares of common stock in settlement of restricted stock units which vested during the period.
Note 11 Accounting for Stock Based Compensation
Effective October 1, 2005, the Company adopted SFAS 123(R) which requires all share-based payments, including grants of stock options, to be recognized in the statement of operations as an operating expense, based on their fair values. We previously accounted for our stock-based compensation using the intrinsic method as defined in APB Opinion No. 25 and accordingly, we have not recognized any expense related to stock option grants in our consolidated financial statements during any fiscal periods prior to the adoption of SFAS 123(R). The Company elected to utilize the modified-prospective transition method as permitted by SFAS 123(R). Under this transition method, stock-based compensation expense for all fiscal periods subsequent to the adoption of SFAS 123(R) includes compensation expense for all stock-based compensation awards granted subsequent to September 30, 2005 based on grant-date fair value estimated in accordance with the provisions of SFAS 123(R). In accordance with the modified-prospective transition method of SFAS 123(R), results for prior periods have not been restated. In addition to stock options issued, we have also included the warrant issued to East Cliff Advisors, LLC, an entity controlled by D. Hunt Ramsbottom, the Companys President and Chief Executive Officer, that was previously accounted for under APB 25, in implementing SFAS 123(R).
Stock options granted by the Company prior to those granted on July 14, 2006 were typically fully-vested at the time of grant and all outstanding and unexercised options were fully vested as of October 1, 2005. Stock options granted subsequent to July 14, 2006 generally vest over three years. As a result, compensation expense recorded during the period includes amortization related to grants during the period as well as prior grants. For the three and six months ended March 31, 2007, the Company recorded approximately $415,000 and $848,000, respectively in aggregate, of stock-based compensation expense related to stock options, included in general and administrative expense. In accordance with SFAS 123(R), there was no tax benefit from recording this non-cash expense as such benefits would be recorded upon utilization of the Companys net operating losses. The compensation expense reduced both basic and diluted earnings per share by $0.003 and $0.006 for the three and six months ended March 31, 2007.
The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options. The fair value of options at the date of grant and the assumptions utilized to determine such values are indicated in the following table:
The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. The Company used the average stock price over the last 40 months to project expected stock price volatility. The Company estimates the expected life based upon the vesting schedule and the term of the option grant. The Company estimates stock option forfeitures to be zero based on historical experience.
During the three months ended March 31, 2007, the Company issued options to employees of the Company to purchase 80,000 shares of the Companys common stock at the market price on the date of grant with exercise prices between $2.61 and $3.77. The options have a ten year term and vest over a three-year period such that one-third will vest on each of the one year, two year and three year anniversary dates of the date of grant. These options were valued at approximately
$161,000 using the Black-Scholes option-pricing model which will result in a charge to compensation expense over the vesting period. The Company also issued options to purchase 20,000 shares to a director at the market price at the date of grant, whose grant vested immediately, has a five year term from the grant date and includes an exercise price of $2.68. These options were valued at approximately $24,000 using the Black-Scholes option-pricing model which resulted in a charge to board compensation expense. During the quarter, the Company also issued options for a total of 90,000 shares to six directors, at the market price at the date of grant, at an exercise price of $2.68. These options have a six year term and vest upon the sooner of one year or the next annual meeting of shareholders. These options were valued at approximately $100,000 using the Black-Scholes option-pricing model which will result in a charge to board compensation expense over the vesting period.
Option transactions during the six months ended March 31, 2007 are summarized as follows:
The aggregate intrinsic value was calculated based on the difference between the Companys stock price on March 31, 2007 and the exercise price of the outstanding shares, multiplied by the number of outstanding shares as of March 31, 2007. The total intrinsic value of options exercised for the six months ended March 31, 2007 and 2006 were approximately $541,000 and $2,451,000, respectively.
The following information summarizes stock options outstanding and exercisable at March 31, 2007:
Warrant transactions during the six months ended March 31, 2007 are summarized as follows:
The following information summarizes warrants outstanding and exercisable at March 31, 2007: