Brave investors rise up

A good example of the investors to stand out when the directors of the company could not perform. Will it set a benchmark for the coming similar situations? Let's see......The article is from "The Edge Daily"

18-06-2007: The 'small man' acts
By M Shanmugam
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In what is probably an unprecedented move in local corporate history, the minority shareholders of a Mesdaq Market-listed company are seeking to wind up the company and recover some RM10.94 million, being the balance of its listing proceeds, instead of seeing the money put to use to sustain the company.

Three shareholders of Litespeed Education Technologies Bhd, who had collectively subscribed to 14.7 million shares in a private placement exercise when the company was listed in November 2005, filed a suit last week to wind up the company.

The suit was filed by Wan Hamimie Ariff, Dr Syed Ibrahim Mohd Ismail and Mokhtar Ahmad at the Kuala Lumpur High Court through legal firm Tommy Thomas and Associates.

It is normal for creditors to file winding-up petitions against listed companies in their bid to recover amounts owing. But rarely do shareholders file to wind up a listed company to recover what's left, as this would mean them cutting their losses on their investments.

For instance, the three shareholders had collectively invested RM6.8 million for 14.7 million shares at 46 sen a share. Last Friday, the counter closed at 13.5 sen. The petitioners claimed that in its prospectus issued in October 2005, Litespeed had forecast a profit after tax of RM7.51 million on a turnover of RM19.89 million for the FY ended April 30, 2006, but posted a loss of RM9.7 million.

The petitioners claimed that Litespeed was making losses in 2005 but the directors did not disclose this information in the prospectus, thereby misleading the regulators, investing public and them (the petitioners).

The petitioners claimed that out of the RM20.55 million that was raised from the listing, the unutilised balance stood at RM10.94 million, and that the directors had proposed that this amount be used as working capital.

The petitioners claimed the amount was supposed to be utilised for setting up regional offices (RM7.55 million) and for research and development (RM3.39 million).

The petitioners claimed that in seeking the revision in the utilisation of the listing proceeds, the directors were abandoning their objectives that were outlined in the prospectus and which were re-stated in a research report announced by the company last December.

The petitioners further claimed that:

* an analysis of the company's financial performance since its listing showed that it was consistently making losses and the situation was aggravated each quarter, except for the quarter in which it entered into a licensing agreement with Prestariang Trading and Simulation Sdn Bhd (PTS), which was announced on June 29, 2006;
* the company's revenue was insufficient to finance its cost of sale. They claimed that, on average, the monthly expenditure and other costs incurred were about RM500,000. They claimed this meant that if the company was allowed to use the remaining RM10.94 million from the listing proceeds, the entire amount would be wiped out within the next one or two years without any reasonable prospect of profit or any reasonable plans towards making a profit for the company;
* under the licensing agreement with PTS, the company was to receive a lump sum payment of RM4 million or three equal instalments of RM1.6 million. In return, PTS will have the exclusive rights to use, re-sell or modify certain key educational products, namely the Dr Series, in Malaysia on an exclusive basis for five years with the extension of two years;
* in the prospectus, the Dr Series was represented as being capable of earning RM2.5 million per year in sales revenue in Malaysia due to its intellectual property rights. The petitioners claimed that considering the revenue as listed in the prospectus, the logical licensing price should be RM12.5 million. They claimed the fact that the directors chose to sell the product at RM4 million amounts to mismanagement;
* last November, the petitioners together with other minorities of the company requested for a board representative but there was no appointment. Subsequently the petitioners, via their solicitors, sent a formal request for two nominees to be on the board, but it was rejected by the directors in a letter dated April 18.

The petitioners believed it was not in the best interest of the company and its shareholders to allow the directors to carry on the business and use what was remaining of the listing proceeds.

They felt it was in the best interest of the company and its shareholders to have Litespeed wound up to preserve the unutilised balance of RM10.94 million which they said could be distributed to shareholders after creditors are paid.

Among the directors at the time of Litespeed's listing were Pok Vic Tor, its executive chairman and group CEO, Pok Vic Sent (executive director), Fock Mun Hong and Wong Kai Choon.

Unlike other exchanges, the listing requirements of Mesdaq companies are less stringent and it essentially is a "buyer beware" exchange.

What this means is that although the authorities approve the listing despite them not being profitable, investors have to bear the risk and scrutinise the forecast carefully.