Chemeq Ltd's share price has plummeted over 33 per cent after convertible bond holder Stark Trading and its associates issued the company with an early redemption notice, seeking repayment of bonds with a face value of $50 million.
Embattled animal pharmaceutical products manufacturer Chemeq Ltd's share price has plummeted over 33 per cent after convertible bond holder Stark Trading and its associates issued the company with an early redemption notice, seeking repayment of bonds with a face value of $50 million.
Stark, in the notice, alleged an event of default had occurred in that Chemeq had failed to achieve total gross revenue from all sources of at least $4 million for 2005-06 financial year as required under the Convertible Bonds Deed Poll clause 2.9 (a).
Their claim may be substantiated by a qualification in Chemeq's annual report, in which the company recognises a dispute with its South African distibutor Inviro over the payment terms of a sale contract worth $1.4 million. This discrepency led to comapny auditor Ernst & Young qualifying the audit report it completed for the company's annual report.
However, Chemeq disputes the claim stating that all covenants in the Convertible Bonds Deed Poll had been satisfied including gross revenue from all sources of at least $4 million and liquid assets of at least $24 million for the 2005-06 financial year.
Stark is seeking repayment of convertible bonds within 10 business days.
The company has on issue $60 million in convertible bonds held by a number of investors that mature on 30th March 2008. The bonds were issued in two tranches in 2005.
Meanwhile, Chemeq non-executive director John Nicholls has resigned from the board effective immediately.
Mr Nicholls is a director of the management company of one of Chemeq's convertible bond holders, Harmony Investment Fund Ltd.
"My resignation does not reflect any view on the merits of the redemption notice received from Stark Trading, or any decision by Harmony with respect to the redemption of its own convertible notes," said Mr Nicholls.
Chemeq reported a $32.6 million loss last financial year, and recently laid off 50 employees as it moved to a new corporate model.
At market close, Chemeq was down 10 cents to 20 cents.
Below is the full announcement:
DISPUTE WITH CONVERTIBLE BOND HOLDER
Chemeq Limited (ASX: CMQ) today announced that it has received from Stark Trading and its associates (Stark), being some of the Bond holders, a Notice of Redemption pursuant to clause 12.2 of the Convertible Bonds Deed Poll.
In the Notice Stark has alleged an Event of Default has occurred in that Chemeq has allegedly failed to achieve a total gross revenue from all sources of at least $4.0 million for the financial year ending 30 June 2006 as required by clause 2.9(a) of the Deed Poll and Stark is seeking the repayment within 10 business days of its convertible bonds, which have a face value of $50.0 million.
Chemeq wholly disputes the claim by Stark.
As disclosed in its 29 September 2006 Australian Stock Exchange release headed "Annual
Report", Chemeq is strongly of the view that it has met the terms of the sale contract with its South African distributor Inviro, that the revenue from this contract is accurately disclosed in its financial statements and that it has met the final milestone covenant.
The company has on issue $60.0 million in convertible bonds held by a number of investors
that mature on 30 March 2008.
Chemeq Chief Executive Officer David Williams said that it was deeply regrettable that Stark
has taken the extraordinary step of issuing an early redemption notice on the insupportable
grounds that Chemeq has not met the covenant in circumstances where Stark was well aware of Chemeq's views.
"Chemeq is steadfast in its view that we have met the final milestone covenant and has
received unambiguous advice from Senior Counsel to support this," Mr Williams said."
"Stark had previously sought to renegotiate the terms of the bonds to improve the
bondholders' commercial position."
"The Board of Chemeq has no option but to take the strongest possible legal steps to protect
the rights of our shareholders and will not hesitate to take action against Stark to recover
damages resulting from Stark's action."
The convertible bonds were issued in two tranches in 2005 and have a face value of $60.0
million. To date, Chemeq has satisfied all covenants in the Convertible Bonds Deed Poll that sets out the terms and conditions of the convertible bonds.
Chemeq and the bond holders agreed in late 2005 to a variation of the Convertible Bonds Deed
Poll to insert new financial covenants for the financial year ended 30 June 2006 which required
that Chemeq:
- achieve gross revenue from all sources of at least $4.0 million for the year ended 30
June 2006; and
- have liquid assets of $24.0 million or more at 30 June 2006.
Chemeq announced to the market on 7 July 2006 that it had achieved these milestones,
supported in a further ASX announcement on 13 September 2006.
The bonds are currently held by:
- Stark Trading, its affiliated entities, Centar Investments (Asia) Ltd, Stark Asia Master
Fund Ltd and Shepherd Investments International, and
- Harmony Investment Fund.
