Section
8 – Other Events
Item
8.01. Other Events
A. Repurchase of 5.5%
Debentures
On
November 10, 2008, LSB Industries, Inc. (the “Company”) purchased a total of
$5,000,000 aggregate principal amount of its 5.5% Convertible Senior
Subordinated Debentures due 2012 (the “Debentures”) for $3,600,000, plus accrued
interest of $100,833. This purchase was funded from the Company’s working
capital.
SBL,
L.L.C. (“SBL”) purchased a total of $4,000,000 aggregate principal amount of the
Debentures for $2,880,000, plus accrued interest of $80,667. SBL is
owned by Golsen Family, L.L.C. (“GFLLC”), Barry H. Golsen (the Company’s
President and Chief Operating Officer and member of its Board of Directors),
Steven J. Golsen (the chief executive of one of the Company’s subsidiaries), and
Linda F. Rappaport. GFLLC is owned by Jack E. Golsen (the Company’s
Chief Executive Officer and Chairman of its Board of Directors), through his
revocable trust, his spouse, Sylvia H. Golsen through her revocable trust, his
sons Barry H. Golsen and Steven J. Golsen, and his daughter, Linda F.
Rappaport. In addition, Linda F. Rappaport purchased a total of
$1,000,000 aggregate principal amount of the Debentures for $720,000, plus
accrued interest of $20,167.
The
Debentures are convertible by the holders, in whole or in part, into shares of
the Company’s common stock prior to their maturity at a conversion rate of 36.4
shares of our common stock per $1,000 principal amount of debentures
(representing a conversion price of $27.47 per share of common stock), subject
to adjustment under certain conditions. The closing price of the
Company’s common stock on November 10, 2008, was $8.70 per
share.
As previously disclosed by the Company,
Jayhawk Capital Management, L.L.C., and certain of its affiliates (the “Jayhawk
Group”), a former affiliate of ours, advised the Company that it may bring legal
action against the Company for all dividends in arrears (approximately
$4,000,000) on the 155,012 shares of Series 2 $3.25 convertible exchangeable
Class C preferred stock (“Series 2 Preferred”) that it converted after receipt
of the Company’s notice of redemption of all outstanding shares of Series 2
Preferred in July 2007, and that it should have been able to tender all of its
preferred shares under the Company’s February 2007 tender offer notwithstanding
an agreement between the Jayhawk Group and the Company that the Jayhawk Group
would tender only approximately one-half of its preferred shares (the “Jayhawk
Agreement”). In connection with its claims, the general counsel of
the Jayhawk Group orally offered to settle all claims against the Company in
return for a payment of $100,000. Through counsel, the Company agreed
to the settlement offer, as the Company considered such to represent the
approximate amount of the cost of defense of litigation. After the
Company agreed to the settlement offer verbally and by e-mail, the Jayhawk
Group’s general counsel purported to withdraw the settlement offer and asserted
the Jayhawk Group was not bound by any settlement
agreement.
According
to the Certificate of Designations for the Company’s Series 2 Preferred, the
holders of Series 2 Preferred could elect to convert each share into 4.329
shares of the Company’s common stock, however, the holder that so converts would
not be entitled to receive payment of any dividends in arrears on the shares so
converted. Despite the conversion rate provided under the Certificate
of Designations, in October 2007, Kent C. McCarthy, the manager and sole member
of Jayhawk Capital Management, L.L.C., solicited the Company, on behalf of the
Jayhawk Group, to exchange either directly or as part of a tender offer, a
portion of the shares of Series 2 Preferred owned by the Jayhawk Group for
shares of the Company’s common stock based on an exchange rate of 7.4 shares of
common stock for each share of Series 2 Preferred surrendered to the
Company.
As part
of the solicitation by the Jayhawk Group, the Jayhawk Group and the Company
entered into the Jayhawk Agreement, which provided, in part, that if the Company
undertook, in its sole discretion, within one year from the date of the Jayhawk
Agreement, (a) a tender offer for its issued and outstanding shares of Series 2
Preferred, or (b) to issue shares of its common stock for a portion of the
Series 2 Preferred owned by the Jayhawk Group pursuant to a private exchange,
each member of the Jayhawk Group agreed to tender or exchange, as applicable, an
aggregate total of only 180,450 shares or 52.9% of the shares of Series 2
Preferred owned by the Jayhawk Group at an exchange rate of 7.4 shares of common
stock for each share of Series 2 Preferred surrendered to the
Company. As demanded by the Jayhawk Group, the Jayhawk Agreement
provided that it was a condition precedent to the Jayhawk Group’s obligations
under the Jayhawk Agreement that the Golsen Group (defined as Jack E. Golsen,
his spouse and children, SBL Corporation and Golsen Petroleum Corporation, being
entities controlled by Jack E. Golsen, his wife and children) also be limited to
exchange or tender in such exchange or tender offer undertaken by the Company
within one year from the date of the Jayhawk Agreement on the same terms as the
Jayhawk Group under the Jayhawk Agreement.
During
November 2008, the Jayhawk Group filed a lawsuit against the Company and Jack E.
Golsen (“Golsen”), the Company’s Chief Executive Officer and Chairman of its
Board of Directors, in the U.S. District Court, for the District of Kansas at
Kansas City, styled Jayhawk Capital Management,
LLC, et al. v. LSB Industries, Inc. and Jack E. Golsen, Case No.
08-CV-2561. In the lawsuit, the Jayhawk Group alleges, among other things, that
the Company and Golsen fraudulently induced the Jayhawk Group to enter into the
Jayhawk Agreement. The lawsuit does not allege that the Jayhawk Group
was entitled to accrued dividends on the shares of Series 2 Preferred that it
converted. The Jayhawk Group claims that it suffered losses because,
in accordance with the terms of the Jayhawk Agreement, the Jayhawk Group did not
tender or exchange 166,212 shares of Series 2 Preferred in connection with the
Company’s February 2007 tender offer. The Jayhawk Group alleges
violations of §10b, Rule 10b-5, §14(d) and Rule 14(d)-10, and §18 of the Exchange Act of
1934, as amended, as well as violations of the Kansas Uniform Securities Act and
each defendant’s fiduciary duty to the Jayhawk Group. The Jayhawk Group
seeks compensatory and punitive damages, as well as related costs and attorneys’
fees.
The
Company’s insurer has been placed on notice of this matter, and the Company
believes its insurer will defend the Company and Golsen in connection with this
litigation. The Company and Golsen intend to vigorously defend this
litigation.