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XL TechGroup, Inc. (XLT)

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Wednesday 30 July, 2008

XL TechGroup, Inc.

Proposals to Shareholders

RNS Number : 1872A
XL TechGroup, Inc.
30 July 2008
 




Press Release

30 July 2008


XL TechGroup, Inc.

('XL TechGroup' or 'the Company')


Proposed restructuring, cancellation of admission and other proposals


XL TechGroup (AIM: XLT) advises that it is mailing to shareholders a circular which incorporates a number of proposals to be put to shareholders at two separate Special Meetings of Shareholders. These proposals are:
 
§          Proposed Restructuring
§          Proposed Certificate of Incorporation Amendment
§          Proposed Cancellation of Admission
 
The circular includes a letter to shareholders from the Company’s Non-Executive Chairman, the relevant text of which is attached to this release.
 
At the request of the Company, trading in its ordinary shares on AIM was suspended on 26 June 2008. Due to the continuation of the Company’s inadequate funding position, trading will remain suspended.


For further information:

XL TechGroup


Dr. John Scott / Harold Gubnitsky

Tel: +1 321 409 7403

[email protected]


Chris Munden, Director of Investor Relations

Tel: +44 (0) 20 7398 7720

[email protected]

www.xltechgroup.com


Nomura Code Securities


Richard Potts, Corporate Finance

Tel: +44 (0) 20 7776 1200

Giles Balleny

www.nomuracode.com


  Letter from the Non-Executive Chairman of XL TechGroup, Inc.

(incorporated in the State of DelawareUSA, under the Delaware General Corporation Law)


Directors                                                                                      Registered Office
Dr. Geoffrey Vernon (Non-Executive Chairman)                         Corporation Trust Center
Dr. John Scott (Chief Executive Officer)                                      1209 Orange Street
David Szostak (Chief Financial Officer)                                       Wilmington
Dr. Andrew Heath (Non-Executive Director)                                Delaware 19801
Gregory Haskell (Non-Executive Director)                                   USA

 

29 July 2008


To Stockholders


Dear Sir/Madam,


Proposed Restructuring

Proposed Certificate of Incorporation Amendment

Proposed Cancellation of Admission

and

Notice of 2 Special Meetings of Stockholders

1.      Introduction
 
In an Operating Update release issued on 27 February 2008, XL TechGroup outlined a number of cash producing events anticipated in 2008. These included third-party investments into DxTech and PetroAlgae, the sale of a non-core technology asset and the first licensing deals by PetroAlgae, DxTech and QuoNova. The Company has made good progress on all these fronts: DxTech has signed its first licensing deal; it was anticipated that PetroAlgae and QuoNova would sign their first licensing deals this year; discussions were continuing to progress with potential strategic investors in DxTech and PetroAlgae, and significant progress had been made towards the potential sale of Mercury Therapeutics Inc..
 
XL TechGroup had also been negotiating the terms of a bridge financing facility with the Company’s primary financing source since 2005, the Laurus/Valens Family of Funds, that would enable it to cover its short-term financing requirements, but these negotiations did not result in a successful transaction for bridge financing being concluded. As a result, given there could be no certainty on timing or that continuing negotiations with Laurus/Valens and others would reach a satisfactory conclusion, XL TechGroup requested that trading in its shares on AIM be suspended on 26 June 2008.
 
Discussions have continued with potential funding sources, including with Laurus/Valens and potential strategic investors in DxTech and PetroAlgae. Unfortunately, these discussions have been adversely impacted by deteriorating market conditions and, after being granted a temporary waiver of default from Laurus/Valens, XL TechGroup was advised on 15 July 2008 by Laurus/Valens that it was in default of the terms and conditions that apply to its various secured note agreements with Laurus/Valens and the debt was therefore accelerated. As a result, XL TechGroup has negotiated a proposed restructuring of itself and its associated debt with Laurus/Valens which will result in the transfer to Laurus/Valens of substantially all of the Company’s assets. The Company’s Non-Executive Directors have been involved in the discussions with Laurus/Valens on an independent basis. The proposed terms of the Restructuring Proposal are set out below in section 3.
 
2.      United States Uniform Commercial Code Strict Foreclosure
 
A significant proportion of the assets created by XL TechGroup since 2002 have been financed through debt provided by Laurus/Valens. The Company’s equity holdings in TyraTech, PetroAlgae and DxTech, which are at more advanced stages of development than the Company’s other assets, are seen by Laurus/Valens as having the greatest and earliest likelihood of being able to repay its loans to XL TechGroup. Laurus/Valens has also determined that, in order to reach a level of value that would repay its debt, DxTech and PetroAlgae will require additional funding.
 
Laurus/Valens has therefore determined to accept, pursuant to a strict foreclosure under Article 9 of the United States Commercial Code, in full satisfaction of the debt owed to Laurus/Valens, substantially all of the assets of XL TechGroup pledged to secure repayment of the debt owed to Laurus/Valens by XL TechGroup. Those assets include the Company’s equity stakes in three key XL TechGroup assets (TyraTech, PetroAlgae and DxTech). Laurus/Valens has also offered to provide XL TechGroup stockholders with an opportunity to share, as described below, in any upside of value created in PetroAlgae and DxTech after the total Laurus/Valens debt then outstanding is repaid. Laurus/Valens also believes that, to create that value, it would be necessary that some of the senior management (to be determined) of XL TechGroup remain directly involved in managing PetroAlgae and DxTech in particular.
 
As part of the Restructuring Proposal negotiated with Laurus/Valens (see below in section 3), XL TechGroup has negotiated with Laurus/Valens a percentage of the upside derived from the value received from TyraTech, PetroAlgae and DxTech that would flow back to the stockholders of XL TechGroup. The Board and management of XL TechGroup has been insistent that any of the upside value created (see terms described in section 3) should be shared equally with all stockholders of the Company. 
 
To confirm that the value of the assets accepted by Laurus/Valens in full satisfaction of the Laurus/Valens debt is fair to XL TechGroup and its shareholders, the Board has engaged an independent third party valuation firm to provide to the Board and XL TechGroup an opinion as to whether the Restructuring Proposal is fair to XL TechGroup. The basis of this opinion will be formulated on an analysis of each of the assets transferred, taking into consideration, amongst other things, the maturity of the assets; estimated cost-to-complete commercialization; and the potential value opportunity, all appropriately risk adjusted.
 
Unfortunately, given the current funding situation of the Company and to secure the continued support of Laurus/Valens, there is inadequate time to complete this opinion in advance of these notices of the Special Meetings of Stockholders. The initial negotiations concerning the terms of the Restructuring Proposal delayed the start of the work on the fairness opinion. This fairness opinion is however expected to be completed before the stockholder vote on the Restructuring Proposal at the Stockholders Meeting on 8 August 2008. In the event that the completed fairness opinion supports the terms of the Restructuring Proposal and the value of the assets being transferred pursuant to the Restructuring Proposal, the Company will proceed with the relevant Resolution at the Stockholders Meeting and shall immediately publish by press release and post by mail the result of this opinion to stockholders. However, if the completed fairness opinion concludes that the terms of the Restructuring Proposal are not fair, then the Company: (a) will immediately publish by press release and post by mail the result of this opinion to stockholders; (b) is likely to adjourn the Special Meeting of Stockholders, and; (c) is likely to seek protection from its creditors under US bankruptcy laws. 
 
3.      Restructuring Proposal
 
XL TechGroup currently owes Laurus/Valens a total of approximately US$103.5 million, including principal, outstanding interest and fees, under five note facilities which are secured by all of the Company’s assets. These assets include XL TechGroup’s interests in the companies that it has created, namely:
 
                                                                                                                                % held by
XL TechGroup companies                                                                              XL TechGroup
§          TyraTech                                                                                                                45.2%
§          DxTech                                                                                                                   83.8%
§          GenXL                                                                                                                     43.3%
§          PetroAlgae                                                                                                              91.3%
§          QuoNova                                                                                                                 88.7%
 
Under the Restructuring Proposal, Laurus/Valens, or its designees or assigns, will accept in full satisfaction of the total amount of debt owed to Laurus/Valens at the time of closing and approximated above (the 'Debt'), the following assets, previously pledged to Laurus/Valens to secure repayment of the Debt, which would initially be owned by Laurus/Valens or its designees or assigns:
 
§          all of XL TechGroup’s equity holdings in TyraTech, DxTech and PetroAlgae;
§          all debt owed to XL TechGroup by DxTech and PetroAlgae; and
§          50% of XL TechGroup’s rights in AgCert’s patents and patent applications and all other intellectual property which was acquired by XL TechGroup along with such patents and patent applications.
 
Following the acceptance of those assets in full satisfaction of the Debt, Laurus/Valens intends to contribute those assets to one or more newly-created companies (collectively “NewCo”), each of which would be 100% owned by Laurus/Valens, in exchange for issuance by Newco to Laurus/Valens of (i) preferred stock carrying a cumulative dividend and having a liquidation preference initially equal to the amount of the Debt (the ”Preferred Stock”) and/or (ii) interest bearing promissory notes having an aggregate stated principal amount of the amount of the Debt (the “New Note”). Following the closing of the Restructuring Proposal, it is intended that NewCo would operate DxTech and PetroAlgae, and all decisions regarding such operations, including decisions relating to financing those companies and the disposition of the assets or equity interests of those companies, will be made by the managing board and stockholders of NewCo, which on the date of closing will include Laurus/Valens. Any financing made available to these companies will be at the sole discretion of NewCo and will likely initially be in the form of debt.
 
Following the closing of the Restructuring Proposal, and after payment/repayment in full to Laurus/Valens of the amount equal to the Preferred Stock liquidation preference plus (i) accrued dividends or the principal amount of the New Note plus accrued interest, as the case may be, in each case, and (ii) any additional amounts invested by Laurus/Valens or third parties in NewCo, DxTech or PetroAlgae in development of the businesses and assets of DxTech and/or PetroAlgae in the form of preferred stock or debt, the stockholders of XL TechGroup will have the contractual right to receive, 15% of the net proceeds received from the sale of NewCo assets, plus the amount of any dividend or other distribution made by TyraTech, DxTech and PetroAlgae to their stockholders.
 
Since, under certain provisions of the Amended and Restated Certificate of Incorporation, as amended, of TyraTech, the transfer to Laurus/Valens of the TyraTech shares held by the Company under the Restructuring Proposal would otherwise require Laurus/Valens (as it would acquire more than 30% of the outstanding stock of TyraTech) to make a tender offer for all of the outstanding shares of TyraTech, TyraTech will seek approval of its stockholders for either (i) an amendment to its Certificate of Incorporation to delete those provisions as they may apply to Laurus/Valens receipt of those shares from the Company, as well as to future transfers of those shares by Laurus/Valens, NewCo or their respective transferees or (ii) a waiver of the operation of those provisions as they may apply to such transfers to Laurus/Valens and by Laurus/Valens to NewCo. It is the intention of the Company to vote all of the 45.2% of the TyraTech shares it holds in favor of the amendment referred to in (i) above.
 
Following the restructuring, XL TechGroup would therefore no longer have the secured debt owed to Laurus on its balance sheet, and would have the following assets and liabilities:
 
                                                                                                                       % to be held by
Shareholdings                                                                                                 XL TechGroup
§          QuoNova LLC                                                                                                         88.7%
§          GenXL LLC                                                                                                             43.3%
 
Other assets
§          the contractual right to receive 15% of the additional funds received by NewCo after payment of the amounts owed to Laurus/Valens and other investors by NewCo, as described above
§          50% of AgCert patents and patent applications
§          the XL TechGroup company creation methodology and pipeline
§          other non-core assets, including convertible debt which if converted would represent a 75% shareholding (see below) in Mercury Therapeutics Inc. (“MTI”); and separately a secured loan to MTI for approximately US$3.0 million
§          approximately US$650,000 net book valued fixed assets and prepaid expenses
 
Liabilities
§          trade creditors and accrued liabilities of approximately US$1.3 million
 
As mentioned above, MTI is a Massachusetts based company that discovers and develops orally active protein kinase targeted drugs. MTI announced in June 2008 that it had made significant progress in its drug development program in Type-2 diabetes which has attracted considerable interest from both pharmaceutical companies and financial investors. XL TechGroup owns its 75% effective interest in MTI via a series of options and convertible notes that are detailed in Note 2 of XL TechGroup’s 2007 Annual Report and Accounts.
 
XL TechGroup has already sharply reduced its operating cost base through significant employee reductions and other measures. The Company expects that, immediately upon the closing of the restructuring described herein, XL TechGroup will not have any employees or operations, but will merely hold the assets and liabilities as stated above. However, some of the senior management of XL TechGroup are expected to continue to be significantly involved in maximising the value of the operating companies held in NewCo, and as such will be employed directly in those companies on a going forward basis. Certain management and other individuals, to be determined, who are also stockholders of XL TechGroup, and are so employed by companies held by NewCo, will receive standard incentive compensation for the services and contribution they provide to NewCo following the implementation of the Restructuring Proposal. Those persons will also be supportive of managing the assets held directly in XL TechGroup. In this regard, following closing of the restructuring contemplated hereby, certain members of the senior management of XL TechGroup and other outside investors intend to provide the Company with funds totalling up to US$1 million in exchange for a secured note. The terms of this note have still to be agreed but it is the intention of XL TechGroup to invite other Qualified Investor stockholders to contribute to this fund raising on the same terms.
 
The primary short term objective of XL TechGroup going forward will be to restructure or pay off all of its trade creditors and accrued liabilities following the closing of the Restructuring Proposal, through a mixture of non-core asset sales, licensing deals and new funds raised, including the senior management fund raising referred to above. The medium term objective of XL TechGroup is to raise additional working capital funds directly into the Company, to raise third-party investment funds into QuoNova and to sell all remaining non-core assets, with a view to maintaining and growing core assets such as QuoNova while considering new opportunities from the XL TechGroup pipeline.
 
In this regard, XL TechGroup has been actively seeking to sell or otherwise realise the value of its 75% shareholding in MTI, and this process is continuing. XL TechGroup is also looking to attract third-party funding into QuoNova, and has started discussions with a number of parties in connection with potential direct funding. Except as described in this Circular, all funds raised and realised over and above the level necessary to achieve the Company’s short and medium term objectives will be paid to stockholders.
 
While there cannot be any certainty that XL TechGroup will be able to secure adequate working capital in the short-term, it is important that stockholders are aware that, if the Restructuring Proposal is not approved, this will result in the forced liquidation by Laurus/Valens of all XL TechGroup assets, and it is anticipated that this process would be highly unlikely to produce any return for stockholders. Furthermore, after implementation of the Restructuring Proposal, there will still be no assurances that XL TechGroup will either raise the necessary capital or liquidate any of its remaining assets to repay any continued liabilities. This would also result in forced liquidation by its creditors with no return for stockholders.
 
On the other hand, the Directors believe that approval of the Restructuring Proposal will allow XL TechGroup stockholders an opportunity to continue to have a stake (albeit reduced in some cases), directly and indirectly, in all of the assets currently owned by the Company. XL TechGroup’s management is committed to maximising the value of these assets for the benefit of all stakeholders in both NewCo and XL TechGroup.
 
Approval of the Restructuring Proposal, and the transfer of substantially all of the assets of the Company, requires a simple majority of those casting their shares at the relevant Special Meeting of Stockholders in person or by proxy.
 
4.      Suspension from Trading on AIM
 
At the request of the Company, trading in its ordinary shares on AIM was suspended on 26 June 2008. Due to the continuation of the Company’s inadequate funding position, trading will continue to be suspended.
 
5.      Cancellation
 
The Directors believe that, following closing of the Restructuring Proposal described herein, the interests of the Company will be best served by becoming an unquoted private company given the significant annual costs directly and indirectly associated with maintaining XL TechGroup’s status as a company traded on AIM.
 
If stockholders approve the Cancellation at Special Meeting of Stockholders B at 11.00am Florida time on 29 August 2008, the proposed Cancellation will take effect at 8.00am UK time on 5 September 2008.
 
Following Cancellation, Common Shares will remain freely transferable but will not be transferable though CREST. Instead, stockholders who currently hold Common Shares in uncertified form will receive share certificates in due course following the Cancellation taking effect. Share transfers may still be effected after the date of Cancellation by depositing a duly executed and stamped stock transfer form together with an appropriate share certificate with the Company Secretary at the registered office of the Company.
 
Approval of the Cancellation Proposal requires a 75% majority of those casting their shares at the relevant Special Meeting of Stockholders in person or by proxy.
 
6.      Amendment to Amended and Restated Certificate of Incorporation of the Company
 
The Directors of XL TechGroup, Inc wish to request the approval of the stockholders of XL TechGroup, Inc. to amend the Amended and Restated Certificate of Incorporation, as amended, of the Company to remove Article 8, which are the provisions that provide that any person who acquires more than 30% of the outstanding stock of the Company is required to make a tender offer to acquire all remaining outstanding stock. This provision reflects the provisions of Article 9 of the UK City Code on Takeovers and Mergers and was included in the Amended and Restated Certificate of Incorporation of the Company at the time of Admission in accordance with custom in the United Kingdom for non-UK issuers but, given the proposed Cancellation, the Directors believe this provision is no longer appropriate.
 
7.      Special Meetings of Stockholders
 
Special Meeting of Stockholders A has been convened for 9.00am Florida time on 8 August 2008 to be held at the offices of XL TechGroup, Inc., 1901 S. Harbor City Blvd., Suite 300, Melbourne, Florida 32901, USA, at which the following ordinary resolutions will be proposed.
 
1.      RESOLVED, that the Restructuring Proposal and the transfer of substantially all of the assets of the Company to Laurus/Valens in full satisfaction of the amount of debt owed to such secured creditors (as detailed in the circular to stockholders dated the same date as the notice of this meeting (the “Circular”)) pursuant to the terms and subject to the conditions as set out in the term sheet and documents relating to the Restructuring Proposal, copies of which are produced to the meeting and initialled by the Chairman for the purposes of identification, be and are hereby approved for the purposes of Rule 15 of the AIM rules (as defined in the Circular) and otherwise be and are hereby approved.
 
Approval of the resolution effecting the Restructuring Proposal and the resulting transfer of substantially all of the assets of the Company requires a favorable vote, in person or by proxy, of the holders of a majority of the outstanding stock of the Company entitled to vote thereon.
 
2.      RESOLVED, that the Amended and Restated Certificate of Incorporation of the Company be and is hereby amended by the deletion of Article VIII of the Amended and Restated Certificate of Incorporation of the Company existing at the date hereof.
 
Approval of the resolution to amend the Amended and Restated Certificate of Incorporation requires a favorable vote, in person or by proxy, of the holders of a majority of the outstanding stock of the Company entitled to vote thereon.
 
Special Meeting of Stockholders B has been convened for 11.00am Florida time on 29 August 2008 to be held at the offices of XL TechGroup, Inc., 1901 S. Harbor City Blvd., Suite 300, Melbourne, Florida 32901, USA, at which the following special resolution will be proposed.
 
1.      RESOLVED, that the Company shall cancel the Admission of its securities on the AIM market of the London Stock Exchange.
 
Approval of the Cancellation proposal requires a 75% majority by those casting their shares at Special Meeting of Stockholders B in person or by proxy.
 
8.      Recommendation
 
The Company’s Board considers that non-executive directors Dr. Vernon and Dr. Heath are independent of management and free of any business or other relationship that could materially interfere with the exercise of their independent judgment.
 
A special committee of the aforementioned independent directors (the “Special Committee”) has been formed for the purpose of evaluating the fairness of the Restructuring Proposal to the shareholders and creditors of the Company. Following (i) its consideration of all material information related to the Restructuring Proposal and negotiation with Laurus/Valens, and (ii) its unanimous adoption of the resolutions approving the Restructuring Proposal, the Special Committee unanimously recommends that stockholders vote in favour of the Resolutions at the Special Meetings of Stockholders. The interested directors and senior management of the Company also support the Restructuring Proposal and other Resolutions.
 
Stockholders should be aware that, if the Restructuring Proposal and the transfer of substantially all of the assets of the Company to Laurus/Valens in full satisfaction of the debt owed by the Company to Laurus/Valens is not approved, Laurus/Valens will likely force a liquidation of all XL TechGroup assets, and the Special Committee anticipates that a forced liquidation would be highly unlikely to produce any return for the Company’s stockholders. Furthermore, after implementation of the Restructuring Proposal, there will still be no assurances that XL TechGroup will either raise the necessary capital or liquidate any of its remaining assets to repay any continued liabilities. This would also result in forced liquidation by its creditors with no return for stockholders.
 
On the other hand, the Special Committee believes that approval of the Restructuring Proposal will allow XL TechGroup stockholders an opportunity to continue to own stakes in the remaining assets of the Company. The Company’s management is committed to maximising the value of these assets.
 
Yours faithfully
Dr. Geoffrey Vernon
Non-Executive Chairman
 
 
EXPECTED TIMETABLE OF PRINCIPAL EVENTS
 

 
 
2008
 
Latest time and dates for receipt of Form of Proxy in respect of the Special Meeting of Stockholder A
9.00am Florida time on 8 August
 
 
Latest time and dates for receipt of Form of Proxy in respect of the Special Meeting of Stockholder B
11.00am Florida time on 29 August
 
 
Time and date of Special Meeting of Stockholders A
9.00am Florida time on 8 August
 
 
Time and date of Special Meeting of Stockholders B
11.00am Florida time on 29 August
 
 
Closing of the Restructuring Proposal (and transfer of substantially all of the assets of the Company)
22 August
 
 
Proposed date of Cancellation of Admission
8.00am UK time on 5 September
 


DEFINITIONS
The following definitions apply throughout this announcement, unless the context requires otherwise:

“Act”
the Companies Act 1985 and the Companies Act 2006, as amended
“Admission”
admission of the Company’s Common Shares to trading on AIM
“AgCert”
AgCert International plc
“AIM”
a market operated by London Stock Exchange plc
“AIM Rules”
the rules published by the London Stock Exchange entitled “AIM Rules for Companies”
“the Board” or “the Directors”
the directors of the Company as at the date of this document
“Cancellation”
the proposed cancellation of Admission
“Certificate of Incorporation”
the amended and restated certificate of incorporation of the Company, as amended
“closing”
the completion of the transfer of substantially all of the assets of the Company pursuant to the terms of the Restructuring Proposal as set out herein
“Common Shares” or “shares”
shares of common stock, of par value US$0.001 each, of the Company
“Company” or “XL TechGroup”
XL TechGroup, Inc.
“DxTech”
DxTech, LLC
“Existing Common Shares”
51,627,414 common shares in issue as at the date of this document
“Form of Proxy”
the forms of proxy enclosed with this document for use by holders of Common Shares in connection with the Special Meetings of Stockholders
“Laurus/Valens”
collectively, Laurus Master Fund, Ltd., a Cayman Islands company, Valens Offshore SPV 1, Ltd., a Cayman Islands company, Valens U.S. SPV 1, LLC., a Delaware limited liability company, Calliope Capital Corporation, a Delaware corporation, PSource Structured Debt Limited, a Guernsey company
“London Stock Exchange”
the London Stock Exchange plc
“PetroAlgae”
PetroAlgae, LLC
“Qualified Investor”
an investor who meets certain criteria as having sufficient knowledge and net worth as set forth by the US regulations of the Securities and Exchange Commission
“QuoNova”
QuoNova, LLC
“Resolutions”
the Resolutions set out in the Circular to shareholders
“Restructuring Proposal”
the restructuring proposal of the Company resulting in the transfer of substantially all of its assets in exchange for the full satisfaction of the amount of debt owed to Laurus/Valens, as set out in section 3 of this announcement
“Special Meeting of Stockholders A”
the Special Meeting of Stockholders of the Company, convened for 9.00am Florida time on 8 August 2008 and any adjournment thereof
“Special Meeting of Stockholders B”
the Special Meeting of Stockholders of the Company, convened for 11.00am Florida time on 29 August 2008 and any adjournment thereof
“stockholders”
the stockholders of the Company
“TyraTech”
TyraTech, Inc.
“$”, “US$”, “US dollar” or “dollar”
the lawful currency of the United States
 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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