As filed with the Securities and Exchange Commission on December 24, 2008
Registration No. 333-155312
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
GOLDEN GREEN ENTERPRISES LIMITED
(Exact Name of Each Registrant as Specified in Its Charter)
British Virgin Islands | 3310 | Not Applicable | ||
(State or Other Jurisdiction of Incorporation or Organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
No. 69 Hualibei Street Longhai Middle Road Henan, China (011) 86-371-6897-0951 | Mingwang Lu, Chairman and Chief Executive Officer No. 69 Hualibei Street Longhai Middle Road Henan, China (011) 86-371-6897-0951 | |
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices) | (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) |
CHINA OPPORTUNITY ACQUISITION CORP.
(Exact Name of Each Registrant as Specified in Its Charter)
Delaware | 6770 | 20-5331360 | ||
(State or Other Jurisdiction of Incorporation or Organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
300 Tice Boulevard Woodcliff Lake, New Jersey 07677 (201) 930-8900 | Harry Edelson, Chairman and Chief Executive Officer China Opportunity Acquisition Corp. 300 Tice Boulevard Woodcliff Lake, New Jersey 07677 (201) 930-8900 | |
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices) | (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) |
Copies to:
David Alan Miller, Esq.
Graubard Miller
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
Telephone: (212) 818-8800
Fax: (212) 818-8881
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting companyx |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective and all other conditions to the merger contemplated by the merger agreement described in the included proxy statement/prospectus have been satisfied or waived.
If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: o
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
CALCULATION OF REGISTRATION FEE
Title of Each Class of Security Being Registered(1) | Amount Being Registered | Proposed Maximum Offering Price per Security(5) | Proposed Maximum Aggregate Offering Price | Amount of Registration Fee(2) | ||||||||||||
Ordinary Shares(3) | 7,468,814 | $ | 5.60 | $ | 41,825,358.40 | $ | 1,643.74 | |||||||||
Warrants to purchase Ordinary Shares(3) | 14,204,295 | $ | 0.19 | $ | 2,698,816.05 | $ | 106.07 | |||||||||
Ordinary Shares underlying the Warrants(3)(4) | 14,204,295 | $ | 5.60 | $ | 79,544,052 | $ | 3,126.09 | |||||||||
Units, each consisting of One Ordinary Share and Two Warrants(3) | 931,186 | $ | 5.60 | $ | 5,214,641.60 | $ | 204.94 | |||||||||
Ordinary Shares included in Units(4) | 931,186 | $ | 5.60 | $ | 5,214,641.60 | $ | 204.94 | |||||||||
Warrants included in Units | 1,862,372 | $ | 0.19 | $ | 353,850.68 | $ | 13.91 | |||||||||
Ordinary Shares underlying Warrants included in Units(4) | 1,862,372 | $ | 5.60 | $ | 10,429,283.20 | $ | 409.87 | |||||||||
Representative’s Unit Purchase Option (“UPO”)(3)(4) | 1 | $ | 100 | $ | 100 | (6) | ||||||||||
Ordinary Shares issuable on exercise of UPO(4) | 600,000 | $ | 5.60 | $ | 3,360,000 | $ | 132.05 | |||||||||
Warrants issuable on exercise of UPO | 1,200,000 | $ | 0.19 | $ | 228,000 | $ | 8.96 | |||||||||
Ordinary Shares underlying Warrants included in UPO(4) | 1,200,000 | $ | 5.60 | $ | 6,720,000 | $ | 264.09 | |||||||||
Total Fee Due | $ | 155,588,743.53 | $ | 6,114.66 |
(1) | All securities being registered are issued by Golden Green Enterprises Limited (“BVICo”), a British Virgin Islands company. In connection with the merger of China Opportunity Acquisition Corp. (“COAC”), a publicly traded Delaware corporation, into BVICo, as described in the proxy statement/prospectus forming a part of this registration statement, all of the outstanding Common Stock, Warrants, Units and Unit Purchase Option of COAC will be exchanged on a one-for-one basis for securities of BVICo that will have terms that are similar in all material respects to those of the COAC securities. As a result of the merger and related transactions, BVICo will become the public company, domiciled in the British Virgin Islands, and the current security holders of COAC will become security holders of BVICo. |
(2) | Determined in accordance with Section 6(b) of the Securities Act at a rate equal to $39.30 per $1,000,000 of the proposed maximum aggregate offering price. |
(3) | Ordinary Shares, Units, Warrants and Unit Purchase Option that will be issued to holders of securities of COAC upon merger of COAC into BVICo in exchange for like securities of COAC. |
(4) | Pursuant to Rule 416, there are also being registered such additional securities as may be issued to prevent dilution resulting from stock splits, stock dividends or similar transactions as a result of the anti-dilution provisions contained in the Warrants. |
(5) | Based on the market price on November 10, 2008 of the common stock, warrants and units of COAC pursuant to Rule 457(f)(1). |
(6) | No fee pursuant to Rule 457(g). |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the SEC, acting pursuant to said Section 8(a), may determine.
CHINA OPPORTUNITY ACQUISITION CORP.
300 TICE BOULEVARD
WOODCLIFF LAKE, NEW JERSEY 07677
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
OF CHINA OPPORTUNITY ACQUISITION CORP.
TO BE HELD ON, 2009
To the Stockholders of China Opportunity Acquisition Corp.:
NOTICE IS HEREBY GIVEN that the special meeting of stockholders of China Opportunity Acquisition Corp. (“COAC”), a Delaware corporation, will be held at a.m. eastern time, on, 2009, at the offices of Graubard Miller, COAC’s counsel, at The Chrysler Building, 405 Lexington Avenue, 19th Floor, New York, New York 10174. You are cordially invited to attend the meeting, which will be held for the following purposes:
(1) | to consider and vote upon a proposal to approve the Agreement of Merger and Plan of Reorganization, dated as of November 12, 2008, among COAC, Golden Green Enterprises Limited (“BVICo”), Wealth Rainbow Development Limited (“HKCo”), Henan Green Complex Materials Co., Ltd (“Ge Rui”) and the shareholders of BVICo, which, among other things, provides for the merger of COAC with and into BVICo, with BVICo being the surviving entity of such merger — this proposal is referred to as the merger proposal; and |
(2) | to consider and vote upon a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the special meeting, COAC is not authorized to consummate the merger — this proposal is referred to as the adjournment proposal. |
These items of business are described in the attached proxy statement/prospectus, which you are encouraged to read in its entirety before voting. Only holders of record of COAC common stock at the close of business on, 2009 are entitled to notice of the special meeting and to vote and have their votes counted at the special meeting and any adjournments or postponements of the special meeting.
After careful consideration, COAC’s board of directors has determined that the merger proposal and the adjournment proposal are fair to and in the best interests of COAC and its stockholders and unanimously recommends that you vote or give instruction to vote “FOR” the approval of both of the proposals.
All COAC stockholders are cordially invited to attend the special meeting in person. To ensure your representation at the special meeting, however, you are urged to complete, sign, date and return the enclosed proxy card as soon as possible. If you are a stockholder of record of COAC common stock, you may also cast your vote in person at the special meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct your broker or bank on how to vote your shares or, if you wish to attend the meeting and vote in person, obtain a proxy from your broker or bank. If you do not vote or do not instruct your broker or bank how to vote, it will have the same effect as voting against the merger proposal.
A complete list of COAC stockholders of record entitled to vote at the special meeting will be available for ten days before the special meeting at the principal executive offices of COAC for inspection by stockholders during ordinary business hours for any purpose germane to the special meeting.
Your vote is important regardless of the number of shares you own. Whether you plan to attend the special meeting or not, please sign, date and return the enclosed proxy card as soon as possible in the envelope provided. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted.
Thank you for your participation. We look forward to your continued support.
By Order of the Board of Directors
Harry Edelson
Chairman and Chief Executive Officer
, 2009
IF YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOUR SHARES WILL BE VOTED IN FAVOR OF EACH OF THE PROPOSALS AND YOU WILL NOT BE ELIGIBLE TO HAVE YOUR SHARES CONVERTED INTO A PRO RATA PORTION OF THE TRUST ACCOUNT IN WHICH A SUBSTANTIAL PORTION OF THE NET PROCEEDS OF COAC’S INITIAL PUBLIC OFFERING ARE HELD. YOU MUST AFFIRMATIVELY VOTE AGAINST THE MERGER PROPOSAL AND DEMAND THAT COAC CONVERT YOUR SHARES INTO CASH NO LATER THAN THE CLOSE OF THE VOTE ON THE MERGER PROPOSAL TO EXERCISE YOUR CONVERSION RIGHTS. IN ORDER TO CONVERT YOUR SHARES, YOU MUST CONTINUE TO HOLD YOUR SHARES THROUGH THE CLOSING DATE OF THE MERGER AND THEN TENDER YOUR STOCK TO COAC’S STOCK TRANSFER AGENT WITHIN THE TIME PERIOD SPECIFIED IN A NOTICE YOU WILL RECEIVE FROM OR ON BEHALF OF BVICo, WHICH PERIOD WILL BE NOT LESS THAN 20 DAYS. YOU MAY TENDER YOUR STOCK BY EITHER DELIVERING YOUR STOCK CERTIFICATE TO THE TRANSFER AGENT OR BY DELIVERING YOUR SHARES ELECTRONICALLY USING DEPOSITORY TRUST COMPANY’S DWAC (DEPOSIT WITHDRAWAL AT CUSTODIAN) SYSTEM. IF THE MERGER IS NOT COMPLETED, THEN THESE SHARES WILL NOT BE CONVERTED INTO CASH. IF YOU HOLD THE SHARES IN STREET NAME, YOU WILL NEED TO INSTRUCT THE ACCOUNT EXECUTIVE AT YOUR BANK OR BROKER TO WITHDRAW THE SHARES FROM YOUR ACCOUNT IN ORDER TO EXERCISE YOUR CONVERSION RIGHTS. SEE “SPECIAL MEETING OF COAC STOCKHOLDERS — CONVERSION RIGHTS” FOR MORE SPECIFIC INSTRUCTIONS.
The information in this proxy statement/prospectus is not complete and may be changed. We may not issue these securities until the registration statement filed with the Securities and Exchange Commission is effective. This proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO AMENDMENT AND COMPLETION, DATED DECEMBER 24, 2008
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS OF
CHINA OPPORTUNITY ACQUISITION CORP.
PROSPECTUS FOR
931,186 UNITS (EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND TWO WARRANTS),
8,400,000 ORDINARY SHARES (INCLUDING SHARES INCLUDED IN THE UNITS),
16,066,667 WARRANTS (INCLUDING WARRANTS INCLUDED IN THE UNITS)
AND
1 UNIT PURCHASE OPTION
China Opportunity Acquisition Corp. (“COAC”) is pleased to report that its board of directors and the board of directors of Golden Green Enterprises Limited (“BVICo”) have approved an agreement of merger and plan of reorganization that provides for the merger between COAC and BVICo, in which BVICo will be the surviving entity. As a result of such merger, COAC’s corporate existence will cease and BVICo will succeed COAC as the publicly traded corporation of which the present holders of COAC securities will be security holders, together with the present holders of BVICo Ordinary Shares. All outstanding securities of COAC (common stock, warrants, units and the Representative’s unit purchase option) will be converted into like securities of BVICo, on a one-to-one basis. Proposals to approve the merger agreement and the other matters discussed in this proxy statement/prospectus will be presented at the special meeting of stockholders of COAC scheduled to be held on, 2009.
Upon completion of the merger, the three current shareholders of BVICo will own 30,000,000 BVICo Ordinary Shares and the holders of common stock of COAC will own 8,400,000 BVICo Ordinary Shares (including shares that are part of units). In addition, the holders of the existing COAC warrants and units will receive like securities of BVICo that will be exercisable or exchangeable into BVICo securities. See the section entitled“The Merger Proposal — Structure of the Merger.” Of the 30,000,000 BVICo Ordinary Shares to be owned by BVICo shareholders, 3,000,000 will be placed in escrow to provide a fund to satisfy their indemnification obligations under the merger agreement.
COAC’s common stock, units and warrants are currently quoted on the Over-the-Counter Bulletin Board under the symbols CHNQ, CHNQU and CHNQW, respectively. After the closing of the transactions contemplated by the merger agreement, the securities of BVICo are expected to be listed on the Nasdaq Stock Market under the symbols CHOP, CHOPU and CHOPW.
COAC is providing this proxy statement/prospectus and accompanying proxy card to its stockholders in connection with the solicitation of proxies to be voted at the special meeting of stockholders of COAC and at any adjournments or postponements of the special meeting. Unless the context requires otherwise, references to “you” are references to COAC stockholders, and references to “we”, “us” and “our” are to COAC. This proxy statement/prospectus also constitutes a prospectus of BVICo for the securities of BVICo to be issued to the security holders of COAC pursuant to terms of the merger. Unless otherwise specifically stated, all currency amounts stated in this proxy statement/prospectus are expressed in United States dollars.
This proxy statement/prospectus provides you with detailed information about the merger and other matters to be considered by the COAC stockholders. You are encouraged to carefully read the entire document and the documents incorporated by reference.IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER“RISK FACTORS” BEGINNING ON PAGE 25.
Your vote is very important. Whether or not you expect to attend the special meeting, the details of which are described on the following pages, please complete, date, sign and promptly return the accompanying proxy in the enclosed envelope.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.
The proxy statement/prospectus statement is dated, 2009, and is first being mailed on or about, 2009.
This proxy statement/prospectus incorporates important business and financial information about COAC and BVICo that is not included in or delivered with this document. This information is available without charge to security holders upon written or oral request. To make this request, or if you would like additional copies of this proxy statement/prospectus or have questions about the merger, you should contact Harry Edelson, Chairman and Chief Executive Officer, China Opportunity Acquisition Corp., 300 Tice Boulevard, Woodcliff Lake, New Jersey 07677, (201) 930-8900.
To obtain timely delivery of requested materials, security holders must request the information no later than five business days before the date they submit their proxies or attend the special meeting. The latest date to request the information to be received timely is, 2009.
TABLE OF CONTENTS
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SUMMARY OF THE MATERIAL TERMS OF THE MERGER
• | In the prospectus included in the registration statement for COAC’s initial public offering (“IPO”), COAC undertook to enter into a business combination with an operating business that has its principal operations in the People’s Republic of China. COAC’s board of directors believes that the merger with BVICo described in this proxy statement/prospectus complies in all material respects with the terms for a transaction described in the registration statement. |
• | The parties to the merger agreement are China Opportunity Acquisition Corp. (“COAC”), Golden Green Enterprises Limited (“BVICo”), Wealth Rainbow Development Limited (“HKCo”), which will be acquired by HKCo concurrently with the closing of the merger between COAC and BVICo and become a wholly owned subsidiary of BVICo, Henan Green Complex Materials Co., Ltd (“Ge Rui), which is a wholly owned subsidiary of HKCo, and the three current shareholders of BVICo. The merger agreement provides for (i) the merger of COAC into BVICo, with BVICo being the surviving entity of the merger, and (ii) the holders of securities of COAC (in the aggregate, 931,186 units, each consisting of one share of common stock and two warrants, 8,400,000 shares of common stock (including shares included in the units), warrants to purchase 16,066,667 shares of COAC common stock (including warrants included in the units) and one Representative’s unit purchase option to purchase 600,000 units) to receive like securities of BVICo, on a one-to-one basis, in exchange for their existing COAC securities. |
• | Immediately prior to the merger, the current shareholders of BVICo will own 30,000,000 BVICo Ordinary Shares, which they will continue to own after the merger is consummated. (Ordinary Shares of a British Virgin Islands company are essentially equivalent to common shares of United States corporations in rights and ranking.) The current shareholders of BVICo will also be entitled to be issued an aggregate of 1,000,000 BVICo Ordinary Shares for each of the years ending on December 31, 2009, 2010 and 2011 in which BVICo has net after tax income that equals or exceeds the target specified for such year in the merger agreement ($45 million, $60 million and $80 million, respectively). In addition, if at least 75% of the warrants that BVICo will issue to the public holders of COAC’s current warrants are exercised, the current BVICo shareholders will be entitled to an aggregate cash payment of $5 million. See the section entitled“The Merger Proposal.” |
• | BVICo is a holding company that owns all of the outstanding shares of HKCo, a Hong Kong corporation that in turn, concurrently with the closing of the merger, will acquire all of the registered capital of Ge Rui, a limited liability company organized under the law of the People’s Republic of China. Neither BVICo or HKCo owns any other material assets or operates any business. Ge Rui is a leading private manufacturer of high precision cold-rolled specialty steel products in China. See the section entitled“Business of BVICo.” |
• | To provide a fund for payment to BVICo with respect to its post-closing rights to indemnification under the merger agreement, at the closing of the merger, the current shareholders of BVICo will place in escrow (with an independent escrow agent) an aggregate of 3,000,000 BVICo Ordinary Shares. See the section entitled“The Merger Proposal — Indemnification of BVICo.” |
• | The merger agreement provides that either COAC or BVICo may terminate the agreement if the merger is not consummated by March 20, 2009. The merger agreement may also be terminated, among other reasons, upon material breach by a party. See the section entitled“The Merger Agreement — Termination.” |
• | As a result of the merger, the present COAC stockholders will own approximately from 22% of the BVICo Ordinary Shares outstanding after the merger (assuming that no holders of shares issued in COAC’s IPO (“Public Shares”) vote against the merger proposal and elect to convert their Public Shares into cash in accordance with COAC’s certificate of incorporation to 16% of the BVICO Ordinary Shares outstanding after the merger (assuming that the holders of 39.99% of COAC’s Public Shares vote against the merger proposal and elect to convert their Public Shares into cash). If, after the merger, the holders of the warrants to acquire BVICo Ordinary Shares that will be issued as a result of the merger in exchange for the outstanding warrants to acquire shares of COAC’s common stock exercise all such warrants, the former COAC stockholders (or their transferees) and the holders of the BVICo Ordinary Shares issued |
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upon exercise of the BVICo warrants will own approximately 43% of the outstanding BVICo Ordinary Shares (assuming no holders of Public Shares exercise their conversion rights and no additional BVICo Ordinary Shares are issued after the merger). |
• | As a consequence of the merger, the funds held in the trust account established by COAC in connection with its IPO for the benefit of the holders of Public Shares will be transferred to BVICo, after deduction of transaction expenses, deferred underwriting commissions and payments to converting stockholders. COAC estimates that such amount will be approximately $_______, prior to deduction of payments to converting stockholders. |
• | In addition to voting on the merger, the stockholders of COAC will vote on a proposal to approve an adjournment of the meeting, if necessary. See the section entitled“The Adjournment Proposal.” |
• | After the merger, the directors of BVICo will be Mingwang Lu, Yi Lu, Wong Kwok Keung, Maotong Xu and Yunlong Wang, who are designees of the BVICo shareholders, Harry Edelson, who is COAC’s chairman and chief executive officer, and J.P. Huang, who is a designee of Harry Edelson. Maotong Xu, Yunlong Wang, Wong Kwok Keung and J.P. Huang will be considered independent directors under applicable regulatory rules. The current shareholders of BVICo and Mr. Edelson will enter into a voting agreement at the time of closing of the merger (to which BVICo will also be a party) that will provide that they will each vote their BVICo Ordinary Shares in favor of the election of such persons as directors of BVICo in specified classes in all elections through the annual meeting that will be held in 2011. |
• | The current BVICo shareholders will not be able to sell any of their BVICo Ordinary Shares during either the twelve month period (for Oasis Green Investments Limited) or the six month period (for the other shareholders) after the closing date of the merger other than as permitted pursuant to the lock-up agreements they will enter into at the closing. Further, the officers and directors of COAC will not be able to sell any of the BVICo Ordinary Shares that they receive as a result of the merger during such twelve month period other than as permitted pursuant to the Stock Escrow Agreement dated as of March 20, 2007, between COAC and each of the persons who was a stockholder of COAC prior to its IPO and the lock-up agreements he or she will enter into upon the closing. |
• | After the merger, COAC anticipates that there will be approximately $ million in cash remaining in the trust account that was established in connection with COAC’s IPO, from which payment of certain deal expenses (including investment banking and finder fees), deferred underwriters compensation and payments for conversions of Public Shares into cash would be made. If the maximum number of Public Shares are converted that would still allow COAC to consummate the merger (2,759,999 shares), such payments would total $based on a conversion price of $ per share. All remaining trust account funds will be transferred to BVICo as a result of the merger. |
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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q. | Why am I receiving this proxy statement/ prospectus? | A. | COAC and BVICo have agreed to a business combination under the terms of the Agreement of Merger and Plan of Reorganization that is described in this proxy statement/prospectus. This agreement is referred to as the merger agreement. A copy of the merger agreement is attached to this proxy statement/prospectus as Annex A, which you are encouraged to read. | |||
You are being asked to consider and vote upon a proposal to approve the merger agreement, which, among other things, provides for (i) the merger of COAC into BVICo, with BVICo being the surviving entity of the merger, and (ii) the holders of securities of COAC (in the aggregate, 931,186 units, each consisting of one share of common stock and two warrants, 8,400,000 shares of common stock (including shares included in the units), warrants to purchase 16,066,667 shares of COAC common stock (including warrants included in the units) and one Representative’s unit purchase option to purchase 600,000 units) to receive like securities of BVICo, on a one-to-one basis, in exchange for their existing COAC securities. | ||||||
The approval of the merger proposal is a condition to the consummation of the merger. As a result of the merger, COAC’s corporate existence will cease and BVICo will succeed COAC as the publicly traded corporation of which the present holders of COAC securities will be security holders, together with the present holders of BVICo Ordinary Shares. All outstanding securities of COAC (common stock, warrants, units and the Representative’s unit purchase option) will be converted into like securities of BVICo, on a one-to-one basis.) BVICo’s memorandum and articles of association, which is its governing document, is annexed hereto as Annex B. The stockholders will also be asked to consider and vote upon a proposal to adjourn the meeting to a later date or dates to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the special meeting, COAC would not have been authorized to consummate the merger. COAC will hold the special meeting of its stockholders to consider and vote upon these proposals. This proxy statement/prospectus contains important information about the proposed merger and the other matters to be acted upon at the special meeting. You should read it carefully. | ||||||
Your vote is important. You are encouraged to vote as soon as possible after carefully reviewing this proxy statement/prospectus. | ||||||
Q. | Why is COAC proposing the merger? | A. | COAC was organized for the purpose of consummating a business combination with an operating business that has its principal operations located in the People’s Republic of China. | |||
COAC consummated its IPO on March 26, 2007 and the exercise of the over-allotment option on March 29, 2007, raising net proceeds of $38,929,040. Of these net proceeds, $38,357,000 (including $414,000 of deferred underwriting commissions), together with $1,360,000 raised from the private sale of warrants (for a total of $39,717,000), was placed in a trust account immediately following the IPO and, in accordance with COAC’s amended and restated certificate of incorporation, will be released upon the consummation of a business |
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combination. As of September 30, 2008, approximately $41,200,000 was held in deposit in the trust account. COAC intends to use funds held in the trust account to pay certain transaction expenses and deferred underwriters compensation. The balance of the funds will be released to BVICo after the closing of the merger to pay stockholders who properly exercise their conversion rights and for working capital and general corporate purposes. | ||||||
BVICo is a holding company that owns all of the outstanding capital stock of HKCo, a Hong Kong corporation that in turn, concurrently with the closing of the merger of COAC and BVICo, will acquire all of the registered capital of Ge Rui. Neither BVICo nor HKCo owns any other material assets or operates any business. Ge Rui is a leading private manufacturer of high precision cold-rolled specialty steel products in China. It utilizes a variety of processes and technological methodologies to convert steel manufactured by third parties into thin steel sheet and plates. Ge Rui’s product offerings are focused predominantly on high-end, value-added finished steel products. | ||||||
Based on its due diligence investigations of Ge Rui and the industry in which it operates, including the financial and other information provided by BVICo in the course of their negotiations, COAC believes that Ge Rui’s management has been successful in running Ge Rui’s business and that Ge Rui has in place the infrastructure for strong business operations and to achieve growth both organically and through accretive strategic acquisitions. As a result, COAC also believes that a business combination with BVICo will provide COAC stockholders with an opportunity to participate in a company with significant growth potential. See the section entitled“The Merger Proposal — Factors Considered by COAC’s Board of Directors.” | ||||||
In accordance with COAC’s amended and restated certificate of incorporation, if COAC is unable to complete a business combination by March 20, 2009, its corporate existence will automatically terminate and it will be required to liquidate. The merger agreement provides that either COAC or BVICo may terminate the merger agreement if the merger is not consummated by March 20, 2009. | ||||||
Q. | Do I have conversion rights? | A. | If you are a holder of Public Shares, you have the right to vote against the merger proposal and demand that COAC convert such shares into a pro rata portion of the trust account in which a substantial portion of the net proceeds of COAC’s IPO are held. These rights to vote against the merger and demand conversion of the Public Shares into a pro rata portion of the trust account are sometimes referred to herein as conversion rights. COAC stockholders who elect to convert their shares into cash will not have appraisal rights under the General Corporation Law of the State of Delaware (“DGCL”). |
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Q. | How do I exercise my conversion rights? | A. | If you are a holder of Public Shares and wish to exercise your conversion rights, you must (i) vote against the merger proposal, which must be approved and completed, (ii) demand that COAC convert your shares into cash, and (iii) deliver your stock to COAC’s transfer agent physically or electronically using Depository Trust Company’s DWAC (Deposit Withdrawal at Custodian) System within the period specified in a notice you will receive from or on behalf of BVICo after the meeting, which period will be not less than 20 days. | |||
Any action that does not include an affirmative vote against the merger will prevent you from exercising your conversion rights. Your vote on any proposal other than the merger proposal will have no impact on your right to convert. | ||||||
You may exercise your conversion rights either by checking the box on the proxy card or by submitting your request in writing to Harry Edelson, COAC’s chairman and chief executive officer, at the address listed at the end of this section. If you (i) initially vote for the merger proposal but then wish to vote against it and exercise your conversion rights or (ii) initially vote against the merger proposal and wish to exercise your conversion rights but do not check the box on the proxy card providing for the exercise of your conversion rights or do not send a written request to COAC to exercise your conversion rights, or (iii) initially vote against the merger but later wish to vote for it, you may request COAC to send you another proxy card on which you may indicate your intended vote. You may make such request by contacting COAC at the phone number or address listed at the end of this section. Any request for conversion, once made, may be withdrawn at any time up to the vote taken with respect to the merger proposal. | ||||||
Any corrected or changed proxy card must be received by COAC’s secretary prior to the special meeting. No demand for conversion will be honored unless the holder’s stock has been delivered (either physically or electronically) to the transfer agent after the meeting within the time period (at least 20 days) specified in a letter that will be sent after the meeting to all COAC stockholders who have voted against the merger proposal and demanded to convert their Public Shares into cash. | ||||||
If the merger is completed, then, if you have also properly exercised your conversion rights, you will be entitled to receive a pro rata portion of the trust account, including any interest earned thereon, calculated as of two business days prior to the date of the consummation of the merger. As of September 30, 2008, there was approximately $41,200,000 in the trust account, which would amount to approximately $5.97 per Public Share upon conversion. If you exercise your conversion rights, then you will be exchanging your shares of COAC common stock for cash and will no longer own these shares. |
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Exercise of your conversion rights does not result in either the exercise or loss of any COAC warrants that you may hold. Your warrants will continue to be outstanding following a conversion of your common stock, shall be automatically converted into a warrant to purchase a BVICo Ordinary Share that will have terms that are substantially similar in all material respects to those of the COAC warrants and will become exercisable upon consummation of the merger. A registration statement must be in effect to allow you to exercise any warrants you may hold or to allow BVICo to call the warrants for redemption if the redemption conditions are satisfied. If the merger is not consummated, the warrants will not become exercisable and will be worthless. | ||||||
Q. | Do I have appraisal rights if I object to the proposed merger? | A. | Yes. COAC stockholders have appraisal rights in connection with the merger under the DGCL. Stockholders who exercise their appraisal rights will not be entitled to seek conversion of their shares into cash. See the section entitled“Appraisal Rights.” | |||
Q. | What happens to the funds deposited in the trust account after consummation of the merger? | A. | At the closing of the merger, the funds in the trust account will be released to pay (i) transaction expenses (including an aggregate of up to $860,000 to EarlyBirdCapital, Inc. for investment banking and finder fees), and (ii) deferred underwriters compensation of $414,000. The balance of the funds will be released to BVICo to pay COAC stockholders who properly exercise their conversion rights and for working capital and general corporate purposes. | |||
Q. | What happens if the merger is not consummated? | A. | If the merger is not consummated by March 20, 2009, either party may terminate the merger agreement. If COAC is unable to complete the merger or another business combination by March 20, 2009, it must liquidate. In any liquidation of COAC, the funds deposited in the trust account, plus any interest earned thereon, less claims requiring payment from the trust account by creditors who have not waived their rights against the trust account, if any, will be distributed pro rata to the holders of COAC’s Public Shares. Holders of COAC common stock issued prior to the IPO, including all of COAC’s officers and directors, have waived any right to any liquidation distribution with respect to those shares. Harry Edelson, COAC’s chairman and chief executive officer, has agreed to be personally liable under certain circumstances to ensure that the proceeds in the trust account are not reduced by the claims of prospective target businesses and vendors or other entities that are owed money by COAC for services rendered or products sold to it. COAC cannot assure you that Mr. Edelson will be able to satisfy those obligations. See the section entitled “Other Information Related to COAC — Liquidation If No Business Combination” for additional information. | |||
Q. | When do you expect the merger to be completed? | A. | It is currently anticipated that the merger will be consummated promptly following the COAC special meeting on _________, 2009. | |||
For a description of the conditions for the completion of the merger, see the section entitled“The Merger Agreement — Conditions to the Closing of the Merger.” |
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Q. | What do I need to do now? | A. | COAC urges you to read carefully and consider the information contained in this proxy statement/prospectus, including the annexes, and to consider how the merger will affect you as a stockholder of COAC. You should then vote as soon as possible in accordance with the instructions provided in this proxy statement/prospectus and on the enclosed proxy card. | |||
Q. | How do I vote? | A. | If you are a holder of record of COAC common stock, you may vote in person at the special meeting or by submitting a proxy for the special meeting. You may submit your proxy by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed postage paid envelope. If you hold your shares in “street name,” which means your shares are held of record by a broker, bank or nominee, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted. In this regard, you must provide the record holder of your shares with instructions on how to vote your shares or, if you wish to attend the meeting and vote in person, obtain a proxy from your broker, bank or nominee. | |||
Q. | If my shares are held in “street name,” will my broker, bank or nominee automatically vote my shares for me? | A. | No. Your broker, bank or nominee cannot vote your shares unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or nominee. | |||
Q. | May I change my vote after I have mailed my signed proxy card? | A. | Yes. Send a later-dated, signed proxy card to COAC’s secretary at the address set forth below so that it is received by COAC’s secretary prior to the special meeting or attend the special meeting in person and vote. You also may revoke your proxy by sending a notice of revocation to COAC’s secretary, which must be received by COAC’s secretary prior to the special meeting. | |||
Q. | What should I do with my stock certificates? | A. | If the merger is approved and consummated, COAC stockholders who do not elect to have their shares converted into the pro rata share of the trust account will need to exchange their shares of common stock for common stock of BVICo. BVICo will cause each COAC stockholder to be mailed instructions and a letter of transmittal for exchanging their COAC stock certificates for BVICo stock certificates. COAC stockholders who vote against the merger and exercise their conversion rights must deliver their stock to COAC’s transfer agent (either physically or electronically) as instructed by COAC or COAC’s transfer agent as instructed by or on behalf of BVICo after the meeting. If your shares are held electronically, they will automatically be exchanged for new shares. | |||
Q. | What should I do with my warrant certificates? | A. | If the merger is approved and consummated, COAC stockholders will need to exchange their warrants for warrants of BVICo. BVICo will cause each COAC stockholder to be mailed instructions and a letter of transmittal for exchanging their COAC warrant certificates for BVICo warrant certificates. |
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Q. | What should I do if I receive more than one set of voting materials? | A. | You may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive in order to cast a vote with respect to all of your COAC shares. | |||
Q. | Who can help answer my questions? | A. | If you have questions about the merger or if you need additional copies of the proxy statement/prospectus or the enclosed proxy card you should contact: | |||
Mr. Nicholas Puro Secretary China Opportunity Acquisition Corp. 300 Tice Boulevard Woodcliff Lake, New Jersey 07677 Tel: (201) 930-8900 | ||||||
Or | ||||||
Morrow & Co., LLC 470 West Avenue Stamford, Connecticut 06902 Tel: (800) 607-0088 | ||||||
You may also obtain additional information about COAC from documents filed with the Securities and Exchange Commission (“SEC”) by following the instructions in the section entitled“Where You Can Find More Information.” If you intend to vote against the merger and seek conversion of your shares, you will need to deliver your stock (either physically or electronically) to COAC’s transfer agent at the address below after the meeting and after receiving delivery instructions from or on behalf of BVICo. If you have questions regarding the certification of your position or delivery of your stock, please contact: | ||||||
Mr. Mark Zimkind Continental Stock Transfer & Trust Company 17 Battery Place New York, New York 10004 Tel: (212) 509-5100 Fax: (212) 845-3201 |
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SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
This summary highlights selected information from this proxy statement/prospectus and does not contain all of the information that is important to you. To better understand the merger, you should read this entire document carefully, including the merger agreement, attached as Annex A to this proxy statement/prospectus. The merger agreement is the legal document that governs the merger and the other transactions that will be undertaken in connection with the merger. It is also described in detail elsewhere in this proxy statement/prospectus.
The Parties
BVICo
Golden Green Enterprises Limited is a British Virgin Islands company that was incorporated on March 11, 2008 solely for the purpose of acquiring the issued share capital of HKCo. BVICo owns no material assets other than the issued share capital of HKCo and does not operate any business other than as the holding company of HKCo. Immediately upon the completion of the merger, the current shareholders of BVICo will hold approximately 78% of the outstanding BVICo Ordinary Shares and the former stockholders of COAC will own approximately 22% of the outstanding BVICo Ordinary Shares. Following the merger, BVICo expects to conduct its business substantially as it is currently conducted as a holding company. Following the completion of the transactions described in this proxy statement/prospectus, it is expected that the securities of BVICo will be listed on the Nasdaq Stock Market.
BVICo’s principal executive office is currently at No. 69 Hualibei Street, Longhai Middle Road, Henan, China, which will continue to be its principal executive office after the merger. Its telephone number is [011] 86-371-6897-0951.
COAC
China Opportunity Acquisition Corp. is a blank check company formed on August 7, 2006 as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business that has its principal operations located in the People’s Republic of China.
On March 26, 2007, COAC closed its initial public offering of 6,000,000 units, with each unit consisting of one share of its common stock and two warrants, each to purchase one share of its common stock at an exercise price of $5.00 per share. On March 29, 2007, COAC closed an additional 900,000 units that were subject to the over-allotment option. The units from the initial public offering (including the over-allotment option) were sold at an offering price of $6.00 per unit, generating total gross proceeds of $41,400,000. Simultaneously with the consummation of the IPO, COAC consummated the private sale of 2,266,667 warrants (“Insider Warrants”) at $0.60 per warrant to certain of its initial stockholders and affiliates for an aggregate purchase price of $1,360,000. Net proceeds from the offering, including proceeds from the exercise of the underwriter’s over-allotment option, were $38,929,040, including $414,000 of deferred underwriting compensation. Of these net proceeds, $38,357,000, together with the entire $1,360,000 raised from the private sale of warrants, for a total of $39,717,000, were deposited into the trust account and the remaining proceeds of approximately $572,000 became available to be used to provide for business, legal and accounting due diligence on prospective business combinations and continuing general and administrative expenses. Notwithstanding the foregoing, COAC was entitled to have an aggregate of $250,000 of the interest earned on the funds in the trust account released to fund expense relating to investigating and selecting a target business and other working capital requirements, as well as any amounts needed to pay income or other tax obligations. COAC has used all of such available interest earned on the funds in the trust account. As of September 30, 2008, there was approximately $41,200,000 held in the trust account.
The funds deposited in the trust account, with the interest earned thereon, will be released to pay (i) transaction expenses (including an aggregate of up to $860,000 to EarlyBirdCapital, Inc. for investment banking and finder fees), and (ii) deferred underwriters compensation of $414,000. The balance of the funds will be released to BVICo to pay stockholders who properly exercise their conversion rights and for working capital and general corporate purposes.
If the merger is not consummated by March 20, 2009, either party may terminate the merger agreement. If COAC is unable to complete the merger or another business combination by March 20, 2009, its corporate
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existence will automatically terminate and it will liquidate and promptly distribute to its public stockholders the amount in its trust account plus any remaining non-trust account funds after payment of its liabilities.
COAC’s common stock, units and warrants are currently quoted on the Over-the-Counter Bulletin Board under the symbols CHNQ, CHNQU and CHNQW, respectively. After the closing of the transactions contemplated by the merger agreement, the securities of BVICo are expected to be listed on the Nasdaq Stock Market under the symbols CHOP, CHOPU and CHOPW.
The mailing address of COAC’s principal executive office is 300 Tice Boulevard, Woodcliff Lake, New Jersey 07677. Its telephone number is (201) 930-8900. COAC’s corporate existence will cease to exist upon consummation of the merger.
HKCo
Wealth Rainbow Development Limited is a Hong Kong corporation that was organized in 2008 for the sole purpose of acquiring and holding all of the outstanding capital of Ge Rui. All of HKCo’s capital stock is owned by BVICo. HKCo has no material assets other than the capital of Ge Rui and does not operate any business.
HKCo’s principal executive office is currently, and will continue to be after the merger, at Room 1711, No. 113, Agryle Street, Kowloon, Hong Kong. Its telephone number is [011] 852-2246-8368.
Ge Rui
Henan Green Complex Materials Co., Ltd is a company organized under the law of the People’s Republic of China in 2000 that became a limited liability company on August 7, 2008. Concurrently with the merger of BVICo and COAC, it will become a wholly owned subsidiary of HKCo and will continue to be so after consummation of the merger.
Ge Rui is a private manufacturer of high precision cold-rolled specialty steel products in China. It utilizes a variety of processes and technological methodologies to convert steel manufactured by third parties into thin steel sheet and plates. Its products are focused predominantly on high-end, value added finished steel products and are sold entirely to companies within China.
Ge Rui’s principal executive offices are located at No. 69 Huaibei Street, Longhai Middle Road, Henan, China. The telephone number at its executive offices is [011] 86-371-6897-0951. Ge Rui’s manufacturing facilities are located at No. 1 Economic Development Zone, Shuanghu, Xinzheng, Henan, China. Ge Rui believes that its existing facilities are adequate to meet current requirements and anticipates that suitable additional or substitute space will be available, as necessary. Ge Rui’s website addresses arewww.henangr.com andwww.hngerui.com.cn. The information on Ge Rui’s websites is in the Chinese language and is not a part of this proxy statement/prospectus.
The Merger
The merger agreement provides for a business combination transaction by means of a merger of COAC into BVICo, with BVICo being the surviving entity. As a result of this merger, the corporate existence of COAC will cease.
Upon consummation of the merger, the current BVICo shareholders will own 30,000,000 BVICo Ordinary Shares and the former holders of common stock of COAC will own 8,400,000 BVICo Ordinary Shares (including shares that are part of units). In addition, the existing COAC warrants and units will be converted into like securities of BVICo that will be exercisable or exchangeable into BVICo securities.
To provide a fund to secure indemnification protection to BVICo against losses that it, as surviving entity of the merger, may sustain, at the closing of the merger, the current BVICo shareholders will place in escrow (with an independent escrow agent) an aggregate of 3,000,000 BVICo Ordinary Shares.Other than with respect to certain specified matters, the escrow will be the sole remedy for BVICo for its rights to indemnification under the merger agreement. See the section entitled“The Merger Proposal — Indemnification.”
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COAC and BVICo plan to complete the merger promptly after the COAC special meeting, provided that:
• | COAC’s stockholders have approved the merger proposal; |
• | holders of fewer than 40% of COAC’s Public Shares have voted against the merger proposal and demanded conversion of their shares into cash; and |
• | the other conditions specified in the merger agreement have been satisfied or waived. |
After consideration of the factors identified and discussed in the section entitled“The Merger Proposal — Factors Considered by COAC’s Board of Directors,” COAC’s board of directors concluded that the merger met all of the requirements disclosed in COAC’s Registration Statement on Form S-1 (Reg. No. 333-137716), that became effective on March 20, 2007, including that BVICo has a fair market value of at least 80% of COAC’s net assets at the time of the merger.
Upon completion of the merger, assuming that none of the holders of the Public Shares elects to convert such shares into cash, the current BVICo shareholders will own approximately 78% of the BVICo Ordinary Shares outstanding immediately after the closing of the merger and the former COAC stockholders will own approximately 22% of BVICo’s Ordinary Shares. If the holders of 39.99% Public Shares elect to convert their shares into cash, such percentages would be approximately 84% and 16%, respectively.
Fairness Opinion
Pursuant to an engagement letter dated September 26, 2008, COAC engaged Baumann Moreau Consulting Group (“BMCG”) to render an opinion that the terms and conditions set forth in the merger agreement are fair to its stockholders from a financial point of view and that the fair market value of BVICo is at least equal to 80% of COAC’s net assets. BMCG is a consulting firm that regularly is engaged in the evaluation of businesses in China and the United States and securities of such businesses in connection with acquisitions, corporate restructuring, private placements and for other purposes. COAC’s board of directors decided to use the services of BMCG because it has substantial experience in matters similar to the transaction with BVICo. The engagement letter provides that COAC will pay BMCG a fee of $30,000 (which has been paid) and will reimburse BMCG for its reasonable out-of-pocket expenses, including attorneys’ fees. COAC has also agreed to indemnify BMCG against certain liabilities that may arise out of the opinion.
BMCG delivered its written opinion to COAC’s board of directors on November 5, 2008, which opinion stated that, as of such date, and based upon and subject to the assumptions made, matters considered and limitations on its review as set forth in the opinion, (i) the merger transaction was fair to COAC’s stockholders from a financial point of view, and (ii) the fair market value of BVICo was at least equal to 80% of COAC’s net assets at the time of the merger. Unless COAC management believes there has been a material adverse change in BVICo’s business or its fair market value since the date of such opinion, such opinion will not be updated.
The terms of the merger, including the relative percentages of BVICo Ordinary Shares that are to be owned by the current BVICo shareholders and the COAC stockholders, were determined pursuant to negotiations between COAC and BVICo and not pursuant to recommendations of BMCG. The full text of BMCG’s written opinion, attached hereto as Annex F, is incorporated by reference into this proxy statement/prospectus. You are encouraged to read the BMCG opinion carefully and in its entirety for descriptions of the assumptions made, matters considered, procedures followed and limitations on the review undertaken by BMCG in rendering them. The summary of the BMCG opinion set forth in this proxy statement/prospectus is qualified in its entirety by reference to the full text of the opinion. See the section entitled“The Merger Proposal — Fairness Opinion.”
COAC has also engaged BMCG to perform an evaluation to determine whether COAC has any intangible assets with respect to which it would be required to recognize gain in connection with the merger. COAC has paid BMCG a fee of $5,000 for such evaluation. See the section entitled“The Merger Proposal – Material Federal Tax Consequences of the Merger to COAC and Its Stockholders.”
Management of BVICo
Upon consummation of the merger, the directors of BVICo will be Mingwang Lu, Yi Lu, Wong Kwok Keung, Maotong Xu and Yunlong Wang, who are designees of the BVICo shareholders, Harry Edelson, who
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is COAC’s chairman and chief executive officer, and J.P. Huang, who is a designee of Harry Edelson. Maotong Xu, Yunlong Wang, Wong Kwok Keung and J.P. Huang will be considered independent directors under applicable regulatory rules. The current BVICo shareholders and Mr. Edelson will enter into a voting agreement at the time of closing of the merger (to which BVICo will also be a party) that will provide that they will each vote their BVICo Ordinary Shares in favor of the election of such persons as directors of BVICo in specified classes in all elections through and including the annual meeting that will be held in 2011.
The directors of BVICo will be classified as follows:
• | in the class to stand for reelection in 2009: Maotong Xu and J.P. Huang; |
• | in the class to stand for reelection in 2010: Wong Kwok Keung and Harry Edelson; and |
• | in the class to stand for reelection in 2011: Mingwang Lu, Yi Lu and Yunlong Wang. |
Upon the consummation of the merger, the executive officers of BVICo will be Mingwang Lu, chairman of the board and chief executive officer, Liyong Qu, Chief accounting officer, Yi Lu, general manager, and Qihong Zhang, finance director. Each of such persons is currently an executive officer of Ge Rui.
If the merger proposal is not approved by COAC’s stockholders at the special meeting or an adjournment thereof, COAC’s current directors and executive officers will continue in office until COAC is liquidated.
The Adjournment Proposal
If, based on the tabulated vote, there are not sufficient votes at the time of the special meeting to authorize COAC to consummate the merger (because either the merger proposal is not approved or 40% or more of the holders of the Public Shares vote against the merger proposal and elect to convert their Public Shares into cash), the adjournment proposal allows COAC’s board of directors to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation of proxies. See the section entitled“The Adjournment Proposal.”
Vote of COAC Inside Stockholders
As of, 2009, the record date for the COAC special meeting, Harry Edelson, COAC’s chairman of the board and chief executive officer, Nicholas Puro, COAC’s president and secretary and a director, Barry M. Shereck, COAC’s chief financial officer and a director, Rose-Marie Fox, a director of COAC, Daxi Li, Shengyun Qiu and China Investment Group LLC, each of whom is a special advisor to COAC, and Bailin Zheng, a former special advisor to COAC, who are collectively referred to as the COAC Inside Stockholders, beneficially owned and were entitled to vote 1,500,000 shares (“Original Shares”). The Original Shares constituted 17.9% of the outstanding shares of COAC’s common stock immediately after the IPO.
In connection with the IPO, COAC and EarlyBirdCapital, Inc. (“EarlyBirdCapital”), the representative of the underwriters of the IPO, entered into agreements with each of the COAC Inside Stockholders pursuant to which each COAC Inside Stockholder agreed to vote his, her or its Original Shares on the merger proposal in accordance with the majority of the votes cast by the holders of Public Shares. The COAC Inside Stockholders have also indicated that they intend to vote their Original Shares in favor of all other proposals being presented at the meeting. The Original Shares have no liquidation rights and will be worthless if no business combination is effected by COAC. In connection with the IPO, the COAC Inside Stockholders have placed their Original Shares in escrow with Continental Stock Transfer & Trust Company pursuant to agreements restricting the sale of their Original Shares until the earlier of twelve months after a business combination or COAC’s liquidation, subject to earlier release within such twelve month period if COAC consummates a subsequent liquidation, merger, stock exchange or other similar transaction that results in all of COAC’s stockholders having the right to exchange their shares for cash, securities or other property. Also, if holders of more than 20% of the Public Shares vote against the merger and seek to exercise their conversion rights and the merger is nevertheless consummated, Mr. Edelson and Ms. Fox have agreed to forfeit and return for cancellation such number of shares so that the COAC Inside Stockholders will own no more than 23.81% of the Ordinary Shares that will be issued to the stockholders of COAC upon consummation of the merger.
As of December 19, 2008, no COAC Inside Stockholder other than Harry Edelson has purchased any shares of COAC common stock in the open market. In connection with COAC’s IPO, Mr. Edelson has entered
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into an agreement with EarlyBirdCapital, Inc., which is intended to comply with Rule 10b5-1 under the Exchange Act, pursuant to which he, or an entity or entities he controls, will place limit orders for $3 million of COAC’s common stock commencing November 26, 2008, which, pursuant to such agreement, was ten business days after COAC filed its Current Report on Form 8-K announcing COAC’s execution of the merger agreement, and ending on the business day immediately preceding the record date for the special meeting of stockholders. The purpose of such purchases is to increase the number of COAC shares that are held by persons who are likely to vote in favor of the merger proposal. As a result, Mr. Edelson’s ability to influence the outcome of the vote on the merger proposal is increased. Through December 19, 2008, Mr. Edelson purchased an aggregate of 120,000 shares of COAC common stock in accordance with such agreement at an average price of $5.70 per share.
If the COAC Inside Stockholders believe it would be desirable for them or their affiliates to purchase shares in advance of the special meeting, such determination would be based on factors such as the likelihood of approval or disapproval of the merger proposal, the number of shares for which conversion may be requested and the financial resources available to such prospective purchasers. Any additional shares purchased by the COAC Inside Stockholders may be voted by them in any way they choose.
Date, Time and Place of Special Meeting of COAC’s Stockholders
The special meeting of the stockholders of COAC will be held at 10:00 a.m., Eastern time, on, 2009, at the offices of Graubard Miller, COAC’s counsel, at The Chrysler Building, 405 Lexington Avenue, 19th Floor, New York, New York 10174 to consider and vote upon the merger proposal and the adjournment proposal.
Voting Power; Record Date
You will be entitled to vote or direct votes to be cast at the special meeting if you owned shares of COAC common stock at the close of business on, 2009, which is the record date for the special meeting. You will have one vote for each share of COAC common stock you owned at the close of business on the record date. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted. COAC warrants do not have voting rights. On the record date, there were 8,400,000 shares of COAC common stock outstanding, of which 6,900,000 were Public Shares and 1,500,000 were shares held by the COAC Inside Stockholders that were acquired prior to the IPO.
Quorum and Vote of COAC Stockholders
A quorum of COAC stockholders is necessary to hold a valid meeting. A quorum will be present at the COAC special meeting if a majority of the outstanding shares entitled to vote at the meeting are represented in person or by proxy. Abstentions and broker non-votes will count as present for the purposes of establishing a quorum. The COAC Inside Stockholders hold 17.9% of the outstanding shares of COAC common stock, none of which are Public Shares. Such shares will be voted on the merger proposal in accordance with the majority of the votes cast by the holders of Public Shares and in favor of all of the other proposals and for the election as directors of management’s nominees.
• | Pursuant to COAC’s charter, the approval of the merger proposal will require the affirmative vote of the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote on the proposal at the meeting. There are currently 8,400,000 shares of COAC common stock outstanding, of which 6,900,000 are Public Shares. The merger will not be consummated if the holders of 40% or more of the Public Shares (2,760,000 shares or more) properly demand conversion of their Public Shares into cash. |
• | The approval of an adjournment proposal will require the affirmative vote of the holders of a majority of the shares of COAC common stock represented in person or by proxy and entitled to vote thereon at the meeting. |
Abstentions will have the same effect as a vote “AGAINST” the merger proposal and the adjournment proposal, if the latter is presented. Broker non-votes, while considered present for the purposes of establishing a quorum, will have no effect on the merger proposal or an adjournment proposal. Please note that you cannot seek conversion of your shares unless you affirmatively vote against the merger proposal.
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Conversion Rights
Pursuant to COAC’s amended and restated certificate of incorporation, a holder of Public Shares may, if the stockholder affirmatively votes against the merger, demand that COAC convert such shares into cash if the merger is consummated. See the section entitled“Special Meeting of COAC Stockholders — Conversion Rights” for the procedures to be followed if you wish to convert your shares into cash. If properly demanded, COAC will convert each Public Share into a pro rata portion of the trust account, calculated as of two business days prior to the anticipated consummation of the merger. As of September 30, 2008, this would amount to approximately $5.97 per share. If you exercise your conversion rights, then you will be exchanging your shares of COAC common stock for cash and will no longer own the shares. You will be entitled to receive cash for these shares only if you affirmatively vote against the merger, properly demand conversion and, after the meeting, tender your stock (either physically or electronically) to COAC’s transfer agent within the period specified in a notice you will receive from or on behalf of BVICo, which period will be not less than 20 days from the date of such notice. If the merger is not completed, these shares will not be converted into cash. If holders of more than 20% of the Public Shares properly exercise their conversion rights and the merger is consummated, Mr. Edelson and Ms. Fox will forfeit a portion of their Original Shares, which were placed into escrow at the time of the IPO, so that the Inside Stockholders will collectively own no more than 23.81% of the BVICo Ordinary Shares that will be issued to the COAC stockholders upon consummation of the merger.
If the merger is not consummated by March 20, 2009, either party may terminate the merger agreement. If COAC is unable to complete the merger or another business combination by March 20, 2009, its corporate existence will terminate on that date and, upon its resulting liquidation, the holders of Public Shares will receive an amount equal to the amount of funds in the trust account at the time of the liquidation distribution divided by the number of Public Shares. Although both the per share liquidation price and the per share conversion price are equal to the amount of trust accounts in the trust account divided by the number of Public Shares, the amount a holder of Public Shares would receive at liquidation may be more or less than the amount such a holder would have received had it sought conversion of its shares in connection with the merger because (i) there will be greater earned interest in the trust account at the time of a liquidation distribution since it would occur at a later date than a conversion and (ii) COAC may incur expenses it otherwise would not incur if COAC consummates the merger, including, potentially, claims requiring payment from the trust account by creditors who have not waived their rights against the trust account. Harry Edelson, COAC’s chairman and chief executive officer, will be personally liable under certain circumstances (for example, if a vendor successfully makes a claim against funds in the trust account) to ensure that the proceeds in the trust account are not reduced by the claims of prospective target businesses and vendors or other entities that are owed money by COAC for services rendered or products sold to it. While COAC has no reason to believe that Mr. Edelson will not be able to satisfy those obligations, there cannot be any assurance to that effect. See the section entitled“Other Information Related to COAC — Liquidation If No Business Combination” for additional information.
The merger will not be consummated if the holders of 40% or more of the Public Shares (2,760,000 shares or more) properly demand conversion of their shares into cash.
Appraisal Rights
COAC stockholders have appraisal rights in connection with the merger under the DGCL, as described in the section entitled“Appraisal Rights.”
Proxies
Proxies may be solicited by mail, telephone or in person. COAC has engaged Morrow & Co., LLC to assist in the solicitation of proxies.
If you grant a proxy, you may still vote your shares in person if you revoke your proxy before the special meeting. You may also change your vote by submitting a later-dated proxy as described in the section entitled“Special Meeting of COAC Stockholders — Revoking Your Proxy.”
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Interests of COAC’s Directors and Officers and Others in the Merger
When you consider the recommendation of COAC’s board of directors in favor of approval of the merger proposal, you should keep in mind that COAC’s directors and officers have interests in the merger transaction that are different from, or in addition to, your interests as a stockholder. These interests include, among other things:
• | If the merger is not consummated by March 20, 2009, COAC will automatically be liquidated. In such event, the 1,500,000 Original Shares held by COAC’s directors and officers that were acquired before the IPO for an aggregate purchase price of $25,000 would be worthless because COAC’s directors and officers are not entitled to receive any of the liquidation proceeds with respect to such shares. Such shares had an aggregate market value of $ based upon the closing bid price of $ on the Over-the-Counter Bulletin Board on, 2009, the record date for the COAC special meeting. |
• | The COAC officers, directors and special advisors have also purchased 2,266,667 warrants (“Insider Warrants”), for an aggregate purchase price of $1,360,000 (or $0.60 per warrant) pursuant to agreements with COAC and EarlyBirdCapital, Inc. and entered into in connection with COAC’s IPO. These purchases took place on a private placement basis simultaneously with the consummation of COAC’s IPO. All of the proceeds COAC received from these purchases were placed in COAC’s trust fund. These Insider Warrants are identical to the warrants underlying COAC’s units, except that if COAC calls the warrants for redemption, the Insider Warrants will not be redeemable by COAC so long as they are held by these purchasers or their affiliates. Such warrants had an aggregate market value of $, based on the closing bid price of $ on the Over-the-Counter Bulletin Board on, 2009, the record date for the COAC special meeting. All of the warrants will become worthless if the merger is not consummated (as will the remainder of the public warrants). |
• | The transactions contemplated by the merger agreement provide that Harry Edelson and J.P. Huang, a designee of Mr. Edelson, will be directors of BVICo after the closing of the merger. As such, in the future they will receive any cash fees, stock options or stock awards that the BVICo board of directors determines to pay to its non-executive directors. |
• | If COAC liquidates prior to the consummation of a business combination, Harry Edelson, COAC’s chairman and chief executive officer, will be personally liable to pay debts and obligations to vendors and other entities that are owed money by COAC for services rendered or products sold to COAC, or to any target business, to the extent such creditors bring claims that would otherwise require payment from monies in the trust account. Based on COAC’s estimated debts and obligations, it is not currently expected that Mr. Edelson will have any exposure under this arrangement in the event of a liquidation. |
• | If holders of more than 20% of the Public Shares properly exercise their conversion rights and the merger is consummated, Mr. Edelson and Ms. Fox will forfeit a portion of their Original Shares, which were placed into escrow at the time of the IPO, so that the Inside Stockholders will collectively own no more than 23.81% of the BVICo Ordinary Shares that will be issued to the COAC stockholders upon consummation of the merger. |
• | Harry Edelson has loaned COAC $200,000 to cover its expenses in connection with the merger and may make further loans for this purpose in the future. Such loans will be unsecured, non-interest bearing and will be repaid at the closing of the merger. If the merger is not consummated and COAC is required to liquidate, such loans will not be repaid to Mr. Edelson. |
Additionally, upon consummation of the merger, COAC is obligated to pay EarlyBirdCapital, Inc. a cash fee at closing up to an aggregate of $860,000 representing investment banking and finder fees. The underwriters in COAC’s IPO, including EarlyBirdCapital, Inc., will also be entitled to receive $414,000 of deferred underwriting commissions upon consummation of the merger.
At any time prior to the special meeting, during a period when they are not then aware of any material nonpublic information regarding COAC or its securities, the COAC Inside Stockholders, BVICo or the current
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BVICo shareholders and/or their respective affiliates may purchase shares from institutional and other investors, or execute agreements to purchase such shares from them in the future, or they or COAC may enter into transactions with such persons and others to provide them with incentives to acquire shares of COAC’s common stock or vote their shares in favor of the merger proposal. The purpose of such share purchases and other transactions would be to increase the likelihood of satisfaction of the requirements that the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote on the merger proposal vote in its favor and that holders of fewer than 40% of the Public Shares vote against the merger proposal and demand conversion of their Public Shares into cash where it appears that such requirements would otherwise not be met.
While the exact nature of any such incentives has not been determined as of the date of this proxy statement/prospectus, they might include, without limitation, arrangements to protect such investors or holders against potential loss in value of their shares, including the granting of put options, the transfer to such investors or holders of shares or warrants owned by the COAC Inside Stockholders for nominal value and the grant to such investors and holders of rights to nominate directors of COAC. COAC will not enter into any such arrangement that would have the effect of constituting a waiver of the voting requirement or the limitation on the maximum number of conversion shares and no funds in its trust account will be used to make such purchases or to fund other such arrangements.
Entering into any such arrangements may have a depressive effect on COAC’s stock. For example, as a result of these arrangements, an investor or holder may have the ability to effectively purchase shares at a price lower than market and may therefore be more likely to sell the shares he owns, either prior to or immediately after the special meeting.
If such transactions are effected, the consequence could be to cause the merger to be approved in circumstances where such approval could not otherwise be obtained. Purchases of shares by the persons described above would allow them to exert more influence over the approval of the merger proposal and other proposals and would likely increase the chances that such proposals would be approved. Moreover, any such purchases may make it less likely that the holders of 40% or more of the Public Shares will vote against the merger proposal and exercise their conversion rights.
As of the date of this proxy statement/prospectus, there have been no such discussions and no agreements to such effect have been entered into with any such investor or holder. COAC will file a Current Report on Form 8-K to disclose arrangements entered into or significant purchases made by any of the aforementioned persons that would affect the vote on the merger proposal or the conversion threshold. Any such report will include descriptions of any arrangements entered into or significant purchases by any of the aforementioned persons.
It is possible that the special meeting could be adjourned to provide time to seek out and negotiate such transactions if, at the time of the meeting, it appears that the requisite vote will not be obtained or that the limitation on conversion will be exceeded, assuming that an adjournment proposal is presented and approved. Also, under Delaware law, the board of directors may postpone the meeting at any time prior to it being called to order in order to provide time to seek out and negotiate such transactions.
In connection with COAC’s IPO, Mr. Edelson entered into an agreement with EarlyBirdCapital, Inc., which is intended to comply with Rule 10b5-1 under the Exchange Act, pursuant to which he, or an entity or entities he controls, will place limit orders for $3 million of COAC’s common stock commencing November 26, 2008 which, pursuant to such agreement, was ten business days after COAC filed its Current Report on Form 8-K announcing COAC’s execution of the merger agreement, and ending on the business day immediately preceding the record date for the special meeting of stockholders. Mr. Edelson may vote these shares any way he chooses. Mr. Edelson has agreed that he will not sell or transfer any shares of common stock purchased by him pursuant to this agreement until one year after COAC has completed the merger. It is intended that these purchases will comply with Rule 10b-18 under the Exchange Act and, accordingly, any purchases that are not permitted by Rule 10b-18 will not be made. These purchases will be made at a price equal to the per share amount held in COAC’s trust account as of November 12, 2008 (the date of the signing of the merger agreement) and will be made by EarlyBirdCapital or an independent broker dealer mutually agreed upon by Mr. Edelson and EarlyBirdCapital (including in the event that EarlyBirdCapital’s participation
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in the purchases would not comply with Rule 10b-18) in such amounts and at such times as EarlyBirdCapital or such other broker dealer may determine, in its sole discretion, so long as the purchase price does not exceed the above-referenced per share purchase price. As a result of EarlyBirdCapital’s interest in COAC’s consummation of a business combination, it may not be deemed to be independent for purposes of this agreement. Through December 19, 2008, Mr. Edelson purchased an aggregate of 120,000 shares of COAC common stock in accordance with such agreement at an average price of $5.70 per share.
Recommendation to Stockholders
COAC’s board of directors believes that the merger proposal is fair to and in the best interest of COAC’s stockholders and unanimously recommends that its stockholders vote “FOR” the merger proposal and an adjournment proposal, if presented.
Conditions to the Closing of the Merger
General Conditions
Consummation of the merger is conditioned on (i) the holders of the Public Shares, at a meeting called for this and other related purposes, approving the merger proposal and (ii) the holders of fewer than 40% of the Public Shares voting against the merger and exercising their right to convert their Public Shares into a pro-rata portion of the trust account, calculated as of two business days prior to the anticipated consummation of the merger.
In addition, the consummation of the transactions contemplated by the merger agreement is conditioned upon, among other things, (i) no order, stay, judgment or decree being issued by any governmental authority preventing, restraining or prohibiting in whole or in part, the consummation of such transactions, (ii) the execution by and delivery to each party of each of the various transaction documents, (iii) the delivery by each party to the other party of a certificate to the effect that the representations and warranties of each party are true and correct in all material respects as of the closing and all covenants contained in the merger agreement have been materially complied with by each party, and (iv) the receipt of consents and approvals by third parties and the completion of necessary proceedings.
Other Conditions
The obligations of COAC, BVICo and the Shareholders to consummate the transactions contemplated by the merger agreement also are conditioned upon a number of other matters that are described in the section entitled“The Merger Agreement — Conditions to Closing of the Merger.”
Termination
The merger agreement may be terminated at any time, but not later than the closing, as follows:
• | by mutual written agreement of COAC and BVICo; |
• | by either COAC or BVICo if the merger is not consummated on or before March 20, 2009, provided that such termination is not available to a party whose action or failure to act has been a principal cause of or resulted in the failure of the merger to be consummated before such date and such action or failure to act is a breach of the merger agreement; |
• | by either COAC or BVICo if a governmental entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, which order, decree, judgment, ruling or other action is final and nonappealable; |
• | by either COAC or BVICo if the other party has breached any of its covenants or representations and warranties in any material respect and has not cured its breach within thirty days of the notice of an intent to terminate, provided that the terminating party is itself not in breach; and |
• | by either COAC or BVICo if, at the COAC stockholder meeting, the merger agreement shall fail to be approved by the affirmative vote of the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote at the meeting or the holders of 40% or more of the Public Shares exercise conversion rights. |
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If permitted under the applicable law, either BVICo or COAC may waive any inaccuracies in the representations and warranties made to such party contained in the merger agreement and waive compliance with any agreements or conditions for the benefit of itself or such party contained in the merger agreement. The condition requiring that the holders of fewer than 40% of the Public Shares affirmatively vote against the merger proposal and demand conversion of their shares into cash may not be waived. COAC cannot assure you that any or all of the conditions will be satisfied or waived.
The existence of the financial and personal interests of the directors may result in a conflict of interest on the part of one or more of them between what he may believe is best for COAC and what he may believe is best for himself in determining whether or not to grant a waiver in a specific situation.
Tax Consequences of the Merger
COAC has obtained an opinion from Graubard Miller, its counsel, that indicates that the merger will qualify as a reorganization for United States tax purposes. No gain or loss will be recognized on the exchange of the COAC common stock for the Ordinary Shares of BVICo by a holder of COAC common stock who owns less than 5% of the stock of BVICo following the merger nor by a holder of COAC common stock who owns 5% or more of the Ordinary Shares of BVICo following the merger if such stockholder files a gain recognition agreement with such stockholder’s federal income tax return. Stockholders of COAC are encouraged to consult their own tax advisors, because the tax consequences may be different among the stockholders depending on their personal circumstances.
COAC also believes that it will not incur any material amount of federal tax as a result of the merger. It is expected that COAC will not recognize any gain or loss as a result of COAC merger with BVICo. An evaluation will be made by BMCG prior to the closing of the merger to establish whether COAC has any intangible assets that will be transferred to BVICo in connection with the merger. If there are any such intangible assets, it is not expected that they will be of a substantial amount and any federal income tax will not be of material significance. The IRS may not agree with this conclusion. In such an event, there may be a significant tax obligations for BVICo, the surviving company, to pay based on the value of COAC’s appreciated assets at the time of the merger.
A stockholder of COAC who exercises conversion rights and effects a termination of the stockholder’s interest in COAC will be required to recognize capital gain or loss upon the exchange of that stockholder’s shares of common stock of COAC for cash, if such shares were held as a capital asset on the date of the business combination. Such gain or loss will be measured by the difference between the amount of cash received and the tax basis of that stockholder’s shares of COAC common stock.
The tax opinion is attached to this proxy statement/prospectus as Annex G. Graubard Miller has consented to the use of its opinion in this proxy statement/prospectus. For a description of the material federal income tax consequences of the business combination, please see the information set forth in“The Merger Proposal — Material Federal Income Tax Consequences of the Merger to COAC and its Stockholders.”
Anticipated Accounting Treatment
The merger will be accounted for in accordance with U.S. generally accepted accounting principles utilizing the “purchase method” under Statement of Financial Accounting Standards No. 141- “Business Combinations”. The purchase price is based on the book value of the acquired net assets, since they are primarily cash, which is deemed the more reliably measurable asset in the transaction.
The shareholders of BVICo will own at least 50.1% of the outstanding shares of the common stock immediately following the completion of the merger, will have its current officers assuming almost all corporate and day-to-day management of BVICo and will control a majority of the board of BVICo. COAC's assets and liabilities will be consolidated with the assets and liabilities of BVICo upon consummation of the merger. Accordingly, following consummation of the merger, COAC will cease to exist as a corporate entity and BVICo's financial statements will continue as the surviving company's financial statements. The combined company's assets and liabilities and the historical operations will be those of BVICo and will be recorded at the historical cost basis of BVICo.
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Regulatory Matters
The merger and the transactions contemplated by the merger agreement are not subject to any additional federal or state regulatory requirement or approval, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or HSR Act, except for filings with the State of Delaware and the Registrar of Corporate Affairs of the British Virgin Islands necessary to effectuate the merger.
Risk Factors
In evaluating the merger proposal and the adjournment proposal, you should carefully read this proxy statement/prospectus and especially consider the factors discussed in the section entitled“Risk Factors.”
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
COAC and BVICo are providing the following selected historical financial information to assist you in your analysis of the financial aspects of the merger. BVICo is a holding company with no operations other than as the holding company of HKCo and its only asset is all of the issued share capital of HKCo. HKCo in turn is a holding company with no operations and its only asset will be all of the registered capital of Ge Rui, BVICo's ultimate operating subsidiary. Consolidated financial information of BVICo has not been prepared as BVICo's acquisition of Ge Rui will occur after September 30, 2008. Accordingly, for purposes of presentation, the historical financial information of Ge Rui is presented as if it were the historical financial information of BVICo and all references to BVICo's financial data and information are therefore Ge Rui's financial data and information. Separate historical financial information of BVICo and HKCo is not being presented as it is immaterial to the consolidated operations of BVICo.
Ge Rui’s balance sheet data as of September 30, 2008 and statement of operations data for the nine months then ended and for the nine months ended September 30, 2007 are derived from its unaudited financial statements, which are included elsewhere in this proxy statement/prospectus. Ge Rui��s balance sheet data as of December 31, 2007 and 2006 and statement of operations data for the years then ended and for the year ended December 31, 2005 are derived from its audited financial statements, which are included elsewhere in this proxy statement/prospectus. Ge Rui’s balance sheet data as of December 31, 2005, 2004 and 2003 and statement of operations data for the years ended December 31, 2004 and 2003 are derived from its consolidated financial statements, which are not included in this proxy statement/prospectus.
COAC’s balance sheet data as of September 30, 2008 and statement of operations data for the nine months then ended are derived from COAC’s unaudited financial statements, which are included elsewhere in this proxy statement/prospectus. COAC’s balance sheet data as of December 31, 2007 and statement of operations data for the period from August 7, 2006 (Inception) to December 31, 2007 are derived from COAC’s audited financial statements, which are included elsewhere in this proxy statement/prospectus.
The information is only a summary and should be read in conjunction with each of COAC’s and Ge Rui’s historical financial statements and related notes and“Other Information Related to COAC — COAC’s Plan of Operation” and“BVICo’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere herein. The historical results included below and elsewhere in this proxy statement/prospectus are not indicative of the future performance of BVICo.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION —
HENAN GREEN COMPLEX MATERIALS CO. LTD.
(000’s of USD)
Nine Months Ended September 30, | Years Ended December 31, | |||||||||||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||
Revenue | $ | 156,860 | $ | 106,517 | $ | 139,649 | $ | 99,017 | $ | 62,520 | $ | 45,530 | $ | 37,012 | ||||||||||||||
Cost of revenue | 112,999 | 76,713 | 100,577 | 72,654 | 48,865 | 37,534 | 32,628 | |||||||||||||||||||||
Gross profit | 43,861 | 29,804 | 39,072 | 26,363 | 13,655 | 7,996 | 4,384 | |||||||||||||||||||||
Operating expenses | 2,955 | 2,436 | 3,301 | 2,470 | 1,930 | 1,583 | 1,150 | |||||||||||||||||||||
Operating income (loss) | 40,906 | 27,368 | 35,771 | 23,893 | 11,725 | 6,413 | 3,234 | |||||||||||||||||||||
Total other income (expense) | (1,807 | ) | (322 | ) | (699 | ) | (244 | ) | (157 | ) | (474 | ) | (321 | ) | ||||||||||||||
Income (loss) before income tax expense | 39,099 | 27,046 | 35,072 | 23,649 | 11,568 | 5,939 | 2,913 | |||||||||||||||||||||
Income tax expense | 9,668 | 8,863 | 11,422 | 7,770 | 3,780 | 1,960 | 961 | |||||||||||||||||||||
Net income | $ | 29,431 | $ | 18,183 | $ | 23,650 | $ | 15,879 | $ | 7,788 | $ | 3,979 | $ | 1,952 |
Pro Forma As of September 30, 2008 | As of September 30, 2008 | As of December 31, | ||||||||||||||||||||||||||
(See Note Below) | 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 15,457 | 25,132 | $ | 218 | $ | 804 | $ | 478 | $ | 834 | $ | 1,450 | |||||||||||||||
Restricted cash | 27,101 | 27,101 | 19,227 | 27,562 | 48,823 | 16,863 | 3,680 | |||||||||||||||||||||
Accounts receivable, net | 18,046 | 18,046 | 10,176 | 5,739 | 761 | 3,384 | 382 | |||||||||||||||||||||
Inventory | 5,335 | 5,335 | 8,660 | 8,511 | 6,283 | 6,655 | 4,589 | |||||||||||||||||||||
Due from owners | — | — | 25,126 | 17,923 | 6,714 | 6,605 | 2,826 | |||||||||||||||||||||
Prepaid expenses and other current assets | 33,425 | 33,425 | 11,245 | 8,283 | 7,962 | 6,500 | 1,463 | |||||||||||||||||||||
Net property and equipment | 18,122 | 18,122 | 17,164 | 16,960 | 14,675 | 8,316 | 10,953 | |||||||||||||||||||||
Total assets | 127,163 | 127,163 | 91,817 | 85,782 | 85,695 | 49,157 | 25,343 | |||||||||||||||||||||
Total liabilities | 106,555 | 106,555 | 60,273 | 63,239 | 72,051 | 39,867 | 19,975 | |||||||||||||||||||||
Owners’ equity | 10,932 | 20,607 | 31,544 | 22,543 | 13,644 | 9,290 | 5,368 |
Note: The Pro Forma Balance Sheet data as of September 30, 2008 includes the adjustment for the dividend anticipated to be declared in the fourth quarter of 2008.
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SELECTED HISTORICAL FINANCIAL INFORMATION — COAC
Nine Months Ended September 30, 2008 | For the Period from August 7, 2006 (Inception) to December 31, 2007 | |||||||
Statement of Operations Data: | ||||||||
Operating expenses | $ | 222,665 | $ | 265,506 | ||||
Total expenses | 222,665 | 265,506 | ||||||
Interest, dividend and other income | 684,800 | 1,075,291 | ||||||
Income before income tax expense | 462,135 | 809,785 | ||||||
Income tax expense | 46,101 | 74,508 | ||||||
Net income | 461,034 | 735,277 | ||||||
Accretion of trust account relating to common stock subject to possible conversion | 173,506 | 427,634 | ||||||
Net income attributable to common stockholders | $ | 242,528 | $ | 307,643 | ||||
Weighted average number of shares outstanding – basic and diluted | 5,640,690 | |||||||
Net income per share – basic and diluted | $ | .04 | $ | |||||
Weighted average shares outstanding subject to possible conversion – basic and diluted | 2,759,310 | |||||||
Net income per share subject to possible conversion – basic and diluted | $ | .06 | $ |
As of September 30, 2008 | As of December 31, 2007 | |||||||
Balance Sheet Data: | ||||||||
Cash and cash equivalents | $ | 70,903 | $ | 256,253 | ||||
Total current assets | 284,815 | 280,711 | ||||||
Cash equivalents held in trust | 41,220,226 | 40,786,353 | ||||||
Total assets | 41,505,041 | 41,067,064 | ||||||
Common stock subject to possible conversion | 16,483,968 | 16,310,462 | ||||||
Total current liabilities | 17,062,546 | 16,867,097 | ||||||
Total liabilities | 17,062,546 | 16,867,097 | ||||||
Total stockholders' equity | 24,442,495 | 24,199,967 |
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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The selected unaudited pro forma condensed combined financial information has been derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial information included elsewhere in this proxy statement/prospectus.
As indicated elsewhere in this proxy statement/prospectus, due to the nature of the operations of BVICo, for purposes of presentation, the financial information of Ge Rui is presented as if it were the historical financial information of BVICo and all references to BVICo's financial data and information are therefore Ge Rui's financial data and information.
The unaudited pro forma combined condensed statement of operations for the year ended December 31, 2007 and the nine months ended September 30, 2008 give pro forma effect to the merger as if it had occurred on January 1, 2007 and 2008. The pro forma statements of operations are based on the historical results of operations of BVICo and COAC for the year ended December 31, 2007 and the nine months ended September 30, 2008.
The unaudited pro forma combined condensed balance sheet as of September 30, 2008 gives pro forma effect to the merger as if it had occurred on that date.
The historical financial information has been adjusted to give effect to pro forma events that are related and/or directly attributable to the merger, are factually supportable and, in the case of the unaudited pro forma statement of operations data, are expected to have a continuing impact on the combined results. The adjustments presented on the unaudited pro forma condensed combined financial information have been identified and presented in“Unaudited Pro Forma Condensed Combined Financial Information” to provide relevant information necessary for an accurate understanding of the combined company upon consummation of the merger.
The historical financial information of Ge Rui is derived from the unaudited financial information of Ge Rui for the nine months ended September 30, 2008 and the audited financial information of Ge Rui for the year ended December 31, 2007 included elsewhere in this proxy statement/prospectus. The historical financial information of COAC is derived from the unaudited financial information of COAC for the nine months ended September 30, 2008 and the audited financial statements of COAC for the year ended December 31, 2007 included elsewhere in this proxy statement/prospectus.
This information should be read together with BVICo’s and COAC’s financial information and related notes,“Unaudited Pro Forma Condensed Combined Financial Information,” “BVICo’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Other Information Related to COAC — COAC’s Plan of Operation” and other financial information included elsewhere in this proxy statement/ prospectus.
The unaudited pro forma condensed combined balance sheet data as of September 30, 2008 and the unaudited pro forma condensed combined statement of operations data for the nine months ended September 30, 2008 and the year ended December 31, 2007 have been prepared using two different levels of approval of the transaction by the COAC stockholders, as follows:
• | Assuming No Conversion: This presentation assumes that no COAC stockholders seek conversion of their COAC stock into pro rata shares of the trust account; and |
• | Assuming Maximum Conversion: This presentation assumes that holders of 39.99% (2,759,310) of the Public Shares exercise their conversion rights and that such shares were converted into their pro rata share of the trust account. |
The unaudited pro forma financial statements are not necessarily indicative of the financial position or results of operations that may have actually occurred had the transaction taken place on the dates noted, or the future financial position or operating results of the combined company.
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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(000’s USD Except Earning per Share)
Nine Months Ended September 30, 2008 | Year Ended December 31, 2007 | |||||||||||||||
Assuming No Conversion | Assuming Maximum Conversion | Assuming No Conversion | Assuming Maximum Conversion | |||||||||||||
Statement of Operations Data: | ||||||||||||||||
Revenue | $ | 156,861 | $ | 156,861 | $ | 139,649 | $ | 139,649 | ||||||||
Cost of revenue | 113,000 | 113,000 | 100,577 | 100,577 | ||||||||||||
Operating expenses | 3,133 | 3,133 | 3,494 | 3,494 | ||||||||||||
Operating income (loss) | 40,728 | 40,728 | 35,578 | 35,578 | ||||||||||||
Total other income (expense) | (1,122 | ) | (1,295 | ) | 376 | (52 | ) | |||||||||
Income (loss) before income tax expense | 39,606 | 39,433 | 35,954 | 35,526 | ||||||||||||
Income tax expense | 9,718 | 9,702 | 11,503 | 11,463 | ||||||||||||
Net income | $ | 29,888 | $ | 29,731 | $ | 24,451 | $ | 24,063 | ||||||||
Pro forma weighted average number of shares outstanding – basic and diluted | 38,400,000 | 35,640,690 | 38,400,000 | 35,640,690 | ||||||||||||
Pro forma net income per share – basic and diluted | $ | 0.78 | $ | 0.83 | $ | 0.64 | $ | 0.68 |
As of September 30, 2008 | ||||||||||||||||||
Assuming No Conversion | Assuming Maximum Conversion | |||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||
Cash and cash equivalents | $ | 48,491 | $ | 32,007 | ||||||||||||||
Restricted cash | 27,101 | 27,101 | ||||||||||||||||
Accounts receivable, net | 18,046 | 18,056 | ||||||||||||||||
Inventory | 5,335 | 5,335 | ||||||||||||||||
Prepaid expenses and other current assets | 33,530 | 33,530 | ||||||||||||||||
Net property and equipment | 18,122 | 18,122 | ||||||||||||||||
Total assets | 150,626 | 134,142 | ||||||||||||||||
Total liabilities | 100,200 | 100,200 | ||||||||||||||||
Total stockholders' equity | 50,426 | 33,942 |
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RISK FACTORS
You should carefully consider the following risk factors, together with all of the other information included in this proxy statement/prospectus, before you decide whether to vote or instruct your vote to be cast to approve the proposals described in this proxy statement/prospectus.
General Risks Related to BVICo’s Business and Operations Following the Merger
The value of your investment in BVICo following consummation of the merger will be subject to the significant risks affecting BVICo and inherent in its business, through Ge Rui. You should carefully consider the risks and uncertainties described below and other information included in this proxy statement/prospectus. If any of the events described below occur, BVICo’s post-acquisition business and financial results could be adversely affected in a material way. This could cause the trading price of its common stock to decline, perhaps significantly, and you therefore may lose all or part of your investment.
If COAC shareholders approve a business combination with BVICo, the current shareholders of BVICo ownership interests will have significant influence on decisions regarding the business of the resulting entity.
If a business combination with BVICo is consummated, the current shareholders of BVICo will own 78% of the shares of the resulting entity. In addition, the current management of BVICo will constitute all of the management of the resulting entity. As a result, the current shareholders of BVICo and/or BVICo’s current management will have a significant influence on decisions regarding the business of the resulting entity.
BVICo may be unable to attract and retain key management personnel and other employees, which may have an adverse impact on the effectiveness of its management and its operating results.
BVICo’s success depends to a significant extent upon the abilities and efforts of its current officers and employees and those of its subsidiaries, particularly Ge Rui. BVICo’s key employees’ reputations, expertise and relationships with customers and other third parties are each critical elements in operating and expanding its business. The loss of any of these individuals could adversely affect BVICo’s business prospects and financial condition and impede the achievement of its business objectives. Difficulty in hiring and retaining personnel could adversely affect BVICo’s business and results of operations.
The financial information of BVICo included in this proxy statement/prospectus is not necessarily indicative of its future performance.
The financial information included of BVICo included in this proxy statement/prospectus is not indicative of future financial results. The results of future periods are likely to be materially different as a result of:
• | the additional costs associated with being a public company; and |
• | the pace of growth of BVICo’s business in the future, which is likely to differ from the historical growth reflected in the BVICo financial information. |
BVICo will incur increased costs as a result of being a public company, which may adversely affect its business.
As a public company, BVICo will incur significant legal, accounting and other expenses that it did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the SEC and Nasdaq have required changes in corporate governance practices of public companies. BVICo expects these new rules and regulations to significantly increase its legal and financial compliance costs and to make some activities more time-consuming and costly. For example, in anticipation of becoming a public company, BVICo will be creating additional board committees and adopting policies regarding internal controls and disclosure controls and procedures. BVICo will also incur additional costs associated with its public company reporting requirements. Further, BVICo expects these new rules and regulations to make it more difficult and more expensive for it to obtain director and officer liability insurance and BVICo may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for BVICo to attract and retain qualified persons to
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serve on its board of directors or as executive officers. BVICo is currently evaluating and monitoring developments with respect to these new rules, and it cannot accurately predict the amount of additional costs it may incur, or the timing of such costs.
BVICo’s internal controls over financial reporting do not currently meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on its business.
BVICo’s internal controls over financial reporting do not currently meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act that it will eventually be required to meet. BVICo is in the process of addressing its internal controls over financial reporting and is establishing formal policies, processes and practices related to financial reporting and to the identification of key financial reporting risks, assessment of their potential impact and linkage of those risks to specific areas and activities within its organization.
Additionally, BVICo has begun the process of documenting its internal control procedures to satisfy the requirements of Section 404, which requires annual management assessments of the effectiveness of its internal controls over financial reporting and a report by its independent registered public accounting firm addressing these assessments. Because BVICo does not currently have comprehensive documentation of its internal controls and have not yet tested its internal controls in accordance with Section 404, BVICo cannot conclude in accordance with Section 404 that it does not have a material weakness in its internal controls or a combination of significant deficiencies that could result in the conclusion that it has a material weakness in its internal controls. As a public entity, BVICo will be required to complete its initial assessment in a timely manner. If BVICo is not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, its independent registered public accounting firm may not be able to certify as to the adequacy of its internal controls over financial reporting. Matters impacting BVICo’s internal controls may cause it to be unable to report its financial information on a timely basis and thereby subject it to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in BVICo and the reliability of its financial statements. Confidence in the reliability of BVICo’s financial statements could also suffer if its independent registered public accounting firm were to report a material weakness in its internal controls over financial reporting. This could materially adversely affect BVICo and lead to a decline in the price of its Ordinary Shares.
Risks Related to Operations in China
Business combinations with companies with operations in China entail special considerations and risks. If the merger is successfully completed, BVICo will be subject to, and possibly adversely affected by, the following risks:
After the merger, substantially all of BVICo’s operating assets will likely be located in China and substantially all of its revenue will be derived from its operations in China. Accordingly, BVICo’s results of operations and prospects will be subject, to a significant extent, to the economic, political and legal policies, developments and conditions in China.
The PRC’s economic, political and social conditions, as well as government policies, could affect BVICo’s business. The PRC economy differs from the economies of most developed countries in many respects. China’s GDP has grown consistently since 1978 (National Bureau of Statistics of China). However, COAC cannot assure you that such growth will be sustained in the future. If in the future China’s economy experiences a downturn or grows at a slower rate than expected, there may be less demand for spending in certain industries. A decrease in demand for spending in certain industries could materially and adversely affect BVICo’s ability to remain profitable.
The PRC’s economic growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may have a negative effect on BVICo. For example, BVICo’s financial condition and results of operations may be adversely affected by PRC government control over capital investments or changes in tax regulations.
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The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the use of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over PRC economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
If the China Securities Regulatory Commission, or CSRC, or another PRC regulatory agency, determines that CSRC approval is required in connection with this merger, this merger may be delayed or cancelled, or we may become subject to penalties.
On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006. Under these new regulations, the prior approval of the CSRC is required for the overseas listing of offshore special purpose vehicles that are directly or indirectly controlled by PRC companies or individuals and used for the purpose of listing PRC onshore interests on an overseas stock exchange. BVICo believes, based on the opinion of the PRC legal counsel, Jingtian & Gongcheng, Attorneys at Law, that BVICo is not required to obtain CSRC approval for the listing and trading of our securities on the Nasdaq Global Market because it is not an offshore special purpose vehicle that is directly or indirectly controlled by PRC companies or individuals. However, there remains some uncertainty as to the interpretation and implementation of these regulations. If the CSRC or another PRC regulatory agency subsequently determines that the CSRC’s approval is required for this merger, BVICo may face sanctions by the CSRC or another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this merger into China, restrict or prohibit payment or remittance of dividends by Ge Rui to us, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our securities. The CSRC or another PRC regulatory agency may also take actions requiring us, or making it advisable for us, to delay or cancel this merger.
Ambiguities in the regulations of September 8, 2006 may make it difficult for COAC, BVICo and HKCo to properly comply with all applicable rules and may affect their ability to consummate the merger.
Although the merger and acquisition regulations provide specific requirements and procedures, there are many ambiguities which give the regulators great latitude in the approval process which will cause uncertainty in the parties’ ability to complete a transaction on a timely basis.
The merger and acquisition regulations set forth many requirements that have to be followed, but there are still many ambiguities in the meaning of many provisions. Although further regulations are anticipated in the future, until there has been clarification either by pronouncements, regulation or practice, there is some uncertainty in the scope of the regulations. Moreover, the ambiguities give the regulators wide latitude in the enforcement of the regulations and approval of transactions. Therefore, COAC cannot predict the extent to which the regulations will apply to a transaction, and therefore, there may be uncertainty in whether or not a transaction will be completed until the approval process is under way or until the preliminary approvals are obtained. This may negatively impact its ability to consummate the merger.
In addition, BVICo believes, based on the opinion of the PRC legal counsel, Jingtian & Gongcheng, Attorneys at Law, that all the necessary approvals and registrations for HKCo’s acquisition of the equity interest in Ge Rui has been obtained. However, there remains some uncertainty as to the interpretation and implementation of these regulations, especially when taking into consideration that the sole owner of HKCo and majority owner of BVICo is the daughter of Mingwang Lu. If a PRC regulatory agency, such as the Ministry of Commerce, subsequently determines that its approval is required for the acquisition, BVICo may face sanctions by such PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from the acquisition into China, restrict or prohibit payment or remittance of dividends by
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Ge Rui to us, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our securities. The PRC regulatory agency may also take actions requiring us, or making it advisable for us, to delay or cancel this merger.
If the PRC imposes restrictions to reduce inflation, future economic growth in the PRC could be severely curtailed which could materially and adversely impact BVICo’s profitability following the merger.
While the economy of the PRC has experienced rapid growth, this growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the supply of money and rising inflation. In order to control inflation in the past, the PRC has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Imposition of similar restrictions may lead to a slowing of economic growth and decrease the interest in the services or products BVICo may ultimately offer, leading to a material and adverse impact on its profitability.
Any devaluation of currencies used in the PRC could negatively impact BVICo’s results of operations and any appreciation thereof could cause the cost of a target business as measured in United States dollars to increase.
Because COAC’s objective is to complete a business combination with a target business having its primary operating facilities located in the PRC, and because substantially all revenues and income following a business combination would be received in a foreign currency such as Renminbi, the main currency used in the PRC, the dollar equivalent of COAC’s net assets and distributions, if any, would be adversely affected by reductions in the value of the Renminbi. The value of the Renminbi fluctuates and is affected by, among other things, changes in the PRC’s political and economic conditions. The conversion of Renminbi into foreign currencies such as the United States dollar has been generally based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets. Historically, China “pegged” its currency to the United States dollar. This meant that each unit of Chinese currency had a set ratio for which it could be exchanged for United States currency, as opposed to having a floating value like other countries’ currencies. Many countries argued that this system of keeping the Chinese currency low when compared to other countries gave Chinese companies an unfair price advantage over foreign companies. Due to mounting pressure from other countries, the PRC recently reformed its economic policies to establish a floating value for its currency. However, China recently adopted a floating rate with respect to the Renminbi, with a 0.3% fluctuation. As of December 18, 2008, the exchange rate of the Renminbi was RMB6.8322 per United States dollar, amounting to a 6.4% appreciation of the Renminbi since January 1, 2008. This floating exchange rate, and any appreciation of the Renminbi that may result from such rate, could cause the cost of a target business as measured in dollars to increase. Further, BVICo may be adversely affected since the competitive advantages that existed as a result of the former policies will cease. COAC cannot assure you that BVICo will be able to compete effectively with the new policies in place.
Fluctuations in the value of the Renminbi relative to foreign currencies could affect BVICo’s operating results.
Following a business combination, BVICo’s payroll and other costs of non-United States operations will be payable in foreign currencies, primarily Renminbi. To the extent future revenue is denominated in non-United States currencies, BVICo would be subject to increased risks relating to foreign currency exchange rate fluctuations that could have a material adverse affect on its business, financial condition and operating results. The value of Renminbi against the United States dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. As BVICo’s operations will be primarily in China, any significant revaluation of the Renminbi may materially and adversely affect its cash flows, revenues and financial condition. For example, to the extent that BVICo needs to convert United States dollars into Chinese Renminbi for its operations, appreciation of this currency against the United States dollar could have a material adverse effect on its business, financial condition and results of operations. Conversely, if BVICo decides to convert its Renminbi into United States dollars for other business purposes and the United States dollar appreciates against this currency, the United States dollar equivalent of the Renminbi that
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is converted would be reduced. The Chinese government recently announced that it is pegging the exchange rate of the Renminbi against a number of currencies, rather than just the United States dollar.
Exchange controls that exist in the PRC may limit BVICo’s ability to utilize its cash flow effectively.
Ge Rui is subject to the PRC’s rules and regulations on currency conversion. In the PRC, the State Administration for Foreign Exchange (SAFE) regulates the conversion of the Renminbi into foreign currencies. Currently, foreign investment enterprises (FIEs) are required to apply to the SAFE for “Foreign Exchange Registration Certificates for FIEs.” Following the merger, BVICo will likely be an FIE as a result of its ownership structure. With such registration certificates, which need to be renewed annually, FIEs are allowed to open foreign currency accounts including a “basic account” and “capital account.” Currency conversion within the scope of the “basic account,” such as remittance of foreign currencies for payment of dividends, can be effected without requiring the approval of the SAFE. However, conversion of currency in the “capital account,” including capital items such as direct investment, loans and securities, still require approval of the SAFE. COAC cannot assure you that the PRC regulatory authorities will not impose further restrictions on the convertibility of the Renminbi. Any future restrictions on currency exchanges may limit BVICo’s ability to use its cash flow for the distribution of dividends to its shareholders or to fund operations it may have outside of the PRC.
A failure by BVICo’s shareholders or beneficial owners who are PRC citizens or residents in China to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits, restrict BVICo’s overseas and cross-border investment activities or subject us to liability under PRC laws.
Notice on Issues Relating to Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, was issued on October 21, 2005 by the SAFE (that replaced two previously issued regulations on January 24, 2005 and April 8, 2005, respectively) that will require approvals from, and registrations with, PRC government authorities in connection with direct or indirect offshore investment activities by PRC residents and PRC corporate entities. The SAFE regulations retroactively require approval and registration of direct or indirect investments previously made by PRC residents in offshore companies. In the event that a PRC shareholder with a direct or indirect stake in an offshore parent company fails to obtain the required SAFE approval and make the required registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE approval and registration requirements described above, as currently drafted, could result in liability under PRC law for foreign exchange evasion.
Although SAFE issued an implementation Notice No. 106, or Notice 106, on May 29, 2007 to its local branches or agencies, because of the uncertainty as to when and how the new procedure and requirements will take effect or be enforced, and uncertainty concerning the reconciliation of the new regulations with other approval requirements, it remains unclear how these existing regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. BVICo is committed to complying with the relevant rules. BVICo understands that none of its shareholders and beneficial owners is a PRC citizen or resident but cannot assure that that has been or will be the case. If one or several of its shareholders or beneficial owners are PRC citizens or residents, BVICo cannot assure that these shareholders or beneficial owners have always complied with and will in the future make or obtain any applicable registrations or approvals required by SAFE Circular 75 or other related regulations. Failure by such shareholders or beneficial owners to comply with SAFE Circular 75 could subject us to fines or legal sanctions, restrict BVICo overseas or cross-border investment activities, limit its subsidiary’s ability to make distributions or pay dividends or affect BVICo ownership structure, which could adversely affect our business and prospects.
Because Chinese law will govern almost all of BVICo’s material agreements, BVICo may not be able to enforce its rights within the PRC or elsewhere, which could result in a significant loss of business, business opportunities or capital.
Chinese law will govern almost all of BVICo’s material agreements, many of which may be with Chinese governmental agencies. BVICo cannot assure you that it will be able to enforce any of its material
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agreements or that remedies will be available outside of the PRC. The system of laws and the enforcement of existing laws and contracts in the PRC may not be as certain in implementation and interpretation as in the United States. The Chinese judiciary is relatively inexperienced in enforcing corporate and commercial law, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. The inability to enforce or obtain a remedy under any of BVICo’s future agreements could result in a significant loss of business, business opportunities or capital.
BVICo’s management is unfamiliar with United States securities laws and will have to expend time and resources becoming familiar with such laws which could lead to various regulatory issues.
Following the merger, management of BVICo will largely be persons who were management of Ge Rui. They are not familiar with United States securities laws and will have to expend time and resources becoming familiar with such laws. This could be expensive and time-consuming and could lead to various regulatory issues which may adversely affect BVICo’s operations.
BVICo will be subject to restrictions on dividend payments from its subsidiaries.
After the merger, BVICo will rely on dividends and other distributions from Ge Rui to provide it with cash flow and to meet its other obligations. Current regulations in China would permit Ge Rui to pay dividends to BVICo only out of its accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, Ge Rui will be required to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its accumulated profits each year. Such reserve account may not be distributed as cash dividends. In addition, if Ge Rui incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to BVICo.
If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.
If you are a U.S. holder, you will be taxed on the U.S. dollar value of your dividends at the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the conversion rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.
BVICo face significant risks if the Chinese government changes its policies, laws, regulations, tax structure or its current interpretations of its laws, rules and regulations relating to BVICo’s operations in China.
Ge Rui’s manufacturing facility is located in Henan, China. All of Ge Rui’s assets are located in China and all of Ge Rui’s sales revenues are generated in China. BVICo’s results of operations, financial state of affairs and future growth are, to a significant degree, subject to China’s economic, political and legal development and related uncertainties. BVICo’s operations and results could be materially affected by a number of factors, including, but not limited to:
• | changes in policies by the Chinese government resulting in changes in laws or regulations or the interpretation of laws or regulations, |
• | changes in taxation, |
• | changes in employment restrictions, |
• | restrictions on imports and sources of supply, |
• | import duties, and |
• | currency revaluation. |
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Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activities and greater economic decentralization. If the Chinese government does not continue to pursue its present policies that encourage foreign investment and operations in China, or if these policies are either not successful or are significantly altered, then BVICo’s business could be adversely affected. Following the Chinese government’s policy of privatizing many state-owned enterprises, the Chinese government has attempted to augment its revenues through increased tax collection. Continued efforts to increase tax revenues could result in increased taxation expenses being incurred by Ge Rui. Economic development may be limited as well by the imposition of austerity measures intended to reduce inflation, the inadequate development of infrastructure and the potential unavailability of adequate power and water supplies, transportation and communications.
Chinese laws and regulations governing Ge Rui’s current business operations are sometimes vague and uncertain. Any changes in such Chinese laws and regulations may have a material and adverse effect on BVICo’s business.
China’s legal system is a civil law system based on written statutes, in which system decided legal cases have little value as precedents, unlike the common law system prevalent in the United States. There are substantial uncertainties regarding the interpretation and application of Chinese laws and regulations, including but not limited to the laws and regulations governing Ge Rui’s business, or the enforcement and performance of Ge Rui’s arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. Ge Rui is considered a foreign invested enterprise under Chinese laws, and as a result, is required to comply with Chinese laws and regulations. BVICo cannot predict what effect the interpretation of existing or new Chinese laws or regulations may have on its business. If the relevant authorities find Ge Rui in violation of Chinese laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:
• | levying fines; |
• | revoking Ge Rui’s business and other licenses; |
• | requiring that BVICo restructure Ge Rui’s ownership or operations; and |
• | requiring that BVICo discontinue any portion or all of Ge Rui’s business. |
BVICo’s business, results of operations and overall profitability are linked to the economic, political and social conditions in China.
All of BVICo’s business, assets and operations, through Ge Rui, are located in China. The economy of China differs from the economies of most developed countries in many respects, including government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. The economy of China has been transitioning from a planned economy to a more market-oriented economy. Although the Chinese government has implemented measures recently emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Therefore, the Chinese government’s involvement in the economy may affect BVICo’s business operations, results of operations and BVICo’s financial condition.
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A slowdown or other adverse developments in the Chinese economy may materially and adversely affect Ge Rui’s customers, demand for Ge Rui’s services and Ge Rui’s business.
All of Ge Rui’s operations are conducted in China and all of Ge Rui’s revenues are generated from sales to businesses operating in China. Although the Chinese economy has grown significantly in recent years, such growth may not continue. BVICo does not know how sensitive Ge Rui is to a slowdown in economic growth or other adverse changes in Chinese economy which may affect demand for precision steel products. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in China may materially reduce the demand for Ge Rui’s products and in turn reduce BVICo’s results of operations.
Inflation in China could negatively affect BVICo’s profitability and growth.
While the Chinese economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for Ge Rui’s products rise at a rate that is insufficient to compensate for the rise in the costs of raw materials, it may have an adverse effect on Ge Rui’s profitability. In order to control inflation in the past, the Chinese government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Such an austerity policy can lead to a slowing of economic growth.
Controversies affecting China’s trade with the United States could depress BVICo’s stock price.
While China has been granted permanent most favored nation trade status in the United States through its entry into the World Trade Organization, controversies and trade disagreements between the United States and China may arise that have a material adverse effect upon BVICo’s stock price. Political or trade friction between the United States and China, whether or not actually affecting its business, could also materially and adversely affect the prevailing market price of BVICo’s common stock.
Imposition of trade barriers and taxes may reduce BVICo’s ability to do business internationally, and the resulting loss of revenue could harm BVICo’s profitability.
BVICo may experience barriers to conducting business and trade in BVICo’s targeted emerging markets in the form of delayed customs clearances, customs duties and tariffs. In addition, BVICo may be subject to repatriation taxes levied upon the exchange of income from local currency into foreign currency, substantial taxes of profits, revenues, assets and payroll, as well as value-added tax. The markets in which BVICo plan to operate may impose onerous and unpredictable duties, tariffs and taxes on BVICo’s business and products, and there can be no assurance that this will not reduce the level of sales that BVICo achieve in such markets, which would reduce BVICo’s revenues and profits.
There can be no guarantee that China will comply with the membership requirements of the World Trade Organization, which could leave Ge Rui subject to retaliatory actions by other governments and reduce Ge Rui’s ability to sell its products internationally.
China has agreed that foreign companies will be allowed to import most products into any part of China. In the sensitive area of intellectual property rights, China has agreed to implement the trade-related intellectual property agreement of the Uruguay Round. There can be no assurances that China will implement any or all of the requirements of its membership in the World Trade Organization in a timely manner, if at all. If China does not fulfill its obligations to the World Trade Organization, Ge Rui may be subject to retaliatory actions by the governments of the countries into which it sell its products, which could render its products less attractive, thus reducing revenues and profits.
The implementation of the new PRC employment contract law and increases in the labor costs in China may adversely affect the business and profitability of Ge Rui.
A new employment contract law became effective on January 1, 2008 in China. It imposes more stringent requirements on employers in relation to entry into fixed-term employment contracts, recruitment of temporary employees and dismissal of employees. In addition, under the newly promulgated Regulations on Paid Annual
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Leave for Employees, which also became effective on January 1, 2008, employees who have worked continuously for more than on year are entitled to paid vacation ranging from 5 to 15 days, depending on the length of the employees’ service. Employees who waive such vacation entitlements at the request of the employer will be compensated for three times their normal daily salaries for each vacation day so waived. As a result of the new law and regulations, the labor costs of Ge Rui may increase. There is no assurance that disputes, work stoppages or strikes will not arise in the future. Increases in the labor costs or future disputes with the employees of Ge Rui could adversely affect the business, financial condition or operating results of Ge Rui.
The Chinese government has been adopting increasingly stringent environmental, health and safety protection requirements, which could affect the business of Ge Rui.
The continuance of the operations of Ge Rui depends upon compliance with the applicable environmental, health and safety, fire prevention and other regulations. Any change in the scope or application of these laws and regulations may limit the production capacity of Ge Rui or increase its cost of operation and could therefore have an adverse effect on the business operations, financial condition and operating results of Ge Rui. Any failure to comply with these laws and regulations could result in fines, penalties or legal proceedings. There can be no assurance that the Chinese government will not impose additional or stricter laws or regulations, compliance with which may cause Ge Rui to incur significant capital expenditures, which it may not be able to pass on to its customers.
Under China’s New EIT Law, BVICo may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and U.S. holders of our ordinary shares.
China passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both of which became effective on January 1, 2008. Under the New EIT Law, an enterprise established outside of China with its “de facto management body” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. Currently no official interpretation or application of this new “resident enterprise” classification is available, therefore it is unclear how tax authorities will determine tax residency based on the facts of each case.
If the PRC tax authorities determine that BVICo is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, BVICo would be subject to enterprise income tax at a rate of 25% on its worldwide taxable income as well as PRC enterprise income tax reporting obligations. In such case, this would mean that income from non-China sources would be subject to PRC enterprise income tax at a rate of 25%, in comparison to no taxation in BVI. Second, although under the New EIT Law and its implementing rules dividends paid to BVICo from its PRC subsidiary would qualify as “tax-exempt income,” BVICo cannot guarantee that such dividends will not be subject to a withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, if BVICo is deemed to be a PRC tax resident enterprise, a 10% withholding tax shall be imposed on dividends it pays to its non-PRC shareholders and with respect to gains derived from its non-PRC shareholders transferring its shares. HKCo is also subject to the risk of being treated as a PRC resident enterprise.
Fluctuations in exchange rates of the Renminbi, or RMB, could adversely affect the value of dividends, if any, payable on BVICo’s Ordinary Shares or otherwise impact BVICo’s operations and profitability.
Substantially all of BVICo’s revenues and a substantial majority of its expenditures are denominated in Renminbi, while a significant portion of our assets are denominated in U.S. dollars. As a result, fluctuations in the exchange rate between the U.S. dollar and Renminbi will affect the relative purchasing power in Renminbi terms of BVICo’s U.S. dollar assets. Fluctuations in the exchange rate may also cause BVICo to incur foreign exchange losses and affect the relative value of any dividend issued to it by its PRC subsidiary. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect its financial results in U.S. dollar terms without giving effect to any underlying change in its business or results of operations.
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Movements in the Renminbi exchange rate are affected by, among other things, changes in political and economic conditions and China’s foreign exchange regime and policy. Since July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to limit short-term fluctuations in the Renminbi exchange rate, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market.
Any future outbreak of avian flu, or severe acute respiratory syndrome in China, or similar adverse public health developments, may severely disrupt Ge Rui’s business and operations and reduce demand for its products.
Adverse public health epidemics or pandemics could disrupt Ge Rui’s business operations and damage China’s economy. For example, from December 2002 to June 2003, China and certain other countries experienced an outbreak of a new and highly contagious form of atypical pneumonia now known as severe acute respiratory syndrome, or SARS. During May and June of 2003, many businesses in China were closed by the PRC government to prevent transmission of SARS. The World Health Organization has announced that there is a high likelihood of an outbreak of avian flu, with the potential to be as or more disruptive than SARS. Any recurrence of the SARS outbreak, an avian flu outbreak, or the development of a similar health hazard in China may disrupt consumer spending. In addition, health or other governmental regulation may require temporary closure of Ge Rui’s offices and operations or of the Internet cafés that participate in our content delivery network. Lastly, such an outbreak may cause the sickness or death of key management and employees.
Risks Specific to BVICo’s Business
Steel consumption is cyclical and worldwide overcapacity in the steel industry and the availability of alternative products has resulted in intense competition, which may have an adverse effect on BVICo’s profitability and cash flow.
Steel consumption is highly cyclical and generally follows general economic and industrial conditions both worldwide and in various smaller geographic areas. The steel industry has historically been characterized by excess world supply. This has led to substantial price decreases during periods of economic weakness, which have not been offset by commensurate price increases during periods of economic strength. Substitute materials are increasingly available for many steel products, which may further reduce demand for steel. Additional overcapacity or the use of alternative products could have a material adverse effect upon BVICo’s results of operations.
Environmental compliance and remediation could result in substantially increased capital requirements and operating costs.
BVICo’s operating subsidiary, Ge Rui, is subject to numerous Chinese provincial and local laws and regulations relating to the protection of the environment. These laws continue to evolve and are becoming increasingly stringent. The ultimate impact of complying with such laws and regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision. BVICo’s business and operating results could be materially and adversely affected if Ge Rui were required to increase expenditures to comply with any new environmental regulations affecting its operations.
BVICo may require additional capital in the future and BVICo cannot assure that capital will be available on reasonable terms, if at all, or on terms that would not cause substantial dilution to stockholdings.
The development of high quality specialty precision steel requires substantial funds. Sourcing external capital funds for product development and requisite capital expenditures are key factors that have and may in the future constrain BVICo’s growth, production capability and profitability. To achieve the next phase of BVICo’s corporate growth, increased production capacity, successful product development and additional external capital will be necessary. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to BVICo, if at all. Any sale of a substantial number of additional shares of common stock or securities convertible into common stock will cause dilution to the holders of BVICo’s common stock and could also cause the market price of BVICo’s common stock to decline.
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Ge Rui face significant competition from competitors who have greater resources than BVICo, and BVICo may not have the resources necessary to successfully compete with them.
Ge Rui is one of a few manufacturers of specialty precision cold-rolled steel products in China. Differences in the type and nature of the specialty precision steel products in China’s steel industry are relatively small, and, coupled with intense competition from international and local suppliers, to a limited extent, consumers’ demand can be price sensitive. Competitors may increase their market share through pricing strategies that adversely impact BVICo’s business. BVICo’s business will be in an industry that is becoming increasingly competitive and capital intensive, and competition comes from manufacturers located in China as well as from international competition. BVICo’s competitors may have financial resources, staff and facilities substantially greater than BVICo’s and BVICo may be at a competitive disadvantage compared with larger companies.
Ge Rui produces a limited number of products and may not be able to respond quickly to significant changes in the market or new market entrants.
Cold-rolled specialty precision steel is a relatively new industry in China; Chinese manufacturers of durable goods previously relied solely on imports from Japan, Korea, the European Union and the United States. BVICo believes the average quality and standards of products of China’s high precision steel industry lags behind the international norm. Ge Rui has developed a nationally recognizable brand; however, it is not yet an internationally recognizable brand for BVICo’s specialty steel products. Although Ge Rui offers more than 40 high precision steel products, there are many other specialty precision steel products of similar nature in the market, even though none currently compete directly with Ge Rui’s products. If there are significant changes in market demands and/or competitive forces, Ge Rui may not be able to change its product mix or adapt its production equipment quickly enough to meet customers’ needs. Under such circumstances, Ge Rui’s narrow band of precision steel products and/or new market entrants may negatively impact BVICo’s financial performance.
Increased imports of steel products into China could negatively affect domestic steel prices and demand levels and reduce profitability of domestic producers, including Ge Rui.
Through June 2008, China’s total production of cold-rolled steel sheets increased approximately 36% over the comparable period in 2007. However, domestic production continues to be insufficient to meet demand. As a result, China continues to import a significant portion of its steel products. Foreign competitors may have lower labor costs, and are often owned, controlled or subsidized by their governments, which allows their production and pricing decisions to be influenced by political and economic policy considerations as well as prevailing market conditions. Import levels may also be impacted by decisions of government agencies, under trade laws. Increases in future levels of imported steel could negatively impact future market prices and demand levels for BVICo’s precision steel products.
BVICo is dependent on its Chinese manufacturing operations to generate all of its income and profits and the deterioration of any current favorable local conditions may make it difficult or prohibitive to continue to operate or expand in China.
BVICo’s manufacturing operations will be located in China, BVICo’s administrative offices are in Hong Kong and BVICo has additional establishments in the British Virgin Islands. The geographical distances between these facilities create a number of logistical and communications challenges, including time differences and differences in the cultures in each location, which makes communication and effective cooperation more difficult. In addition, because of the location of the manufacturing facilities in China, BVICo’s operations could be affected by, among other things:
• | economic and political instability in China, including problems related to labor unrest, |
• | lack of developed infrastructure, |
• | variances in payment cycles, |
• | currency fluctuations, |
• | overlapping taxes and multiple taxation issues, |
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• | employment and severance taxes, |
• | compliance with local laws and regulatory requirements, |
• | greater difficulty in collecting accounts receivable, and |
• | the burdens of cost and compliance with a variety of foreign laws. |
Moreover, inadequate development or maintenance of infrastructure in China, including adequate power and water supplies, transportation, raw materials availability or the deterioration in the general political, economic or social environment could make it difficult, more expensive and possibly prohibitive to continue to operate or expand BVICo’s facilities in China.
The end-use markets for certain of Ge Rui’s products are highly competitive and customers are willing to accept substitutes for Ge Rui’s products which could reduce BVICo’s results of operations.
Buyers of certain cold-rolled steel products are in highly competitive markets. Cold-rolled precision steel competes with other materials, such as aluminum, plastics, composite materials and glass, among others, for industrial and commercial applications. Customers have demonstrated a willingness to substitute other materials for cold-rolled steel. The willingness of Ge Rui’s customers to accept substitutes for cold-rolled steel products could have a material adverse effect on BVICo’s financial results.
Although Ge Rui is dependent on a steady flow of raw materials for its operations, it does not have in place long-term supply agreements for all of its material requirements.
Ge Rui relies on several suppliers to provide it with the raw materials used in BVICo’s operations but does not currently have long-term supply contracts with any particular supplier to assure a continued supply of the raw materials. While Ge Rui maintains good relationships with these suppliers, the supply of raw materials may nevertheless be interrupted on account of events outside its control, which will negatively impact its operations.
BVICo is subject to risks associated with changing technology and manufacturing techniques, which could place it at a competitive disadvantage.
The successful implementation of BVICo’s business strategy requires it to continuously evolve its existing products and services and introduce new products and services to meet customers’ needs. BVICo’s designs and products are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing and engineering expertise. BVICo believes that its customers rigorously evaluate its services and products on the basis of a number of factors, including, but not limited to:
• | quality, |
• | price competitiveness, |
• | technical expertise and development capability, |
• | innovation, |
• | reliability and timeliness of delivery, |
• | product design capability, |
• | operational flexibility, |
• | customer service, and |
• | overall management. |
BVICo’s success depends on its ability to continue to meet its customers’ changing requirements and specifications with respect to these and other criteria. There can be no assurance that BVICo will be able to address technological advances or introduce new designs or products that may be necessary to remain competitive within the precision steel industry.
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Ge Rui depends upon its largest customers for a significant portion of its sales revenue, and it cannot be certain that sales to these customers will continue. If sales to these customers do not continue, then Ge Rui’s sales may decline and its business may be negatively impacted.
Ge Rui currently supplies high precision steel products to more than 20 major customers in the Chinese domestic market. For the six months ended June 30, 2008 and 2007, sales revenues generated from the top 10 customers amounted to 48.2% and 58.1% of total sales revenues, respectively; sales to the largest single customer for the same periods amounted to 6.1% and 24.0% of total sales revenues, respectively. Ge Rui does not enter into long-term contracts with its customers and therefore cannot be certain that sales to these customers will continue. The loss of any of Ge Rui’s largest customers would likely have a material negative impact on its sales revenues and business.
Ge Rui’s production facilities are subject to risks of power shortages which may adversely affect its ability to meet its customers’ needs.
Many cities and provinces in China have suffered serious power shortages since the second quarter of 2004. Many of the regional grids do not have sufficient power generating capacity to fully satisfy the increased demand for electricity driven by continual economic growth and persistent hot weather. Local governments have occasionally required local factories to temporarily shut down their operations or reduce their daily operational hours in order to reduce local power consumption levels. To date, Ge Rui’s operations have not been affected by those administrative measures. However, there is a risk that Ge Rui’s operations may be affected by those administrative measures in the future, thereby causing material production disruption and delay in delivery schedule. In such event, BVICo’s business, results of operation and financial conditions could be materially adversely affected. Ge Rui does not have any back-up power generation system. Although Ge Rui has not experienced any power outages in the past, it may be adversely affected by power outages in the future.
BVICo shareholders may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. or British Virgin Island laws, including the federal securities laws or other foreign laws, against BVICo or BVICo’s management.
All of BVICo’s operations will be conducted in China. Moreover, all but one of BVICo’s directors and all of BVICo’s officers are nationals and residents of China or Hong Kong. All or substantially all of the assets of these persons are located outside the United States. As a result, it may not be possible to effect service of process within the United States or elsewhere outside of China or Hong Kong upon these persons. In addition, uncertainty exists as to whether the courts of China or Hong Kong would recognize or enforce judgments of U.S. courts obtained against BVICo or its officers and/or directors predicated upon the civil liability provisions of the securities law of the United States or any state thereof, or be competent to hear original actions brought in China or Hong Kong against BVICo or such persons predicated upon the securities laws of the United States or any state thereof.
Risks Related to the Merger
The COAC Inside Stockholders, including its officers and directors, control a substantial interest in COAC and thus may influence certain actions requiring stockholder vote.
The COAC Inside Stockholders collectively own approximately 19% of COAC’s issued and outstanding shares of common stock. In addition, Harry Edelson has entered into an agreement with EarlyBirdCapital, pursuant to which he, or an entity or entities he controls, will place limit orders for $3 million of COAC’s common stock commencing November 26, 2008 (ten business days after COAC files its Current Report on Form 8-K announcing its execution of the merger agreement) and ending on the business day immediately preceding the record date for the special meeting of stockholders. Mr. Edelson may vote these shares on a proposed business combination in any manner he chooses. If Mr. Edelson purchases the full $3 million worth of stock pursuant to this agreement (assuming a purchase price of $___ per share), the COAC Inside Stockholders will collectively hold approximately 22% of COAC’s issued and outstanding shares of common stock and, accordingly, may influence actions requiring a stockholder vote, including the merger proposal.
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If COAC is unable to effect a business combination and is forced to liquidate, its warrants will expire worthless.
If COAC does not complete the merger or another business combination by March 20, 2009, its corporate existence will automatically terminate and it will distribute to all holders of IPO Shares, in proportion to the number of IPO Shares held by them, an aggregate sum equal to the amount in the trust fund, inclusive of any interest, plus any remaining net assets. In such event, there will be no distribution with respect to COAC’s outstanding warrants. Accordingly, the warrants will expire worthless.
COAC’s stockholders may be held liable for claims by third parties against COAC to the extent of distributions received by them.
COAC’s amended and restated certificate of incorporation provides that COAC will continue in existence only until March 20, 2009. If COAC has not completed a business combination by such date and amended this provision in connection thereto, pursuant to the Delaware General Corporation Law, its corporate existence will cease except for the purposes of winding up its affairs and liquidating. Under Sections 280 through 282 of the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures set forth in Section 280 of the Delaware General Corporation Law intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, it is COAC’s intention to make liquidating distributions to its stockholders as soon as reasonably possible after March 20, 2009 and, therefore, it does not intend to comply with those procedures.
Because COAC will not be complying with those procedures, it is required, pursuant to Section 281 of the Delaware General Corporation Law, to adopt a plan that will provide for its payment, based on facts known to it at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against it within the subsequent 10 years. Accordingly, COAC would be required to provide for any creditors known to it at that time or those that it believes could be potentially brought against it within the subsequent 10 years prior to distributing the funds held in the trust to stockholders. COAC cannot assure you that it will properly assess all claims that may be potentially brought against it. As such, COAC’s stockholders could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of COAC’s stockholders may extend well beyond the third anniversary of such date. Accordingly, there can be no assurance that third parties will not seek to recover from COAC’s stockholders amounts owed to them by COAC.
If COAC is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against it which is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover all amounts received by COAC’s stockholders. Furthermore, because COAC intends to distribute the proceeds held in the trust fund to its public stockholders promptly after March 20, 2009 if it has not completed a business combination by such date, this may be viewed or interpreted as giving preference to COAC’s public stockholders over any potential creditors with respect to access to or distributions from COAC’s assets. Furthermore, COAC’s board may be viewed as having breached their fiduciary duties to COAC’s creditors and/or may have acted in bad faith; thereby exposing itself and COAC to claims of punitive damages, by paying public stockholders from the trust fund prior to addressing the claims of creditors. There can be no assurance that claims will not be brought against COAC for these reasons.
You will not be able to exercise your warrants if an effective registration statement is not in place when you desire to do so.
No public warrant will be exercisable and BVICo will not be obligated to issue Ordinary Shares unless, at the time a holder seeks to exercise such public warrant, a prospectus relating to the common stock issuable upon exercise of the warrant is current. Under the terms of the warrant agreement, BVICo will be required to
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use its best efforts to meet these conditions and to maintain a current prospectus relating to the Ordinary Shares issuable upon exercise of the warrants until the expiration of the warrants. However, there can be no assurance that BVICo will be able to do so, and if it does not maintain a current prospectus related to the Ordinary Shares issuable upon exercise of the warrants, holders will be unable to exercise their warrants. Additionally, BVICo will have no obligation to settle the warrants for cash or “net cash settle” any warrant exercise. Accordingly, if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current, the warrants may have no value, the market for the warrants may be limited and the warrants may expire worthless. If the warrants expire worthless, this would mean that a person who paid $6.00 for a unit in COAC’s IPO and who did not sell the warrant included in the unit would have effectively paid $6.00 for one BVICo Ordinary Share.
An investor will only be able to exercise a warrant if the issuance of BVICo Ordinary Shares upon such exercise has been registered or qualified or is deemed exempt under the securities laws of the state of residence of the holder of the warrants.
No warrants will be exercisable by a warrant holder and BVICo will not be obligated to issue Ordinary Shares unless the Ordinary Shares issuable upon such exercise have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. At the time that the warrants become exercisable (following completion of the merger), BVICo expects to become listed on the Nasdaq Stock Market, which would provide an exemption from registration in every state. Accordingly, BVICo believes holders in every state will be able to exercise their warrants as long as its prospectus relating to the Ordinary Shares issuable upon exercise of the warrants is current. However, there can be no assurance of this fact. If a warrant holder is unable to exercise his warrants in a particular state, he may be forced to sell his warrant and therefore lose out of the benefit of purchasing BVICo stock. Furthermore, the price he receives for his warrant may not equal the difference between the exercise price and the stock price.
BVICo’s working capital will be reduced if COAC stockholders exercise their right to convert their shares into cash, which reduced working capital may adversely affect BVICo’s business and future operations.
Pursuant to COAC’s certificate of incorporation, holders of Public Shares may vote against the merger proposal and demand that it convert their shares, calculated as of two business days prior to the anticipated consummation of the merger, into a pro rata share of the trust account where a substantial portion of the net proceeds of the IPO are held. COAC and BVICo will not consummate the merger if holders of 2,760,000 or more Public Shares exercise these conversion rights. If no holders elect to convert their Public Shares, the trust account will be approximately $41.5 million at closing. To the extent the merger is consummated and holders have demanded to convert their shares, there will be a corresponding reduction in the amount of funds available to BVICo. If conversion rights are exercised with respect to 2,759,999 shares, the maximum potential conversion cost would be approximately $__ million.
BVICo’s outstanding warrants may be exercised in the future, which would increase the number of shares eligible for future resale in the public market and result in dilution BVICo’s stockholders.
Outstanding redeemable warrants to purchase an aggregate of 16,066,667 BVICo Ordinary Shares (issued in exchange for COAC common stock issued in the IPO) and warrants to purchase an aggregate of 2,266,667 Ordinary Shares (issued in exchange for COAC warrants issued to certain of the COAC Inside Stockholders and others in a private placement concurrently with the IPO) will become exercisable after the consummation of the merger. These warrants likely will be exercised only if the $5.00 per share exercise price is below the market price of BVICo’s Ordinary Shares. To the extent such warrants or options are exercised, additional shares of BVICo’s Ordinary Shares will be issued, which will result in dilution to BVICo’s stockholders and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of BVICo’s common stock.
BVICo’s management’s ability to require holders of its warrants to exercise such warrants on a cashless basis will cause holders to receive fewer shares of common stock upon their exercise of the warrants than they would have received had they been able to exercise their warrants for cash.
If BVICo calls its warrants for redemption after the redemption criteria described in the prospectus for COAC’s IPO have been satisfied, BVICo’s management will have the option to require any holder that wishes
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to exercise his warrant to do so on a “cashless basis.” If BVICo’s management chooses to require holders to exercise their warrants on a cashless basis, the number of shares of common stock received by a holder upon exercise will be fewer than it would have been had such holder exercised his warrant for cash. This will have the effect of reducing the potential “upside” of the holder’s investment in BVICo.
If COAC stockholders fail to vote against the merger proposal and fail to deliver their shares in accordance with the conversion requirements specified in this proxy statement/prospectus, they will not be entitled to convert their shares of common stock of COAC into a pro rata portion of the trust account.
COAC stockholders holding Public Shares who affirmatively vote against the merger proposal may demand that COAC convert their shares into a pro rata portion of the trust account, calculated as of two business days prior to the anticipated consummation of the merger. COAC stockholders who seek to exercise this conversion right must affirmatively vote against the merger and deliver their stock (either physically or electronically) to COAC’s transfer agent within the time period described in this proxy statement/prospectus. Any COAC stockholder who fails to vote against the merger proposal and who fails to deliver his or her stock will not be entitled to convert his or her shares into a pro rata portion of the trust account for conversion of his or her shares. See the section entitled“Special Meeting of COAC Stockholders — Conversion Rights” for the procedures to be followed if you wish to convert your shares to cash.
The Nasdaq Stock Market may not list BVICo’s securities on its exchange, which could limit investors’ ability to make transactions in BVICo’s securities and subject BVICo to additional trading restrictions.
BVICo will seek listing of its securities on the Nasdaq Stock Market as soon as practicable after the consummation of the merger. BVICo will be required to meet Nasdaq’s initial listing requirements as opposed to its more lenient continued listing requirements. BVICo may not be able to meet those initial listing requirements. Even if such application is accepted and BVICo’s securities are so listed, BVICo may be unable to maintain the listing of its securities in the future.
If Nasdaq does not list BVICo’s securities for trading on its exchange, BVICo could face significant material adverse consequences, including:
• | a limited availability of market quotations for its securities; |
• | reduced liquidity with respect to its securities; |
• | a determination that its Ordinary Shares are “penny stock,” which will require brokers trading in its Ordinary Shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the Ordinary Shares; |
• | a limited amount of news and analyst coverage for BVICo; and |
• | a decreased ability to issue additional securities or obtain additional financing in the future. |
BVICo’s ability to request indemnification from BVICo’s shareholders for damages arising out of the merger is limited in certain instances to those claims where damages exceed $250,000 and, except in very limited circumstances, is also limited to the Ordinary Shares placed in escrow.
To provide a fund to secure indemnification protection to COAC and its stockholders against losses that BVICo, as surviving entity of the merger, may sustain as a result of (i) the inaccuracy or breach of any representation or warranty made by BVICo and its shareholders in the merger agreement or any schedule or certificate delivered by them in connection with the merger agreement, (ii) the non-fulfillment or breach of any covenant or agreement made by BVICo or its shareholders in the merger agreement, (iii) any assessment against BVICo, HKCo or Ge Rui for taxes for any period ending prior to the closing date, and (iv) the operation of the businesses of BVICo, HKCo and Ge Rui prior to the closing date of the merger, the current BVICo shareholders will place in escrow (with an independent escrow agent) an aggregate of 3,000,000 BVICo Ordinary Shares, which will be canceled to the extent that BVICo has damages for which it is entitled to indemnification. Other than with respect to claims of fraud or intentional or willful misrepresentation or omission, the escrow will be the sole remedy for BVICo for its rights to indemnification pursuant to the merger agreement. Claims for indemnification may be asserted against the escrow by BVICo once its damages exceed a deductible and will be reimbursable to the full extent of the damages in excess of such amount up to
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a maximum of the escrowed funds, except that claims made with respect to representations and warranties regarding corporate organization, subsidiaries, capitalization, authority, title to property and taxes and those specific to BVICo’s shareholders will not be subject to such deductible. Claims for indemnification may be asserted until the later of one year after the closing of the merger or thirty (30) days after the date on which BVICo has filed its annual report on Form 10-K (or, if BVICo is deemed to be a “foreign private issuer,” its annual report on Form 20-F) for the fiscal year ending December 31, 2009, except that there is no limitation as to the period during which claims may be asserted for breaches of the representations and warranties regarding corporate organization, subsidiaries, capitalization, authority and those specific to BVICo’s shareholders and claims for breaches of the representations and warranties regarding title to property and taxes may be made until the sixtieth day following the expiration of the applicable statute of limitations. As a consequence of these limitations, BVICo may not be able to be entirely compensated for indemnifiable damages that it may sustain.
COAC’s current directors and executive officers own shares of COAC common stock and warrants that will be worthless if the merger is not approved. Such interests may have influenced their decision to approve the business combination with BVICo.
Certain of COAC’s officers, directors, initial shareholders and/or their affiliates beneficially own stock in COAC that they purchased prior to its IPO. Additionally, certain of such persons and others purchased 2,266,667 Insider Warrants in a private placement that occurred simultaneously with COAC’s IPO. Such persons are not entitled to receive any of the cash proceeds that may be distributed upon COAC’s liquidation with respect to shares they acquired prior to its IPO. Therefore, if the merger is not approved and COAC does not consummate another business combination by March 20, 2009 and is forced to liquidate, such shares held by such persons will be worthless, as will the warrants. As of the _______, 2009, the record date for the special meeting, COAC’s officers, directors and initial shareholders held $_______ in common stock (based on a market price of $___) and $_______ in warrants (based on a market price of $___). See the section entitled“The Merger Proposal — Interests of COAC’s Directors and Officers in the Merger.”
These financial interests of COAC’s directors, officers and initial shareholders may have influenced their decision to approve COAC’s merger with BVICo and to continue to pursue the merger. In considering the recommendations of COAC’s board of directors to vote for the merger proposal and other proposals, you should consider these interests.
COAC’s chairman and chief executive officer is liable to ensure that proceeds of the trust are not reduced by vendor claims in the event the merger is not consummated. Such liability may have influenced his decision to approve the merger with BVICo.
If COAC liquidates prior to the consummation of a business combination, Harry Edelson, its chairman and chief executive officer, will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by COAC for services rendered or contracted for or products sold to COAC. On the other hand, if COAC consummates the merger, BVICo will be liable for all such claims. Neither COAC nor Mr. Edelson has any reason to believe that Mr. Edelson will not be able to fulfill his indemnity obligations to COAC. See the section entitled“Other Information Related to COAC — COAC’s Plan of Operation” for further information.
This personal obligation may have influenced Mr. Edelson’s decision to approve COAC’s merger with BVICo and to continue to pursue the merger. In considering the recommendations of COAC’s board of directors to vote for the merger proposal and other proposals, you should consider these interests.
If holders of more than 20% of the Public Shares properly exercise their conversion rights and the merger is consummated, certain of the COAC Inside Stockholders will forfeit a portion of their Original Shares. Such requirement may have influenced their decision to approve the business combination with BVICo.
Any of the COAC stockholders holding Public Shares as of the record date who affirmatively vote their Public Shares against the merger proposal may also demand that COAC convert such shares into a pro rata portion of the trust account, calculated as of two business days prior to the consummation of the merger. If holders of more than 20% of the Public Shares properly exercise their conversion rights and the merger is
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consummated, Harry Edelson and Rose-Marie Fox will forfeit a portion of their Original Shares, which were placed into escrow at the time of the IPO, so that the Inside Stockholders will collectively own no more than 23.81% of the BVICo Ordinary Shares that will be issued to the COAC stockholders upon consummation of the merger.
These personal obligations of Mr. Edelson and Ms. Fox may have influenced their decision to approve COAC’s with BVICo and to continue to pursue the merger. In considering the recommendations of COAC’s board of directors to vote for the merger proposal and other proposals, you should consider these interests.
The exercise of COAC’s directors’ and officers’ discretion in agreeing to changes or waivers in the terms of the merger may result in a conflict of interest when determining whether such changes to the terms of the merger or waivers of conditions are appropriate and in COAC’s stockholders’ best interest.
In the period leading up to the closing of the merger, events may occur that, pursuant to the merger agreement, would require COAC to agree to amend the merger agreement, to consent to certain actions taken by BVICo or to waive rights that COAC is entitled to under the merger agreement. Such events could arise because of changes in the course of BVICo’s business, a request by BVICo to undertake actions that would otherwise be prohibited by the terms of the merger agreement or the occurrence of other events that would have a material adverse effect on BVICo’s business and would entitle COAC to terminate the merger agreement. In any of such circumstances, it would be discretionary on COAC, acting through its board of directors, to grant its consent or waive its rights. The existence of the financial and personal interests of the directors described in the preceding risk factors may result in a conflict of interest on the part of one or more of the directors between what he may believe is best for COAC and what he may believe is best for himself in determining whether or not to take the requested action. As of the date of this proxy statement/prospectus, COAC does not believe there will be any changes or waivers that its directors and officers would be likely to make after stockholder approval of the merger proposal has been obtained. While certain changes could be made without further stockholder approval, COAC will circulate a new or amended proxy statement/prospectus and resolicit its stockholders if changes to the terms of the transaction that would have a material impact on its stockholders are required prior to the stockholder vote on the merger proposal.
If COAC is unable to complete the merger with BVICo or another business combination by March 20, 2009, its corporate existence will automatically terminate and, it will be forced to liquidate. In such event, third parties may bring claims against COAC and, as a result, the proceeds held in trust could be reduced and the per-share liquidation price received by stockholders could be less than $____ per share.
COAC must complete a business combination with BVICo or another target business by March 20, 2009, when its corporate existence will terminate and it will be required to liquidate. In such event, third parties may bring claims against COAC. Although COAC has obtained waiver agreements from certain vendors and service providers it has engaged and owe money to, and the prospective target businesses it has negotiated with, whereby such parties have waived any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they or other vendors who did not execute such waivers will not seek recourse against the trust account notwithstanding such agreements. Furthermore, there is no guarantee that a court will uphold the validity of such agreements. Accordingly, the proceeds held in trust could be subject to claims which could take priority over those of COAC’s public stockholders. Additionally, if COAC is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against it which is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in COAC’s bankruptcy estate and subject to the claims of third parties with priority over the claims of COAC’s stockholders. To the extent any bankruptcy or other claims deplete the trust account, there can be no assurance that COAC will be able to return to its public stockholders at least $____ per share.
If COAC is unable to consummate the business combination with BVICo or another target company, its public stockholders will be forced to wait until after March 20, 2009 before receiving liquidation distributions.
COAC has until March 20, 2009 to complete an initial business combination. It has no obligation to return funds to its public stockholders prior to such date unless it consummates an initial business combination prior thereto and only then in cases where public stockholders have sought conversion of their shares. Only
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after the expiration of this full time period will public stockholders be entitled to liquidation distributions if COAC is unable to complete an initial business combination. Accordingly, public stockholders’ funds may be unavailable to them until such date.
Activities taken by existing COAC stockholders to increase the likelihood of approval of the merger proposal and other proposals could have a depressive effect on COAC’s stock.
At any time prior to the special meeting, during a period when they are not then aware of any material nonpublic information regarding COAC or its securities, the COAC Inside Stockholders, BVICo and BVICo’s shareholders and/or their respective affiliates may purchase shares from institutional and other investors, or execute agreements to purchase such shares from them in the future, or they or COAC may enter into transactions with such persons and others to provide them with incentives to acquire shares of COAC’s common stock and vote the acquired shares in favor of the merger proposal. The purpose of such share purchases and other transactions would be to increase the likelihood of satisfaction of the requirements that the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote on the merger proposal at the meeting vote in its favor and that holders of fewer than 40% of the Public Shares vote against the merger proposal and demand conversion of their Public Shares into cash where it appears that such requirements would otherwise not be met. Entering into any such arrangements may have a depressive effect on COAC’s stock. For example, as a result of these arrangements, an investor or holder may have the ability to effectively purchase shares at a price lower than market and may therefore be more likely to sell the shares he owns, either prior to or immediately after the special meeting. See the section entitled“Beneficial Ownership of Securities — Security Ownership of Certain Beneficial Owners and Management.”
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FORWARD-LOOKING STATEMENTS
COAC and BVICo believe that some of the information in this proxy statement/prospectus constitutes forward-looking statements within the definition of the Private Securities Litigation Reform Act of 1995. However, because COAC is a “blank check” company, the safe-harbor provisions of that act do not apply to statements made in this proxy statement/prospectus. You can identify these statements by forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “intends,” and “continue” or similar words. You should read statements that contain these words carefully because they:
• | discuss future expectations; |
• | contain projections of future results of operations or financial condition; or |
• | state other “forward-looking” information. |
COAC and BVICo believe it is important to communicate their expectations to their stockholders. However, there may be events in the future that they are not able to predict accurately or over which they have no control. The risk factors and cautionary language discussed in this proxy statement/prospectus provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by COAC or BVICo in such forward-looking statements, including among other things:
• | the number and percentage of COAC’s stockholders voting against the merger proposal and seeking conversion; |
• | changes adversely affecting the business in which BVICo is engaged; |
• | management of growth; |
• | general economic conditions; |
• | BVICo’s business strategy and plans; and |
• | the result of future financing efforts. |
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement/prospectus.
All forward-looking statements included herein attributable to any of COAC, BVICo or any person acting on either party’s behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, COAC and BVICo undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this proxy statement/prospectus or to reflect the occurrence of unanticipated events.
Before you grant your proxy or instruct how your vote should be cast or vote on the merger proposal or any of the other proposals, you should be aware that the occurrence of the events described in the“Risk Factors” section and elsewhere in this proxy statement/prospectus may adversely affect COAC and/or BVICo.
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SPECIAL MEETING OF COAC STOCKHOLDERS
General
COAC is furnishing this proxy statement/prospectus to its stockholders as part of the solicitation of proxies by its board of directors for use at the special meeting of COAC stockholders to be held on _______ __, 2009, and at any adjournment or postponement thereof. This proxy statement/prospectus is first being furnished to COAC stockholders on or about _______ __, 2009 in connection with the vote on the merger proposal and the adjournment proposal. This proxy statement/prospectus provides you with information you need to know to be able to vote or instruct your vote to be cast at the special meeting.
Date, Time and Place
The special meeting of stockholders will be held on _______ __, 2009, at 10:00 a.m., eastern time, at the offices of Graubard Miller, COAC’s counsel, at The Chrysler Building, 405 Lexington Avenue, 19th Floor, New York, New York 10174.
Purpose of the COAC Special Meeting
At the special meeting, COAC will ask holders of its common stock to:
• | consider and vote upon a proposal to approve the Agreement of Merger and Plan of Reorganization, dated as of November 12, 2008, among COAC, BVICo, HKCo, Ge Rui and the shareholders of BVICo, which, among other things, provides for (i) the merger of COAC into BVICo and (ii) each holder of common stock of COAC to receive a like number of shares of BVICo Ordinary Shares (merger proposal); and |
• | consider and vote upon a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the special meeting, COAC is not authorized to consummate the merger (adjournment proposal). |
Recommendation of COAC Board of Directors
COAC’s board of directors:
• | has unanimously determined that the merger proposal is fair to and in the best interests of COAC and its stockholders; |
• | has unanimously approved the merger proposal; |
• | unanimously recommends that COAC’s common stockholders vote “FOR” the merger proposal; and |
• | unanimously recommends that COAC’s stockholders vote “FOR” the adjournment proposal. |
Record Date; Who is Entitled to Vote
COAC has fixed the close of business on _______ __, 2009, as the “record date” for determining COAC stockholders entitled to notice of and to attend and vote at its special meeting. As of the close of business on _______ __, 2009, there were 8,400,000 shares of COAC’s common stock outstanding and entitled to vote. Each share of COAC’s common stock is entitled to one vote per share at the special meeting.
Pursuant to agreements with COAC, the 1,500,000 Original Shares held by the COAC Inside Stockholders will be voted on the merger proposal in accordance with the majority of the votes cast at the special meeting on such proposal by the holders of the Public Shares. The vote of such shares will not affect the outcome of the vote on the merger proposal.
Quorum
The presence, in person or by proxy, of a majority of all the outstanding shares of common stock entitled to vote constitutes a quorum at the special meeting.
Abstentions and Broker Non-Votes
Proxies that are marked “abstain” and proxies relating to “street name” shares that are returned to COAC but marked by brokers as “not voted” will be treated as shares present for purposes of determining the
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presence of a quorum on all matters. The latter will not be treated as shares entitled to vote on the matter as to which authority to vote is withheld from the broker. If you do not give the broker voting instructions, under applicable self-regulatory organization rules, your broker may not vote your shares on “non-routine” proposals, such as the merger proposal. Since a stockholder must affirmatively vote against the merger proposal to have conversion rights, individuals who fail to vote or who abstain from voting may not exercise their conversion rights. See the information set forth in“Special Meeting of COAC Stockholders — Conversion Rights.”
Vote of COAC’s Stockholders Required
The approval of the merger proposal will require the affirmative vote for the proposal by the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote on the proposal at the meeting. Abstentions will have the same effect as a vote “AGAINST” the merger proposal and broker non-votes, while considered present for the purposes of establishing a quorum, will have no effect on the merger proposal. You cannot seek conversion unless you affirmatively vote against the merger proposal.
The approval of the adjournment proposal will require the affirmative vote of the holders of a majority of COAC’s common stock represented and entitled to vote thereon at the meeting. Abstentions are deemed entitled to vote on such proposal. Therefore, they have the same effect as a vote against the proposal. Broker non-votes are not deemed entitled to vote on such proposal and, therefore, they will have no effect on the vote on the proposal.
Voting Your Shares
Each share of COAC common stock that you own in your name entitles you to one vote. Your proxy card shows the number of shares of COAC’s common stock that you own. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted.
There are two ways to vote your shares of COAC common stock at the special meeting:
• | You Can Vote By Signing and Returning the Enclosed Proxy Card. If you vote by proxy card, your “proxy,” whose name is listed on the proxy card, will vote your shares as you instruct on the proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares, your shares will be voted as recommended by COAC’s board “FOR” the merger proposal and, if necessary, an adjournment proposal. Votes received after a matter has been voted upon at the special meeting will not be counted. |
• | You Can Attend the Special Meeting and Vote in Person. COAC will give you a ballot when you arrive. However, if your shares are held in the name of your broker, bank or another nominee, you must get a proxy from the broker, bank or other nominee. That is the only way COAC can be sure that the broker, bank or nominee has not already voted your shares. |
Revoking Your Proxy
If you give a proxy, you may revoke it at any time before it is exercised by doing any one of the following:
• | you may send another proxy card with a later date; |
• | you may notify Harry Edelson, COAC’s chairman and chief executive officer, in writing before the special meeting that you have revoked your proxy; or |
• | you may attend the special meeting, revoke your proxy, and vote in person, as indicated above. |
Who Can Answer Your Questions About Voting Your Shares
If you have any questions about how to vote or direct a vote in respect of your shares of COAC’s common stock, you may call Morrow & Co., LLC, COAC’s proxy solicitor, at (800) 607-0088, or Nicholas Puro, COAC’s secretary, at (201) 930-8900.
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Conversion Rights
Any of COAC’s stockholders holding Public Shares as of the record date who affirmatively vote their Public Shares against the merger proposal may also demand that such shares be converted into a pro rata portion of the trust account, calculated as of two business days prior to the consummation of the merger. If demand is properly made and the merger is consummated, these shares will be converted into a pro rata portion of funds deposited in the trust account plus interest, calculated as of such date.
COAC stockholders who seek to exercise this conversion right (“converting stockholders”) must affirmatively vote against the merger proposal. Abstentions and broker non-votes do not satisfy this requirement. Additionally, holders demanding conversion must deliver their stock (either physically or electronically using Depository Trust Company’s DWAC (Deposit Withdrawal at Custodian) System) to COAC’s transfer agent after the meeting within the time period specified in a notice you will receive after the meeting from or on behalf of BVICo, which period will be not less than 20 days. If you hold the shares in street name, you will have to coordinate with your broker to have your shares certificated or delivered electronically. Certificates that have not been tendered (either physically or electronically) in accordance with these procedures will not be converted into cash.
If holders of more than 20% of the Public Shares properly exercise their conversion rights and the merger is consummated, Harry Edelson and Rose-Marie Fox will forfeit a portion of their Original Shares, which were placed into escrow at the time of the IPO, so that the Inside Stockholders will collectively own no more than 23.81% of the BVICo Ordinary Shares that will be issued to the COAC stockholders upon consummation of the merger.
If the holders of at least 2,760,000 or more Public Shares (an amount equal to 40% or more of the Public Shares) vote against the merger proposal and properly demand conversion of their shares, COAC will not be able to consummate the merger.
The closing bid price of COAC’s common stock on ________, 2009 (the record date for the COAC special meeting) was $____. The cash held in the trust account on _______ __, 2009 was approximately $_______ ($____ per Public Share). Prior to exercising conversion rights, stockholders should verify the market price of COAC’s common stock as they may receive higher proceeds from the sale of their common stock in the public market than from exercising their conversion rights if the market price per share is higher than the conversion price. COAC cannot assure its stockholders that they will be able to sell their shares of COAC common stock in the open market, even if the market price per share is higher than the conversion price stated above, as there may not be sufficient liquidity in COAC’s securities when COAC’s stockholders wish to sell their shares.
If you exercise your conversion rights, then you will be exchanging your shares of COAC common stock for cash and will no longer own those shares. You will be entitled to receive cash for these shares only if you affirmatively vote against the merger proposal, properly demand conversion, and deliver your stock certificate (either physically or electronically) to COAC’s transfer agent after the meeting within the time period specified in a notice you will receive from or on behalf of BVICo, which period will be not less than 20 days.
Appraisal Rights
Stockholders of COAC have appraisal rights in connection the merger under the DGCL. See the section entitled“Appraisal Rights.” Stockholders who vote against the merger proposal and elect to convert their shares into cash will not have appraisal rights.
Proxy Solicitation Costs
COAC is soliciting proxies on behalf of its board of directors. All solicitation costs will be paid by COAC. This solicitation is being made by mail but also may be made by telephone or in person. COAC and its directors, officers and employees may also solicit proxies in person, by telephone or by other electronic means, including email and facsimile.
COAC has hired Morrow & Co., LLC to assist in the proxy solicitation process. It will pay that firm a fee of $20,000 plus disbursements. Such payments will be made from non-trust account funds. If the merger is successfully closed, COAC will pay Morrow & Co., LLC an additional contingent fee of $20,000.
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COAC will ask banks, brokers and other institutions, nominees and fiduciaries to forward its proxy materials to their principals and to obtain their authority to execute proxies and voting instructions. COAC will reimburse them for their reasonable expenses.
COAC Inside Stockholders
As of ___________, 2009, the record date for the COAC special meeting, Harry Edelson, COAC’s chairman of the board and chief executive officer, Nicholas Puro, COAC’s president and secretary and a director, Barry M. Shereck, COAC’s chief financial officer and a director, Rose-Marie Fox, a director of COAC, Daxi Li, Shengyun Qiu and China Investment Group LLC, each of whom is a special advisor to COAC, and Bailin Zheng, a former special advisor to COAC, beneficially owned and were entitled to vote the 1,500,000 Original Shares. The Original Shares constituted 17.9% of the outstanding shares of COAC’s common stock immediately after the IPO (including shares of common stock issued pursuant to the exercise of the over-allotment option). In connection with COAC’s IPO, COAC and EarlyBirdCapital, Inc. entered into agreements with each of the COAC Inside Stockholders pursuant to which each COAC Inside Stockholder agreed to vote his or its Original Shares on the merger proposal in accordance with the majority of the votes cast by the holders of Public Shares. Further, Mr. Edelson and Ms. Fox have agreed that if holders of more than 20% of the Public Shares properly exercise their conversion rights and the merger is consummated, they will forfeit a portion of their Original Shares, so that the Inside Stockholders will collectively own no more than 23.81% of the BVICo Ordinary Shares that will be issued to the COAC stockholders upon consummation of the merger. The COAC Inside Stockholders have also indicated that they intend to vote their Original Shares in favor of all other proposals being presented at the meeting. The Original Shares have no liquidation rights and will be worthless if no business combination is effected by COAC. In connection with the IPO, the COAC Inside Stockholders entered into an escrow agreement pursuant to which their Original Shares will be held in escrow until the earlier of twelve months after a business combination or COAC’s liquidation.
At any time prior to the special meeting, during a period when they are not then aware of any material nonpublic information regarding COAC or its securities, the COAC Inside Stockholders, BVICo or BVICo’s shareholders and/or their respective affiliates may purchase shares from institutional and other investors, or execute agreements to purchase such shares from them in the future, or they or COAC may enter into transactions with such persons and others to provide them with incentives to acquire shares of COAC’s common stock or vote their shares in favor of the merger proposal. The purpose of such share purchases and other transactions would be to increase the likelihood of satisfaction of the requirements that the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote on the merger proposal vote in its favor and that holders of fewer than 40% of the Public Shares vote against the merger proposal and demand conversion of their Public Shares into cash where it appears that such requirements would otherwise not be met.
While the exact nature of any such incentives has not been determined as of the date of this proxy statement/prospectus, they might include, without limitation, arrangements to protect such investors or holders against potential loss in value of their shares, including the granting of put options, the transfer to such investors or holders of shares or warrants owned by the COAC Inside Stockholders for nominal value and the grant to such investors and holders of rights to nominate directors of COAC. COAC will not enter into any such arrangement that would have the effect of constituting a waiver of the voting requirement or the limitation on the maximum number of conversion shares and no funds in its trust account will be used to make such purchases or to fund other such arrangements.
Entering into any such arrangements may have a depressive effect on COAC’s stock. For example, as a result of these arrangements, an investor or holder may have the ability to effectively purchase shares at a price lower than market and may therefore be more likely to sell the shares he owns, either prior to or immediately after the special meeting.
If such transactions are effected, the consequence could be to cause the merger to be approved in circumstances where such approval could not otherwise be obtained. Purchases of shares by the persons described above would allow them to exert more influence over the approval of the merger proposal and other proposals and would likely increase the chances that such proposals would be approved. Moreover, any such purchases
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may make it less likely that the holders of 40% or more of the Public Shares will vote against the merger proposal and exercise their conversion rights.
As of the date of this proxy statement/prospectus, there have been no such discussions and no agreements to such effect have been entered into with any such investor or holder. COAC will file a Current Report on Form 8-K to disclose arrangements entered into or significant purchases made by any of the aforementioned persons that would affect the vote on the merger proposal or the conversion threshold. Any such report will include descriptions of any arrangements entered into or significant purchases by any of the aforementioned persons.
It is possible that the special meeting could be adjourned to provide time to seek out and negotiate such transactions if, at the time of the meeting, it appears that the requisite vote will not be obtained or that the limitation on conversion will be exceeded, assuming that an adjournment proposal is presented and approved. Also, under Delaware law, the board of directors may postpone the meeting at any time prior to it being called to order in order to provide time to seek out and negotiate such transactions.
In connection with COAC’s IPO, Mr. Edelson entered into an agreement with EarlyBirdCapital, which is intended to comply with Rule 10b5-1 under the Exchange Act, pursuant to which he, or an entity or entities he controls, will place limit orders for $3 million of COAC’s common stock commencing November 26, 2008, which, pursuant to such agreement, was ten business days after COAC filed its Current Report on Form 8-K announcing COAC’s execution of the merger agreement, and ending on the business day immediately preceding the record date for the special meeting of stockholders. Mr. Edelson may vote these shares any way he chooses. Mr. Edelson has agreed that he will not sell or transfer any shares of common stock purchased by him pursuant to this agreement until one year after COAC has completed the merger. It is intended that these purchases will comply with Rule 10b-18 under the Exchange Act and, accordingly, any purchases that are not permitted by Rule 10b-18 will not be made. These purchases will be made at a price equal to the per share amount held in COAC’s trust account as of November 12, 2008 (the date of the signing of the merger agreement) and will be made by EarlyBirdCapital or an independent broker dealer mutually agreed upon by Mr. Edelson and EarlyBirdCapital (including in the event that EarlyBirdCapital’s participation in the purchases would not comply with Rule 10b-18) in such amounts and at such times as EarlyBirdCapital or such other broker dealer may determine, in its sole discretion, so long as the purchase price does not exceed the above-referenced per share purchase price. As a result of EarlyBirdCapital’s interest in COAC’s consummation of a business combination, it may not be deemed to be independent for purposes of this agreement. Through December 19, 2008, Mr. Edelson purchased an aggregate of 120,000 shares of COAC common stock in accordance with such agreement at an average price of $5.70 per share.
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THE MERGER PROPOSAL
The discussion in this proxy statement/prospectus of the merger and the principal terms of the merger agreement by and among COAC, BVICo and the current BVICo shareholders is subject to, and is qualified in its entirety by reference to, the merger agreement. A copy of the merger agreement is attached as Annex A to this proxy statement/prospectus and is incorporated into this proxy statement/prospectus by reference.
Structure of the Merger
The merger agreement provides for (i) the merger of COAC into BVICo, with BVICo being the surviving entity of the merger and (ii) the holders of securities of COAC (in the aggregate, 931,186 units, each consisting of one share of common stock and two warrants, 8,400,000 shares of common stock (including shares included in the units), warrants to purchase 16,066,667 shares of COAC common stock (incuding warrants included in the units) and one Representative’s unit purchase option to purchase 600,000 units) to receive like securities of BVICo, on a one-to-one basis, in exchange for their existing COAC securities.
Immediately prior to the merger, the current shareholders of BVICo will own 30,000,000 BVICo Ordinary Shares, which they will continue to own after the merger is consummated. The current shareholders of BVICo will also be entitled to be issued 1,000,000 BVICo Ordinary Shares for each of the years ending on December 31, 2009, 2010 and 2011 in which Ge Rui, BVICo’s operating subsidiary, has net after tax income that equals or exceeds the target specified for such year in the merger agreement ($45 million, $60 million and $80 million, respectively). In addition, if at least 75% of the warrants that BVICo will issue to the public holders of COAC’s current warrants are exercised, the current BVICo shareholders will be entitled to an aggregate cash payment of $5 million.
Interest of COAC Shareholders in the Merger
As a result of the merger, the present COAC stockholders (including the COAC Inside Stockholders) will own approximately from 22% of the BVICo Ordinary Shares outstanding after the merger (assuming that no holders of Public Shares vote against the merger proposal and elect to convert their Public Shares into cash in accordance with COAC’s certificate of incorporation to 16% of the BVICO Ordinary Shares outstanding after the merger (assuming that the holders of 39.99% of COAC’s Public Shares vote against the merger proposal and elect to convert their Public Shares into cash). If, after the merger, the holders of the warrants to acquire BVICo Ordinary Shares that will be issued as a result of the merger in exchange for the outstanding warrants to acquire shares of COAC’s common stock exercise all such warrants, the former COAC stockholders (or their transferees) and the holders of the BVICo Ordinary Shares issued upon exercise of the BVICo warrants will own approximately 43% of the outstanding BVICo Ordinary Shares (assuming no additional BVICo Ordinary Shares are issued after the merger).
Name; Headquarters; Stock Symbols
After completion of the merger:
• | the corporate headquarters and principal executive offices of BVICo will be located at No. 69 Huaibei Street, Longhai Middle Road, Henan, China; and |
• | BVICo’s Ordinary Shares, warrants and units (each consisting of one share of common stock and two warrants), will be listed for trading on the Nasdaq Stock Market under the symbols CHOP, CHOPW and CHOPU, respectively if an application made by BVICo to such effect is granted. |
Indemnification
To provide a fund to secure indemnification protection to BVICo against losses that BVICo, as surviving entity of the merger, may sustain as a result of (i) the inaccuracy or breach of any representation or warranty made by BVICo and its shareholders in the merger agreement or any schedule or certificate delivered by them in connection with the merger agreement, (ii) the non-fulfillment or breach of any covenant or agreement made by BVICo or its shareholders in the merger agreement, (iii) any assessment against BVICo, HKCo or Ge Rui for taxes for any period ending prior to the closing date, (iv) the operation of the businesses of BVICo, HKCo and Ge Rui prior to the closing of the merger, (v) certain matters relating to governmental approvals and regulatory and other legal requirements in connection with the acquisition by HKCo of the
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shares of Ge Rui and Ge Rui’s operations and (vi) certain deficiencies in insurance coverage, the current shareholders of BVICo will place in escrow (with an independent escrow agent) an aggregate of 3,000,000 BVICo Ordinary Shares, which will be canceled to the extent that BVICo has damages for which it is entitled to indemnification. Other than with respect to claims of fraud or intentional or willful misrepresentation or omission, the escrow will be the sole remedy for BVICo for its rights to indemnification pursuant to the merger agreement. Claims for indemnification may be asserted against the escrow by BVICo once its damages exceed a $250,000 deductible and will be reimbursable to the full extent of the damages in excess of such amount up to a maximum of the escrowed funds, except that claims made with respect to representations and warranties regarding corporate organization, subsidiaries, capitalization, authority, title to property and taxes and those specific to BVICo’s shareholders will not be subject to such deductible. Claims for indemnification may be asserted until the later of one year after the closing of the merger or thirty (30) days after the date on which BVICo has filed its annual report on Form 10-K (or, if BVICo is deemed to be a “foreign private issuer,” its annual report on Form 20-F) for the fiscal year ending December 31, 2009, except that there is no limitation as to the period during which claims may be asserted for breaches of the representations and warranties regarding corporate organization, subsidiaries, capitalization, authority and those specific to BVICo’s shareholders and claims for breaches of the representations and warranties regarding title to property and taxes may be made until the sixtieth day following the expiration of the applicable statute of limitations. A copy of the escrow agreement is attached to this proxy statement/prospectus as Annex C.
Voting Agreement
After the merger, the directors of BVICo will be Mingwang Lu, Yi Lu, Wong Kwok Keung, Maotong Xu and Yunlong Wang, who are designees of the BVICo shareholders, Harry Edelson, who is COAC’s chairman and chief executive officer, and J.P. Huang, who is a designee of Harry Edelson. Maotong Xu, Yunlong Wang, Wong Kwok Keung and J.P. Huang will be considered independent directors under applicable regulatory rules. The current BVICo shareholders and Mr. Edelson will enter into a voting agreement at the time of closing of the merger (to which BVICo will also be a party) that will provide that they will each vote their BVICo Ordinary Shares in favor of the election of such persons as directors of BVICo in specified classes in all elections through and including the annual meeting that will be held in 2011. A copy of the form of voting agreement is attached to this proxy statement/prospectus as Annex D.
Lock-Up Agreements
The current BVICo shareholders will not be able to sell any of their BVICo Ordinary Shares during either the twelve month period (for Oasis Green Investments Limited) or the six month period (for the other shareholders) after the closing date of the merger other than as permitted pursuant to the lock-up agreements they will enter into at the closing. Further, the officers and directors of COAC will not be able to sell any of the BVICo Ordinary Shares that they receive as a result of the merger during such twelve month period other than as permitted pursuant to the Stock Escrow Agreement dated as of March 20, 2007, between COAC and each of the persons who was a stockholder of COAC prior to its IPO and the lock-up agreements he or she will enter into upon the closing. A copy of the form of lock-up agreement is attached to this proxy statement/prospectus as Annex E.
Background of the Merger
The terms of the merger agreement are the result of arms’-length negotiations between representatives of BVICo and COAC. The following is a brief discussion of the background of these negotiations, the merger agreement and related transactions.
COAC was formed on August 7, 2006 to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in China. COAC completed its IPO on March 20, 2007, raising net proceeds of $38,929,040, including net proceeds from the sale of units on exercise of the underwriter’s overallotment option, of which $38,357,000 was deposited into the trust account. In addition, all of the proceeds from the private sale of warrants ($1,360,000) were deposited into the trust fund, for a total of $39,717,000 held in trust (or approximately $5.76 per share sold in the offering). In accordance with COAC’s certificate of incorporation, these funds will be released upon either its consummation of a
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business combination or its liquidation. COAC must liquidate unless it has consummated a business combination by March 20, 2009. As of September 30, 2008, approximately $41,200,000 was held in deposit in the trust account.
Promptly following the IPO of COAC, COAC contacted several investment bankers, private equity firms, consulting firms, legal and accounting firms, as well as numerous other business relationships. Through these and further efforts, COAC identified and reviewed information with respect to more than 100 potential target companies.
Starting in July 2007, COAC had entered into substantial discussions with several companies, including the type and amount of consideration to be provided relative to a potential transaction. Eleven of these companies were provided with non-binding preliminary letters of intent, none of which was executed for the reasons stated below:
• | In July 2007, COAC entered into discussions with a Chinese coal mining company and delivered a non-binding letter of intent. After several meetings with the chairman and other representatives of the company in the US and Asia, discussions ended when the company indicated it was not prepared to enter into a transaction with COAC on terms that would be acceptable to COAC’s stockholders. |
• | In August 2007 COAC met with a large Chinese steel company in China and delivered a non-binding letter of intent. COAC subsequently met with them again in New York City. This company eventually decided to enter into a transaction with a major U.S. based investment bank. |
• | In October 2007, COAC entered into discussions with a Chinese seed company. COAC presented the majority owner with a non-binding letter of intent and a Confidentiality Agreement in December 2007. COAC terminated the negotiations in January 2008 following initial due diligence that showed the company to be an unacceptable candidate for a business combination with COAC. |
• | In October 2007, COAC entered into discussions with another steel company firm in China. COAC presented a letter of intent in October 2007, but discussions were discontinued shortly thereafter when it became clear that a business combination could not be completed on terms that would be acceptable to COAC’s stockholders. |
• | In October 2007, COAC presented a non-binding letter of intent to a Chinese sanitary building materials company that COAC met through an intermediary in China. The letter of intent was subsequently revised in late October 2007, but the negotiations were terminated because the parties could not agree upon the valuation of the target. |
• | In October 2007, COAC met with a Chinese real estate firm and presented a non-binding letter of intent to them. The letter of intent was subsequently revised in June 2008, but the negotiations were terminated because the parties could not agree upon the valuation of the target. |
• | In November 2007, COAC entered into discussions with and delivered a non-binding letter of intent to an intermediary of a Chinese set-top box company. COAC were unable to reach an agreement with the seller and discussions were terminated. |
• | In December 2007, COAC commenced discussions with and delivered a non-binding letter of intent to a China-based magnesium company. Discussions were terminated when the company elected to pursue an initial public offering on the Asian markets. |
• | In January 2008, COAC met in China with a Chinese company manufacturing high fashion clothing. In February 2008, COAC presented this company with a non-binding letter of intent. In the course of due diligence, COAC could not get a sufficient level of comfort with the company’s financial statements and terminated COAC’s consideration of the proposed transaction. |
• | In March 2008, COAC entered into discussions with a Chinese-based paper company and presented it with a non-binding letter of intent. Later that month, COAC presented a confidentiality agreement. During COAC’s initial due diligence COAC ascertained that the company’s financial history and projections made it too small for a business combination with COAC. |
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• | In March 2008, COAC entered into discussions with and presented a non-binding letter of intent to a Chinese titanium mining company. The company decided that it was not interested in entering into a transaction that would result in the company being publicly traded. |
On April 14, 2008, COAC was introduced to Ge Rui when Harry Edelson, COAC’s CEO, received a short business description of Ge Rui labeled “ABC Composite Material Company Ltd.” from a representative of EarlyBirdCapital who knew that Ge Rui was exploring strategic alternatives. On April 23, 2008, Mr. Edelson met in China with Michael Wu, a representative of Ge Rui, to discuss the business operations of Ge Rui. On May 12, 2008, COAC hired Jpigroup Inc. in Beijing to assist in due diligence and verbal contact in the Mandarin language with company management. Mr. Edelson visited Michael Wu again in Beijing on May 27, 2008 to further discuss a business merger. Thereafter, a confidentiality agreement was executed by and between COAC and Ge Rui. In the next several months Mr. Edelson had a series of phone calls with Michael Wu and Wong Kwok Keung (Francis), special advisor to the Chairman of Ge Rui. The term sheet was discussed over the next few weeks and a revised term sheet was sent on June 7, 2008. The revised term sheet was signed by Mr. Edelson for COAC on June 11, 2008 and by the Chairman of Ge Rui, Mr. Lu, on June 12, 2008. On July 6, 2008 Mr. Edelson met with Michael Wu, Chairman Lu and the entire management team of Ge Rui in Zhengzhou for dinner. The next day, Mr. Edelson toured the Ge Rui facilities and had lunch with the executive team. On June 17, 2008, a Chinese law firm, Commerce & Finance Law Offices, was engaged by COAC to do legal due diligence on Ge Rui.
During the period following the signing of the term sheet, COAC’s attorneys prepared drafts of the merger agreement and the other transaction documents, including the escrow agreement, the voting agreement and the lock-up agreement. These were submitted to the BVICo parties, their attorneys and other representatives and were revised several times through the course of the negotiations, which took place by email and teleconference. During this period, the parties agreed on the terms of indemnification provisions, which were not addressed in the term sheet.
At meetings on July 22, August 19, September 16 and October 3, 2008, the board of COAC met to discuss progress on the negotiations, the financial results and forecasts of Ge Rui and to review the legal progress to complete the transaction. On November 5, 2008, another telephonic meeting of the board of directors was held. All directors attended, as did, by invitation, Noah Scooler and Jeffrey M. Gallant of Graubard Miller, and representatives of BMCG. Prior to the meeting, copies of the most recent drafts of the significant transaction documents, in substantially final form, were delivered to the directors. Paul Baumann of BMCG made a presentation regarding the fairness of the consideration to be paid in the merger. Mr. Baumann advised the board that it was the opinion of BMCG that the consideration to be paid in the merger was fair to COAC’s stockholders from a financial point of view, and that the fair market value of BVICo is at least 80% of COAC’s net assets. Mr. Baumann detailed for the board the analysis performed by BMCG and made a presentation concerning how BMCG had arrived at its opinion. Mr. Baumann discussed at length with COAC’s board the different analyses used to determine whether or not the merger consideration to be paid by COAC was fair from a financial point of view, as well as to determine the fair market value of BVICo. After considerable review and discussion, the merger agreement and related documents were unanimously approved, subject to final negotiations and modifications, and the board determined to recommend the approval of the merger agreement. For a more detailed description of the BMCG fairness opinion, see the subsection below entitled“The Merger Proposal — BMCG Fairness Opinion.”
In connection with the negotiations relating to the merger agreement, the parties agreed that Ge Rui would be entitled to declare and pay dividends equal to its net profits for all full fiscal quarters prior to the quarter in which the merger agreement would be signed, but, through inadvertence, provision for these dividends was not made in the merger agreement, which, in Section 4.1(d), contains a prohibition against dividends by Ge Rui without the consent of COAC. Pursuant to this understanding, Ge Rui, subsequent to the signing of the merger agreement, advised COAC that it had declared dividends of approximately $24,501,225, the amount of its net profits for 2007, $17,680,106, the amount of its profits for the first half of 2008, and $9,675,125, the amount of its net profits for the third quarter of 2008, and COAC consented to such dividends.
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The merger agreement was signed on November 12, 2008. Prior to the market open on November 13, 2008, COAC issued a press release and on November 14, 2008 filed a Current Report on Form 8-K announcing the execution of the merger agreement and discussing the terms of the merger agreement.
COAC’s Board of Directors’ Reasons for the Approval of the Merger
The final agreed-upon consideration in the merger agreement was determined by several factors. COAC’s board of directors reviewed industry and financial data in order to determine that the transaction terms were reasonable and that the merger was in the best interests of COAC’s stockholders.
COAC conducted a due diligence review of Ge Rui that included an industry analysis, a description of Ge Rui’s existing business model, a valuation analysis and financial projections in order to enable the board of directors to ascertain the reasonableness of the of consideration. During its negotiations with Ge Rui, COAC did not receive consulting services from any unrelated financial advisors because its officers and directors believe that their experience and backgrounds, together with the experience and background of COAC’s consultant, J.P. Huang, were sufficient to enable them to make the necessary analysis and determinations. Dr. Huang is a nominee to be appointed a director of BVICo effective after the merger. See the section entitled “Directors and Executive Officers of BVICo Following the Merger.”
Board discussions covered various topics regarding the proposed merger. The board decided that the offer of 30 million shares of stock was appropriate as was the offer of 3 million bonus shares for meeting 90% of projected net earnings in 2009, 2010 and 2011. COAC was able to move the bonus shares out one year from the original offer of bonus shares for 2008, 2009 and 2010. This was done because by the time a merger was accomplished, 2008 results would most likely have been finalized.
The board also studied research reports on the steel industry and determined that COAC’s offering price was favorable to COAC stockholders. The board kept track of the negotiations by Ge Rui to make it a wholly foreign owned enterprise (WFOE). It took several months for BVICo’s shareholders to establish BVI and Hong Kong entities in order to facilitate the acquisition of Ge Rui and convert Ge Rui into a wholly foreign owned enterprise (WFOE). The Chinese advisors of COAC, Ambassador Qui and Daxi Li, advised the board of their investigation and contacts with Ge Rui. Harry Edelson described his visits with Ge Rui management and his visit to Ge Rui’s headquarters and plant facilities. Using his background in securities analysis, Mr. Edelson informed the board of his strong belief that Ge Rui would be an excellent merger partner. The board requested and received information on the steel industry from two major investment banking firms and numerous research resources on a continuing basis. The board discussed the spike in steel prices and its inevitable fall. It was decided that Ge Rui would be a good investment even if a recession ensued in the US and Europe and a slow down occurred in China and other parts of Asia. Ge Rui was considered by the board to be a sound investment in good times or bad.
The management of COAC, including members of its board of directors, has long and diverse experience in operational management, investments and financial management and analysis. In the opinion of COAC, it is well qualified to conduct the due diligence and other investigations and analyses required in connection with the search for a merger partner. Harry Edelson has been a board member of seventy-five companies in numerous industries, in addition to having extensive experience in the public markets as a securities analyst and as a venture capitalist in the private markets. Nicholas Puro has been a board member of seven companies in several industries, a venture capitalist, a venture capital attorney and the president of a technology manufacturing company. Barry Shereck has been the CFO of six companies, public and private, domestic and foreign. Rose-Marie Fox was a Senior Vice President of Lehman Brothers Investment Banking Division and for the past 14 years has her own private investment firm in China of which she is the sole owner. COAC believes that this experience makes COAC’s board highly qualified to render an opinion on the merits of this transaction. More detailed descriptions of the experience of Messrs. Edelson, Puro and Shereck and Ms. Fox are included in the section of this proxy statement/prospectus entitled“Directors and Executive Officers of BVICo Following the Merger.”
The COAC board of directors concluded that the merger agreement with Ge Rui is in the best interests of COAC’s stockholders. In reaching this conclusion, it considered a wide variety of factors. In light of the complexity of those factors, the board did not consider it practicable to quantify or otherwise assign relative weights to the specific factors it considered in reaching its decision. In addition, individual members of the
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board may have given different weight to different factors. The board also determined to engage Baumann Moreau Consulting Group to provide a fairness opinion as further support for its opinion. In considering the merger, the board of directors gave considerable weight to the following factors:
Record of Growth and Potential for Future Growth
Important criteria established by the board in identifying an acquisition target were that the company must have steady and profitable business operations in China, that it must be generating substantial revenues and that it have the potential for sustainable high growth in revenues and earnings. The board believes that Ge Rui has the appropriate infrastructure in place and is well positioned in its industry to achieve growth both organically and through acquisitions. The board also believes that the growth potential of Ge Rui is very good based on its historical growth rate, acquisition of more than 40 acres adjacent to its facilities to permit plant expansion, possible introduction of new lines of manufacturing, a loyal customer base and technology leadership in its field. In the six months ended June 30, 2008 revenues increased 49% over the corresponding period a year earlier from $67.8 million to $100.9 million and net income increased 77% over the corresponding period for the prior year from $11.2 million to $19.8 million. Ge Rui intends to continue or enhance its growth through new product introductions or transactions such as acquisitions using COAC’s cash and stock as a valuable currency. For a description of BVICo’s post-merger plans for additional acquisitions, please see the section entitled“Business of BVICo — Business Strategy.”
A business downturn and sharp decline in market prices in the United States has spread to Europe and could eventually hinder the growth of the Chinese steel industry including Ge Rui. The effects of the recession in the United States have caused the price of steel and the prices of US steel companies to decline sharply. As worldwide steel demand diminishes, it is only a matter of time before the Chinese steel industry feels the effects. It is COAC’s belief that larger manufacturers will be more affected than smaller steel milling companies like Ge Rui. Nevertheless, the steel industry is cyclical in nature and a slow down in demand is likely to affect almost all steel companies.
The Experience of Ge Rui’s Management
Another important attribute of Ge Rui is its seasoned management team, which has a specialized knowledge of its markets. It works closely with its customers to provide products to exact specifications. The Chairman and founder, Mr. Lu, has twenty-three years experience in the steel industry in China. In addition, the executive management team has an average of fifteen years of industry experience. Their long tenure with the company and the industry has enabled the management team to build close relationships with suppliers and customers. The expertise of management and technical innovation of the company give it a strong competitive advantage.
Financial Condition and Results of Operations
The balance sheet, revenue, net income and return on equity of Ge Rui were reviewed in absolute terms and in relation to other companies in the steel industry. The board believes that the company is well capitalized and has a liquid balance sheet that will be improved with the cash it will receive from COAC’s trust fund. As a result, it also believes that the BVICo public stock will be well positioned to experience significant growth as a result of the transaction. The net profit margins of Ge Rui have increased from 12% in 2005 to 16% in 2006 and 17% in 2007. This can be attributed to production efficiencies, small price increases and economies of scale that result from spreading fixed costs over a larger revenue base.
Valuation
The board considered the value of BVICo in relation to its growth potential and found it to be attractive when compared to other publicly traded steel companies. The price/earnings ratio of 3.7 at the price based upon the transaction terms is approximately 25% of the lowest P/E ratio of 15 for the companies in the S&P 500 in the past 12 years. The board noted that the PEG ratio (see discussion below under“Comparable Company Analysis”) of 0.11 for BVICo is at the extreme low end of almost all public companies. Based on the company’s past performance of high growth and high return on equity, a seasoned management team, favorable comparisons to domestic and foreign steel companies, and the board’s significant transaction experience, the board negotiated terms that they felt were in the best interests of the stockholders of COAC.
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Projections Furnished by BVICo to COAC
BVICo provided COAC with its internally prepared projections for each of the years in the three-year period ended December 31, 2011. The projections did not include costs associated with a merger transaction with COAC. The projections were not prepared with a view to public disclosure or in compliance with GAAP, the published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. The internal financial forecasts (upon which the projections were based in part) were, in general, prepared solely for internal use and capital budgeting and other management purposes, are subjective in many respects and therefore susceptible to varying interpretations and the need for periodic revision based on actual experience and business developments.
In compiling the projections, BVICo took into account historical performance as well as estimates of revenue, gross profit, operating income and net income. The projections reflect numerous assumptions that BVICo’s management believed were reasonable when made, including assumptions with respect to general business, economic, market, regulatory and financial conditions, all of which are difficult to predict and many of which are beyond the control of BVICo, such as the risks and uncertainties contained in the “Risk Factors” section of this proxy statement/prospectus.
While all projections are necessarily somewhat speculative, BVICo believes that the prospective financial information covering periods beyond twelve months from its date of preparation carries increasingly higher levels of uncertainty and should be read in that context. There will be differences between actual and projected results and actual results may be materially greater or materially less than those contained in the projections.
The projections were disclosed to COAC for use as a component in its overall evaluation of Ge Rui and are indicated below. Neither Ge Rui’s management nor any of its representatives has made or makes any representation to any person regarding the ultimate performance of Ge Rui compared to the information contained in the projections and none of them intends to update or otherwise revise the projections to reflect circumstances existing after the date when made or to reflect the occurrence of future events in the event that any or all of the assumptions underlying the projections are shown to be in error.
The projections were prepared by, and are the responsibility of, the management of Ge Rui. Its auditor, UHY Vocation HK CPA Limited, has neither examined nor compiled the projections and, accordingly, UHY Vocation HK CPA Limited does not express an opinion or any other form of assurance with respect thereto. The UHY Vocation HK CPA Limited report included in this proxy statement/prospectus relates to Ge Rui’s historical financial information. It does not extend to the projections and should not be read as if it does so. The projections do not include the impact of any acquisitions, employee stock options plans, any non-cash interest expenses due to the amortization of debt, or any costs associated with the proposed merger with COAC.
The management of COAC discussed the forecast with the management of Ge Rui and offered 1 million bonus shares for each of years 2009, 2010 and 2011 if Ge Rui achieves 90% of its estimates of net income for those three years. This offer was accepted by the management of Ge Rui. The net income targets involve a 35% increase in 2009 to $45 million, 33.3% increase to $60 million in 2010 and 33.3% increase to $80 million 2011. The base year of 2008 has a projected net income of $33.4 million. These targets of net income would be less than 33.3% increases on an annual basis if net income were higher than expected in earlier years including the base year of 2008.
The income statement projections were supported by the trend of the past three years, increasing demand by customers, the lack of additional manufacturing production lines, the additional funds that would be provided by the merger with COAC, the purchase of additional land adjacent to existing facilities, the possibility of export sales when production capacity is increased, the possibility of adding new products and the robust demand for steel in China where the growth in gross national product has been at least 3 times that of the United States in the past decade. If Ge Rui fails to meet the targeted net income in 2009, 2010 or 2011, the current BVICo shareholders will fail to receive bonus shares for each year in which it fails to meet the target. Bonus shares, if earned, will be issued only after audits are issued confirming the results.
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COAC Comparable Company Analysis
The management of COAC used a comparable company analysis to assess the value of BVICo after the merger. Although it is difficult to find public companies exactly like BVICo, COAC chose six companies of different sizes in the steel industry, which are located in either China or the United States. Four of the companies had market capitalizations of at least $2 billion and the other two companies had market capitalizations of between $100 and $200 million. One of the latter was China Precision Steel, Inc., a Chinese company listed in the United States; the other was Universal Stainless & Alloy Products, Inc., a United States based company.
Management of COAC looked at a number of ways to ascertain appropriate valuations, including discounted cash flow, enterprise value and PEG ratios. It decided on the latter because PEG ratios fairly compare large slower growing companies with small faster growing companies by relating the P/E ratio to the growth rate. However, in the current period of extreme market volatility, P/E ratios and PEG ratios are greatly distorted because it takes time for P/Es and growth rates to be properly adjusted by analysts to reflect quarterly reports of greatly lower earnings and forecasts. Consequently, a broad range of periods was looked at by COAC’s management. The PEG ratio is a ratio of the P/E of a company compared to its growth rate, looking backward or forward. The numerator or the P/E is the ratio of price to earnings, or similarly, market capitalization to net income. For example, if a company is earning $1 a share in a particular year and the price of its stock is 10, the P/E would be 10. The P/E ratio is probably the most common method of valuing stocks. If two companies in the same industry have a P/E of 10, but one company is growing much faster than the other company, that company would normally be considered a better buy. The PEG ratio takes the factor of growth into the analysis — the lower a PEG ratio the more attractive the stock. A company with a P/E of 10 and a growth rate of 10% would have a PEG of 1. PEGs normally range from 0.5 to 1.5, but can fall outside that range, on the higher (less attractive) side because of such things as balance sheet problems or poor management and on the lower (more attractive) side because of extremely high growth or product innovations. COAC’s board believes PEGs are fair to both fast and slow growing companies because the P/E is considered in relation to growth.
Because of the recent severe slide in stock prices, the price/earnings ratios and PEG ratios often varied widely even in the course of a single week. For this reason, COAC’s board decided to show PEG ratios for the past year and the following year for each quarter starting with the end of 2005. There was a wide variation in PEG ratios but in most financial quarters PEG ratios exceeded 1.0 and in some cases rose to as high as 2.0 or 3.0. In virtually all cases the PEG ratios declined on the latest date because of market conditions. As prices for all of these stocks declined, security analysts did not yet have a chance to reduce estimated growth rates. When this is done, PEG ratios will increase.
The management of COAC calculated the P/E of its investment in BVICo as follows. As a public stock, COAC has a market capitalization of approximately $47 million. The $47 million market capitalization is derived by multiplying its stock price of $5.60 by its 8.4 million shares outstanding. Using 8.4 million as the numerator and 38.4 million as the denominator (8.4 million plus 30 million outstanding shares of BVICo), the COAC shareholders would have approximately 22% of the total shares of the combined company. By dividing the $47 million valuation of COAC by its 22% ownership position, a value of $215 million post the merger is calculated. Subtracting $47 million from this figure gives $168 million as the value of BVICo before the merger. On 2009 estimated earnings of $45 million (90% of BVICo’s estimate), the price/earnings ratio is approximately 3.7. The forward growth rate of BVICo’s earnings in the 2009 – 2011 period to earn contingent shares is 33.3%; therefore, the PEG ratio is 3.7 divided by 33.3, or 0.11. Using the post-money valuation of $227 million, the price earnings ratio is approximately 4.8 and the PEG is 0.14.The actual growth rate of Ge Rui for the past three years was 45%.
The management of COAC reasoned that BVICo should have a PEG ratio of as much as 1.2 considering its track record, supported forecast, high demand for steel in China, seasoned and stable management team and strong balance sheet strengthened by the merger with COAC. This analysis would indicate that the investment in BVICo is undervalued by as much as 8 times. There are many caveats to this analysis. Growth could slow because of the effects of a worldwide recession. The Chinese government could decide to slow steel production because of environmental concerns or other reasons. Plant expansions could be mishandled or there could be machinery malfunctions, competition is always a threat in any business.
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The recent sharp decline in steel prices in China and abroad is hurting the steel industry badly. But GeRui is not a steel mill; rather, it is a leading manufacturer of cold-rolled precision specialty steel products. Its products replace expensive imports, and the demand is still larger than its capacity. GeRui uses cold-rolled steel from steel mills as a raw material to produce high value cold-rolled precision specialty steel products. The drop in steel prices means that GeRui will have lower material costs and GeRui may sell its products at a lower price, but profit margins may hold firm. Lower costs for material could mean that GeRui will need less money for the costs of production. After considering all of the factors, the positive and negative, the management of COAC decided to proceed with the business combination.
Comparable company analysis is a difficult task because there are thousands of steel companies operating in diverse markets, offering different products and having balance sheets that may vary from weak to strong. The tables below show the PEG ratios for both large and small companies considered by COAC’s management to be generally appropriate for comparison to Ge Rui for the purpose of determining whether, based on the reasons for considering PEG ratio analysis described above and subject to the difficulties of determining whether companies are suitably comparable as described above, Ge Rui has a PEG ratio that would make it an attractive investment. Given that the recent world-wide economic and financial turmoil has most likely decreased the expected growth rates for these companies, as well as Ge Rui, it is likely that the stated ratios for the period ended September 30, 2008 are lower (and thus appear to be more favorable) than they would have been had more recent growth forecasts are factored into such calculations by those making the analyses.
COAC’s management has evaluated current economic and financial circumstances and come to the conclusion that, at its stage of development, BVICo is an attractive target not only for its performance but also because of its location in China, which, according to the World Steel Association(World Steel in Figures, 2008), accounted for 33.8% of the worldwide use of steel in 2007. However, it should be noted that recent Chinese government forecasts indicate that the growth of many sectors of the Chinese economy, including the steel and steel products sectors, has drastically declined in recent months. As a consequence, historical data as to the underlying bases for the calculation of such ratios are likely not to be adequate indicators of the future levels of such ratios.
Baoshan Iron & Steel | United States Steel | Steel Dynamics Inc. | ||||||||||||||||||||||
Date | Trailing FY1 | Leading FY2 | Trailing FY1 | Leading FY2 | Trailing FY1 | Leading FY2 | ||||||||||||||||||
30-Sep-2008 | 0.76 | 0.79 | 1.06 | 0.96 | 0.80 | 0.79 | ||||||||||||||||||
30-Jun-2008 | 0.92 | 0.80 | 2.39 | 2.06 | 2.08 | 1.98 | ||||||||||||||||||
31-Mar-2008 | 1.22 | 1.08 | 2.23 | 2.16 | 2.10 | 2.08 | ||||||||||||||||||
31-Dec-2007 | 2.03 | 1.60 | 3.02 | 2.81 | 2.09 | 1.68 | ||||||||||||||||||
28-Sep-2007 | 1.99 | 1.61 | 2.50 | 2.54 | 2.03 | 1.85 | ||||||||||||||||||
29-Jun-2007 | 1.19 | 1.04 | 2.65 | 2.81 | 1.85 | 1.81 | ||||||||||||||||||
30-Mar-2007 | 1.10 | 0.99 | 2.72 | 2.85 | 2.08 | 2.12 | ||||||||||||||||||
29-Dec-2006 | 1.34 | 1.15 | 1.66 | 2.08 | 1.62 | 1.65 | ||||||||||||||||||
29-Sep-2006 | 0.79 | 0.70 | N/A | N/A | 1.27 | 1.30 | ||||||||||||||||||
30-Jun-2006 | 0.85 | 0.74 | N/A | N/A | 2.00 | 1.95 | ||||||||||||||||||
31-Mar-2006 | 0.89 | 0.85 | 0.95 | 1.04 | 1.94 | 2.08 | ||||||||||||||||||
30-Dec-2005 | 0.38 | 0.49 | 0.69 | 0.89 | 1.43 | 1.54 |
China Precision Steel | Gerdau AmeriSteel | Universal Stainless | ||||||||||||||||||||||
Date | Trailing FY1 | Leading FY2 | Trailing FY1 | Leading FY2 | Trailing FY1 | Leading FY2 | ||||||||||||||||||
30-Sep-2008 | 0.67 | 0.55 | 1.52 | 1.58 | 0.86 | 0.76 | ||||||||||||||||||
30-Jun-2008 | 1.32 | 1.32 | 3.62 | 3.46 | N/A | N/A | ||||||||||||||||||
31-Mar-2008 | 4.16 | 4.02 | 2.89 | 2.99 | N/A | N/A | ||||||||||||||||||
31-Dec-2007 | N/A | N/A | 2.96 | 2.95 | N/A | N/A | ||||||||||||||||||
28-Sep-2007 | N/A | N/A | 0.74 | 0.75 | N/A | N/A | ||||||||||||||||||
29-Jun-2007 | N/A | N/A | N/A | N/A | N/A | N/A |
Available information on PEG ratios courtesy of Navellier & Associates
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Satisfaction of 80% Test
It is a requirement that any business acquired by COAC have a fair market value equal to at least 80% of COAC’s net assets at the time of acquisition, which assets shall include the amount in the trust account. Based on the financial analysis of BVICo generally used to approve the transaction, including a comparison of comparable companies and a discounted cash flow analysis, the COAC board of directors determined that this requirement was met. The COAC board of directors believes because of the financial skills and background of several of its shareholders, it was qualified to conclude that the acquisition of BVICo met this requirement. However, COAC has also received an opinion from BMCG that the 80% test has been met.
Interests of COAC’s Directors and Officers and Others in the Merger
In considering the recommendation of the board of directors of COAC to vote for the proposal to approve the merger proposal, you should be aware that certain COAC directors and officers have agreements or arrangements that provide them with interests in the merger that differ from, or are in addition to, those of COAC stockholders generally. In particular:
• | If the merger is not consummated by March 20, 2009, COAC will be liquidated. In such event, the 1,500,000 Original Shares held by COAC’s directors and officers that were acquired before the IPO for an aggregate purchase price of $25,000 would be worthless because COAC’s directors and officers are not entitled to receive any of the liquidation proceeds with respect to such shares. Such shares had an aggregate market value of $ ______ based upon the closing bid price of $ _____ on the Over-the-Counter Bulletin Board on _________, 2009, the record date for the COAC special meeting. |
• | The COAC officers, directors and special advisors have also purchased 2,266,667 Insider Warrants, for an aggregate purchase price of $1,360,000 (or $0.60 per warrant) pursuant to agreements with COAC and EarlyBirdCapital, Inc. and entered into in connection with COAC’s IPO. These purchases took place on a private placement basis simultaneously with the consummation of COAC’s IPO. All of the proceeds COAC received from these purchases were placed in COAC’s trust fund. These Insider Warrants are identical to the warrants underlying COAC’s units, except that if COAC calls the warrants for redemption, the Insider Warrants will not be redeemable by COAC so long as they are held by these purchasers or their affiliates. Such warrants had an aggregate market value of $____, based on the closing bid price of $_______. on the Over-the-Counter Bulletin Board on ________, 2009, the record date for the COAC special meeting. All of the warrants will become worthless if the merger is not consummated (as will the remainder of the public warrants). |
• | The transactions contemplated by the merger agreement provide that Harry Edelson and J.P. Huang, a designee of Mr. Edelson, will be directors of BVICo after the closing of the merger. As such, in the future they will receive any cash fees, stock options or stock awards that the BVICo board of directors determines to pay to its non-executive directors. |
• | If COAC liquidates prior to the consummation of a business combination, Harry Edelson, COAC’s chairman and chief executive officer, will be personally liable to pay debts and obligations to vendors and other entities that are owed money by COAC for services rendered or products sold to COAC, or to any target business, to the extent such creditors bring claims that would otherwise require payment from monies in the trust account. Based on COAC’s estimated debts and obligations, it is not currently expected that Mr. Edelson will have any exposure under this arrangement in the event of a liquidation. |
• | If holders of more than 20% of the Public Shares properly exercise their conversion rights and the merger is consummated, Mr. Edelson and Ms. Fox will forfeit a portion of their Original Shares, which were placed into escrow at the time of the IPO, so that the Inside Stockholders will collectively own no more than 23.81% of the BVICo Ordinary Shares that will be issued to the COAC stockholders upon consummation of the merger. |
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• | Harry Edelson has loaned COAC $125,000 to cover its expenses in connection with the merger and may make further loans for this purpose in the future. Such loans will be unsecured, non-interest bearing and will be repaid at the closing of the merger. If the merger is not consummated and COAC is required to liquidate, such loans will not be repaid to Mr. Edelson. |
Additionally, upon consummation of the merger, COAC is obligated to pay EarlyBirdCapital, Inc. a cash fee at closing up to an aggregate of $860,000 representing investment banking and finder fees. The underwriters in COAC’s IPO, including EarlyBirdCapital, Inc., will also be entitled to receive $414,000 of deferred underwriting commissions upon consummation of the merger.
Recommendation of COAC’s Board of Directors
After careful consideration of the matters described above, particularly Ge Rui’s record of growth, high return on equity, potential for growth and profitability, the experience of BVICo’s management, the company’s competitive positioning, its customer and labor relationships, and technical skills, COAC’s board of directors determined unanimously that the merger proposal is fair to and in the best interests of COAC and its stockholders. COAC’s board of directors has approved and declared advisable and unanimously recommend that you vote or give instructions to vote “FOR” the merger proposal.
The foregoing discussion of the information and factors considered by the COAC board of directors is not meant to be exhaustive, but includes the material information and factors considered by the COAC board of directors.
BMCG Fairness Opinion
In connection with its determination to approve the merger agreement at its meeting of November 5, 2008, COAC’s board of directors engaged Baumann Moreau Consulting Group (“BMCG”) to provide it with a “fairness opinion” as to whether the terms of the transaction with BVICo are fair, from a financial point of view, to the stockholders of COAC and whether the fair market value of Ge Rui is at least equal to 80% of COAC’s net assets at the time of the merger. BMCG engaged Chengjun Wang, PhD, FCPV, ASA, CPA, Chairman of DeveChina International Appraisal Co., to assist in the overall assessment of local economic, political, and financial risk attributed to Ge Rui. Dr. Wang also provided personnel for onsite inspections of the facilities and equipment as well as in-depth interviews with management. BMCG has no ownership interest in DeveChina International Appraisal Co., and DeveChina International Appraisal Co. has no ownership interest in BMCG.
BMCG is an international business valuation firm that, as part of its valuation practice, regularly is engaged in the valuation of businesses and their securities in connection with mergers, acquisitions, corporate restructurings, negotiated underwritings, private placements and for other purposes. COAC determined to use the services of BMCG because it is a recognized business valuation firm that has substantial experience in similar matters. BMCG does not beneficially own any interest in COAC or BVICo and has not previously provided, nor are there any pending agreements to provide, any other services to either company.
COAC has paid BMCG fees totaling $30,000 in connection with the preparation and issuance of BMCG’s opinion. Such fees are not contingent upon consummation of the merger. In addition, COAC has also agreed to indemnify and hold BMCG, its officers, directors, principals, employees, affiliates, and members, and their successors and assigns, harmless from and against any and all loss, claim, damage, liability, deficiencies, actions, suits, proceedings, costs and legal expenses (collectively the “Losses”) or expense whatsoever arising out of, based upon, or in any way related or attributed to, (i) any breach of a representation, or warranty made by COAC in its agreement with BMCG; or (ii) any activities or services performed under that agreement by BMCG, unless such Losses were the result of the intentional misconduct or gross negligence of BMCG. Losses would include, but not be limited to, reasonable legal fees and other expenses and reasonable disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever, or in appearing or preparing for appearance as witness in any proceeding, including any pretrial proceeding such as a deposition.
The BMCG opinion is for the use and benefit of COAC’s board of directors in connection with its consideration of the transaction and is not intended to be, and does not constitute a recommendation to you as to
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how you should vote or proceed with respect to the transaction. BMCG does not express any opinion as to the future performance of BVICo or the price at which either COAC’s or BVICo’s securities might trade at any time in the future, and its opinion does not in any manner address, the relative merits of the transaction as compared to any alternative business strategy that might exist for COAC, COAC’s underlying business decision to proceed with or effect the transaction, and other alternatives to the transaction that might exist for COAC. You are encouraged to read the BMCG opinion (a copy of which is attached as Annex F to this proxy statement/prospectus to gain an understanding of the assumptions made, matters considered, procedures followed and limitations on the review undertaken by BMCG, on which COAC’s board of directors has relied, as discussed above.
BMCG made a presentation to the COAC board of directors on November 5, 2008 and subsequently delivered its written opinion to the board of directors. The opinion stated that, as of November 5, 2008, based upon and subject to the assumptions made, matters considered, and limitations on BMCG’s review as set forth in the opinion, the terms of the transaction with BVICo are fair, from a financial point of view, to the stockholders of COAC and that the fair market value of Ge Rui is at least equal to 80% of COAC’s net assets. The terms of the merger transaction were determined pursuant to negotiations between COAC, the shareholders of BVICo and each of their respective financial advisors and not pursuant to recommendations of BMCG.
BMCG’s analysis and opinion are necessarily based upon market, economic and other conditions, as they existed on, and could be evaluated as of, November 5, 2008. Accordingly, although subsequent developments may affect its opinion, BMCG has not assumed any obligation to update, review or reaffirm its opinion.
In arriving at its opinion, BMCG took into account an assessment of general economic, market and financial conditions, as well as its experience in connection with similar transactions and securities valuations generally.
In so doing, among other things, BMCG:
• | Reviewed the draft merger agreement. |
• | Reviewed publicly available financial information and other data with respect to COAC that it deemed relevant, including the Annual Report on Form 10-K for the year ended 2007 and the 10-Q for the quarter ending June 30, 2008. |
• | Reviewed non-public information and other data with respect to Ge Rui, the sole and 100% owned subsidiary of BVICo, including audited financial statements for the three years ended December 31, 2005, 2006 and 2007, unaudited financial statements for the six months ended June 30, 2008, financial projections for the three years ending December 31, 2010, valuation report dated December 31, 2007, and other internal financial information and management reports. |
• | Reviewed and analyzed the transaction’s pro forma impact on COAC’s securities outstanding and stockholder ownership. |
• | Considered the historical financial results and present financial condition of Ge Rui, including but not limited to top clients and suppliers, fixed assets lists, accounts receivables, land use details and rights, and tax documents. |
• | Reviewed certain publicly available information concerning the trading of, and the trading market for, COAC’s common stock and units. |
• | Reviewed and analyzed the indicated value range of the merger consideration. |
• | Reviewed and analyzed Ge Rui’s projected unlevered free cash flows and prepared a discounted cash flow analysis. |
• | Reviewed and analyzed certain financial characteristics of publicly traded companies that were deemed to have characteristics comparable to Ge Rui. |
• | Reviewed and analyzed certain financial characteristics of target companies in transactions where such target company was deemed to have characteristics comparable to that of Ge Rui. |
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• | Reviewed and compared the net asset value of COAC to the indicated enterprise value range of Ge Rui. |
• | Reviewed and discussed with representatives of Ge Rui’s management certain financial and operating information furnished by them, including financial projections and analyses with respect to Ge Rui’s business and operations. |
• | Conducted a site visit of Ge Rui’s manufacturing facility and interviewed management regarding the operations of the Company on October 13, 2008 through October 16, 2008. |
• | Performed such other analyses and examinations as were deemed appropriate. |
In arriving at its opinion, BMCG relied upon and assumed the accuracy and completeness of all of the financial and other information that was supplied or otherwise made available to BMCG without assuming any responsibility for any independent verification of any such information. Further, BMCG relied upon the assurances of COAC’s and Ge Rui’s management that they were not aware of any facts or circumstances that would make any such information inaccurate or misleading. With respect to the financial information and projections utilized, BMCG assumed that such information has been reasonably prepared on a basis reflecting the best currently available estimates and judgments, and that such information provides a reasonable basis upon which it could make an analysis and form an opinion. The projections were solely used in connection with the rendering of BMCG’s fairness opinion. Investors should not place reliance upon such projections, as they are not necessarily an indication of what COAC’s revenues and profit margins will be in the future. The projections were prepared by Ge Rui’s management and are not to be interpreted as projections of future performance (or “guidance”) by COAC or Ge Rui and were not audited or reviewed by the auditors of either COAC or Ge Rui. BMCG did not evaluate the solvency or fair value of COAC or Ge Rui under any foreign, state or federal laws relating to bankruptcy, insolvency or similar matters. BMCG did make a physical inspection of the properties and facilities of Ge Rui but did not make or obtain any evaluations or appraisals of Ge Rui’s assets and liabilities (including any contingent, derivative or off-balance-sheet assets and liabilities). In addition, BMCG did not attempt to confirm whether COAC and Ge Rui had good title to their respective assets.
BMCG assumes that the transaction will be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act, the Exchange Act and all other applicable foreign, federal and state statutes, rules and regulations. BMCG assumes that the transaction will be consummated substantially in accordance with the terms set forth in the draft merger agreement, without any further amendments thereto, and that any amendments, revisions or waivers thereto will not be detrimental to COAC’s stockholders. In addition, based upon discussions with COAC management, BMCG assumed that the transaction will qualify as a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (“IRC”).
In connection with rendering its opinion, BMCG performed certain financial, comparative and other analyses. The summary below includes all material analyses performed by BMCG. Each of the analyses conducted by BMCG was carried out to provide a different perspective on the transaction, and to enhance the total mix of information available. BMCG did not form a conclusion as to whether any individual analysis, considered in isolation, supported or failed to support an opinion as to the fairness, from a financial point of view, of the merger consideration to COAC’s stockholders. Further, the summary of BMCG’s analyses described below is not a complete description of the analyses underlying BMCG’s opinion. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a fairness opinion is not readily susceptible to partial analysis or summary description.
In arriving at its opinion, BMCG made qualitative judgments as to the relevance of each analysis and factors that it considered. In addition, BMCG may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions, so that the range of valuations resulting from any particular analysis described above should not be taken to be BMCG’s view of the value of Ge Rui’s assets. The estimates contained in BMCG’s analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or actual future
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results, which may be significantly more or less favorable than suggested by such analyses. In addition, analyses relating to the value of businesses or assets neither purport to be appraisals nor do they necessarily reflect the prices at which businesses or assets may actually be sold. Accordingly, BMCG’s analyses and estimates are inherently subject to substantial uncertainty. BMCG believes that its analyses must be considered as a whole and that selecting portions of its analyses or the factors it considered, without considering all analyses and factors collectively, could create an incomplete and misleading view of the process underlying the analyses performed by BMCG in connection with the preparation of its opinion.
The summaries of the financial reviews and analyses include information presented in tabular format. In order to fully understand BMCG’s financial reviews and analyses, the tables must be read together with the accompanying text of each summary. The tables alone do not constitute a complete description of the financial analyses, including the methodologies and assumptions underlying the analyses, and if viewed in isolation could create a misleading or incomplete view of the financial analyses performed by BMCG.
The analyses performed were prepared solely as part of BMCG’s analysis of the fairness, from a financial point of view, of the merger consideration to COAC’s stockholders, and were provided to COAC’s board of directors in connection with the delivery of BMCG’s opinion. The opinion of BMCG was just one of the many factors taken into account by COAC’s board of directors in making its determination to approve the transaction, including those described elsewhere in this proxy statement.
Valuation Overview
Based upon a review of the historical and projected financial data and certain other qualitative data for Ge Rui, BMCG utilized several valuation methodologies and analyses to determine a range of the fair market value of a 100% interest in Ge Rui as of November 5, 2008. BMCG utilized the discounted cash flow and comparable company analyses for the valuation of Ge Rui. For the purpose of this analysis, fair market value is defined as the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
In arriving at an indicated valuation range, BMCG weighted the discounted cash flow and the comparable company analyses equally and determined an indicated Fair Market Value of between approximately $205 million and approximately $219.75 million for Ge Rui.
Financial Performance Review
BMCG undertook a review of Ge Rui’s historical financial data in order to understand and interpret its operating and financial performance and strength. BMCG reviewed Ge Rui's historical financial data for the three fiscal years ended December 31, 2007 and the six months ended June 30, 2008 and noted the following:
• | Revenue has increased significantly over the review period from approximately $62.5 million in FY2005 to approximately $139.6 million in FY2007. |
• | EBIT grew from approximately $12.8 million in FY2005 to approximately $38.8 million FY2007 and to an estimated 49 million for the twelve months ended June 30, 2008. |
Ge Rui operates, manufactures and sells its products in the People’s Republic of China (PRC). Despite the considerable growth potential of the country and its low cost base, PRC remains a risky environment. BMCG noted the following significant risk factors:
• | Foreign exchange regulations; |
• | Political and legal risk; |
• | Lack of accounting transparency; |
• | Limitations and restrictions on dividend repatriation; |
• | Geographic concentration. |
China is by far the largest steel producing country with more than four times the steel output of Japan, the second largest producer. According to the World Steel Association, the demand for steel increased 6.8% in
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2007 and is expected to increase the same amount in 2008. China’s demand for steel rose 11.4% in 2007 and is expected to rise 11.5% in 2008, despite the global economic slowdown. China is the largest consumer of steel, requiring about 35% of the world output of steel.
Discounted Future Cash Flows
In order to arrive at a present Fair Market Value, BMCG utilized discount rates ranging from 19% to 23%. This was based on Ge Rui's estimated weighted average cost of debt of 12.5% and an estimated cost of equity between 22% and 27%. The cost of equity calculation was derived utilizing the Modified Capital Asset Pricing Model utilizing appropriate industry risk and size premiums provided by Duff and Phelps Risk Premium Report, and a country risk premium of 3% based on an analysis of volatility between the U.S. and China equity markets. Furthermore, an additional 3 to 8 percent premium was added to reflect the risk associated with achieving the forecasted growth and margins and was utilized by BMCG to calculate a range of indicated enterprise values.
BMCG presented a terminal value at the end of the forecast period by applying a long-term perpetual growth rate of 5%. The long-term perpetual growth rate is typically limited to inflation and Gross Domestic Product growth. For the United States, this has historically ranged from four to five percent. Gross Domestic Product growth in China has historically been greater over the last decade, ranging from ten to twelve percent. It is anticipated, however, that as China develops over the next decade this growth will slow to match other developed countries. Therefore, it is BMCG’s opinion that the perpetual growth will fall in line with global output expectations of approximately five percent.
BMCG then deducted net debt of approximately $64.5 million (which includes approximately $25.5 million in interest bearing short term debt, and approximately $38.9 million in notes payable) to derive an indicated equity value range of approximately $180 million to approximately $259.5 million. The two indicated ranges were then weighted equally to arrive at a final indication of value of $219.75 million for the discounted cash flow method. The indicated value derived from this approach was used in the determination of the aggregate post-Transaction indicated equity value.
Ge Rui Comparable Company Analysis
BMCG located several companies that it deemed comparable to Ge Rui with respect to their industry sector and operating model (the “Ge Rui Comparable Companies”). All of the Ge Rui Comparable Companies are involved in manufacture and sale of steel products and are either located in China or provide products in China markets. They are classified under SIC codes 3315 (Steel Wire and Related Products), 3312 (Blast Furnaces and Steel Mills), 3316 (Cold Finishing of Steel Shapes), and 3317 (Steel Pipe and Tubes). The specific Ge Rui Comparable Companies considered by BMCG were China Premium Steel, WSP Holdings Limited, POSCO, Universal Stainless & Alloy Products, Inc., and National Steel Company. In reviewing such companies, BMCG considered various performance measures in comparison to Ge Rui including EBITDA margins, revenue growth, return on assets, and return on equity. When compared to such companies, Ge Rui out-performed the majority of the companies in most categories. This information was useful when selecting the multiples within the observed range for the comparables.
The Ge Rui Comparable Companies had LTM revenue ranging from approximately $90 million to over $20 billion, compared with approximately LTM revenues of $170 million for Ge Rui.
BMCG noted that only one of the Ge Rui Comparable Companies are more profitable than Ge Rui, with EBITDA margins ranging from approximately 13% to over 30%, compared with approximately 25% for Ge Rui as of June 30, 2008.
Ge Rui's historical and projected EBITDA growth is higher than all of the Ge Rui Comparable Companies, reflecting the additional capacity and the shift to higher margin steel products.
In reviewing the above listed BMCG considered two multiples which provided an indication of fair market value. The first multiple considered was enterprise value- to- latest twelve month (LTM) revenue. BMCG noted that with respect to this multiple, the range was 1 to 3 times during the 2007 and 2008 period, with an approximate mean of 1.5 times. Based on an approximate mean multiple of 1.5 and a LTM revenue for Ge Rui of approximately $170 million, BMCG calculated an indicated enterprise value of $255 million.
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BMCG then deducted net debt of approximately $64.5 million to derive an indicated equity value of $190.5 million. It was ultimately determined by BMCG that enterprise value to LTM revenue was not the most appropriate multiple for Ge Rui, since it appears that profit margins in this industry are not homogeneous, and therefore the revenues multiple would not be as useful in providing an accurate indication of fair market value.
The second multiple considered was enterprise value -to- LTM EBITDA. BMCG noted that with respect to this multiple, the range was 3 to 8 times during the 2007 and 2008 period, with an approximate mean of 5.
BMCG selected an appropriate multiple range for Ge Rui by examining the range indicated by the Ge Rui Comparable Companies. It also considered several “company-specific factors” when determining the multiple range for Ge Rui. These factors represented quantitative and qualitative differences between the comparable companies and Ge Rui. The quantitative factors considered include EBITDA margins, revenue, growth, return on assets, and return on equity. The qualitative factors considered were geographic diversification, customer concentration, management depth, and access to capital. When compared to the comparable companies, positive and negative observations were made and this ultimately augmented BMCG’s analysis and opinion as to the multiples selected. BMCG expects Ge Rui's valuation multiples to be significantly above the mean of the Ge Rui Comparable Companies due to its higher projected revenue and EBITDA growth, and higher EBITDA margins.
Based on the above factors, BMCG applied the following multiple range of 5 to 6 to Ge Rui's LTM June 30, 2008 EBITDA of $49 million.
Based on the selected multiple ranges, BMCG calculated a range of enterprise values for Ge Rui by weighting the above indications and then deducted net debt of approximately $64.5 million to derive an indicated equity value range of approximately $180.5 million to approximately $229.5 million. The two indication ranges of value were then weighted equally to arrive at an indication of value based on the comparable company approach of 205 million. None of the Ge Rui Comparable Companies have characteristics identical to Ge Rui. An analysis of publicly traded comparable companies is not mathematical; rather it involves complex consideration and judgments concerning differences in financial and operating characteristics of the Ge Rui Comparable Companies and other factors that could affect the public trading of the Ge Rui Comparable Companies. The indicated value derived from this approach was used in the determination of the pre-merger indicated equity value.
Net Asset Value of COAC
In determining the net asset value of COAC, BMCG utilized the reported 10-Q as of June 30, 2008. Based on COAC’s balance sheet as of June 30, 2008, the reported net asset value was $40,782,327 (without taking into account potential redemption). BMCG assumed that the net asset value of BVICo as of the date of their opinion is approximately the same. In order to apply the 80% test, BMCG then took this value and multiplied it by 80% to arrive at $32,625,862, which is the minimum value the fair market value of Ge Rui must be at the time of the merger, in order to be considered “fair.”
Conclusion of Opinion
Based on the information and analyses set forth above, BMCG calculated the fair market value of Ge Rui to be a range from $205 million as indicated by the guideline company method to $219.75 million as indicated by the discounted cash flow method with and average indicator of $212.375 million of Ge Rui as of November 5, 2008. BMCG delivered its written opinion to the Board of Directors, which stated that, as of November 5, 2008, based upon and subject to the assumptions made, matters considered, and limitations on its review as set forth in the opinion, that the transaction was “fair,” from a financial point of view, to COAC’s stockholders and that the fair market value of Ge Rui was at least equal to 80% of COAC’s net assets.
Material Federal Income Tax Consequences of the Merger to COAC and Its Stockholders
The following section is a summary of the opinion of Graubard Miller, counsel to COAC, regarding material United States federal income tax consequences of the business combination to holders of COAC common stock. This discussion addresses only those COAC security holders that hold their securities as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (“the Code”), and does
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not address all the United States federal income tax consequences that may be relevant to particular holders in light of their individual circumstances or to holders that are subject to special rules, such as:
• | financial institutions; |
• | investors in pass-through entities; |
• | tax-exempt organizations; |
• | dealers in securities or currencies; |
• | traders in securities that elect to use a mark-to-market method of accounting; |
• | persons that hold COAC common stock as part of a straddle, hedge, constructive sale or conversion transaction; and |
• | persons who are not citizens or residents of the United States. |
The Graubard Miller opinion is based upon the Code, applicable treasury regulations thereunder, published rulings and court decisions, all as currently in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect. Tax considerations under state, local and foreign laws, or federal laws other than those pertaining to the income tax, are not addressed.
Neither COAC nor BVICo intends to request any ruling from the Internal Revenue Service as to the U.S. federal income tax consequences of the business combination.
The merger has been structured to qualify as a reorganization under the Code. It is the opinion of Graubard Miller that the merger will qualify as a reorganization within the meaning of Section 368(a) of the Code, and pursuant to Section 367(a) of the Code and Treasury Regulations Sections 1.367(a)-3(c), will not result in the recognition of gain or loss by any holder of COAC common stock owning less than 5% of the stock of BVICo following the merger or any holder of COAC common stock owning 5% or more of the stock of BVICo following the merger if such stockholder files a gain recognition agreement, as further described below.
The U.S. federal tax basis of the stock of BVICo received by the holder of COAC common stock in the merger will be the same as the adjusted tax basis of the COAC common stock surrendered in exchange therefore. The holding period of the stock of BVICo received in the merger by a holder of COAC common stock will include the period during which such COAC common stock was held as a capital asset on the date of the merger.
A holder of COAC common stock who owns 5% or more of the Ordinary Shares of BVICo will recognize gain upon the exchange of such stockholder’s common stock in COAC for Ordinary Shares of BVICo, unless such stockholder files a gain recognition agreement with the stockholder’s income tax return for the taxable year that includes the date of the merger. Gain is measured by the difference between the fair market value of the shares of BVICo common stock received and the tax basis of that stockholder’s shares of COAC common stock. The gain recognition agreement requires, among other things, the five-percent or more BVICo stockholder:
• | to waive the statute of limitations on a Form 8838, |
• | to file a statement with his or her income tax return for each of the five full taxable years following the year of the merger certifying that a taxable disposition of substantially all of the assets of BVICo has not occurred; and |
• | if such a disposition has occurred, to include in income the previously unrecognized gain on the conversion of the shares and pay interest on any resulting tax. |
COAC stockholders required to file gain recognition agreements as described above are strongly encouraged to consult their own tax advisors regarding the specific information to be included in such agreements, and the requirements for recognizing gain with respect to the COAC securities.
The foregoing U.S. federal income tax consequences are not materially affected by the changes made to the Code by the American Jobs Creation Act of 2004 in the treatment of domestic business entities which expatriate from the United States to a foreign jurisdiction. These new provisions generally apply to the direct or indirect acquisition of substantially all of the properties of a domestic enterprise by a foreign corporation if
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there is at least 60% or 80% continuing share ownership in the successor foreign entity by the former stockholders of the U.S. corporation and substantial business activities are not conducted in the jurisdiction in which such successor is created or organized. Under the terms of the merger agreement, immediately following the merger the current holders of COAC will own less than 60% of the then outstanding shares of Ordinary Shares and warrants of BVICo. As a result, BVICo will be respected as a foreign corporation for U.S. income tax purposes and will not be classified as an expatriated entity.
As COAC’s assets consist primarily, if not solely, of cash, COAC should not incur any material amount of U.S. federal income or other tax as a result of the merger. No gain or loss will be recognized by COAC on the transfer of its cash assets to BVICo in the merger. An evaluation will be made by BMCG prior to the closing of the merger to establish whether COAC has any intangible assets with respect to which it would be required to recognize gain in connection with the merger. If there are any such intangible assets, it is not expected that they are of substantial value or that any material U.S. federal income tax will be incurred.
For United States federal income tax purposes, the gross amount of all dividends paid with respect to BVICo’s Ordinary Shares out of current or accumulated earnings and profit (“E&P”) to a stockholder generally will be treated as foreign source ordinary income to such holder. United States corporations that hold shares of BVICo’s Ordinary Shares will not be entitled to the dividends received deduction available for dividends received from United States corporations. To the extent a distribution exceeds E&P, it will be treated first as a return of capital to the extent of the basis of the stockholder, and then as gain from the sale of a capital asset.
The conclusions expressed above are based on current law. Future legislative, administrative or judicial changes or interpretations, which can apply retroactively, could affect the accuracy of those conclusions.
It is also the opinion of Graubard Miller that a stockholder of COAC who exercises conversion rights and effects a termination of the stockholder’s interest in COAC will be required to recognize gain or loss upon the exchange of that stockholder’s shares of common stock of COAC for cash. Such gain or loss will be measured by the difference between the amount of cash received and the tax basis of that stockholder’s shares of COAC common stock. This gain or loss will be a capital gain or loss if such shares were held as a capital asset on the date of the business combination and will be a long-term capital gain or loss if the holding period for the share of COAC common stock is more than one year. The tax opinion issued to COAC by Graubard Miller, its counsel, is attached to this proxy statement/prospectus as Annex G. Graubard Miller has consented to the use of its opinion in this proxy statement/prospectus.
This discussion is intended to provide only a summary of the material United States federal income tax consequences of the merger. It does not address tax consequences that may vary with, or are contingent on, your individual circumstances. In addition, the discussion does not address any non-income tax or any foreign, state or local tax consequences of the business combination. Accordingly, you are strongly urged to consult with your tax advisor to determine the particular United States federal, state, local or foreign income or other tax consequences to you of the business combination.
BVICo’s Reasons for Engaging in the Merger
BVICo and its shareholders believe that BVICo will derive the following benefits from engaging in the merger with COAC:
• | BVICo will have availability of the funds in COAC’s trust account (after deduction of transaction expenses, deferred underwriting commissions and payments to COAC stockholders who elect to convert their COAC Public Shares into cash), which, among other things, will enhance its ability to expand its operations. |
• | BVICo will have publicly traded securities that could be used in connection with possible acquisitions (although no acquisitions are presently being contemplated) and will provide it with increased public recognition. |
• | The BVICo shareholders will own securities that will be tradable in a public market. |
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• | BVICo will gain the expertise of Mr. Edelson in investment banking, mergers and acquisitions, fund raising, business operations of companies located in China, the steel industry and corporate governance. |
Anticipated Accounting Treatment
The merger will be accounted for in accordance with U.S. generally accepted accounting principles utilizing the “purchase method” under Statement of Financial Accounting Standards No. 141 “— Business Combinations”. The purchase price is based on the book value of the acquired net assets, since they are primarily cash, which is deemed the more reliably measurable asset in the transaction.
The shareholders of BVICo will own at least 50.1% of the outstanding shares of the common stock immediately following the completion of the merger, will have its current officers assuming almost all corporate and day-to-day management of BVICo and will control a majority of the board of BVICo. COAC's assets and liabilities will be consolidated with the assets and liabilities of BVICo upon consummation of the merger. Accordingly, following consummation of the merger, COAC will cease to exist as a corporate entity and BVICo's financial statements will continue as the surviving company's financial statements. The combined company's assets and liabilities and the historical operations will be those of BVICo and will be recorded at the historical cost basis of BVICo.
Regulatory Matters
The merger and the transactions contemplated by the merger agreement are not subject to any additional federal or state regulatory requirement or approval, including the HSR Act, except for filings with the State of Delaware and the Registrar of Corporate Affairs of the British Virgin Islands necessary to effectuate the merger.
Required Vote
The approval of the merger proposal will require the affirmative vote of the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote at the COAC special meeting.
THE COAC BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE COAC STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE MERGER PROPOSAL.
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THE MERGER AGREEMENT
For a discussion of the merger structure, merger consideration and indemnification provisions of the merger agreement, see the section entitled“The Merger Proposal.” Such discussion and the following summary of other material provisions of the merger agreement is qualified by reference to the complete text of the merger agreement, a copy of which is attached as Annex A to this proxy statement/prospectus and is incorporated herein by reference. All stockholders are encouraged to read the merger agreement in its entirety for a more complete description of the terms and conditions of the merger.
Closing and Effective Time of the Merger
The closing of the merger will take place promptly following the satisfaction of the conditions described below under the subsection entitled“Conditions to the Closing of the Merger,” unless COAC and BVICo agree in writing to another time. The merger is expected to be consummated promptly after the special meeting of COAC’s stockholders described in this proxy statement/prospectus.
Representations and Warranties
The merger agreement contains representations and warranties of each of BVICo and COAC relating, among other things, to:
• | proper organization and similar limited liability and corporate matters; |
• | capital structure of each constituent company; |
• | the authorization, performance and enforceability of the merger agreement; |
• | licenses and permits; |
• | taxes; |
• | financial statements, information and absence of undisclosed liabilities; |
• | holding of leases and ownership of other properties, including intellectual property; |
• | contracts; |
• | title to, and condition of, properties and assets and environmental and other conditions thereof; |
• | absence of certain changes; |
• | employee matters; |
• | compliance with laws; |
• | litigation; and |
• | regulatory matters and compliance. |
Covenants
The parties have each agreed to take such actions as are necessary, proper or advisable to consummate the merger. BVICo and COAC have each also agreed to continue to operate their respective businesses in the ordinary course prior to the closing and, unless otherwise required or permitted under the merger agreement, not to take the following actions, among others, without the prior written consent of the other party:
• | waive any stock repurchase rights, accelerate, amend or (except as specifically provided for in the merger agreement) change the period of exercisability of options or restricted stock, or reprice options granted under any employee, consultant, director or other stock plans or authorize cash payments in exchange for any options granted under any of such plans; |
• | grant any severance or termination pay to any officer or employee (other than severance or termination pay to an employee consistent with past practices or as identified in schedules to the merger agreement) except pursuant to applicable law, written agreements outstanding, or policies currently existing and disclosed to the other party, or adopt any new severance plan, or amend or modify or alter in any manner any severance plan, agreement or arrangement; |
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• | transfer or license to any person or otherwise extend, amend or modify any material rights to any intellectual property or enter into grants to transfer or license to any person future patent rights, other than in the ordinary course of business consistent with past practices provided that in no event will either party license on an exclusive basis or sell any of its intellectual property; |
• | declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock, equity securities or property) in respect of any capital stock or split, combine or reclassify any capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any capital stock; |
• | purchase, redeem or otherwise acquire, directly or indirectly, any shares of its own capital stock or other equity securities or ownership interests; |
• | except as contemplated by the merger agreement, issue, deliver, sell, authorize, pledge or otherwise encumber, or agree to any of the foregoing with respect to, any shares of its capital stock or other equity securities or ownership interests or any securities convertible into or exchangeable for shares of its capital stock or other equity securities or ownership interests, or subscriptions, rights, warrants or options to acquire any shares of its capital stock or other equity securities or ownership interests or any securities convertible into or exchangeable for shares of its capital stock or other equity securities or other ownership interests, or enter into other agreements or commitments of any character obligating it to issue any such shares, equity securities or other ownership interests or convertible or exchangeable securities; |
• | amend its charter documents; |
• | acquire or agree to acquire by merging or consolidating with, or by purchasing any equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to its business, or enter into any joint ventures, strategic partnerships or alliances or other arrangements that provide for exclusivity of territory or otherwise restrict such party’s ability to compete or to offer or sell any products or services; |
• | sell, lease, license, encumber or otherwise dispose of any properties or assets, except (i) sales of inventory in the ordinary course of business consistent with past practice, and (ii) the sale, lease or disposition (other than through licensing) of property or assets that are not material, individually or in the aggregate, to the business of such party; |
• | except, with respect to COAC as permitted pursuant to the merger agreement, incur any indebtedness for borrowed money or guarantee any such indebtedness of another person or persons, issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of COAC or BVICo, as applicable, enter into any “keep well” or other agreement to maintain any financial statement condition or enter into any arrangement having the economic effect of any of the foregoing; |
• | adopt or amend any employee benefit plan, policy or arrangement, any employee stock purchase or employee incentive stock option plan, or enter into any employment contract or collective bargaining agreement (other than offer letters and letter agreements entered into in the ordinary course of business consistent with past practice with employees who are terminable “at will”), pay any special bonus or special remuneration to any director or employee, or increase the salaries or wage rates or fringe benefits (including rights to severance or indemnification) of its directors, officers, employees or consultants, except in the ordinary course of business consistent with past practices or to conform to the requirements of any applicable law; |
• | pay, discharge, settle or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), or litigation (whether or not commenced prior to the date of the merger agreement) other than the payment, discharge, settlement or satisfaction, in the ordinary course of business consistent with past practices or in accordance with their terms, of liabilities |
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previously disclosed in financial statements to the other party in connection with the merger agreement or incurred since the date of such financial statements, or waive the benefits of, agree to modify in any manner, terminate, release any person from or knowingly fail to enforce any confidentiality or similar agreement to which it is a party or of which it is a beneficiary; |
• | except in the ordinary course of business consistent with past practices, modify, amend or terminate any material contract, or waive, delay the exercise of, release or assign any material rights or claims thereunder; |
• | except as required by U.S. GAAP, revalue any of its assets or make any change in accounting methods, principles or practices; |
• | except in the ordinary course of business consistent with past practices, incur or enter into any agreement, contract or commitment requiring such party to pay in excess of $100,000 in any 12 month period; |
• | engage in any action that could reasonably be expected to cause the merger to fail to qualify as a tax-free transaction pursuant to Section 368 of the Code; |
• | settle any litigation where an officer, director or stockholder is a party or the consideration is other than monetary; |
• | make or rescind any tax elections that, individually or in the aggregate, could be reasonably likely to adversely affect in any material respect the tax liability or tax attributes of such party, settle or compromise any material income tax liability or, except as required by applicable law, materially change any method of accounting for tax purposes or prepare or file any return in a manner inconsistent with past practice; |
• | form or establish any subsidiary except in the ordinary course of business consistent with prior practice or as contemplated by the merger agreement; |
• | permit any person or entity to exercise any of its discretionary rights under any employee benefit plan to provide for the automatic acceleration of any outstanding options, the termination of any outstanding repurchase rights or the termination of any cancellation rights issued pursuant to such plans; |
• | make capital expenditures except in accordance with prudent business and operational practices consistent with prior practice; |
• | make or omit to take any action that would be reasonably anticipated to have a material adverse effect; |
• | enter into any transaction with or distribute or advance any assets or property to any of its officers, directors, partners, stockholders, managers, shareholders or other affiliates other than the payment of salary and benefits and tax distributions in the ordinary course of business consistent with prior practice; or |
• | agree in writing or otherwise agree, commit or resolve to take any of the foregoing actions. |
The merger agreement also contains additional covenants of the parties, including covenants providing for:
• | the parties to use commercially reasonable efforts to obtain all necessary approvals from governmental agencies and other third parties that are required for the consummation of the transactions contemplated by the merger agreement; |
• | the protection of confidential information of the parties and, subject to the confidentiality requirements, the provision of reasonable access to information; |
• | BVICo and COAC to prepare and file a registration statement, which shall contain this proxy statement/prospectus, to register, under the Securities Act, the shares that will be issued to COAC’s stockholders pursuant to the merger, and to solicit proxies from the COAC stockholders to vote on the proposals that will be presented for consideration at the special meeting; |
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• | COAC and BVICo to use commercially reasonable efforts to obtain the listing for trading on the Nasdaq Stock Market of BVICo’s Ordinary Shares, warrants and units. If such listing is not obtained by the closing, the parties shall continue to use their best efforts after the closing to obtain such listing. |
• | BVICo and its shareholders to waive their rights to make claims against COAC to collect from the trust fund established for the benefit of the holders of the Public Shares for any monies that may be owed to them by COAC; and |
• | BVICo to provide periodic financial information to COAC through the closing. |
Conditions to Closing of the Merger
General Conditions
Consummation of the merger is conditioned on (i) the holders of the Public Shares, at a meeting called for this and other related purposes, approving the merger proposal and (ii) the holders of fewer than 40% of the Public Shares voting against the merger and properly demanding that their Public Shares be converted into a pro-rata portion of the trust account, calculated as of two business days prior to the anticipated consummation of the merger.
In addition, the consummation of the transactions contemplated by the merger agreement is conditioned upon, among other things:
(i) | no order, stay, judgment or decree being issued by any governmental authority preventing, restraining or prohibiting in whole or in part, the consummation of such transactions; |
(ii) | the execution by and delivery to each party of each of the various transaction documents; |
(iii) | the delivery by each party to the other party of a certificate to the effect that the representations and warranties of each party are true and correct in all material respects as of the closing and all covenants contained in the merger agreement have been materially complied with by each party; |
(iv) | the receipt of all necessary consents and approvals by third parties and the completion of necessary proceedings in compliance with the rules and regulations of each jurisdiction having jurisdiction over the subject matters. |
BVICo’s Conditions to Closing
The obligations of BVICo and the the shareholders of BVICo to consummate the transactions contemplated by the merger agreement also are conditioned upon, among other things,
(i) | there being no material adverse change in the business of COAC since the date of the merger agreement; |
(ii) | the lock-up agreements, the voting agreement and the escrow agreement shall have been executed and delivered by the parties thereto (other than the BVICo parties). See the section entitled“The Merger Proposal” for further details regarding these agreements; |
(iii) | COAC shall have arranged for funds remaining in the trust account to be disbursed to it upon closing of the merger; |
(iv) | receipt by BVICo of an opinion of COAC’s United States counsel in agreed form; and |
(v) | COAC being in compliance with the reporting requirements under the Exchange Act. |
COAC’s Conditions to Closing
The obligations of COAC to consummate the transactions contemplated by the merger agreement also are conditioned upon each of the following, among other things:
(i) | there shall have been no material adverse change in the business of BVICo, HKCo, Ge Rui or their businesses since the date of the merger agreement; |
(ii) | the lock-up agreements, the voting agreement and the escrow agreement shall have been executed and delivered by the parties thereto (other than the COAC parties); |
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(iii) | (a) all outstanding indebtedness owed by any BVICo insider to BVICo, HKCo or Ge Rui shall have been repaid in full; (b) all guarantees or similar arrangements pursuant to which BVICo, HKCo or Ge Rui has guaranteed the payment or performance of any obligations of any BVICo insider to a third party shall have been terminated; and (c) except as set forth on Schedule 5.18 to the merger agreement, no BVICo insider shall own any direct equity interests in any entity that uses “Ge Rui” as part of its name; |
(iv) | employment agreements between Ge Rui and certain of its executive officers shall be in full force and effect; |
(v) | specified officers and directors of BVICo, HKCo and Ge Rui shall have resigned from their positions; |
(vi) | the holders of no more than 39.99% (on a cumulative basis with any stockholders seeking conversion rights) of COAC’s outstanding common stock shall have taken action to exercise their appraisal rights pursuant to the DGCL; and |
(vii) | receipt by COAC of opinions of BVICo’s United States, People’s Republic of China, Hong Kong and British Virgin Islands counsel. |
Waiver
If permitted under applicable law, either BVICo or COAC may waive any inaccuracies in the representations and warranties made to such party contained in the merger agreement or in any document delivered pursuant to the merger agreement and waive compliance with any agreements or conditions for the benefit of itself or such party contained in the merger agreement or in any document delivered pursuant to the merger agreement. The condition requiring that the holders of fewer than 40% of the Public Shares affirmatively vote against the merger proposal and demand conversion of their shares into cash may not be waived. There can be no assurance that all of the conditions will be satisfied or waived.
At any time prior to the closing, either BVICo or COAC may, in writing, to the extent legally allowed, extend the time for the performance of any of the obligations or other acts of the other parties to the merger agreement.
The existence of the financial and personal interests of the directors may result in a conflict of interest on the part of one or more of them between what he may believe is best for COAC and what he may believe is best for himself in determining whether or not to grant a waiver in a specific situation.
Termination
The merger agreement may be terminated at any time, but not later than the closing, as follows:
• | by mutual written agreement of COAC and BVICo; |
• | by either COAC or BVICo if the merger is not consummated on or before March 20, 2009, provided that such termination is not available to a party whose action or failure to act has been a principal cause of or resulted in the failure of the merger to be consummated before such date and such action or failure to act is a breach of the merger agreement; |
• | by either COAC or BVICo if a governmental entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, which order, decree, judgment, ruling or other action is final and nonappealable; |
• | by either COAC or BVICo if the other party has breached any of its covenants or representations and warranties in any material respect and has not cured its breach within thirty days of the notice of an intent to terminate, provided that the terminating party is itself not in breach; and |
• | by either COAC or BVICo if, at the COAC stockholder meeting, the merger agreement shall fail to be approved by the affirmative vote of the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote at the meeting or the holders of 40% or more of the Public Shares exercise conversion rights. |
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Effect of Termination
In the event of proper termination by either COAC or BVICo, the merger agreement will become void and have no effect, without any liability or obligation on the part of COAC or BVICo, except that:
• | the confidentiality obligations set forth in the merger agreement will survive; |
• | the waiver by BVICo of all rights against COAC to collect from the trust account any monies that may be owed to it by COAC for any reason whatsoever, including but not limited to a breach of the merger agreement, and the acknowledgement that BVICo will not seek recourse against the trust account for any reason whatsoever, will survive; |
• | the rights of the parties to bring actions against each other for breach of the merger agreement will survive; and |
• | the fees and expenses incurred in connection with the merger agreement and the transactions contemplated thereby will be paid by the party incurring such expenses. |
Fees and Expenses
All fees and expenses incurred in connection with the merger agreement and the transactions contemplated thereby will be paid by the party incurring such expenses whether or not the merger agreement is consummated.
Confidentiality; Access to Information
COAC and BVICo will afford to the other party and its financial advisors, accountants, counsel and other representatives prior to the completion of the merger reasonable access during normal business hours, upon reasonable notice, to all of their respective properties, books, records and personnel to obtain all information concerning the business, including the status of product development efforts, properties, results of operations and personnel, as each party may reasonably request. COAC and BVICo will maintain in confidence any non-public information received from the other party, and use such non-public information only for purposes of consummating the transactions contemplated by the merger agreement.
Amendments
The merger agreement may be amended by the parties thereto at any time by execution of an instrument in writing signed on behalf of each of the parties.
Public Announcements
COAC and BVICo have agreed that until closing or termination of the merger agreement, the parties will:
• | cooperate in good faith to jointly prepare all press releases and public announcements pertaining to the merger agreement and the transactions governed by it; and |
• | not issue or otherwise make any public announcement or communication pertaining to the merger agreement or the transaction without the prior consent of the other party, which shall not be unreasonably withheld by the other party, except as may be required by applicable law or court process. |
Arbitration
Any disputes or claims arising under or in connection with the merger agreement or the transactions contemplated thereunder will be resolved by binding arbitration conducted and governed by applicable rules of the American Arbitration Association in New York City. Any award and/or decision shall be conclusive and binding on the parties. In the event that preliminary or permanent injunctive relief is necessary or desirable in order to prevent a party from acting contrary to the merger agreement or to prevent irreparable harm prior to confirmation of an arbitration award, the other party is authorized and entitled to commence a lawsuit solely to obtain equitable relief against the other parties pending the completion of the arbitration. The parties have consented to the exclusive jurisdiction of the federal and state courts located in the State of New York, County of New York for such purpose.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
BVICo and COAC are providing the following unaudited pro forma condensed combined financial information to aid you in your analysis of the financial aspects of the merger.
As indicated elsewhere in this proxy statement/prospectus, due to the nature of the operations of BVICo, for purposes of presentation, the financial information of Ge Rui is presented as if it were the historical financial information of BVICo and all references to BVICo's financial data and information are therefore Ge Rui's financial data and information.
The principal terms of the merger, among others, are:
• | BVICo would issue 8,400,000 Ordinary Shares to the stockholders of COAC, after which the COAC stockholders will own 22% of the 38,400,000 outstanding ordinary shares of BVICo outstanding after the merger. |
• | BVICo will exchange on a one for one basis, the outstanding warrants of COAC on the merger date. After the merger, there will be 16,066,667 warrants outstanding for the purchase of BVICo ordinary shares at en exercise price of $5.00. In addition, the COAC underwriters have an option to purchase 600,000 units, each unit consisting of one ordinary share and warrants to purchase two ordinary shares. The underwriter option is exercisable at a price of $6.60 per unit and may be exercised on a cashless basis. The warrants are exercisable at a price of $5.00 per share. |
• | The acquisition of COAC will be accounted for as a purchase at book value under U.S. GAAP, since COAC’s assets consist principally of cash and cash equivalents and its liabilities are de minimis operating expenses payable in cash. COAC is a shell company and does not conduct daily, ongoing operations. After the merger, COAC will cease to exist as a corporate entity and its capital structure will dissolve. The carrying value of its assets and liabilities carry over, while the common stock outstanding will be that of BVICo. Historical statements of operations up to the merger date will include only those of BVICo. |
The Unaudited Pro Forma Condensed Consolidated Balance Sheet of BVICo as of September 30, 2008 gives prospective effect to the acquisition of the Ge Rui registered capital by HKCo and the capitalization of HKCo by BVICo.
The unaudited pro forma combined condensed statement of operations for the year ended December 31, 2007 and the nine months ended September 30, 2008 give pro forma effect to the merger as if it had occurred on January 1, 2007 and 2008. The pro forma statements of operations are based on the historical results of operations of BVICo and COAC for the year ended December 31, 2007 and the nine months ended September 30, 2008.
The unaudited pro forma combined condensed balance sheet as of September 30, 2008 gives pro forma effect to the merger as if it had occurred on that date.
The historical financial information has been adjusted to give effect to pro forma events that are related and/or directly attributable to the merger, are factually supportable and, in the case of the unaudited pro forma statement of operations data, are expected to have a continuing impact on the combined results. The adjustments presented on the unaudited pro forma condensed combined financial information have been identified and presented in“Unaudited Pro Forma Condensed Combined Financial Information” to provide relevant information necessary for an accurate understanding of the combined company upon consummation of the merger.
The historical financial information of Ge Rui are derived from the unaudited financial information of Ge Rui for the nine months ended September 30, 2008 and the audited financial information of Ge Rui for the year ended December 31, 2007 included elsewhere in this proxy statement/prospectus. The historical financial information of COAC are derived from the unaudited financial information of COAC for the nine months ended September 30, 2008 and the audited financial statements of COAC for the year ended December 31, 2007 included elsewhere in this proxy statement/prospectus.
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This information should be read together with BVICo’s and COAC’s financial information and related notes,“Selected Unaudited Pro Forma Condensed Combined Financial Information,” “BVICo’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Other Information Related to COAC — COAC’s Plan of Operation” and other financial information included elsewhere in this proxy statement/prospectus.
The unaudited pro forma condensed combined balance sheet data as of September 30, 2008 and the unaudited pro forma condensed combined statement of operations data for the nine months ended September 30, 2008 and the year ended December 31, 2007 have been prepared using two different levels of approval of the transaction by the COAC stockholders, as follows:
• | Assuming No Conversion: This presentation assumes that no COAC stockholders seek conversion of their COAC stock into pro rata shares of the trust account; and |
• | Assuming Maximum Conversion: This presentation assumes that holders of 39.99% (2,759,310) of the Public Shares exercise their conversion rights and that such shares were converted into their pro rata share of the trust account. |
The unaudited pro forma financial statements are not necessarily indicative of the financial position or results of operations that may have actually occurred had the transaction taken place on the dates noted, or the future financial position or operating results of the combined company.
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GOLDEN GREEN ENTERPRISES LIMITED (“BVICo”)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of September 30, 2008
Henan Green Complex Materials PRC | Pro Forma Adjustments | Henan Green Complex Materials Adjusted | Wealth Rainbow Development Ltd. Hong Kong | Pro Forma Adjustments | Wealth Rainbow Development Ltd. Adjusted | Pro Forma Consolidation Adjustments | Wealth Rainbow Development Ltd. Consolidated | Golden Green Enterprises Ltd. BVI | Pro Forma Adjustments | Golden Green Enterprises Ltd. Adjusted | Pro Forma Consolidation Adjustments | Golden Green Enterprises Ltd. Consolidated | ||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and equivalents | $ | 25,132,375 | $ | (9,675,125 | )(2) | $ | 8,937,161 | $ | 1 | $ | 10,932,292 | (6) | $ | 1 | $ | 8,937,162 | $ | 1 | $ | 11,000,000 | (4) | 67,708 | $ | 9,004,870 | ||||||||||||||||||||||||||||
(6,520,089 | )(1) | (10,932,292 | )(7) | (1 | )(5) | |||||||||||||||||||||||||||||||||||||||||||||||
�� | (10,932,292 | )(6) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted Cash | 27,100,883 | 27,100,883 | 27,100,883 | 27,100,883 | ||||||||||||||||||||||||||||||||||||||||||||||||
Accounts receivable | 18,046,501 | 18,046,501 | 18,046,501 | 18,046,501 | ||||||||||||||||||||||||||||||||||||||||||||||||
Inventories | 5,335,428 | 5,335,428 | 5,335,428 | 5,335,428 | ||||||||||||||||||||||||||||||||||||||||||||||||
Prepaid expenses | 32,193,186 | 32,193,186 | 32,193,186 | 32,193,186 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other receivables | 1,231,952 | 1,231,952 | 1,231,952 | 1,231,952 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total current assets | 109,040,325 | (16,195,214 | ) | 92,845,111 | 1 | 0 | 1 | 0 | 92,845,112 | 1 | 67,707 | 67,708 | 0 | 92,912,820 | ||||||||||||||||||||||||||||||||||||||
Investment in subsidiaries | 10,932,292 | (3) | 10,932,292 | (10,932,292 | )(8) | 0 | 1 | (5) | 10,932,293 | (10,932,293 | )(9) | 0 | ||||||||||||||||||||||||||||||||||||||||
10,932,292 | (6) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Property, plant and equipment, net | 16,691,059 | 16,691,059 | 16,691,059 | 16,691,059 | ||||||||||||||||||||||||||||||||||||||||||||||||
Land use right, net | 1,431,294 | 1,431,294 | 1,431,294 | 1,431,294 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 127,162,678 | $ | (16,195,214 | ) | $ | 110,967,464 | $ | 1 | $ | 10,932,292 | $ | 10,932,293 | $ | (10,932,292 | ) | $ | 110,967,465 | $ | 1 | $ | 11,000,000 | $ | 11,000,001 | $ | (10,932,293 | ) | $ | 111,035,173 |
See Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
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GOLDEN GREEN ENTERPRISES LIMITED (“BVICo”)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of September 30, 2008
Henan Green Complex Materials PRC | Pro Forma Adjustments | Henan Green Complex Materials Adjusted | Wealth Rainbow Development Ltd. Hong Kong | Pro Forma Adjustments | Wealth Rainbow Development Ltd. Adjusted | Pro Forma Consolidation Adjustments | Wealth Rainbow Development Ltd. Consolidated | Golden Green Enterprises Ltd. BVI | Pro Forma Adjustments | Golden Green Enterprises Ltd. Adjusted | Pro Forma Consolidation Adjustments | Golden Green Enterprises Ltd. Consolidated | ||||||||||||||||||||||||||||||||||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Notes payable | $ | 31,517,400 | $ | 31,517,400 | $ | $ | $ | $ | $ | 31,517,400 | $ | $ | $ | $ | $ | 31,517,400 | ||||||||||||||||||||||||||||||||||||
Short term loans | 25,375,926 | 25,375,926 | 25,375,926 | 25,375,926 | ||||||||||||||||||||||||||||||||||||||||||||||||
Accounts payable | 13,373,846 | 13,373,846 | 10,932,292 | (3) | — | 13,373,846 | 13,373,846 | |||||||||||||||||||||||||||||||||||||||||||||
(10,932,292 | )(7) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Taxes payable | 1,129,763 | 1,129,763 | 1,129,763 | 1,129,763 | ||||||||||||||||||||||||||||||||||||||||||||||||
Accrued liabilities and other payables | 9,977,394 | 9,977,394 | 9,977,394 | 9,977,394 | ||||||||||||||||||||||||||||||||||||||||||||||||
Receipts in advance | 18,632,185 | 18,632,185 | 18,632,185 | 18,632,185 | ||||||||||||||||||||||||||||||||||||||||||||||||
Due to owner(s) | 6,520,089 | (6,520,089 | )(1) | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||
Total current liabilities | 106,526,603 | (6,520,089 | ) | 100,006,514 | 0 | 0 | 0 | 0 | 100,006,514 | 0 | 0 | 0 | 0 | 100,006,514 | ||||||||||||||||||||||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Land use right payable, net | 28,658 | 28,658 | 28,658 | 28,658 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total non-current liabilities | 28,658 | 28,658 | 0 | 0 | 0 | 0 | 28,658 | 0 | 0 | 0 | 0 | 28,658 | ||||||||||||||||||||||||||||||||||||||||
Total liabilities | 106,555,261 | (6,520,089 | ) | 100,035,172 | 0 | 0 | 0 | 0 | 100,035,172 | 0 | 0 | 0 | 0 | 100,035,172 | ||||||||||||||||||||||||||||||||||||||
Stockholders' equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital | 3,335,043 | 3,335,043 | 1 | 10,932,292 | (6) | 10,932,293 | (3,335,043 | )(8) | 10,932,293 | 1 | 11,000,000 | (4) | 11,000,001 | (10,932,293 | )(9) | 11,000,001 | ||||||||||||||||||||||||||||||||||||
Accumulated other comprehensive income – Foreign currency translation adjustment | 3,736,194 | 3,736,194 | (3,736,194 | )(8) | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||
Retained earnings | 13,536,180 | (9,675,125 | )(2) | 3,861,055 | (3,861,055 | )(8) | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||||
Total stockholders' equity | 20,607,417 | (9,675,125 | ) | 10,932,292 | 1 | 10,932,292 | 10,932,293 | (10,932,292 | ) | 10,932,293 | 1 | 11,000,000 | 11,000,001 | (10,932,293 | ) | 11,000,001 | ||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 127,162,678 | $ | (16,195,214 | ) | $ | 110,967,464 | $ | 1 | $ | 10,932,292 | $ | 10,932,293 | $ | (10,932,292 | ) | $ | 110,967,465 | $ | 1 | $ | 11,000,000 | $ | 11,000,001 | $ | (10,932,293 | ) | $ | 111,035,173 |
See Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
78
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of September 30, 2008
(Golden Green Enterprises Ltd.) BVICo | COAC | Proforma Acquisition Adjustments | Combined Assuming No Conversion | Adjustments for Maximum Conversion | Combined Assuming Maximum Conversion | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||
Cash and equivalents | $ | 9,004,870 | $ | 70,903 | $ | 41,220,226 | (10) | $ | 48,491,235 | $ | (16,483,968 | )(15) | $ | 32,007,267 | ||||||||||
(414,000 | )(13) | |||||||||||||||||||||||
(1,390,764 | )(14) | |||||||||||||||||||||||
Restricted Cash | 27,100,883 | 27,100,883 | 27,100,883 | |||||||||||||||||||||
Accounts receivable | 18,046,501 | 18,046,501 | 18,046,501 | |||||||||||||||||||||
Inventories | 5,335,428 | 5,335,428 | 5,335,428 | |||||||||||||||||||||
Prepaid expenses | 32,193,186 | 104,676 | 32,297,862 | 32,297,862 | ||||||||||||||||||||
Deferred acquisition costs | 109,236 | (109,236 | )(14) | |||||||||||||||||||||
Other receivables | 1,231,952 | 1,231,952 | 1,231,952 | |||||||||||||||||||||
Total current assets | 92,912,820 | 284,815 | 39,306,226 | 132,503,861 | (16,483,968 | ) | 116,019,893 | |||||||||||||||||
Cash equivalents held in trust | 41,220,226 | (41,220,226 | )(10) | 0 | 0 | |||||||||||||||||||
Property, plant and equipment, net | 16,691,059 | 16,691,059 | 16,691,059 | |||||||||||||||||||||
Land use right, net | 1,431,294 | 1,431,294 | 1,431,294 | |||||||||||||||||||||
Total assets | $ | 111,035,173 | $ | 41,505,041 | $ | (1,914,000 | ) | $ | 150,626,214 | $ | (16,483,968 | ) | $ | 134,142,246 | ||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||
Notes payable | $ | 31,517,400 | $ | $ | $ | 31,517,400 | $ | $ | 31,517,400 | |||||||||||||||
Short term loans | 25,375,926 | 25,375,926 | 25,375,926 | |||||||||||||||||||||
Accounts payable | 13,373,846 | 89,642 | 13,463,488 | 13,463,488 | ||||||||||||||||||||
Taxes payable | 1,129,763 | 74,936 | 1,204,699 | 1,204,699 | ||||||||||||||||||||
Accrued liabilities and other payables | 9,977,394 | 9,977,394 | 9,977,394 | |||||||||||||||||||||
Receipts in advance | 18,632,185 | 18,632,185 | 18,632,185 | |||||||||||||||||||||
Deferred underwriting fees | 414,000 | (414,000 | )(13) | 0 | 0 | |||||||||||||||||||
Common stock subject to redemption, 2,759,310 shares at redemption value | 16,483,968 | (16,483,968 | )(11) | 0 | 0 | |||||||||||||||||||
Total current liabilities | 100,006,514 | 17,062,546 | (16,897,968 | ) | 100,171,092 | 0 | 100,171,092 | |||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||
Land use right payable, net | 28,658 | 28,658 | 28,658 | |||||||||||||||||||||
Total non-current liabilities | 28,658 | 28,658 | 0 | 28,658 | ||||||||||||||||||||
Total liabilities | 100,035,172 | 17,062,546 | (16,897,968 | ) | 100,199,750 | 0 | 100,199,750 | |||||||||||||||||
Stockholders' equity | ||||||||||||||||||||||||
Capital | 11,000,001 | 23,291,184 | 16,483,968 | (11) | 50,426,464 | (16,483,968 | )(15) | 33,942,496 | ||||||||||||||||
(1,500,000 | )(14) | |||||||||||||||||||||||
1,151,311 | (12) | |||||||||||||||||||||||
Retained earnings | 0 | 1,151,311 | (1,151,311 | )(12) | 0 | 0 | ||||||||||||||||||
Total stockholders' equity | 11,000,001 | 24,442,495 | 14,983,968 | 50,426,464 | (16,483,968 | ) | 33,942,496 | |||||||||||||||||
Total liabilities and stockholders' equity | 111,035,173 | 41,505,041 | (1,914,000 | ) | 150,626,214 | (16,483,968 | ) | 134,142,246 |
See Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2008
BVICo | COAC | Acquisition Adjustments | Combined Assuming No Conversion | Adjustments for Maximum Conversion | Combined Assuming Maximum Conversion | |||||||||||||||||||
Revenue | $ | 156,860,563 | $ | $ | $ | 156,860,563 | $ | $ | 156,860,563 | |||||||||||||||
Cost of revenue | 112,999,500 | 112,999,500 | 112,999,500 | |||||||||||||||||||||
Gross profit | 43,861,063 | 0 | 0 | 43,861,063 | 0 | 43,861,063 | ||||||||||||||||||
Selling, general and administrative expenses | 2,955,069 | 222,665 | (45,000 | )(16) | 3,132,734 | 3,132,734 | ||||||||||||||||||
Operating income (loss) | 40,905,994 | (222,665 | ) | 45,000 | 40,728,329 | 0 | 40,728,329 | |||||||||||||||||
Other income and expenses | ||||||||||||||||||||||||
Interest expense | (2,969,819 | ) | (2,969,819 | ) | (2,969,819 | ) | ||||||||||||||||||
Interest income | 1,077,947 | 926 | 1,078,873 | 1,078,873 | ||||||||||||||||||||
Interest on Trust Fund | 683,874 | 683,874 | (173,506 | )(15) | 510,368 | |||||||||||||||||||
Other income and expenses | 84,910 | 84,910 | 84,910 | |||||||||||||||||||||
Income before income taxes | 39,099,032 | 462,135 | 45,000 | 39,606,167 | (173,506 | ) | 39,432,661 | |||||||||||||||||
Income tax expense | 9,667,525 | 46,101 | 4,212 | (16) | 9,717,838 | (16,240 | )(15) | 9,701,598 | ||||||||||||||||
Net income | $ | 29,431,507 | $ | 416,034 | $ | 40,788 | $ | 29,888,329 | $ | (157,266 | ) | $ | 29,731,063 | |||||||||||
Maximum number of shares subject to possible conversion: | ||||||||||||||||||||||||
Weighted average number of shares | 2,759,310 | |||||||||||||||||||||||
Income per share basic and diluted | $ | 0.06 | ||||||||||||||||||||||
Weighted average number of shares outstanding not subject to possible conversion | ||||||||||||||||||||||||
Basic | 30,000,000 | (19) | 5,640,690 | (19) | 8,400,000 | (19) | 38,400,000 | (19) | (2,759,310 | )(19) | 35,640,690 | (19) | ||||||||||||
Diluted | ||||||||||||||||||||||||
Income per share | ||||||||||||||||||||||||
Basic | $ | 0.98 | (19) | $ | 0.04 | (19) | $ | 0.78 | (19) | $ | 0.83 | (19) | ||||||||||||
Diluted |
See Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Twelve Months Ended December 31, 2007
BVICo | COAC | Acquisition Adjustments | Combined Assuming No Conversion | Adjustments for Maximum Conversion | Combined Assuming Maximum Conversion | |||||||||||||||||||
Revenue | $ | 139,649,209 | $ | $ | $ | 139,649,209 | $ | $ | 139,649,209 | |||||||||||||||
Cost of revenue | 100,577,079 | 100,577,079 | 100,577,079 | |||||||||||||||||||||
Gross profit | 39,072,130 | 0 | 0 | 39,072,130 | 0 | 39,072,130 | ||||||||||||||||||
Selling, general and administrative expenses | 3,301,091 | 263,912 | (70,403 | )(16) | 3,494,600 | 3,494,600 | ||||||||||||||||||
Operating income (loss) | 35,771,039 | (263,912 | ) | 70,403 | 35,577,530 | 0 | 35,577,530 | |||||||||||||||||
Other income and expenses | ||||||||||||||||||||||||
Interest expense | (2,147,451 | ) | (2,147,451 | ) | (2,147,451 | ) | ||||||||||||||||||
Interest income | 1,432,019 | 4,867 | 1,436,886 | 1,436,886 | ||||||||||||||||||||
Interest on Trust Fund | 1,069,353 | 1,069,353 | (427,634 | )(15) | 641,719 | |||||||||||||||||||
Other income and expenses | 16,165 | 1,071 | 17,236 | 17,236 | ||||||||||||||||||||
Income before income taxes | 35,071,772 | 811,379 | 70,403 | 35,953,554 | (427,634 | ) | 35,525,920 | |||||||||||||||||
Income tax expense | 11,421,638 | 74,508 | 6,590 | (16) | 11,502,736 | (40,027 | )(15) | 11,462,709 | ||||||||||||||||
Net income | $ | 23,650,134 | $ | 736,871 | $ | 63,813 | $ | 24,450,818 | $ | (387,607 | ) | $ | 24,063,211 | |||||||||||
Maximum number of shares subject to | ||||||||||||||||||||||||
possible conversion: | ||||||||||||||||||||||||
Weighted average number of shares | 2,759,310 | |||||||||||||||||||||||
Income per share basic and diluted | $ | 0.15 | ||||||||||||||||||||||
Weighted average number of shares outstanding not subject to possible conversion | ||||||||||||||||||||||||
Basic | 30,000,000 | (19) | 4,683,325 | (19) | 8,400,000 | (19) | 38,400,000 | (19) | (2,759,310 | )(19) | 35,640,690 | (19) | ||||||||||||
Diluted | ||||||||||||||||||||||||
Income per share | ||||||||||||||||||||||||
Basic | $ | 0.79 | (19) | $ | 0.07 | (19) | $ | 0.64 | (19) | $ | 0.68 | (19) | ||||||||||||
Diluted |
See Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
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Notes to Unaudited Pro Forma Condensed Combined Financial Information
1. Henan Green Complex Materials (“Ge Rui”) – Wealth Rainbow (“HKCo”) – Golden Green (“BVICo”) Consolidation
Note 1 | The share transfer agreement among the stockholders of Ge Rui, HKCo and Ge Rui, pursuant to which HKCo will acquire the registered share capital of Ge Rui concurrently with the closing of the merger between COAC and BVICo, provides, among other terms, that the purchase price is to be increased by the amount of the profits earned by Ge Rui from January 1, 2008 through October 29, 2008 (the date on which governmental approval of the transfer was issued). At September 30, 2008, Ge Rui had declared dividends payable to its stockholders on profits through June 30, 2008, of which approximately $6,520,089 remained unpaid at September 30, 2008. Payment of this remaining balance is reflected in this adjustment. |
Note 2 | The transfer agreement, as noted above, provides that all profits earned by Ge Rui up to and including October 29, 2008, are to be paid to the selling stockholders of Ge Rui. By agreement with COAC, it was agreed that dividends were to be paid on net income for the quarter ended September 30, 2008. Accordingly, a dividend equal to the net income of Ge Rui for the quarter ended September 30, 2008 is accrued and payable in the pro forma balance sheet. |
Additionally, net income earned in the period from October 1, 2008 up to and including October 29, 2008 is also payable to the selling stockholders of Ge Rui and will be added to the purchase price of the Ge Rui shares purchased by HKCo. This amount is not reflected in the pro forma balance sheet but is anticipated to be approximately $2 million to $3 million USD and will be funded by the investors in BVICo.
Note 3 | Reflects the acquisition of 100% of the shares of Ge Rui by HKCo pursuant to the transfer agreement. The share price was established in accordance with the fair value appraisal of the assets of Ge Rui accepted by both the selling and acquiring parties. The fair value, excluding dividends due to the selling stockholders up to October 29, 2008, approximated the book value of the net assets at the appraisal date. |
Note 4 | Reflects the investment in BVICo by Honest Joy Group (a BVI corporation), Plumpton Group Limited (a BVI corporation) and Oasis Green Investments Limited (a BVI corporation). Assumes that the three investing entities have placed $11,000,000 in escrow with an independent escrow agent in the British Virgin Islands, to be released to capitalize BVICo upon the approval of the merger with COAC by the COAC stockholders as detailed elsewhere in this prospectus. |
Note 5 | Reflects acquisition of the sole outstanding share of HKCo by BVICo. |
Note 6 | Reflects the investment in HKCo by BVICo sufficient to fund the amount owed by HKCo to the selling stockholders of Ge Rui pursuant to the transfer agreement noted above, on both the BVICo and HKCo balance sheets. |
Note 7 | Reflects the payment to the Ge Rui selling stockholders pursuant to the transfer agreement. |
Note 8 | Consolidation entry to consolidate HKCo and Ge Rui, eliminating the investment in Ge Rui on the balance sheet of HKCo and the equity accounts of Ge Rui as at the pro forma date of acquisition by HKCo. |
Note 9 | Consolidation entry to consolidate HKCo and BVICo, eliminating the investment in HKCo on the balance sheet of BVICo against the equity accounts on the balance sheet of HKCo as at the pro forma date of acquisition by BVICo. |
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2. BVICo – COAC Merger and Consolidation
Note 10 | To record the reclassification of funds held in trust by COAC |
Note 11 | Assuming no conversions, to reclassify common stock subject to conversion ($15,882,828) and related interest ($601,140 since inception – $427,634 for the period ended December 31, 2007 and $173,506 for the nine months ended September 30, 2008) to permanent capital. |
Note 12 | The transaction constitutes a purchase transaction under US GAAP, with BVICo acquiring COAC. However, since the primary assets acquired by BVICo consist primarily of cash and cash equivalents, the acquisition of COAC is recorded at the net book value of COAC and no goodwill is recognized, pursuant to SFAS 141, Paragraph B87, wherein the value of the assets acquired, primarily cash, is the most reliable measurement. Accordingly, the capital accounts of BVICo reflect the issuance of 8,400,000 shares to the stockholders of COAC valued at the net book value of COAC resulting in capital as shown below: |
September 30, 2008 | ||||||||||||
Before Consummation of Transaction | Assuming No Conversions 0% | Assuming Maximum Conversions 39.99% | ||||||||||
BVICo Capital, before transaction | 11,000,001 | 11,000,001 | 11,000,001 | |||||||||
COAC stockholders' equity | 24,442,495 | 24,442,495 | ||||||||||
Common stock subject to redemption | 16,483,968 | |||||||||||
Estimated expenses associated with the transaction | (1,500,000 | ) | (1,500,000 | ) | ||||||||
BVICo capital, post transaction | 11,000,001 | 50,426,464 | 33,942,496 |
Note 13 | To record the payment of the deferred underwriter fees payable to the underwriters upon completion of a transaction. |
Note 14 | To record estimated costs of completing the merger, including legal, accounting, consultants, proxy solicitation and financial advisory services and finders fee. |
Note 15 | Assuming maximum conversion, to record funds ( $15,882,828) and related interest attributable to common stock subject to possible conversion ($601,1403 since inception; $427,634 for the period ended December 31, 2007 and $173,506 for the nine months ended September 30, 2008) to converting stockholders. |
Note 16 | To eliminate the fee (year ended December 31, 2007 – $70,403; nine months ended September 30, 2008 – $67,500) that per agreement, Edelson Technology, Inc., an affiliate of Harry Edelson, the chairman and chief executive officer of COAC charges COAC for general and administrative services. This agreement will be terminated in accordance with its terms upon consummation of a business combination. |
Note 17 | The operating expenses of COAC consist principally of legal, accounting, travel and administrative costs related to due diligence in seeking acquisition candidates and preparing SEC filings. These costs will not recur after the consummation of a business combination, however, no pro forma adjustments have been made to reflect the potential reduction in expenses except for the administrative fees described in Note H above. |
Note 18 | COAC anticipates an additional $500,000 of annual recurring general and administrative costs related to public company administrative and reporting costs. However, since these costs are estimates and not currently factually supportable, they have not been included as pro forma adjustments. |
Note 19 | COAC's historical statement of operations includes a presentation of earnings per share for common stock subject to possible conversion in a manner similar to the two class method of earnings per share. Since any conversions will be a one-time event occurring at closing, pro forma earnings per share is presented as a single class based on a basic and diluted basis assuming no conversions and maximum conversions. BVICo was capitalized with 30 million shares issued and outstanding. Pro |
83
forma net income per share was calculated by dividing pro forma net income by the weighted average number of shares as follows: |
Year Ended December 31, 2007 | ||||||||||||
Before Consummation of Transaction | Assuming No Conversions 0% | Assuming Maximum Conversions 39.99% | ||||||||||
BVICo pro forma weighted average shares | 30,000,000 | 30,000,000 | 30,000,000 | |||||||||
Shares issued in transaction | 8,400,000 | 5,640,690 | ||||||||||
COAC pro forma weighted average shares – basic and diluted | 30,000,000 | 38,400,000 | 35,640,690 |
Nine Months Ended September 30, 2008 | ||||||||||||
Before Consummation of Transaction | Assuming No Conversions 0% | Assuming Maximum Conversions 39.99% | ||||||||||
COAC weighted average shares | 30,000,000 | 30,000,000 | 30,000,000 | |||||||||
Shares issued in transaction | 8,400,000 | 5,640,690 | ||||||||||
COAC pro forma weighted average shares – basic and diluted | 30,000,000 | 38,400,000 | 35,640,690 |
Fully diluted earnings per share is not presented because the effect would be anti-dilutive under the treasury method. The $5.00 per share exercise price for the 16,066,667 outstanding warrants and the underwriter's purchase option to purchase 600,000 unts (600,000 common shares and 1,200,000 warrants) for $6.60 exceed the BVICo per share value of approximately $4.87 as determined through the issuance of BVICo shares for the net assets of COAC (which are primarily cash and equivalents), in the merger. In the event at least 75% of the warrants are exercised at a future date, a payment of $5 million will be required to be made to certain shareholders of BVICo. See Section 1.15,Warrant Exercise Payment, of the Merger Agreement. No payment is required unless the warrants are exercised.
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THE ADJOURNMENT PROPOSAL
The adjournment proposal, if adopted, will allow COAC’s board of directors to adjourn the special meeting to a later date or dates to permit further solicitation of proxies in the event, based on the tabulated votes, there are not sufficient votes at the time of the special meeting to approve the consummation of the merger. In no event will COAC adjourn the special meeting or consummate the merger beyond the date by which it may properly do so under its amended and restated certificate of incorporation and Delaware law. The purpose of the adjournment proposal is to provide more time for the COAC Inside Stockholders, BVICo and the current BVICo shareholders to make purchases of Public Shares or other arrangements that would increase the likelihood of obtaining a favorable vote on the merger proposal and to meet the requirement that the holders of fewer than 40% of the Public Shares vote against the merger proposal and demand that their Public Shares be converted into cash (although no such purchases will be made by COAC itself). See the section entitled“Summary of the Proxy Statement/Prospectus — Interests of COAC’s Directors and Officers in the Merger.”
In addition to an adjournment of the special meeting upon approval of an adjournment proposal, the board of directors of COAC is empowered under Delaware law to postpone the meeting at any time prior to the meeting being called to order. In such event, COAC will issue a press release and take such other steps as it believes are necessary and practical in the circumstances to inform its stockholders of the postponement.
Consequences if the Adjournment Proposal is Not Approved
If the adjournment proposal is not approved by the stockholders, COAC’s board of directors may not be able to adjourn the special meeting to a later date in the event, based on the tabulated votes, there are not sufficient votes at the time of the special meeting to approve the consummation of the merger (because the merger proposal is not approved or because the holders of 40% or more of the Public Shares vote against the merger proposal and demand conversion of their Public Shares into cash). In such event, the merger would not be completed and, unless COAC were able to consummate a business combination with another party no later than March 20, 2009, it would be required to liquidate.
Required Vote
Adoption of the adjournment proposal requires the affirmative vote of a majority of the issued and outstanding shares of COAC’s common stock represented in person or by proxy at the meeting and entitled to vote thereon. Adoption of the adjournment proposal is not conditioned upon the adoption of any of the other proposals.
COAC’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT COAC’S STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE ADJOURNMENT PROPOSAL.
85
DIRECTORS AND EXECUTIVE OFFICERS OF BVICo FOLLOWING THE MERGER
At the effective time of the merger, the board of directors and executive officers of BVICo will be as follows:
Name | Age | Position | ||
Mingwang Lu | 56 | Chairman of the Board | ||
Liyong Qu | 36 | Chief Accounting Officer | ||
Yi Lu | 33 | General Manager and Director | ||
Qihong Zhang | 41 | Finance Director | ||
Ping Li | 36 | Deputy General Manager | ||
Zheyu Chen | 54 | Deputy General Manager & Chief of Engineering Research Center | ||
Harry Edelson | 75 | Director | ||
J.P. Huang | 48 | Director | ||
Wong Kwok Keung | 59 | Director | ||
Yunlong Wang | 46 | Director | ||
Maotong Xu | 69 | Director |
Information About the Nominees
Mingwang Lu has served as Ge Rui’s general manager since 2000. He was previously senior economist and engineer of Ge Rui. Mr. Lu has been in the steel industry since 1985, with expertise in managing and marketing cold-rolled steel construction, technologies, production and marketing. Mr. Lu was elected as a member of the 9th, 10th and 11th National People Congress in Henan Province. He has been awarded numerous honors including the “Wuyi Labor Medal,” “Excellent Director/Manager in Henan Province,” “National Excellent Town Entrepreneur,” “Expert in Steel Industry of Henan Province.” Mr. Lu graduated from Northwest Industrial University in 1996.
Liyong Qu has served as Ge Rui’s deputy general manager in charge of its finance and accounting departments since December 2007. Prior to this, he served as an accountant in Ge Rui’s finance ministry from July 1995 to December 2000 and as the director of the finance ministry from December 2000 to December 2007. Mr. Qu graduated from Henan College of Finance and Economics.
Yi Lu has served as the deputy general manager of Ge Rui since May 2008. From July 2003 to May 2008, he served as general manager of Ge Rui. While with Ge Rui, Mr. Lu has helped develop 5 series as well as over 20 types of high precision strip steel products. Prior to joining Ge Rui, Mr. Lu served as the recording department director of Zhengzhou television station. He has been honored as one of the sixth top ten excellent youth of Xinzheng in Jun. 2005, and elected into the second Union of Youth Committee in Apr. 2006. Mr. Lu graduated from Northwest College in business administration.
Qihong Zhang served as a civil servant from 1986 to 1982. She joined Zhengzhou No. 2 Steel and Iron Company Limited from 1992-2000 in charge of the Accounts Department. She worked as accounting supervisor of Ge Rui since 2000 and promoted to Finance Director in 2007. She holds a degree in Finance Accounting and graduated from Zhengzhou Institute of Finance, Commerce and Accounting in 1995.
Ping Li has served as general manager and minister of the production department of Ge Rui since April 2007. From April 2004 to April 2007, he served as the assistant of the Ge Rui general manager and minister of production department. From 2001 to April 2004, Mr. Li served as chief of the production division of the cold-rolled steel subsidiary of Zhengzhou No. 2 Steel. Prior to this, he worked as the technician in Delong Steel Company in Jiaxing, Zhejiang, mainly engaged in management of technics and production process. Mr. Li graduated from Chong High Steel College.
Zheyu Chen has served as assistant to the chief of the Henan Special Steel Complex Material Engineering Research Center since December 2000. From July 1998 to December 2000, he served as the deputy general manager of Ge Rui. FromJuly 1972 to July 1998, he had worked in Luoyang Steel Group as chief in
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the mechanism and repairing workshop, director in the power service department, party general secretary in the oxygen sub-plant, and director in its second smelting subsidiary. He began his career in 1970 as a fitter in Lizishan Iron Mechanism and Repairing Factory in Helongjiang Province. Mr. Chan graduated from Beijing Economic Correspondence College and Henan Economic College.
Harry Edelsonhas served as COAC’s chairman of the board and chief executive officer since its inception. Since August 1984, he has been the managing partner of Edelson Technology Partners, which manages a series of five venture capital technology funds (the “Edelson Funds”) for ten multinational corporations (AT&T, Viacom, Ford Motor, Cincinnati Bell, Colgate Palmolive, Reed Elsevier, Imation, Asea Brown Boveri and UPS) and two large pension funds. Mr. Edelson previously worked for Merrill Lynch, Drexel Burnham Lambert and CS First Boston and was ranked byInstitutional InvestorMagazine as anAll Star analyst. Mr. Edelson is a former president of the Analyst Club, the oldest club on Wall Street, founded in 1925, and is a founding member of the China Investment Group LLC, an organization formed to provide a forum for update and exchange of its members’ knowledge of China. He has been a member of the Juilliard Council since 2001. The Julliard is one of the world’s leading schools in the fields of music, dance and acting. Mr. Edelson was honored in the Knesset by receiving the Israel 50th Anniversary Award from the Prime Minister of Israel. Mr. Edelson is a member of the Asia Society and the China Cultural Foundation. He is also an advisor to the China Cultural Foundation. He has given numerous speeches in Hong Kong, China and the United States on investing in China. Mr. Edelson received a B.S. from Brooklyn College and an MBA from New York University Graduate School of Business.
Dr. J.P. Huang has been Founder, Chairman Emeritus and Chief Strategic Adviser of Jpigroup Inc. since 1988. Under Dr. Huang’s advisory guidance, Jpigroup has become one of China's major private investment and development companies that has invested and advised in the areas of manufacturing, human capital development, technologies and financial services. From 1985 and prior to founding Jpigroup, Dr. Huang worked for the Government of China in the former Ministry of Foreign Economic Relations and Trade and during this time, he was very active and instrumental in helping formulating some of China's first open door strategies and reform plans, especially in the area of international investment and trade. Dr. Huang holds a Ph.D. in economics from University of International Business and Economics in Beijing, where he now concurrently holds a Professorship in Finance. Dr. Huang has acted as a consultant to COAC in connection with the merger.
Wong Kwok Keunghas in-depth and practical business working experience in dealing with Chinese companies and the Chinese government and assisting foreign investors in doing investments in China for more than twenty years. Since 2000, he has been the Senior Consultant of Thundercap Investments Consultant Limited, a consulting company that advises Chinese clients regarding the raising of funds through Sino-foreign joint ventures, private investment and overseas initial public offerings. Since 1986, Mr. Wong has been a private consultant providing services in the areas of marketing, manufacturing, production, financing and management to more than twenty Chinese enterprises. From 2000 to 2007, he provided consultation services and successfully assisted three Chinese companies in completing initial public offerings in Singapore.
Yunlong Wang has been the Head and Chief Engineer of Biotech Research Center of Hernan Province in China since 2000. Professor Wang is one of the leading scholars and experts in human cell research and has published over twenty one theses in that and related fields. He has been admitted and recognized as a member Specialist in Bio-engineering by the State Council of the People's Republic of China. He also served as a Professor at the Hernan Vocational Institute since 2005.
Maotong Xuhas been the secretary of the board of directors of Ge Rui since 2000. Prior to joining Ge Rui, Mr. Xu had served with Henan Luoyang Steel Group from 1966 to 1997 as technician, engineer, vice general engineer and vice factory director. Mr. Xu received a bachelors degree from Beijing Steel College.
Independence of Directors
Upon the consummation of the merger, the board of directors of BVICo will consult with its counsel to ensure that the board’s determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors. The Nasdaq Stock Market listing standards define an “independent director” generally as a person, other than an officer of a company, who does not have a relationship with the company that would interfere with the director’s exercise of independent judgment. Nasdaq
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requires that a majority of the board of directors of a company be independent, as determined by the board. Consistent with these considerations, the board of directors of COAC has affirmatively determined that, upon the closing of the merger, Yunlong Wang, Maotong Xu, Wong Kwok Keung and J.P. Huang will be the independent directors of BVICo.
Audit Committee Information
COAC has not had an audit committee and is not required to have one under applicable rules and regulations. Upon the consummation of the merger, BVICo will establish an audit committee of the board of directors and adopt a charter having material provisions described below. The initial members of BVICo’s audit committee will be Maotong Xu, Wong Kwok Keung and J.P. Huang, with Maotong Xu serving as chairman. Each is an independent director under Nasdaq listing standards. The audit committee’s duties, which are specified in BVICo’s Audit Committee Charter, include, but are not limited to:
• | reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending to the board whether the audited financial statements should be included in BVICo’s Annual Report; |
• | discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of BVICo’s financial statements; |
• | discussing with management major risk assessment and risk management policies; |
• | monitoring the independence of the independent auditor; |
• | verifying the rotation of the audit partners having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law; |
• | reviewing and approving all related-party transactions; |
• | inquiring and discussing with management BVICo’s compliance with applicable laws and regulations; |
• | pre-approving all audit services and permitted non-audit services to be performed by BVICo’s independent auditor, including the fees and terms of the services to be performed; |
• | appointing or replacing the independent auditor; |
• | determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work; and |
• | establishing procedures for the receipt, retention and treatment of complaints received by BVICo regarding accounting, internal accounting controls or reports which raise material issues regarding BVICo’s financial statements or accounting policies. |
Financial Experts on Audit Committee
The audit committee will at all times be composed exclusively of “independent directors” who are “financially literate” as defined under Nasdaq listing standards. Nasdaq listing standards define “financially literate” as being able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement.
In addition, a listed company must certify to Nasdaq that the committee will have at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the individual’s financial sophistication. The boards of directors of both COAC and BVICo have determined that Wong Kwok Keung satisfies the definition of financial sophistication and also qualifies as an “audit committee financial expert,” as defined under rules and regulations of the Securities and Exchange Commission.
Meetings and Attendance
As COAC has not had an audit committee, there have been no meetings of such committee.
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Independent Auditors’ Fees
The firm of WithumSmith+Brown, P.C. (“WSB”) acts as COAC’s independent registered public accounting firm. The following is a summary of fees paid or to be paid to WSB for services rendered. The firm of UHY Vocation HK CPA Limited (“UHY”) acts as BVICo’s independent registered public accounting firm and will continue to so act after consummation of the merger.
Audit Fees
The aggregate fees billed or to be billed by WSB for professional services rendered since its appointment as COAC’s independent registered public accounting firm are $128,300. Such fees relate to (i) the audit of COAC’s financial statements as of August 15, 2006 and for the period from August 7, 2006 (inception) through December 31, 2006, appearing in COAC’s prospectus and registration statement for its IPO; and the audit of COAC’s financial statements as of March 26, 2007 and for the period from August 7, 2006 (inception) through March 26, 2007 appearing in COAC’s Current Report on Form 8-K/A filed on March 28, 2007 (total $72,300); (ii) the review of COAC’s quarterly financial statements set forth in COAC’s Quarterly Reports on Form 10-QSB for the quarters ended March 31, June 30 and September 30, 2007 (total $15,000); (iii) the audit of COAC’s annual financial statements set forth in COAC’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007 ($25,000), (iv) the review of COAC’s quarterly financial statements set forth in COAC’s Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2008 (total $19,500); and (v) the preparation of corporate tax returns for 2007 ($3,000).
WSB has not waived its right to make claims against the funds in COAC’s trust account for fees of any nature owed to it.
Audit Related Fees
During the fiscal year ended December 31, 2007, WSB did not render assurance and related services unrelated to the performance of the audit or review of COAC’s financial statements.
Tax Fees
During the fiscal year ended December 31, 2007, WSB did not render services to COAC for tax compliance, tax advice and tax planning.
All Other Fees
During the fiscal year ended December 31, 2007, there were no fees billed for products and services provided by WSB to COAC other than those set forth above.
Audit Committee Pre-Approval Policies and Procedures
As COAC has not had an audit committee, its board of directors has approved the services described above.
Code of Ethics
In April 2007, COAC’s board of directors adopted a code of ethics that applies to COAC’s directors, officers and employees as well as those of its subsidiaries. A copy of COAC’s code of ethics may be obtained free of charge by submitting a request in writing to China Opportunity Acquisition Corp., 300 Tice Boulevard, Woodcliff Lake, New Jersey 07677.
Upon the consummation of the merger, BVICo will adopt a similar Code of Ethics that will apply to BVICo’s directors, officers and employees as well as those of its subsidiaries.
Compensation Committee Information
COAC has not had a compensation committee and is not required to have one under applicable rules and regulations. Upon consummation of the merger, the board of directors of BVICo will establish a compensation committee with Wong Kwok Keung, J.P. Huang and Maotung Xu as its members with Maotung Xu serving as chairman. Each is an independent director under Nasdaq listing standards. The purpose of the compensation
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committee will be to review and approve compensation paid to BVICo’s officers and directors and to administer BVICo’s incentive compensation plans, should any such plans be adopted in the future, including authority to make and modify awards under such plans.
Compensation Committee Interlocks and Insider Participation
None of the persons designated as directors of BVICo currently serves on the compensation committee of any other company on which any other director designee of BVICo or any officer or director of COAC or BVICo is currently a member.
Nominations Committee Information
COAC has not had a nominations committee and is not required to have one under applicable rules and regulations. Upon consummation of the merger, the board of directors of BVICo will establish a nominations committee, with Wong Kwok Keong, J.P. Huang and Maotung Xu as its members with Maotung Xu serving as chairman, each of whom is an independent director under Nasdaq listing requirements. During the period commencing with the closing of the merger and ending with the BVICo 2011 annual meeting, the nominees for BVICo’s board of directors will be determined pursuant to the terms of the voting agreement and approved by the nominations committee.
Guidelines for Selecting Director Nominees
Upon the consummation of the merger, BVICo’s nominations committee will be responsible for overseeing the selection of persons to be nominated to serve on BVICo’s board of directors. The nominations committee will consider persons identified by its shareholders, management, shareholders, investment bankers and others. The guidelines for selecting nominees, which will be specified in the nominations committee charter, will provide that, generally, persons to be nominated should be actively engaged in business, have an understanding of financial statements, corporate budgeting and capital structure, be familiar with the requirements of a publicly traded company, be familiar with industries relevant to the BVICo business, be willing to devote significant time to the oversight duties of the board of directors of a public company, and be able to promote a diversity of views based on the person’s education, experience and professional employment. The nominations committee will evaluate each individual in the context of the board as a whole, with the objective of recommending a group of persons that can best implement BVICo’s business plan, perpetuate its business and represent shareholder interests. The nominations committee may require certain skills or attributes, such as financial or accounting experience, to meet specific board needs that arise from time to time. The nominations committee will not distinguish among nominees recommended by shareholders and other persons.
Specifically, the guidelines for selecting nominees provide that the nominations committee will consider and evaluate based on, among other factors, the following:
• | The candidate’s independence under the rules of Nasdaq; |
• | The candidate’s accomplishments and reputations, both personal and professional; |
• | The candidate’s relevant experience and expertise; |
• | The candidate’s knowledge of the company and issues affecting BVICo; |
• | The candidate’s moral and ethical character; and |
• | The candidate’s ability to commit the required time necessary to discharge the duties of board membership. |
Compensation of Officers and Directors
No compensation of any kind, including finders and consulting fees, has been or will be paid to any of COAC’s officers or their affiliates for services rendered through the closing of the merger. However, COAC’s executive officers are reimbursed for any out-of-pocket expenses incurred in connection with activities on COAC’s behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. As of September 30, 2008, an aggregate of approximately $86,000 has been reimbursed to them for such expenses. There is no limit on the amount of these out-of-pocket expenses and there will be no
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review of the reasonableness of the expenses by anyone other than COAC’s board of directors, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. Because of the foregoing, BVICo generally does not have the benefit of independent directors examining the propriety of expenses incurred on its behalf and subject to reimbursement.
The policies of BVICo with respect to the compensation of its executive officers and following the merger will be administered by BVICo’s board in consultation with its compensation committee (as described above). The compensation policies followed by BVICo will be intended to provide for compensation that is sufficient to attract, motivate and retain executives of outstanding ability and potential and to establish an appropriate relationship between executive compensation and the creation of shareholder value. To meet these goals, the compensation committee will be charged with recommending executive compensation packages to BVICo’s board of directors.
It is anticipated that performance-based and equity-based compensation will be an important foundation in executive compensation packages as COAC and BVICo believe it is important to maintain a strong link between executive incentives and the creation of shareholder value. COAC and BVICo believe that performance and equity-based compensation can be an important component of the total executive compensation package for maximizing shareholder value while, at the same time, attracting, motivating and retaining high-quality executives. The adoption of the proposed incentive compensation plan and the management incentive compensation plan reflect and will reflect what COAC and BVICo believe is a focus on performance- and equity-based compensation. Since BVICo will not have a compensation committee until completion of the merger, it has not yet adopted any formal guidelines for allocating total compensation between equity compensation and cash compensation for executives hired in the future.
Compensation Discussion and Analysis
Upon consummation of the merger, BVICo will seek to provide total compensation packages that are competitive in terms of potential value to its executives, and which are tailored to the unique characteristics and needs of BVICo within its industry in order to create an executive compensation program that will adequately reward its executives for their roles in creating value for BVICo stockholders. BVICo intends to be competitive with other similarly situated companies in its industry following completion of the merger.
The compensation decisions regarding BVICo’s executives will be based on BVICo’s need to attract individuals with the skills necessary for BVICo to achieve its business plan, to reward those individuals fairly over time, and to retain those individuals who continue to perform at or above BVICo’s expectations.
It is anticipated that BVICo’s executives’ compensation will have three primary components — salary, cash incentive bonus and stock-based awards. BVICo will view the three components of executive compensation as related but distinct. Although BVICo’s compensation committee will review total compensation, BVICo does not believe that significant compensation derived from one component of compensation should negate or reduce compensation from other components. BVICo anticipates determining the appropriate level for each compensation component based in part, but not exclusively, on its view of internal equity and consistency, individual performance and other information deemed relevant and timely. Since BVICo’s compensation committee will not be formed until consummation of the merger, BVICo has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and currently paid out compensation, between cash and non-cash compensation, or among different forms of compensation.
In addition to the guidance provided by its compensation committee, BVICo may utilize the services of third parties from time to time in connection with the hiring and compensation awarded to executive employees. This could include subscriptions to executive compensation surveys and other databases.
BVICo’s compensation committee will be charged with performing an annual review of BVICo’s executive officers’ cash compensation and equity holdings to determine whether they provide adequate incentives and motivation to executive officers and whether they adequately compensate the executive officers relative to comparable officers in other companies.
Benchmarking of Cash and Equity Compensation
BVICo and COAC both believe it is important when making compensation-related decisions to be informed as to current practices of similarly situated publicly held companies in the similar field. It is
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expected that the compensation committee will stay apprised of the cash and equity compensation practices of publicly held companies in the precision steel production and related industries through the review of such companies’ public reports and through other resources. It is also expected that any companies chosen for inclusion in any benchmarking group would have business characteristics comparable to BVICo, including revenues, financial growth metrics, stage of development, employee headcount and market capitalization. While benchmarking may not always be appropriate as a stand-alone tool for setting compensation due to the aspects of BVICo post-reorganization business and objectives that may be unique to BVICo, BVICo generally believes that gathering this information will be an important part of its compensation-related decision-making process.
Compensation Components
Base Salary. Generally, BVICo, working with the compensation committee, anticipates setting executive base salaries at levels comparable with those of executives in similar positions and with similar responsibilities at comparable companies. BVICo will seek to maintain base salary amounts at or near the industry norms, while avoiding paying amounts in excess of what it believes is necessary to motivate executives to meet corporate goals. It is anticipated base salaries will generally be reviewed annually, subject to terms of employment agreements, and that the compensation committee and board will seek to adjust base salary amounts to realign such salaries with industry norms after taking into account individual responsibilities, performance and experience.
Annual Bonuses. BVICo intends to utilize cash incentive bonuses for executives to focus them on achieving key operational and financial objectives within a yearly time horizon. Near the beginning of each year, the board, upon the recommendation of the compensation committee and subject to any applicable employment agreements, will determine performance parameters for appropriate executives. At the end of each year, the board and compensation committee will determine the level of achievement for each corporate goal.
Equity Awards. BVICo also will use share options and other share-based awards to reward long-term performance. It believes that providing a meaningful portion of its executives’ total compensation package in share options and other share-based awards will align the incentives of its executives with the interests of BVICo’s shareholders and with BVICo’s long-term success. The compensation committee and board will develop their equity award determinations based on their judgments as to whether the complete compensation packages provided to BVICo’s executives, including prior equity awards, are sufficient to retain, motivate and adequately award the executives.
Equity awards will be granted through BVICo’s incentive compensation plan, which was adopted by COAC’s board and is being submitted to the stockholders of COAC for their consideration at the special meeting. All of BVICo’s employees, directors, officers and consultants will be eligible to participate in the incentive compensation plan and all BVICo’s senior management will be eligible to participate in the management incentive compensation plan.
BVICo will account for any equity compensation expense under the rules of SFAS 123R, which requires a company to estimate and record an expense for each award of equity compensation over the service period of the award. Accounting rules also will require BVICo to record cash compensation as an expense at the time the obligation is accrued.
Severance Benefit. BVICo currently has no severance benefits plan. BVICo may consider the adoption of a severance plan for executive officers and other employee in the future.
Other Compensation. BVICo will establish and maintain various employee benefit plans, including medical and retirement insurance plans. These plans will be available to all qualified employees.
Director and Consultant Compensation. BVICo currently does not have a definitive compensation plan for its future directors or consultants. BVICo, working with the compensation committee, anticipates setting director and consultant compensation at a level comparable with those directors and consultants with similar positions at comparable companies. It is currently anticipated that such compensation will be based on cash and/or equity compensation under BVICo’s incentive compensation plan and management incentive compensation plan.
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OTHER INFORMATION RELATED TO COAC
Business of COAC
COAC was formed on August 7, 2006, to acquire one or more operating businesses or assets through a merger, stock exchange, asset acquisition, reorganization or similar business combination with an operating company that has its principal operations located in the People’s Republic of China. Prior to executing the merger agreement with BVICo, COAC’s efforts were limited to organizational activities, completion of its IPO and the evaluation of possible business combinations.
Offering Proceeds Held in Trust
On March 26, 2007, COAC consummated its IPO of 6,000,000 units. On March 29, 2007, COAC consummated the sale of an additional 900,000 units which were subject to the underwriters’ over-allotment option. The net proceeds of the offering, including proceeds from the over-allotment option and from the private sale of 2,266,667 Insider Warrants at a price of $0.60 per warrant and after deducting the underwriting discounts and commissions and the offering expenses, were $40,289,040. Of that amount, $39,717,000 was deposited into the trust account and invested in government securities. The remaining proceeds have been used by COAC in its pursuit of a business combination. In addition, as provided for in the prospectus for COAC’s IPO, COAC withdrew $250,000 from interest earned on funds in the trust account to fund its business combination expenses. Except as set forth above, no funds in the trust account have been released and no further funds will be released until the earlier of the consummation of a business combination or the liquidation of COAC. The trust account contained approximately $41,200,000 as of September 30, 2008. If the merger with BVICo is consummated, the trust account will be released to BVICo, less the amounts paid to holders of Public Shares who vote against the merger and elect to convert their shares of common stock into their pro-rata share of the trust account.
The holders of Public Shares will be entitled to receive funds from the trust account only in the event of COAC’s liquidation or if they seek to convert their shares into cash and the merger is actually completed. In no other circumstances will a stockholder have any right or interest of any kind to or in the trust account.
Fair Market Value of Target Business
Pursuant to the underwriting agreement for COAC’s IPO, the initial target business that COAC acquires must have a fair market value equal to at least 80% of COAC’s net assets at the time of such business combination. COAC’s board of directors determined that this test was met in connection with its business combination with BVICo. Further, COAC has received an opinion from BMCG that this test has been met.
Stockholder Approval of Business Combination
COAC will proceed with the merger only if a majority of the Public Shares present and entitled to vote on the merger proposal at the special meeting is voted in favor of the merger proposal. The COAC Inside Stockholders have agreed to vote their common stock issued prior to the IPO on the merger proposal in accordance with the vote of holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote at the special meeting. If the holders of 40% or more of the Public Shares vote against the merger proposal and properly demand that COAC convert their Public Shares into their pro rata share of the trust account, COAC will not consummate the merger. In this case, COAC will be forced to liquidate.
Liquidation if No Business Combination
COAC’s certificate of incorporation provides for the automatic termination of COAC’s corporate existence and mandatory liquidation of COAC if COAC does not consummate a business combination by March 20, 2009. If COAC has not completed a business combination by such date, its corporate existence will cease except for the purposes of winding up its affairs liquidating, pursuant to Section 278 of the DGCL. This has the same effect as if COAC’s board of directors and stockholders had formally voted to approve COAC’s dissolution pursuant to Section 275 of the DGCL. Accordingly, limiting COAC’s corporate existence to a specified date as permitted by Section 102(b)(5) of the DGCL removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required COAC’s board of directors and stockholders to formally vote to approve its dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State).
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COAC anticipates notifying the trustee of the trust account within 10 business days to begin liquidating such assets promptly after such date and anticipates it will take no more than 10 business days to effectuate such distribution. The COAC Inside Stockholders have waived their rights to participate in any liquidation distribution with respect to their Original Shares. Also, as there will be no funds remaining to pay the costs associated with the implementation and completion of the liquidation and distribution, the COAC Inside Stockholders have agreed to advance COAC the funds necessary to pay such costs and complete such liquidation (currently anticipated to be no more than approximately $15,000) and not to seek repayment for such expenses.
In connection with its liquidation, COAC will distribute to the holders of its Public Shares, in proportion to their respective amounts of Public Shares, an aggregate sum equal to the amount in the trust account, inclusive of any interest thereon, plus remaining net assets (subject to COAC’s obligations under Delaware law to provide for claims of creditors as described below). COAC’s stockholders who obtained their COAC stock prior to COAC’s IPO have waived their rights to participate in any liquidation distribution with respect to shares of common stock owned by them immediately prior to the IPO. As a consequence of the provisions of COAC’s certificate of incorporation and such waivers, a liquidating distribution will be made only with respect to the Public Shares and no liquidating distribution will be made with respect to any other shares of COAC capital stock. There will be no distribution from the trust account with respect to COAC’s warrants, which will expire worthless.
COAC expects to have expended all of the net proceeds of the IPO, other than the proceeds deposited in the trust account, in pursuit of its business combination transaction. Accordingly, the per-share liquidation price for the Public Shares as of__________, 2009, the record date for COAC’s special meeting, is approximately $ ____, or $ ____ less than the per-unit offering price of $6.00 in COAC’s IPO. The proceeds deposited in the trust account could, however, become subject to the claims of COAC’s creditors (which could be prior to the claims of the holders of the Public Shares and could include vendors and service providers COAC has engaged to assist it in connection with its search for a target business and that are owed money by it, as well as target businesses themselves) and there is no assurance that the actual per-share liquidation price will not be less than $ ____, due to those claims. If COAC liquidates prior to the consummation of a business combination, Harry Edelson has personally agreed that he will be personally liable to pay debts and obligations to target businesses or vendors or other entities that are owed money by COAC for services rendered or contracted for or products sold to COAC in excess of the net proceeds of COAC’s IPO not held in the trust account. Accordingly, if a claim brought by a target business or vendor or other entity did not exceed the amount of funds available to COAC outside of the trust account or available to be released to COAC from interest earned on the trust account balance, Mr. Edelson would not have any personal obligation to indemnify such claims as they would be paid from such available funds. However, if a claim exceeded such amounts, there is no exception to the obligations of Mr. Edelson to pay such claim. There is no assurance, however, that he would be able to satisfy those obligations. Accordingly, COAC cannot assure you that the per-share distribution from the trust account, if COAC liquidates, will not be less than $____, plus interest, due to claims of creditors.
The holders of COAC’s Public Shares will be entitled to receive funds from the trust account only in the event of COAC’s liquidation or if they seek to convert their shares into cash upon a business combination which the stockholder properly demanded conversion of his Public Shares into cash and which is completed by COAC. In no other circumstances will a stockholder have any right or interest of any kind to or in the trust account.
Under the DGCL, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures set forth in Section 280 of the DGCL intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred
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after the third anniversary of the dissolution. However, as stated above, it is COAC’s intention to make liquidating distributions to its stockholders as soon as reasonably possible after March 20, 2009 and, therefore, COAC does not intend to comply with those procedures. As such, COAC’s stockholders could potentially be liable for any claims to the extent of distributions received by them and any liability of COAC’s stockholders may extend well beyond the third anniversary of such date. Because COAC will not be complying with Section 280, Section 281(b) of the DGCL requires COAC s to adopt a plan that will provide for payment, based on facts known to it at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against it within the subsequent 10 years. Accordingly, COAC would be required to provide for any claims of creditors known to it at that time or those that it believes could be potentially brought against it within the subsequent 10 years prior to it distributing the funds in the trust account to its public stockholders. However, because COAC is a blank check company, rather than an operating company, and its operations have been limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from potential target businesses, many of whom have given COAC agreements waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, or COAC’s vendors (such as accountants, lawyers, investment bankers, etc.). As a result, the claims that could be made against COAC are significantly limited and the likelihood that any claim that would result in any liability extending to the trust is remote. Nevertheless, such agreements may not be enforceable. Accordingly, COAC cannot assure you that third parties will not seek to recover from COAC’s stockholders amounts owed to them by COAC.
Additionally, if COAC is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against it that is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in COAC’s bankruptcy estate and subject to the claims of third parties with priority over the claims of COAC’s stockholders. Also, in any such case, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover all amounts received by COAC’s stockholders. Furthermore, because, in the event of a liquidation, COAC intends to distribute the proceeds held in the trust account to its public stockholders promptly after March 20, 2009, this may be viewed or interpreted as giving preference to COAC’s public stockholders over any potential creditors with respect to access to or distributions from COAC’s assets. In addition, COAC’s board may be viewed as having breached their fiduciary duties to COAC’s creditors and/or may have acted in bad faith, and thereby exposing itself and COAC to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors and/or complying with certain provisions of the DGCL with respect to COAC’s liquidation. COAC cannot assure you that claims will not be brought against it for these reasons. To the extent any bankruptcy or other claims deplete the trust account, COAC cannot assure you it will be able to return to its public stockholders at least $____ per share.
Facilities
COAC maintains executive offices at 300 Tice Boulevard, Woodcliff Lake, New Jersey 07677. An affiliate of Mr. Edelson is providing this space and administrative services to COAC for $7,500 per month.
Employees
COAC has three executive officers and four directors (of whom three are also the executive officers). These individuals are not obligated to contribute any specific number of hours per week and devote only as much time as they deem necessary to COAC’s affairs. COAC does not intend to have any full time employees prior to the consummation of the merger.
Periodic Reporting and Audited Financial Statements
COAC has registered its securities under the Exchange Act and has reporting obligations, including the requirement to file annual and quarterly reports with the SEC. In accordance with the requirements of the Exchange Act, COAC’s annual reports contain financial statements audited and reported on by COAC’s independent accountants. COAC has filed with the SEC its Annual Report on Form 10-KSB covering the fiscal year ended December 31, 2007.
Legal Proceedings
There are no legal proceedings pending against COAC.
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COAC’s Plan of Operation
The following discussion should be read in conjunction with COAC’s financial statements and related notes thereto included elsewhere in this proxy statement/prospectus.
COAC is a blank check company formed on August 7, 2006 to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business that has its principal operations located in the People’s Republic of China.
For the three months ended September 30, 2008, COAC had a net income of $144,136 derived from dividend and interest income of $224,680 offset by $6,384 in travel expenses, $22,500 for management fees, $14,898 for accounting, legal and consulting fees, $9,625 for state franchise taxes, $8,314 for directors and officers insurance, $2,945 for other operating expenses, primarily stock transfer fees and $15,878 in state income taxes.
For the three months ended September 30, 2007, COAC had a net income of $293,704 derived from dividend and interest income of $359,898 and other income of $1,071 offset by $16,905 in travel expenses, $22,500 for management fees, $7,318 for accounting and legal fees, $9,250 for state franchise taxes, $8,310 for directors and officers insurance and $2,982 for other operating expenses, primarily stock transfer fees.
For the nine months ended September 30, 2008, COAC had a net income of $416,034 derived from dividend and interest income of $684,800 offset by $29,362 in travel expenses, $67,500 for management fees, $55,722 for accounting, legal and consulting expenses, $30,400 for state franchise taxes, $24,573 for directors and officers insurance, $15,108 for other operating expenses, primarily trustee and stock transfer fees and 46,101 for state income taxes.
For the nine months ended September 30, 2007, COAC had a net income of $559,723 derived from dividend and interest income of $734,270 and other income of $1,071 offset by $44,731 in travel expenses, $47,903 for management fees, $19,375 for accounting and legal fees, $27,678 for state and local franchise taxes, $16,982 for directors and officers insurance, $16,930 for other operating expenses, primarily trustee and stock transfer fees and $2,019 for state income taxes.
For the period from August 7, 2006 (inception) to September 30, 2008, COAC had a net income of $1,151,311 derived from dividend and interest income of $1,759,020 and $1,071 of other income offset by $89,850 in travel expenses, $137,903 for management fees, $103,337 for accounting, legal and consulting fees, $67,328 for state and local franchise taxes, $49,865 for directors and officers insurance, $1,594 for costs incurred in forming the company, $38,294 for other operating expenses, primarily trustee and stock transfer fees and $120,609 in state income taxes.
For the period from August 7, 2006 (inception) to September 30, 2007, COAC had a net income of $558,129 derived from dividend and interest income of $735,341 offset by $44,731 in travel and entertainment expenses, $47,903 for management fees, $19,375 for accounting and legal fees, $29,697 for state and local franchise taxes, $16,982 for directors and officers insurance, $12,727 for trustee and escrow fees, $1,594 for costs incurred in forming the company and $4,203 for other operating expenses, primarily stock transfer fees.
COAC consummated its initial public offering on March 26, 2007. On March 29, 2007, it consummated the closing of an additional 900,000 units that were subject to the over-allotment option. Gross proceeds from the initial public offering were $41,400,000. COAC paid a total of $2,018,000 in underwriting discounts and commissions (after deferring $414,000), and approximately $452,960 was paid for costs and expenses related to the offering. After deducting the underwriting discounts and commissions and the offering expenses, the total net proceeds to COAC from the offering were approximately $38,929,040, of which $38,357,000 was deposited into the trust fund. In addition, all of the proceeds from the private sale of the warrants, $1,360,000, were deposited into the trust fund, for a total of $39,717,000 held in trust (or approximately $5.76 per share sold in the offering). The remaining proceeds are available to be used by COAC to provide for business, legal and accounting due diligence on prospective acquisitions, tax payments and continuing general and administrative expenses.
COAC believes it will have sufficient available funds outside of the trust fund to operate through March 20, 2009, assuming that a business combination is not consummated during that time. From March 20,
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2007 through March 20, 2009, COAC anticipates approximately $250,000 of expenses for legal, accounting and other third-party expenses attendant to the due diligence investigations, structuring and negotiating of a business combination, $180,000 for the administrative fee payable to Edelson Technology Inc. ($7,500 per month for 24 months), $100,000 of expenses in legal and accounting fees relating to its SEC reporting obligations, $50,000 of expenses for the due diligence and investigation of a target business by its officers, directors, existing stockholders and special advisors and $170,000 for general working capital that will be used for miscellaneous expenses, taxes and reserves, including approximately $50,000 for director and officer liability insurance premiums.
Commencing on March 20, 2007, COAC began incurring a fee from Edelson Technology Inc., an affiliate of Harry Edelson, its chairman of the board and chief executive officer, of $7,500 per month for providing it with office space and certain general and administrative services. Payment of this fee will end upon consummation of the merger with BVICo. Additionally, on August 9, 2006, Harry Edelson advanced an aggregate of $125,000 to COAC for payment of expenses in connection with COAC’s IPO on COAC’s behalf. This loan was repaid following COAC’s IPO from the proceeds of the offering.
Through December 19, 2008, Harry Edelson, COAC’s chairman and chief executive officer, has loaned COAC an aggregate of $200,000 to make payments of expenses COAC has incurred in connection with the consummation of the merger. Such loans are not secured, do not bear interest and will be repayable from funds in COAC’s trust account upon consummation of the merger. If the merger is not consummated and COAC is required to liquidate, such loans will not be repaid.
Off-Balance Sheet Arrangements
As of December 31, 2007, COAC did not have any off-balance sheet arrangements as defined in Item 303 (a)(4)(ii) of Regulation S-K.
Contractual Obligations and Commitments
As of December 31, 2007, COAC had the following contractual obligations and commitments (all amounts in $):
Payment Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less Than 1 Year | 1 – 3 Years | 3 – 5 Years | More Than 5 Years | |||||||||||||||
Administrative services agreement | 109,597 | 90,000 | 19,597 | — | — | |||||||||||||||
Fee due to investment banker on completion of business combination | 414,000 | — | 414,000 | — | — | |||||||||||||||
Total | 523,597 | 90,000 | 433,597 | — | — |
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BUSINESS OF BVICo
Corporate Structure and History
All of BVICo’s business is conducted through Ge Rui. The following chart reflects BVICo’s organizational structure as of the date of this proxy statement/prospectus and after giving effect to the purchase of Ge Rui by HKCo that will occur concurrently with the closing of the merger.
Overview of Business
Ge Rui is one of the leading private manufacturers of cold-rolled specialty steel products in China. It utilizes a variety of processes and technological methodologies to convert steel manufactured by third parties into thin steel sheet and plates. Its product offerings are focused predominantly on high-end, value-added finished steel products.
Ge Rui’s revenue increased from $62.5 million in fiscal year 2005 to $99.0 million in fiscal year 2006 and $139.6 million in fiscal year 2007, representing a compounded growth rate of approximately 49.5%. These significant increases reflect its success in expanding its production lines and its increasing market penetration. Ge Rui plans to broaden its product capacity and mix by introducing new production lines and improve its profit margin by introducing higher valued-added products such as zinc coated or galvanized products. Ge Rui has submitted an application and obtained an approval from the local government for a plan to expand overall capacity from 250,000 metric tons to 500,000 metric tons in the next 12 months and expects that the addition of this new production will help the further growth of revenue in 2009 and beyond.
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Ge Rui sells most of its products to customers who operate primarily in the decoration materials, chemistry, appliances, food and packaging, telecommunications, automobiles and infrastructure and manufacturing industries. Ge Rui’s principal market is the Chinese market, with domestic sales accounting for all of its total revenue in fiscal year 2007. Ge Rui’s products are sold primarily to East and Coastal areas of China, including Guangdong, Jiansu, Shanghai, Shandong, Liaoning, Shaanxi and Sichuan.
The steel industry is a large, cyclical and highly competitive industry whose overall performance is closely tied to the global economy. Historically, steel prices have increased during periods of overall economic growth and decreased during recessionary periods. According to China Steel Industry Statistical Book, 2007 version, China produced 565 million metric tons of steel products.
Growth in the global steel industry has been driven primarily by economic development in the Asia-Pacific region and increased commercial activity in Europe over the last five years. The Asia-Pacific area is the largest steel production region, accounting for approximately 51% of the global market’s steel production value. Europe accounts for approximately 29.6% of the market value.
The growth of the steel market in China has grown in tandem with the growth in overall economic activity in China, but the expansion rate of steel industry is well above the growth rate of the overall Chinese economy. Similar to the global steel market, the rate of growth in the Chinese steel market continues to increase, but at a decreasing rate due to oversupply in certain segments of the marketplace, particularly the low- and middle-grade segments.
Steel products can be categorized as low-end (long products such as pipes, tubes, wires and rods) and high-end (flat products such as hot-rolled steel or cold-rolled steel sheets). Based upon information obtained by Ge Rui, approximately 65% of China’s steel production are low-end long products and approximately 35% are high-end high value cold-rolled steel sheets. Ge Rui operates in the high-end category of this market with its niche precision steel processing and produces and sells high precision cold-rolled steel products.
Notwithstanding the oversupply trend in the low-and middle-grade steel segments, the demand in China for high-end products that utilize steel and steel products as a component, such as the steel products produced by Ge Rui, still exceeds the supply in China. According to China Steel Industry Statistical Book, 2007 version, total domestic consumption of cold-rolled plates amounts to approximately 30 million metric tons. The consumption of the cold-rolled products with width above 1,000mm, which are generally called wide plates, amount to 23.7 million metric tons, whereas the products with width below 1,000 mm and with thinness up to 1.5mm, which are generally called narrow plates, amount to approximately 6.2 million metric tons. Ge Rui’s current products are up to 650mm in width and therefore categorized as narrow plates. The cold-rolled products can also be measured by thinness. Among the narrow plates, products with thinness below 0.3mm are called ultra-thin products, and this is where Ge Rui’s product line resides (BVICo’s current product widths range from 0.05 to 0.25mm). China consumes approximately 2 million metric tons of these ultra-thin steel products annually. Based on Ge Rui’s 2007 volume, Ge Rui supplies approximately 9.35% of the market for ultra-thin cold-steel products in China. In 2006, the Chinese government issued the industrial structure reform directive for controlling low-end production. Ge Rui believes that this directive will have a positive impact on its business.
Like most marketplaces, there are various grades of products within the steel industry. Ge Rui produces high-end steel products, with varying thinness and specifications, using an advanced production technology that meets requirements and specifications of BVICo’s customers.
Continued strong demand led by exports, coupled with domestic demands for automobile parts and components, microelectronics, packing and containers in China’s booming economy, has required and is expected to continue to require increasing quantities of high precision steel products. With the increasing demands for high precision steel products and limited production in China, China’s manufacturers are expected to continue to import millions of tons of cold-rolled steel and sheets from abroad.
Cold-rolled specialty precision steel is a relatively new industry in China and manufacturers of products that use specialty precision steel products have traditionally imported precision steel products from Japan, Korea, the European Union and the United States. Cold-rolled steel products represent hot-rolled de-scaled (pickled) steel coils, which are used as raw materials in the precision steel industry, are processed by cold
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reduction through a cold-rolling mill to the desired thinness. The process does not involve heating and the primary feature of cold reduction is to reduce the thickness of the steel coils. However, because the cold reduction operation induces very high strains (work hardening) into the steel sheet, the precision steel sheet not only becomes thinner, but also becomes much harder, less ductile and very difficult to form. Thus, cold-reduced steel products are annealed (heated to high temperatures) to become soft and formable. Cold rolled sheet products are used in a wide variety of such end applications as appliances (refrigerators, washers, dryers, and other small appliances), automobiles (exposed as well as unexposed parts), electric motors and bathtubs, food and packaging. Cold rolled sheet products are used in these and many other areas of manufacturing.
In addition, China is a large architectural material manufacturer. Given that a significant portion of China’s GDP is driven by fixed asset investment, it is expected that the market for high-end construction steel will grow, which will result in a large consumption of high-end coated steel. Ge Rui has already started the process of expanding its capacity into coated steel products.
Several characteristics about the coated steel markets and production in China are noteworthy:
• | Despite the over-expansion of low and medium-end coated steel production, the high-end coated steel products are under-supplied. Since 2001, although low and medium-end coated steel production capacities have over expanded and the total supply has outstripped demand, high-end coated steel products remain in short supply and rely, in a significant part, on imports. Since high-end coated steel products require advanced technology and capital-intensive equipment, most Chinese manufactures are not technically capable of producing high-end coated steel products. |
• | The coated steel market is highly fragmented. There is no significant market leader in the Chinese coal steel industry. Most manufacturers are small-scale private companies operating with out-of-date equipment and technology. Large state-owned enterprises are the main manufacturers; however, only a few of them can produce high-end coated steel products. |
• | Barriers to entry. Due to the nature of the high-end steel products industry, there are significant barriers to entry for new players. The steel industry is capital-intensive. Companies in this industry must maintain large and advanced pieces of equipment that are used in the manufacturing process and that require considerable initial investment, maintenance and repair expenses. |
Products
Ge Rui’s current products include high precision various cold-rolled steel, with different specifications in terms of width and thinness. Ge Rui’s products are typically up to 650mm in width and between 0.05 – 0.25mm in thinness that are manufactured from steel substrate of cold-rolled or hot-rolled pickled coils. Ge Rui is also capable of manufacturing more extreme specifications based on the needs of its customers. Ge Rui has the flexibility to adjust its production specifications to meet changes in market demand.
Ge Rui’s products are used for producing a large variety of down stream goods in electrical appliance, construction materials, chemical, food and packaging, telecommunications and military products. For example, Ge Rui is the leading producer of the galvanized steel materials with width of 0.15mm for use in the telecommunication fiber wires in China.
Ge Rui’s deliveries of products amounted to approximately 187,000 metric tons in fiscal year 2007, representing increase of 32.6% from previous year. Ge Rui believes that its high precision cold-rolled products has about 9.35% of the domestic market share in the segment.
Facilities
Ge Rui’s manufacturing facilities are located on land and buildings in Zhengzhou, Henan Province, China, that it leases from Zhengzhou No. 2 Iron and Steel Company Limited, a related party. See the section entitled“Certain Relationships and Related Transactions — BVICo Related Transactions” and Note 17 of Notes to Financial Statements of Ge Rui for the nine months ended September 30, 2008. The total land area is approximately 1,194,000 square feet. The facilities have a total area of approximately 264,000 square feet, of which 226,000 square feet is devoted to production facilities, 9,100 square feet is raw material warehouse space, 6,350 square feet is finished product warehouse space and 22,700 square feet is an office building.
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These facilities contain six sets of cold-rolled steel production lines and two acid pickling lines. The present facilities have an annual production capacity of approximately 250,000 metric tons of finished products.
Ge Rui also leases additional land, adjacent to its present facilities, from the Zhengzhou local government (see Note 10 of Notes to Financial Statements of Ge Rui for the nine months ended September 30, 2008) on which it has received permission to construct, and is presently constructing, additional facilities to produce chrome coated, zinc coated and tin coated products. When completed, this facility is expected to add an additional annual capacity of 250,000 metric tons of finished products.
Raw Materials and Suppliers
The principal raw materials used in producing Ge Rui’s products are steel coil. Ge Rui’s raw materials are sourced from various suppliers and it believes that its suppliers are sufficient to meet its present and anticipated future needs. Ge Rui does not depend on any one single supplier for its steel raw materials. Steel coil historically accounted for approximately 90% of Ge Rui’s total production cost.
The prices of steel rolls can be quite competitive, volatile and dependent on supplies and demands. To provide some protection from the pressure and volatility of the market, Ge Rui makes bulk purchases after taking into account customers’ orders on hand whenever steel prices are considered to be lower in the market. As steel rolls have an extremely long shelf-life, obsolescence is not a major concern and Ge Rui may build up its inventory during such periods when prices are low.
When sales orders are executed with the customers, the selling price agreed to is based on the cost of raw material at that date, effectively allowing Ge Rui to pass incremental cost increases in raw materials to its customers.
Customers, Sales and Marketing
Ge Rui’s products can be applied to various industries, including construction decoration materials, electrical household appliances, automobile parts, food and packaging, chemical, telecommunications and others, and Ge Rui’s main customers are the manufacturers operating in those industries. During the last fiscal year, 40% of Ge Rui’s products were sold to food and packaging sector, 30% were sold to the telecom sector, 20% were sold to the decoration materials sector and 10% were sold to the electric appliance sector.
Ge Rui’s high precision steel products are sold directly to the end users in various parts of China and its production is based on confirmed sales orders. Generally, an initial deposit (approximately 30% of the aggregate contracted sales amount) is pre-paid when the contract is signed. Ge Rui’s major customers are located in Shanghai, Zhejiang, Jiangsu, Shandong, Guangdong, Hebei, Tianjin, Guangxi, Fujian, Liaoning, and other provinces. During the last three years, Ge Rui has sold its products to more than 200 customers.
Major customers during 2007:
Customer Name | Quantity Sold (Tons) | % of Total Sales | ||||||
Tianjin Shenyuan Steel Production Group | 30,408 | 17.43 | % | |||||
Jiangsu Wuying Precision Steel Plates Co | 14,169 | 8.12 | % | |||||
Luo Yang Lixin Commerce and Trading Co | 11,308 | 6.48 | % | |||||
Wuxi Changmao Metal Products Co | 11,228 | 6.43 | % | |||||
Jiangyin Kemao Metal Products Co | 7,074 | 4.05 | % |
Ge Rui sells its products mostly in China using its own sales staff. Its sales network covers many provinces and regions, especially in the eastern coastal regions in China. Ge Rui is developing a diversified sales network that allows it to effectively market products and services to its customers. Its sales and marketing department currently consists of approximately 30 employees as of the date of this prospectus.
Ge Rui has also been marketing and promoting its products through the following means:
• | Promotion in industrial journals; |
• | Hosting annual product promotion meeting with current and potential customers, in which it introduces its products and new improvements to the market; |
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• | Attending various exhibitions to improve its name recognition; and |
• | Visiting its customers and collecting information regarding their needs. |
Backlog
Ge Rui typically receives orders from its customers one or two months in advance of production on a rolling basis. On November 30, 2008 Ge Rui had a backlog of approximately $26.5 million, which represented approximately two months of revenues at the time, compared to backlog of approximately $27.6 million on November 30, 2007, which represented approximately three months of revenues for 2007. Ge Rui considers this variance to represent normal fluctuations in receipt of customer orders and does not necessarily represent a fall off in business because of the slowdown in economic activity in late 2008. Given the typical figure of two months of backlog, approximately half of the November 30 backlog would be filled by the end of the current year.
Competition and Ge Rui’s Market Position
Competition within the steel industry, both in China and worldwide, is intense. There are many large state-owned enterprises and smaller private steel companies in China. In addition, Chinese steel makers also face competition from international steel manufacturers.
For high precision cold-rolled products, Ge Rui is not in direct competition with China’s local state-owned steel giants because those companies concentrate on the production of hot rolled de-scaled (pickled) steel coils and steel sheets from iron ore. Steel sheets produced by these large Chinese companies are then supplied as raw materials to high precision steel manufacturers such as Ge Rui for cold reduction processing to the desired thickness. Cold rolled products are then sold to customers in the further down stream manufacturers in industries such as electric alliances, construction, chemical and automobile industries.
Private steel product manufacturers in China generally focus on low-end products. Many of Ge Rui’s competitors are much smaller than Ge Rui and use older equipment and production techniques. In contrast, Ge Rui’s products are aimed at the high-end markets so Ge Rui attempts to manufacture them with superior quality and broader range of specifications. Ge Rui uses advanced manufacturing equipment that it has purchased from developed countries, such as Italy, and employs engineers and researchers who are experienced with different production techniques.
Ge Rui’s business is becoming increasingly competitive and capital intensive, and its competition comes from local Chinese firms and importers. Ge Rui believes that it is one of the largest privately-owned cold-rolled precision steel makers in China, and that its products have superior quality and consistency and can meet various needs of its customers. Ge Rui enjoys a high reputation among its customers and will continue to leverage these strengths in expanding its product mix and services. More of Ge Rui’s products are being placed as replacement for imported.
Ge Rui estimates its current market share in China for high precision cold-rolled thin steel products to be approximately 9.35%, based on the sales volume fiscal year 2007.
Ge Rui also competes with international steel product manufacturers in the global market, such as Posco Steel. As compared to its competitors in Korea and Japan, Ge Rui believes it has lower production costs and can offer more competitive pricing.
Research and Development
Ge Rui believes that the development of new products and new technology is critical to its success. It is continuously working to improve the quality, efficiency and cost-effectiveness of its existing products and develop technology to expand the range of specifications of its products.
Ge Rui has a strong research and development team that has approximately [20] employees devoted to research and development, all of whom have at least a bachelor’s degree. Its research and development staff has developed several production techniques that it believes improved its product quality and reduced its production costs.
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In fiscal years 2007, 2006 and 2005, Ge Rui’s research and development expenses amounted to about $4.04 million, $2.66 million and $1.81 million, respectively. These expenses were mainly composed of staff costs, equipment purchases and other research and development-related expenses.
Intellectual Property
All of Ge Rui’s products are sold with the trademark of , which is widely accepted by its customers. In addition, Ge Rui has registered thewww.henangr.com andwww.hngerui.com.cn domain names.
All Ge Rui’s key employees, especially engineers, have signed confidentiality and non-competition agreements with us. In addition, all Ge Rui employees are obligated to protect its confidential information. Where appropriate for its business strategy, Ge Rui will continue to take steps to protect its intellectual property rights.
Employees
Ge Rui currently employs approximately 588 full-time employees of whom approximately 500 are production workers, 30 are sales staff, 31 are management, administrative and general office staff, 8 are security guards and 19 are laborers. Approximately 20% of its employees hold at least a bachelors degree. Ge Rui believes that it maintains a satisfactory working relationship with its employees and it has not experienced any significant labor disputes or any difficulty in recruiting staff for its operations.
As required by applicable Chinese law, Ge Rui has entered into employment contracts with all of its officers, managers and employees. It is required by Chinese law to make several mandatory contributions for its employees, including social pension, medical insurance, unemployment insurance, work-related injury insurance and maternity insurance. As of the date of this proxy statement/prospectus, Ge Rui is in compliance with the applicable PRC employee law and regulations and has made the contributions required by the applicable laws.
Executive Compensation
During the past three years, Ge Rui’s senior managers received base salary and other cash awards, but there were no stock or option incentive plan awards. Some of the senior managers were also Ge Rui’s shareholders. The following table details the cash compensation paid to such individuals (all amounts are in U.S. dollars):
2005 | 2006 | 2007 | 2008 First Half | |||||||||||||
Chairman | 84,899 | 107,064 | 127,145 | 64,762 | ||||||||||||
General Manager | 64,875 | 71,236 | 70,327 | 36,405 | ||||||||||||
Chief Engineer | 63,635 | 70,366 | 70,567 | 36,570 | ||||||||||||
Deputy General Manager | 43,482 | 70,363 | 70,397 | 36,565 | ||||||||||||
Deputy General Manager | 64,003 | 69,651 | 70,370 | 36,442 |
Regulation
Ge Rui is subject to numerous provincial and local laws and regulations, which may be changed from time to time in response to economic or political conditions and have a significant impact upon overall operations. Changes in these regulations could require Ge Rui to expend significant resources to comply with new laws or regulations or changes to current requirements and could have a material adverse effect on it.
Included among these laws and regulations are numerous central and local laws and regulations relating to the protection of the environment. These laws continue to evolve and are becoming increasingly stringent. The ultimate impact of complying with such laws and regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision. The State Environmental Protection Administration Bureau is responsible for the supervision of environmental protection in, implementation of national standards for environmental quality and discharge of pollutants for and supervision of the environmental management system of the PRC. Environmental protection bureaus at the county level or above are responsible for environmental protection within their jurisdictions.
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The laws and regulations on environmental protection require each company to prepare environmental impact statements for a construction project to the environmental protection bureaus at the county level. These must be prepared prior to when the construction, expansion or modification commences.
The Environment Protection Law requires production facilities that may cause pollution or produce other toxic materials to take steps to protect the environment and establish an environmental protection and management system. The system includes the adopting of effective measures to prevent and control exhaust gas, sewage, waste residues, dust and other waste materials. Entities discharging pollutants must register with the relevant environmental protection authorities.
Penalties for breaching the Environmental Protection Law include a warning, payment of a penalty calculated on the damage incurred, or payment of a fine. When an entity has failed to adopt preventive measures or control facilities that meet the requirements of environmental protection standards, it may be liable to suspension of its production or operations and for payment of a fine. Material violations of environmental laws and regulations causing property damage or casualties may be subject to criminal liabilities. Ge Rui believes that its current production and operating activities are in compliance with the environmental protection requirements of the PRC. Ge Rui has not been penalized as a result of any breach of the laws and regulations on environmental protection.
Litigation
From time to time, Ge Rui may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Ge Rui is currently not aware of any such legal proceedings or claims that it believes will have a material adverse affect on its business, financial condition or operating results.
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BVICo’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the financial statements and accompanying notes of Ge Rui appearing elsewhere in this proxy statement/prospectus.
Overview
GeRui is one of the leading private manufacturers of high precision cold-rolled specialty steel products in China. BVICo utilizes a variety of processes and technological methodologies to convert steel manufactured by third parties into thin steel sheet and plates. Ge Rui’s product offerings are focused predominantly on high-end, value-added finished steel products.
Ge Rui’s revenue increased from $62.5 million in fiscal year 2005 to $99.0 million in fiscal year 2006 and $139.6 million in fiscal year 2007, representing a compounded growth rate of approximately 49%. These significant increases reflect Ge Rui’s success in expanding its production lines and its increased market penetration.
Ge Rui plans to broaden its product capacity and mix by introducing new production lines and improve its profit margin by introducing higher valued-added products, such as zinc coated or galvanizing products. It plans to expand overall capacity from 250,000 metric tons to 500,000 metric tons in the next 12 months. It expects that the addition of this new production will help the further growth of revenue in 2009 and beyond. Ge Rui’s current market share in the segment is 9.35%, based on production volume in 2007.
Factors that are Relevant to Ge Rui’s Business
Growth in the Chinese Economy. Because of the steady increase in the size of the economy and disposable income, China is expected to experience continued growth in all areas of investment and consumption, even in the face of a potential global recession. However, China, like virtually every other country in the world, is experiencing a slowing of the rate of its growth, which is expected to continue at least into 2009.
Demand for High-End Precision Cold-Rolled Steel. There is an increasing shortage of high-end thin steel sheets and galvanized steel products in China. Since there are currently only limited producers of high-end thin steel sheet in China, Ge Rui expects that the shortage of supply in this steel market will continue. In addition, due to the continuing improvement of the standard of living in China, the demand for electrical household appliances and upscale architectural materials has soared in recent years. This provides support for continued strong demand for high-end steel products that Ge Rui produces.
Inventory Valuation: The recent price reductions in cold rolled steel, which is used as raw material, reduces the cost of sales. This cost saving is eventually passed onto the customer by lowering the respective selling price of the finished product.
Apart from the above, the price drop can also affect the raw material inventory at December 31, 2008. The year end raw material inventory balance will be valued at lower of actual cost or market value. Ge Rui expects no material effect from application of the valuation since we do not carry material amounts of inventory that are not already contracted to customers at a stipulated price.
There is no effect on inventory valuation from prepayments to our suppliers because the prepayment is an advance to supplier for securing the booking quantity. Gross purchase price is not predetermined and is only fixed at current market price upon full order confirmation and confirmation of physical delivery.
Recent Economic Events: Despite the recent global economic crises, Ge Rui is operating near capacity in October, November and December of 2008. As a whole, Ge Rui will be able to achieve the expected operational result for 2008. While sales prices for raw steel materials declined in China during the 4th quarter of 2008, this did not materially affect Ge Rui’s gross margins, which were stable during the quarter. Ge Rui experienced a symmetric drop in its raw materials costs, offsetting the sales price reductions.
Ge Rui believes that the demand for its products will remain strong. Ge Rui customarily carries a rolling order backlog of two months. Although some uncertainty can be expected in demand for 2009, given the general slow down in China’s economy, Ge Rui’s customers have given no indication of a reduction in orders
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through the first quarter of 2009. Ge Rui believes that its products are of high quality, competitive compared to many other similar producers and will continue to command robust customer orders in the coming year.
Supporting this forward view, the PRC government has issuedCentral Government Policy On Stimulating Domestic Consumption To Counter The Damage Result From Export Business Of The Country. Under this policy, Central Government is putting up approximately US$ 580 billion to stimulate domestic consumption. Under this policy, companies that are either directly or indirectly related to construction, building material, electrical household appliances and telecommunication will benefit.
An executive order has been announced that Central Government will improve the living standard in the Country’s rural area by subsidizing purchase of any electric household appliance for every household in the rural area. In addition, the Policy also indicates a strong determination to improve telecommunication in all rural areas. Ge Rui believes that it will benefit through order growth from such economic stimulus plans.
Ge Rui’s 2009 results will be further supported by the expected sales of Ge Rui’s new product, zinc coated steel sheets and chrome coated steel sheets. In August 2008, Ge Rui speeded up its expansion plan by installing a zinc coated processing line producing zinc coated steel products. The zinc coated processing is a higher value added manufacturing process resulting in higher selling price and higher profit margin. The zinc coated steel products are now in trial production and it is expected that normal manufacturing of zinc coated steel products will begin in the first quarter of 2009.
As a result of the merger with COAC, Ge Rui will speed up its expansion plan by also introducing chrome plated steel products and tin plated steel products, while at the same gradually increasing the current fabricating capacity to 500,000 tons per year.
Ge Rui believes these events and strategic decisions will collectively drive sales growth in future operating periods and effectively counter currently measurable and known impacts on the Chinese economy.
Ge Rui also expects that its 2009 results will be further supported by expected sales of new products, particularly zinc coated and chrome coated steel sheets. In August 2008, Ge Rui accelerated its expansion plan by installing a zinc coating processing line. Zinc coated steel sheets are higher value-added products that have higher selling prices and higher profit margins than non-coated products. The zinc coated steel products are now in trial production and it is expected that quantity manufacturing will start in the beginning of 2009. Ge Rui also plans to introduce chrome coated and tin coated steel products in the near future, while at the same time gradually increasing its current fabricating capacity to 500,000 metric tons per year, from the current 250,000 metric tons capacity.
Cyclicality. The steel industry is highly cyclical and affected significantly by general economic conditions and other factors, such as worldwide production capacity, fluctuations in imports and exports, fluctuations in metal purchase prices and tariffs. Recently, the global steel markets have been experiencing larger and more pronounced cyclical fluctuations, primarily driven by the expected slower global economic growth and the increase in Chinese production and consumption. This trend, combined with the upward pressure on costs of key inputs, mainly metals and energy, as well as transportation costs and logistics, presents increasing uncertainty and challenge for steel producers on a worldwide basis.
However, processed steel demand and prices for the precision products manufactured by Ge Rui are driven by and sensitive to other factors. Substantially all of its customers are domestic customers in the Peoples Republic of China. Its products are utilized in products for domestic consumption. The key drivers for maintaining a competitive position and positive financial performance in this challenging environment continue to be product differentiation, customer service and cost reductions through improved efficiencies and economies of scale.
Raw Materials Prices. The market for cold-rolled steel, which is the principal raw material used by Ge Rui, is sensitive to the types of price pressures described above for the commodity steel industry generally. In recent months, because of the general slowdown in economic activity experienced in China and the rest of the world, prices for this material have declined. Consequently, Ge Rui’s cost of sales has also declined. However, the savings are passed on to Ge Rui’s customers who place new orders by a lowering of the prices for its
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finished products. While Ge Rui frequently makes prepayments to its suppliers to assure itself of the production capacity, the price for the order is not established until the order and physical delivery are confirmed, at which time the price is confirmed at the then-current market price. Ge Rui carries its inventory on its books of account at cost. Any adjustment required to value inventory at the lower of cost or market is made at the fiscal year-end and not at interim periods. Because of the relatively short periods during which inventory is kept on hand, Ge Rui does not believe that differences between cost and market are material. No raw materials other than cold-rolled steel are significantly used in Ge Rui’s manufacturing processes.
Consolidation in the Steel Industry. There has been significant consolidation in the global steel industry and consolidation is also taking place in China. The government of China has publicly stated that it expects consolidation of the Chinese steel industry and the top several producers in China to account for the majority of national production. Cross border consolidation has also occurred with the aim of achieving greater efficiency and economies of scale, particularly in response to the effective consolidation undertaken by raw material suppliers and consumers of steel products.
Notwithstanding the general trend towards consolidation in the industry, China’s specialty steel sector in which the Company operates is dominated by privately-owned enterprises and is still highly fragmented. This presents an opportunity for companies like Ge Rui to grow rapidly both through internal expansion and acquisitions to develop into an industry leader.
Revenue
Ge Rui’s revenue was mainly generated from sales of its cold-rolled thin steel products. Its gross revenue has historically been affected by growth in sales volumes, sales price cycles of its products and its ability to improve its product mix with inventory undergoing sustained demand expansion within China.
Cost of Revenue
Cost of revenue includes Ge Rui’s direct costs of manufacturing, including the cost of steel raw materials, labor and overhead.
Gross Profit and Gross Margin
For the nine months ended September 30, 2008 and for the full fiscal year 2007, Ge Rui’s gross margin was 28.0%. Between fiscal years 2005 and 2007, Ge Rui was able to maintain gross margins between approximately 21.8% and 28.0%. Ge Rui’s Direct costs of manufacturing are generally high when Ge Rui first introduces a new product due to higher start-up costs and higher raw material consumption rate. As production volumes increase, Ge Rui typically improves its manufacturing efficiency and is able to strengthen its purchasing power by buying raw materials in greater quantities.
Changes in Ge Rui’s gross margin are primarily driven by changes in its product mix and other strategic operating decisions. Its high-end, value-added products generally tend to have higher profit margin and Ge Rui has moved to emphasize these products in its mix. Further, general economic conditions and Ge Rui’s response to them, cost of raw materials as well as supply and demand of steel finishing fabrication products within Ge Rui’s markets influence sales prices.
To gain market penetration, Ge Rui prices its products at levels that it believes are competitive compared to imported products. Through its continuous efforts to improve manufacturing efficiency and reduce production costs, it believes that it is able to offer products of comparable quality to its Chinese state-owned competitors and international competitors at more competitive prices. General economic conditions, cost of raw materials as well as supply and demand of steel finishing fabrication products within Ge Rui’s markets influence sales prices. Its high-end, value-added products generally tend to have higher profit margin.
Operating Expenses
Selling Expenses. Selling expenses consist primarily of compensation and benefits to Ge Rui’s sales and marketing staff, sales commission, cost of advertising, promotion, business travel, after-sale support, transportation costs and other sales related costs.
General and Administrative Expenses. General and administrative expenses consist primarily of compensation and benefits to Ge Rui’s general management, finance and administrative staff, professional advisor
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fees, bad debts reserve and other expenses incurred in connection with general operations. Ge Rui expects its general and administrative expenses will increase proportionately as its business grows and it incurs increased costs as a public company.
Provision for Income Taxes
United States. No provision for income taxes in the United States has been made as Ge Rui has had no United States taxable income up to now.
BVI. BVICo was incorporated in the British Virgin Islands (“BVI”) and, under the current laws of the BVI, is not subject to income taxes.
PRC. Foreign Invested Entities, or FIE, established in the PRC are generally subject to an enterprise income tax, or EIT, at a rate of 33%, which includes a 30.0% state income tax and a 3.0% local income tax. On March 16, 2007, the National People’s Congress of China passed the new Enterprise Income Tax Law, or EIT Law, and on November 28, 2007, the State Council of China passed the Implementing Rules for the EIT Law, or Implementing Rules, which took effect on January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the EIT, and its associated preferential tax treatments, beginning January 1, 2008.
Results of Operations
The following tables set forth key components of Ge Rui’s results of operations for the periods indicated, both in thousands (000s) of dollars and as a percentage of its revenues:
HENAN GREEN COMPLEX MATERIALS CO., LTD
STATEMENTS OF INCOME (UNAUDITED)
For the Periods Ended September 30, 2008 and 2007
(000’s of USD)
For the Nine Months Ended September 30, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
USD | % of Revenue | USD | % of Revenue | |||||||||||||
Revenue | $ | 156,860 | 100.0 | % | $ | 106,517 | 100.0 | % | ||||||||
Cost of revenue | (112,999 | ) | -72.0 | % | (76,713 | ) | -72.0 | % | ||||||||
Gross profit | 43,861 | 28.0 | % | 29,804 | 28.0 | % | ||||||||||
General and administrative expenses | (2,374 | ) | -1.5 | % | (2,038 | ) | -1.9 | % | ||||||||
Selling and marketing expenses | (581 | ) | -0.4 | % | (398 | ) | -0.4 | % | ||||||||
Operating income | 40,906 | 26.1 | % | 27,368 | 25.7 | % | ||||||||||
Other income and (expense) | ||||||||||||||||
Interest income | 1,078 | 0.7 | % | 1,236 | 1.2 | % | ||||||||||
Interest expenses | (2,970 | ) | -1.9 | % | (1,559 | ) | -1.5 | % | ||||||||
Sundry income | 85 | 0.1 | % | 1 | ||||||||||||
Income before income taxes | 39,099 | 24.9 | % | 27,046 | 25.4 | % | ||||||||||
Income tax expense | (9,668 | ) | -6.2 | % | (8,863 | ) | -8.3 | % | ||||||||
Net income | $ | 29,431 | 18.8 | % | $ | 18,183 | 17.1 | % |
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HENAN GREEN COMPLEX MATERIALS CO., LTD
STATEMENTS OF INCOME
For the Years Ended December 31, 2007, 2006 and 2005
2007 | 2006 | 2005 | ||||||||||||||||||||||
USD | % of Revenue | USD | % of Revenue | USD | % of Revenue | |||||||||||||||||||
Revenue | $ | 139,649 | 100.0 | % | $ | 99,017 | 100.0 | % | $ | 62,520 | 100 | % | ||||||||||||
Cost of revenue | (100,577 | ) | -72.0 | % | (72,654 | ) | -73.4 | % | (48,865 | ) | -78.2 | % | ||||||||||||
Gross profit | 39,072 | 28.0 | % | 26,363 | 26.6 | % | 13,655 | 21.8 | % | |||||||||||||||
General and administrative expenses | (2,767 | ) | -2.0 | % | (1,999 | ) | -2.0 | % | (1,556 | ) | -2.5 | % | ||||||||||||
Selling and marketing expenses | (534 | ) | -0.4 | % | (471 | ) | -0.5 | % | (374 | ) | -0.6 | % | ||||||||||||
Operating income | 35,771 | 25.6 | % | 23,893 | 24.1 | % | 11,725 | 18.7 | % | |||||||||||||||
Other income and (expense) | ||||||||||||||||||||||||
Interest income | 1,432 | 1.0 | % | 1,068 | 1.1 | % | 870 | 1.4 | % | |||||||||||||||
Interest expenses | (2,147 | ) | -1.5 | % | (1,312 | ) | -1.3 | % | (1,030 | ) | -1.6 | % | ||||||||||||
Sundry income | 16 | 0.0 | % | — | 3 | 0.0 | % | |||||||||||||||||
Income before income taxes | 35,072 | 25.1 | % | 23,649 | 23.9 | % | 11,568 | 18.5 | % | |||||||||||||||
Income tax expense | (11,422 | ) | -8.2 | % | (7,770 | ) | -7.8 | % | (3,780 | ) | -6.0 | % | ||||||||||||
Net income | $ | 23,650 | 16.9 | % | $ | 15,879 | 16.0 | % | $ | 7,788 | 12.5 | % |
See accompanying notes to the financial statements.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Revenue. Ge Rui’s revenue increased $50.3 million, or 47.3% to $156.9 million for the nine months ended September 30, 2008 from $106.5 million for the same period in 2007. Approximately 13% of this increase was attributable to volumes of its steel products and 59% was from increases of the sales price per ton during 2008 as compared to the same period in 2007. Average sales price for the nine months ended September 30, 2008 was Rmb7160 per ton, compared to Rmb5673 per son for the same period in 2007, and this increase in unit price reflected continued strong market demand of the thin cold-rolled products made by Ge Rui. See the supporting disclosure above underRecent Economic Events and Demand for high-end precision cold-rolled steel for an expanded discussion of known trends affecting Ge Rui’s revenue growth. The remaining 28% of the revenue increase for the period resulted from beneficial foreign exchange rate effects in translating results from RMB to US dollars.
Cost of Revenue. Ge Rui’s cost of revenue increased $36.3 million, or 47.3% to $113.0 million for the nine months ended September 30, 2008 from $76.7 million for the same period in 2007. Approximately 13% of this increase was due to increased production volume, and 59% was from increased cost for steel raw materials in 2008. The average cost for our cost of sales was Rmb5282 per ton for the nine months ended September 30, 2008, compared to Rmb4228 per ton for the same period in 2007. The increase in the cost of steel materials reflected the general market supply and demand condition for the relevant periods. As a percentage of revenue, the cost of revenue remained level at 72.0% for both nine month periods. As with revenue, the remaining 28% of the increase resulted from the effects of foreign exchange in translating results from RMB to US Dollars.
Gross Profit. Ge Rui’s gross profit increased $14.0 million to $43.9 million for the nine months ended September 30, 2008 from $29.8 million for the same period in 2007. Gross profit as a percentage of revenue (gross margin) was 28.0% in both periods and reflects a product mix change from rolled carbon steel to coated products with higher margins. We refer to our discussion ofGross Profit and Gross Margin andRecent Economic Events above for a discussion of the factors and trends affecting gross profit on a period to period basis.
General and Administrative Expenses. Ge Rui’s general and administrative expenses increased $336.0 thousand to approximately $2.4 million for the nine months ended September 30, 2008 from approximately $2.0 million for the same period in 2007. As a percentage of revenue, general and administrative expenses
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were 1.5% compared to 1.9% for the nine months ended September 30, 2007. The dollar increase was mainly attributable to the increase in staff salaries and other expenses such as financial advisory and audit fees.
Selling Expenses. Ge Rui’s selling expenses increased approximately $183.0 thousand to approximately $581.0 thousand for the nine months ended September 30, 2008 from approximately $398.0 thousand for the same period in 2007. As a percentage of revenue, selling expenses in both periods were 0.4%. The dollar increase was mainly related to the increased sales revenue and volume.
Interest and Other Income. Ge Rui’s other income was mainly interest income generated from the restricted cash balance and decreased approximately $159.0 to approximately $1,078 thousand for the nine months ended September 30, 2008 from approximately $1,236 thousand for the same period in 2007. Such decrease was mainly due to reductions in the restricted cash balance during the period.
Interest Expense. Ge Rui’s interest expense is primarily interest expense on notes payable and short term loans related to the daily operations of its business. Interest expense for the nine months ended September 30, 2008 of approximately $2,970 thousand increased approximately $1,411.0 thousand or 90.5% from interest expense of approximately $1,559.0 thousand for the same period in 2007. During 2008 the interest rate level in China was higher, and Ge Rui had a higher average balance of short-term loans during the nine months ended September 30, 2008, compared to the same period in 2007 to service the related growth in its operations.
Provision for Income Taxes. Ge Rui incurred income tax expense of approximately $9.7 million and approximately $8.9 million during the nine months ended September 30, 2008 and 2007, respectively.
Net Income. Net income increased approximately $11.2 million, or 61.9%, to approximately $29.4 million for the nine months ended September 30, 2008 from approximately $18.2 million for the same period in 2007, as a result of the factors described above. The net income margins were 18.8% and 17.1% for the nine months ended September 30, 2008 and 2007, respectively.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenue. Ge Rui’s revenue increased $40.6 million, or 41.0% to $139.6 million in fiscal year 2007 from $99.0 million in fiscal year 2006. Approximately 71% of this increase was attributable to the growth in sales volume during the periods. Ge Rui sold approximately 187,023 tons of steel products in 2007, compared to 139,985 tons in 2006, and such increase reflected the robust demand in China for the cold-rolled products produced by the company for 2007 compared to 2006. See the supporting disclosure above underDemand for high-end precision cold-rolled steel for an expanded discussion of trends affecting Ge Rui’s revenue growth. The remaining 29% of the increase was attributable to modest price growth (13%) and effects of foreign exchange translation (16%).
Cost of Revenue. Ge Rui’s cost of revenue increased approximately $27.9 million, or 38.4% to approximately $100.6 million in fiscal year 2007 from approximately $72.7 million in fiscal year 2006. Approximately 76% of this dollar increase was due to increased production and sales volume. The remaining 24% of the increase was attributable to small raw steel cost growth (7%), which remained relatively stable during both periods and foreign exchange (16%).
As a percentage of revenue, the cost of revenue decreased to 72.0% in fiscal year 2007 from 73.4% in fiscal year 2006. Ge Rui benefited from a transition in its product mix from rolled carbon steel to coated products with higher margins. We refer to our discussion ofGross Profit and Gross Margin andRecent Economic Events above for a discussion of the factors and trends affecting cost of revenue on a period to period basis.
Gross Profit. Ge Rui’s gross profit increased approximately $12.7 million to approximately $39.1 million in fiscal year 2007 from approximately $26.4 million in fiscal year 2006. Gross profit as a percentage of revenue (gross margin) was 28.0% in fiscal year 2007, as compared to 26.6% in fiscal year 2006. See the supporting discussion of cost of revenue for the period.
General and Administrative Expenses. Ge Rui’s general and administrative expenses increased $0.8 million to $2.8 million in fiscal year 2007 from $2.0 million in fiscal year 2006. As a percentage of revenue,
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general and administrative expenses at 2.0% of revenue in fiscal year 2007 was unchanged from 2.0% in fiscal year 2006. The dollar increase was mainly attributable to the increase in number of workers and related salary, benefits and other costs.
Selling Expenses. Ge Rui’s selling expenses increased $63,762 to $534,468 in fiscal year 2007 from $470,706 in fiscal year 2006. As a percentage of revenue, its selling expenses was 0.4% in fiscal year 2007 and 0.5% in fiscal year 2006. Such increase reflected the increased salary, benefits, travel, and other related costs in 2007, which corresponded with the company’s growth in sales and operations.
Other Income. Ge Rui’s other income, mainly interest income, increased $379,739 to $1,448,184 in fiscal year 2007 from $1,068,446 in fiscal year 2006. The increase was mainly due to the increase in the balance of the restricted cash.
Interest Expense. Ge Rui’s interest expense is primarily interest expense on notes payable and short term loans. Interest expense in 2007 of $2,147,451 increased $835,195 or 63.5% from interest expense of $1,312,256 in 2006. The general interest level in China was higher compared to that of 2006, and Ge Rui had higher average balance in short-term loans during 2007 as a result of the growth in its operations.
Provision for Income Taxes. Ge Rui incurred income tax expense of $11.4 million and $7.8 million in fiscal years 2007 and 2006, respectively.
Net Income. Net income, increased approximately $7.8 million, or 49.0%, to approximately $23.7 million in fiscal year 2007 from approximately $15.9 million in fiscal year 2006, as a result of the factors described above. The net income margins were 16.9% and 16.0% for fiscal year ended December 31, 2007 and fiscal year ended December 31, 2006, respectively.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Revenue. Revenue increased approximately $36.5 million, or 58.4% to approximately $99.0 million in fiscal year 2006 from approximately $62.5 million in fiscal year 2005. Approximately 73% of this increase was attributable to the increased market demand for Ge Rui’s steel products which resulted in increased sales volume. Sales price growth was responsible for approximately 20%, while foreign exchange impact was 7%. The increase in sales volume and unit price reflected continued strong demand for the cold-rolled products in China, supported by the robust GDP growth in China during the periods. See the supporting disclosure above underDemand for high-end precision cold-rolled steel for an expanded discussion of trends affecting Ge Rui’s revenue growth.
Cost of Revenue. Ge Rui’s cost of revenue increased approximately $23.8 million to approximately $72.7 million in fiscal year 2006 from approximately $48.9 million in fiscal year 2005. Approximately 88% of the increase in cost of sales was due to growth in the sales volume in 2006. The remaining 12% of the increase was attributable to small raw steel cost growth (4%), which remained relatively stable during both periods and foreign exchange effects (8%).
As a percentage of revenue, the cost of revenue decreased to 73.4% in fiscal year 2006 from 78.2% in fiscal year 2005. Ge Rui benefited from scaling production and beginning a transition in its product mix from rolled carbon steel to coated products with higher margins. We refer to our discussion ofGross Profit and Gross Margin andRecent Economic Events above for a discussion of the factors and trends affecting cost of revenue on a period to period basis.
Gross Profit. Ge Rui’s gross profit increased approximately $12.7 million, or 93.1% to $26.4 million in fiscal year 2006 from approximately $13.7 million in fiscal year 2005. Gross margin increased to 26.7% in fiscal year 2006, as compared to 21.8% in fiscal year 2005. Such increase was due to the increased sales volume and resulting operating efficiencies. See supporting discussion of cost of revenue for the period.
General and Administrative Expenses. Ge Rui’s general and administrative expenses increased $442,536, or 28.4%, to $2.0 million in fiscal year 2006 from $1.6 million in fiscal year 2005. As a percentage of revenue, the general and administrative expenses decreased to 2.0% in fiscal year 2006 from 2.5% in fiscal year 2005. This percentage decrease was primarily attributable to increased sales volumes and more efficient controls of its general and administrative expenses.
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Selling Expenses. Ge Rui’s selling expenses increased $97,047 to $470,706 in fiscal year 2006 from $373,659 in fiscal year 2005. As a percentage of revenue, its selling expenses decreased to 0.48% in fiscal year 2006 from 0.6% in fiscal year 2005. This increase in selling expenses was primarily attributable to the increase of its business activities.
Other Income. Ge Rui’s other income, mainly interest income, increased $195,172 to $1,068,446 in fiscal year 2006 from $873,274 in fiscal year 2005. As a percentage of revenue, the other income decreased to 1.1% for fiscal year 2006 from 1.4% for fiscal year 2005.
Interest Expense. Ge Rui’s interest expense is primarily interest expense on notes payable and short term loans. Interest expense in 2006 of $1,312,256 increased $281,733 or 27% from interest expense of $1,030,523 in 2005. The average balance of short-term loans during 2006 was higher than that of 2005.
Provision for Income Taxes. Ge Rui incurred income taxes of $7.8 million and $3.8 million in fiscal year 2006 and 2005, respectively.
Net Income. Net income increased $8.1 million, or 103.9%, to $15.9 million in fiscal year 2006 from $7.8 million in fiscal year 2005, as a result of the factors described above. The net income margins were 16.0% and 12.5% for fiscal year ended December 31, 2006 and fiscal year ended December 31, 2005, respectively.
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Liquidity and Capital Resources
As of September 30, 2008, Ge Rui had cash and cash equivalents (excluding restricted cash) of approximately $25.1 million and restricted cash of approximately $27.1 million. The following Statements of Cash Flows provide detailed information about BVICo’s net cash flow for all financial statement periods presented in this proxy statement/prospectus:
For the Nine Months Ended September 30, | ||||||||
2008 USD | 2007 USD | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 29,431,507 | $ | 18,183,329 | ||||
Adjustments to reconcile net income to net cash provided by/ (used in) operating activities | ||||||||
Depreciation of property, plant and equipment | 1,789,691 | 1,592,419 | ||||||
Amortization of land use right | 22,595 | 20,580 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (7,870,047 | ) | (7,052,630 | ) | ||||
Inventories | 3,325,195 | 1,579,663 | ||||||
Prepayments | (21,583,694 | ) | (1,867,985 | ) | ||||
Other receivables | (596,534 | ) | (402,861 | ) | ||||
Accounts payable | 7,487,323 | 3,263,605 | ||||||
Dividend payable | — | 8,644,076 | ||||||
Tax payable | (1,466,924 | ) | 1,262,787 | |||||
Receipts in advance | 10,183,220 | 2,920,820 | ||||||
Accrued liabilities and other payables | 4,688,223 | (41,987 | ) | |||||
Net cash provided by operating activities | 25,410,555 | 28,101,816 | ||||||
Cash flows from investing activities: | ||||||||
Capital expenditures on addition of property, plant and equipment | (2,633,788 | ) | (1,356,617 | ) | ||||
Dividend paid | (42,181,331 | ) | (16,134,445 | ) | ||||
Change in restricted cash | (7,874,332 | ) | (7,393,675 | ) | ||||
Due from owners | 25,126,394 | (737,842 | ) | |||||
Net cash used in investing activities | (27,593,057 | ) | (25,622,579 | ) | ||||
Cash flows from financing activities: | ||||||||
Repayment of short term loans | (21,037,242 | ) | (5,290,367 | ) | ||||
Short term loans raised | 29,057,865 | 8,657,375 | ||||||
Due to owner(s) | 6,458,401 | 230,706 | ||||||
Land use right | (125,467 | ) | (309,076 | ) | ||||
Proceeds from notes payable | 11,036,497 | 5,604,855 | ||||||
Net cash provided by financing activities | 25,390,054 | 8,893,493 | ||||||
Net increase in cash | 23,207,552 | 11,372,730 | ||||||
Effect on change of exchange rates | 1,706,471 | 609,350 | ||||||
Cash as of January 1 | 218,352 | 804,160 | ||||||
Cash as of September 30 | $ | 25,132,375 | $ | 12,786,240 | ||||
See accompanying notes to the financial statements. | ||||||||
Supplemental disclosures of cashflow and non-cash information: | ||||||||
Interest paid | 2,969,819 | 1,559,355 | ||||||
Income tax paid | 11,284,502 | 7,694,624 |
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HENAN GREEN COMPLEX MATERIALS CO., LTD
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2007, 2006 and 2005
2007 USD | 2006 USD | 2005 USD | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 23,650,134 | $ | 15,879,052 | $ | 7,787,740 | ||||||
Adjustments to reconcile net income to net cash (used in)/provided by operating activities: | ||||||||||||
Depreciation of property, plant and equipment | 2,156,130 | 1,815,676 | 1,362,074 | |||||||||
Amortization of land use right | 27,641 | 26,388 | 38,496 | |||||||||
Gain on disposal of property, plant and equipment | (16,133 | ) | — | — | ||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivable | (4,400,574 | ) | (4,933,521 | ) | 2,622,380 | |||||||
Inventories | (149,620 | ) | (2,228,217 | ) | 372,659 | |||||||
Prepayments | (2,482,968 | ) | (450,784 | ) | (2,785,831 | ) | ||||||
Other receivables | (478,874 | ) | 129,314 | 1,414,031 | ||||||||
Accounts payable | (76,729 | ) | (673,911 | ) | 4,859,246 | |||||||
Tax payable | 648,030 | 979,876 | 494,572 | |||||||||
Receipts in advance | 3,146,217 | 2,298,352 | (3,233,384 | ) | ||||||||
Accrued liabilities and other payables | (517,004 | ) | 4,562,754 | (6,217,491 | ) | |||||||
Net cash provided by operating activities | 21,506,250 | 17,404,979 | 6,714,492 | |||||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures on addition of property, plant and equipment | (2,277,378 | ) | (4,083,230 | ) | (7,698,432 | ) | ||||||
Dividend paid | (16,134,445 | ) | (7,464,078 | ) | (3,624,720 | ) | ||||||
Change in restricted cash | 8,335,884 | 21,260,491 | (31,959,518 | ) | ||||||||
Due from owners | (7,203,669 | ) | (11,209,137 | ) | (108,139 | ) | ||||||
Net cash used in investing activities | (17,279,608 | ) | (1,495,954 | ) | (43,390,809 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Repayment of short term loans | (5,887,615 | ) | (4,404,828 | ) | (25,302,223 | ) | ||||||
Short term loans raised | 15,093,356 | 10,584,179 | 24,819,707 | |||||||||
Notes payable | (15,006,853 | ) | (22,009,057 | ) | 38,178,265 | |||||||
Land use right payable | (304,465 | ) | (59,226 | ) | (1,536,365 | ) | ||||||
Due to owners | (60,683 | ) | (90,047 | ) | 121,286 | |||||||
Net cash (used in)/provided by financing activities | (6,166,260 | ) | (15,978,979 | ) | 36,280,670 | |||||||
Net (decrease)/increase in cash | (1,939,618 | ) | (69,954 | ) | (395,647 | ) | ||||||
Effect on change of exchange rates | 1,353,810 | 396,404 | 39,527 | |||||||||
Cash as of January 1 | 804,160 | 477,710 | 833,830 | |||||||||
Cash as of December 31 | $ | 218,352 | $ | 804,160 | $ | 477,710 | ||||||
See accompanying notes to the financial statements. | ||||||||||||
Supplemental disclosures of cashflow and non-cash information: | ||||||||||||
Interest paid | 2,147,451 | 1,312,256 | 1,030,523 | |||||||||
Income tax paid | 10,930,112 | 6,841,773 | 3,304,464 |
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Operating Activities. Net cash generated by operating activities was approximately $ 25.4 million for the nine months ended September 30, 2008, decrease of approximately $2.7 million from the $28.1 million net cash generated by operating activities for the same period in 2007. Such decrease was primarily attributable to the increased net income achieved by the Company, and beneficial changes in the following operating accounts: receipts in advance, accrued liabilities and other payables, accounts payable and reduced inventories offset by increased prepayments and taxes payable.
These changes reflect Ge Rui’s focused strategic management of its cash resources as a means to optimize its available cash flows. Ge Rui has not experienced any deterioration in the collection of its receivables and is unaware of any trends underway to change that. Ge Rui does intend to extend credit to certain customers prospectively as part of its growth strategy but will apply stringent and prudent criteria for determining qualification for such credit, including securing it with underlying assets and required cash minimums.
Net cash provided by operating activities was $21.5 million in fiscal year 2007, an increase of $4.1 million from the $17.4 million net cash provided by operating activities in fiscal year 2006. Such increase of net cash provided by operating activities was primarily attributable to the increase in net income and depreciation in 2007 compared to 2006, offset in part by increased accounts receivable and prepayments as compared to 2006.
Net cash provided by operating activities was $17.4 million in fiscal year 2006, as compared to $6.7 million in fiscal year 2005. The increase of approximately $10.7 million in cash provided by operating activities was mainly attributable to the increased net income in 2006 as compared to 2005 offset in part by increases in accounts receivable, inventory and prepayments and increases in certain current liabilities.
Investing Activities. For the nine months ended September 30, 2008, Ge Rui used approximately $27.6 million in investing activities as compared to using approximately $25.6 million for the same period in 2007. Approximately $2.7 million was used in 2008 to acquire additional capital equipment as compared to approximately $1.4 million in the same period in 2007. Restricted cash increased approximately $7.9 million in the nine months ended September 30, 2008 versus an increase of approximately $7.4 million in the same period in 2007. In addition, in the nine months ended September 30, 2008, Ge Rui paid dividends of approximately $42.2 million compared to dividends paid in the same period in 2007 of approximately 16.1 million. Additionally, in the nine month period ended September 30, 2008, amounts advanced to shareholders decreased by approximately $25.1 million as compared to an increase of approximately $0.7 million in the same period in 2007.
Net cash used in investing activities in fiscal years 2007, 2006 and 2005 was approximately $17.3 million, $1.5 million and $43.4 million, respectively. In 2007, approximately $2.3 million was used to acquire capital equipment, $16.1 million was used to pay a dividend and approximately $7.2 million was advanced to owners and restricted cash decreased by $8.3 million. In 2006, approximately $4.1 million was used to acquire capital equipment, $7.5 million to pay a dividend, $11.2 million was advanced to owners and restricted cash decreased by approximately $21.3 million. In 2005, approximately $7.7 million was used to acquire capital equipment, $3.6 million was paid as a dividend approximately $108,000 was advanced to owners and restricted cash increased by approximately $32 million.
The expansion to add another 250,000 metric tons of capacity is to add product lines of Ge Rui’s cold-rolled thin steel products and to add a new line of zinc coated steel sheets. These will take place in two stages, with the first stage costing approximately $36 million and the second stage costing approximately $22 million. The financing of the expansion will be from cash obtained in the merger plus the upcoming profit of the operations. The construction of the facilities will take about seven months. As the new capacity goes into operation, Ge Rui may also need funding for sales working capital, which will come from its internal profits and cash flow as well as some additional short-term bank facilities.
Financing Activities. Net cash provided by financing activities for the nine months ended September 30, 2008 was approximately $25.4 million as compared to approximately $8.9 million in the same period in 2007. The increase in cash provided by financing activities in the six months ended June 30, 2008 and 2007 was primarily provided by additional short term loans, notes payable and increase in the amounts owed to owners, offset in part by repayment of such loans.
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Net cash used by financing activities of approximately $6.2 million in 2007, $16.0 million in 2006 and $36.3 million provided in 2005 was derived primarily from net increases and decreases in short term loans and notes payable and payments for land use rights.
Loan Facilities. Ge Rui believes it currently maintains a good business relationship with many banks. As of September 30, 2008, its outstanding bank loans were as follows.
(All Amounts in U.S. Dollars)
Banks | Amounts* | |||
Guangdong Development Bank | 2,209,164 | |||
Commercial Bank of Zhengzhou | 7,363,879 | |||
Zhengzhou City Rural Credit Cooperative | 736,388 | |||
Shanghai Pu Dong Development Bank | 5,891,103 | |||
Zhengzhou City Urban Credit Cooperative | 1,075,126 | |||
China Citic Bank | 3,681,939 | |||
China Merchants Bank | 4,418,327 | |||
Total | $ | 25,375,926 |
Ge Rui believes that its currently available working capital, including anticipated cash flow from operations and available credit facilities referred to above are adequate to finance its operations at current levels through at least the next twelve months.
In this regard, Ge Rui is not experiencing any obstacles to acquisition and rollover of its short term credit facilities that fund its daily operations. It anticipates rollover of all current facilities coming due in the 2009 operating year and does not foresee a squeeze on the availability of credit to fund its operations and meet its growth objectives.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires Ge Rui’s management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. Ge Rui considers its critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:
• | Functional Currency and Translating Financial Statements — The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The functional currency of Ge Rui is the RMB; however, the reporting currency used in the accompanying consolidated financial statements is the United States dollars (“USD”). The accompanying balance sheets have been translated into US dollars at the exchange rates prevailing at each balance sheet date. The accompanying statements of operations and cash flows have been translated using the weighted-average exchange rates prevailing during the periods of each statement. Transactions in equity securities have been recorded at the exchange rate existing at the time of the transaction. |
• | Restricted Cash — Ge Rui has entered into loan agreements with banks to make advances to and purchase inventory from suppliers, which require it to maintain secured cash balances. These secured cash balances are presented in the consolidated balance sheets as restricted cash. |
• | Advances to Suppliers and from Customers — Ge Rui, as is common practice in the PRC, will often make advance payments to its suppliers for materials, or receive advance payments from its customers. It had net advances to suppliers of $18.9 million and $10.6 million at June 30, 2008 and December 31, 2007, respectively. It also had advances from its customers in the amount of $4.3 million and $8.4 million at June 30, 2008 and December 31, 2007, respectively. |
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• | Basic and Diluted Earnings per Common Share — The computation of basic earnings per common share is based on net income divided by the weighted-average number of common shares outstanding. Diluted earnings per common share are calculated by dividing income assuming dilution by the weighted-average number of common shares outstanding, including dilutive qualified participating securities, and potential dilutive shares of common stock issuable upon conversion of non-participating securities. Ge Rui does not have any non-participating potentially dilutive securities. The calculations of basic and diluted income per share based on the the pro forma issuance of 30,000,000 common shares. |
• | Accumulated Other Comprehensive Income — Accumulated other comprehensive income presented in the accompanying consolidated financial statements consists of foreign currency translation adjustments. |
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 will be applied prospectively and is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS 157 is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“SFAS 159”). This pronouncement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and to recognize the resulting gains and losses in the results of operations. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The impact of adopting SFAS 159 on BVICo’s consolidated financial statements, if any, has not yet been determined.
Seasonality
Ge Rui’s operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.
Off-Balance Sheet Arrangements
Ge Rui does not have any off-balance arrangements.
Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk. Ge Rui is exposed to interest rate risk due primarily to its short-term bank loans. Although the interest rates are fixed for the terms of the loans, the terms are typically twelve months and interest rates are subject to change upon renewal. Ge Rui monitors interest rates in conjunction with its cash requirements to determine the appropriate level of debt balances relative to other sources of funds. Ge Rui has not entered into any hedging transactions in an effort to reduce its exposure to interest rate risk.
Foreign Exchange Risk. The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that, in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Because substantially all of Ge Rui’s earnings and cash assets are denominated in RMB, but its reporting currency is the U.S. dollar, fluctuations in the exchange rate between the U.S. dollar and the RMB will affect its balance sheet and its earnings per share in U.S. dollars. In addition, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect Ge Rui’s financial results reported in U.S. dollar terms without giving effect to any underlying change in its business or results of operations. Fluctuations in
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the exchange rate will also affect the relative value of any dividend BVICo issues in the future that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments BVICo makes in the future.
Very limited hedging transactions are available in China to reduce Ge Rui’s exposure to exchange rate fluctuations. To date, Ge Rui has not entered into any hedging transactions in an effort to reduce its exposure to foreign currency exchange risk. While Ge Rui may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and it may not be able to successfully hedge its exposure at all. In addition, Ge Rui’s foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict its ability to convert RMB into foreign currencies.
Inflation. Inflationary factors, such as increases in the cost of its products and overhead costs, could impair Ge Rui’s operating results. Although Ge Rui does not believe that inflation has had a material impact on its financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on its ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of its products do not increase with these increased costs.
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COMPARISON OF RIGHTS OF COAC AND BVICo
The rights of COAC’s stockholders are currently governed by the Delaware General Corporation Law and COAC’s amended and restated certificate of incorporation and bylaws. Under the merger agreement, at the closing of the merger, the stockholders of COAC will be entitled to receive BVICo Ordinary Shares. Accordingly, after the merger, the rights of any former stockholder of COAC who receives BVICo Ordinary Shares will be governed by the BVI Business Companies Act, 2004, of the British Virgin Islands and BVICo’s memorandum and articles of association.
The following discussion identifies material differences between current rights of COAC stockholders and those of BVICo shareholders following the transactions. The following discussions are summaries only. They do not give you a complete description of the differences that may affect you. You should also refer to the Delaware General Corporation Law, as well as BVICo’s memorandum and articles of association and COAC’s amended and restated certificate of incorporation and bylaws, copies of which are annexed hereto as Annexes B, I and J, respectively. For a more detailed discussion of your rights as shareholders of BVICo, you should also see “Description of COAC and BVICo Securities.”
Current COAC Stockholder Rights | BVICo Shareholder Rights | |||
Authorized Capital Stock | The authorized capital stock of COAC currently consists of 30,000,000 shares of common stock, par value $0.0001 per share, and 1,000,000 shares of preferred stock, par value $0.0001 per share. | The authorized shares of BVICo will consist of 100,000,000 ordinary shares, no par value, and 1,000,000 preferred shares, no par value. | ||
Preferred Stock | The board may fix the designations, powers, preferences, rights, qualifications, limitations and restrictions by resolution. | Same. | ||
Voting Rights | Each share of common stock is entitled to one vote on all matters before the stockholders of COAC. | Each ordinary share is entitled to one vote on all matters before the shareholders of BVICo. | ||
COAC shall submit any business combination to its stockholders for approval regardless of whether the business combination is of a type which normally would require such stockholder approval under the Delaware General Corporation Law. COAC shall not consummate any business combination if holders of 40% or more of the shares of common stock issued in COAC’s initial public offering exercise their conversion rights as described below. | No comparable provision. | |||
Conversion Rights | Holders of common stock issued in COAC’s initial public offering, other than COAC’s initial stockholders, who vote against a business combination may demand COAC convert their shares of common stock into cash. | No comparable provision. |
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Current COAC Stockholder Rights | BVICo Shareholder Rights | |||
Liquidation if No Business Combination | If a business combination is not consummated prior to the termination date set forth in COAC’s amended and certificate of incorporation, COAC shall liquidate and the holders of common stock issued in COAC’s initial public offering shall receive a pro rata distribution from COAC’s trust account. | No comparable provision. | ||
Classification of Board of Directors; Number of Directors; Election of Directors | COAC has a classified board consisting of three classes of directors serving staggered three-year terms. The number of directors shall not be less than one nor more than nine, with the exact number fixed by resolution of the board. A plurality of votes cast shall be sufficient to elect directors. | Same. | ||
Except as the GCL may otherwise require, newly created directorships and any vacancies in the Board of Directors may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum (as defined in the Corporation’s Bylaws), or by the sole remaining director. | ||||
Removal of Directors | Directors may be removed with or without cause by the vote of a majority of the voting power of the shares of COAC. | Same. | ||
Action by Written Consent | The stockholders of COAC may act by written consent. | Same. | ||
Amendment of Certificate of Incorporation | COAC’s certificate of incorporation may be amended by the vote of a majority of the voting power of the shares of COAC. | BVICo’s memorandum of association may be amended by a special resolution of the shareholders of BVICo and by the directors for the purpose of creating the rights attached to new classes of shares. | ||
Special Meetings | Special meetings of the stockholders may be called by the President or Chairman, a majority of the board of COAC or the holders of a majority of the outstanding COAC capital stock. | Same. |
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APPRAISAL RIGHTS
COAC stockholders (other than those who vote against the merger proposal and properly exercise their conversion rights) have appraisal rights in connection the merger and the issuance of BVICo Ordinary Shares pursuant to the merger.
Holders of shares of COAC common stock who properly demand appraisal of their shares may be entitled to receive consideration for their shares in accordance with Subchapter IX, Section 262 of the DGCL. The disclosure contained herein shall constitute COAC’s notice of appraisal rights under Section 262, and the full text of Section 262 is attached hereto as Annex H. Any holder of COAC common stock who wishes to exercise appraisal rights, or who wishes to preserve such holder’s right to do so, should review the following discussion and the full text of Section 262 carefully because failure to timely and properly comply with the procedures specified will result in the loss of appraisal rights.
The board of directors of COAC has determined that the consideration to be paid to the COAC stockholders is reasonable and that the merger is in the best interests of COAC and its stockholders. Further, COAC will have received a fairness opinion from BMCG to the effect that the merger and the transactions contemplated thereby are fair to and in the best interests of the stockholders of COAC, as a condition to closing of the merger agreement.
The following discussion is not a complete statement of the law pertaining to appraisal rights under Section 262 and is qualified in its entirety by the full text of Section 262. All references in Section 262 and in this summary to a “stockholder” are to the record holder of the shares of COAC common stock as to which appraisal rights are asserted. A PERSON HAVING A BENEFICIAL INTEREST IN SHARES OF COAC’S COMMON STOCK HELD OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS A BROKER, FIDUCIARY (INCLUDING A VOTING TRUSTEE), DEPOSITARY OR OTHER NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW THE STEPS SUMMARIZED BELOW PROPERLY AND IN A TIMELY MANNER TO PERFECT APPRAISAL RIGHTS.
HOLDERS OF COAC COMMON STOCK WHO VOTE AGAINST THE MERGER PROPOSAL AND ELECT TO CONVERT THEIR SHARES INTO A PROPORTIONATE PART OF THE CASH IN COAC’S TRUST FUND WILL NOT BE ABLE TO PERFECT THEIR APPRAISAL RIGHTS BECAUSE THEIR SHARES WILL HAVE BEEN SURRENDERED AND CANCELED AS PART OF THE CONVERSION PROCESS.
Under Section 262, persons who hold shares of COAC common stock who follow the procedures set forth in Section 262 will be entitled to have their shares appraised by the Delaware Court of Chancery and to receive payment of the “fair value” of the shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, if any, as determined by the court.
Under Section 262, where a merger proposal is submitted for approval at a meeting of stockholders, as is the case in COAC’s proposed merger with BVICo, the constituent corporation (in this case, COAC) must notify each stockholder entitled to appraisal rights that appraisal rights are available to such stockholder. The notification must be given not less than 20 days prior to the meeting. The disclosure in this section constitutes such notification.
Each COAC stockholder electing to demand the appraisal of such stockholder’s shares must deliver to COAC, BEFORE THE TAKING OF THE VOTE ON THE MERGER PROPOSAL, a written demand for appraisal of such stockholder’s shares. Such demand will be sufficient if it reasonably informs COAC of the identity of the stockholder, including if applicable the beneficial holder of such shares, and that the stockholder intends thereby to demand the appraisal of such stockholder’s shares. A PROXY OR VOTE AGAINST THE MERGER SHALL NOT CONSTITUTE SUCH A DEMAND and a stockholder electing to demand appraisal must do so by a separate written demand as herein described. Such demand is considered made on the date it is mailed. A COAC STOCKHOLDER’S FAILURE TO MAKE THE WRITTEN DEMAND BEFORE THE TAKING OF THE VOTE ON THE MERGER PROPOSAL WILL CONSTITUTE A WAIVER OF APPRAISAL RIGHTS.
Any COAC stockholder demanding appraisal rights as described above must not have consented or voted its shares of common stock in favor of the merger proposal. A holder of shares of COAC common stock
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wishing to exercise appraisal rights must hold of record the shares on the date the written demand for appraisal is made and must continue to hold the shares of record through the effective time of the merger.
Only a holder of record of shares of COAC common stock is entitled to assert appraisal rights for the shares registered in that holder’s name. A demand for appraisal in respect of shares of COAC common stock should be executed by or on behalf of the holder of record, fully and correctly, as the holder’s name appears on the holder’s stock certificates and must state that the person intends thereby to demand appraisal of the holder’s shares pursuant to the merger agreement. If the shares are owned of record in a fiduciary capacity, such as by a trustee (including a voting trustee), guardian or custodian, execution of the demand should be made in that capacity and should identify the beneficial holder with respect to which such demand is being made, and if the shares are owned of record by more than one person, as in a joint tenancy and tenancy in common, the demand should be executed by or on behalf of all joint owners. An authorized agent, including an agent for two or more joint owners, may execute a demand for appraisal on behalf of a holder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, the agent is acting as agent for the record owner or owners. A record holder such as a broker who holds shares as nominee for several beneficial owners may exercise appraisal rights with respect to the shares held for one or more beneficial owners while not exercising the rights with respect to the shares held for other beneficial owners. In such case, however, the written demand should set forth the number of shares as to which appraisal is sought and, where no number of shares is expressly mentioned, the demand will be presumed to cover all shares of COAC common stock held in the name of the record owner. Stockholders who hold their shares in brokerage accounts or other nominee forms and who wish to exercise appraisal rights are urged to consult with their brokers to determine the appropriate procedures for the making of a demand for appraisal by such a nominee.
All written demands for appraisal pursuant to Section 262 should be sent or delivered to China Opportunity Acquisition Corp., 300 Tice Boulevard, Woodcliff Lake, New Jersey 07677, Attention: Harry Edelson, Chairman and Chief Executive Officer.
Within 10 days after the effective time of the merger, BVICo, as the corporation surviving the merger (or its successor in interest, which is sometimes referred to herein as the surviving corporation) must notify each holder of COAC common stock who has complied with Section 262 and who has not voted in favor of the adoption of the merger agreement and approval of the merger that the merger has become effective. Within 120 days after the effective time of the merger, but not thereafter, the surviving corporation or any holder of COAC common stock who has so complied with Section 262 and is entitled to appraisal rights under Section 262 may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the holder’s shares. The surviving corporation is under no obligation to and has no present intention to file a petition. Accordingly, it is the obligation of the holders of COAC common stock to initiate all necessary action to perfect their appraisal rights in respect of shares of COAC common stock within the time prescribed in Section 262.
Within 120 days after the effective time of the merger, any holder of COAC common stock who has complied with the requirements for exercise of appraisal rights will be entitled, upon written request, to receive from the surviving corporation a statement setting forth the aggregate number of shares of COAC common stock not voted in favor of the adoption of the merger agreement and approval of the merger and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. The statement must be mailed within 10 days after a written request has been received by the surviving corporation or within 10 days after the expiration of the period for delivery of demands for appraisal, whichever is later.
If a petition for an appraisal is timely filed by a holder of shares of COAC common stock and a copy thereof is served upon the surviving corporation, the surviving corporation will then be obligated within 20 days to file with the Delaware Register in Chancery a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares and with whom agreements as to the value of their shares have not been reached. After notice to the stockholders as required by the Court, the Delaware Court of Chancery is empowered to conduct a hearing on the petition to determine those stockholders who have complied with Section 262 and who have become entitled to appraisal rights thereunder. The Delaware
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Court of Chancery may require the stockholders who demanded appraisal of their shares to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceeding. If any stockholder fails to comply with the direction, the Court of Chancery may dismiss the proceedings as to that stockholder.
After determining the holders of COAC common stock entitled to appraisal, the Delaware Court of Chancery will appraise the “fair value” of their shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. Stockholders considering seeking appraisal should be aware that the fair value of their shares as so determined could be more than, the same as or less than the consideration they would receive pursuant to the merger if they did not seek appraisal of their shares and that an investment banking opinion as to fairness from a financial point of view is not necessarily an opinion as to fair value under Section 262. You should not expect the surviving corporation to offer more than the applicable merger consideration to any stockholder exercising appraisal rights and COAC and CEA reserve the right to assert, in any appraisal proceeding, that for purposes of Section 262, the “fair value” of a share of COAC common stock is less than the applicable merger consideration. The Delaware Supreme Court has stated that “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court” should be considered in the appraisal proceedings. In addition, Delaware courts have decided that the statutory appraisal remedy, depending on factual circumstances, may or may not be a dissenter’s exclusive remedy. The Delaware Court of Chancery will also determine the amount of interest, if any, to be paid upon the amounts to be received by persons whose shares of COAC common stock have been appraised. The Court shall then direct payment of the fair value of the shares, together with interest, if any, by the surviving corporation to the stockholders entitled to payment. If such shares are represented by certificates, payment will be made upon the surrender to the corporation of the certificates. The costs of the action may be determined by the Court and taxed upon the parties as the Court deems equitable. The Court may also order that all or a portion of the expenses incurred by any stockholder in connection with an appraisal, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro rata against the value of all the shares entitled to be appraised.
Any holder of shares of COAC common stock who has duly demanded an appraisal in compliance with Section 262 will not, after the effective time of the merger, be entitled to vote the shares subject to the demand for any purpose or be entitled to the payment of dividends or other distributions on those shares (except dividends or other distributions payable to holders of record of COAC common stock as of a record date prior to the effective time of the merger).
If any stockholder who demands appraisal of shares of COAC common stock under Section 262 fails to perfect or effectively withdraws or loses such holder’s right to appraisal, the stockholder’s shares of COAC common stock will be deemed to have been converted at the effective time of the merger into the right to receive the merger consideration such stockholder would have received if such stockholder had not demanded appraisal. A stockholder will fail to perfect or effectively lose or withdraw the stockholder’s right to appraisal if no petition for appraisal is filed within 120 days after the effective time of the merger, or if the stockholder delivers to the surviving corporation a written withdrawal of the holder’s demand for appraisal and an acceptance of the merger, except that any attempt to withdraw made more than 60 days after the effective time of the merger will require the written approval of the surviving corporation and, once a petition for appraisal is filed, the appraisal proceeding may not be dismissed as to any holder absent court approval.
Failure to follow the steps required by Section 262 for perfecting appraisal rights may result in the loss of these rights.
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BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth information regarding the beneficial ownership of COAC’s common stock as of December 19, 2008 (Pre-Merger) and, immediately following consummation of the merger (Post-Merger), ownership of BVICo Ordinary Shares, by:
• | each person known by COAC to be the beneficial owner of more than 5% of COAC’s outstanding shares of common stock either on December 19, 2008 (Pre-Merger) or of BVICo’s Ordinary Shares outstanding after the consummation of the merger (Post-Merger); |
• | each of COAC’s current executive officers and directors; |
• | each person who will become an executive officer or director of BVICo upon consummation of the merger; |
• | all of COAC’s current executive officers and directors as a group; and |
• | all of the executive officers and directors of BVICo as a group after the consummation of the merger. |
Information (Pre-Merger) does not reflect beneficial ownership of COAC’s outstanding warrants as these warrants are not currently exercisable and will not become exercisable until consummation of the merger.
Pre-Merger | Post-Merger | |||||||||||||||
Name and Address of Beneficial Owner(1) | Amount and Nature of Beneficial Ownership | Percent of Class | Amount and Nature of Beneficial Ownership | Percent of Class | ||||||||||||
Harry Edelson | 1,220,000 | 14.52 | 2,886,667 | (2) | 7.20 | |||||||||||
Nicholas Puro | 70,000 | * | 270,000 | (3) | * | |||||||||||
Barry M. Shereck | 70,000 | * | 120,000 | (4) | * | |||||||||||
Rose-Marie Fox | 100,000 | 1.19 | 200,000 | (5) | * | |||||||||||
Platinum Partners Value Arbitrage Fund LP(6) | 1,056,000 | (7) | 12.58 | 1,056,000 | (7) | 2.75 | ||||||||||
HBK Services LLC(8) | 839,900 | (9) | 9.9 | 839,900 | (9) | 2.19 | ||||||||||
Fir Tree, Inc.(10) | 758,500 | (11) | 9.03 | 758,500 | (11) | 1.98 | ||||||||||
David M. Knott(12) | 500,000 | (13) | 5.95 | 500,000 | (13) | 1.30 | ||||||||||
Farallon Partners, LLC.(14) | 485,000 | (15) | 5.77 | 485,000 | (15) | 1.26 | ||||||||||
QVT Financial GP LLC(16) | 453,750 | (17) | 5.40 | 453,750 | (17) | 1.18 | ||||||||||
Oasis Green Investments Limited(18) | 0 | 0 | 27,600,000 | 71.88 | ||||||||||||
Plumpton Group Limited(18) | 0 | 0 | 1,500,000 | 3.90 | ||||||||||||
Honest Joy Group Limited(18) | 0 | 0 | 900,000 | 2.34 | ||||||||||||
J.P. Huang | 0 | 0 | 0 | 0 | ||||||||||||
Mingwang Lu | 0 | 0 | 0 | 0 | ||||||||||||
Yi Lu | 0 | 0 | 0 | 0 | ||||||||||||
Wong Kwok Keung | 0 | 0 | 0 | 0 | ||||||||||||
Yunlong Wang | 0 | 0 | 0 | 0 | ||||||||||||
Maotong Xu | 0 | 0 | 0 | 0 | ||||||||||||
Liyong Qu | 0 | 0 | 0 | 0 | ||||||||||||
All Pre-Merger directors and executive officers as a group (4 individuals) | 1,460,000 | 17.38 | 3,726,667 | (19) | 9.30 | |||||||||||
All Post-Merger directors and executive officers as a group (8 individuals) | 1,220,000 | 14.52 | 2,886,667 | (19) | 7.20 |
* | Less than 1%. |
(1) | Unless otherwise indicated, the business address of each of the individuals is 300 Tice Boulevard, Woodcliff Lake, New Jersey 07677. |
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(2) | Includes 1,666,667 shares of common stock issuable upon exercise of warrants held by Mr. Edelson that will become exercisable upon consummation of the merger. |
(3) | Includes 200,000 shares of common stock issuable upon exercise of warrants held by Mr. Puro that will become exercisable upon consummation of the merger. |
(4) | Includes 50,000 shares of common stock issuable upon exercise of warrants held by Mr. Shereck that will become exercisable upon consummation of the merger. |
(5) | Includes 100,000 shares of common stock issuable upon exercise of warrants held by Ms. Fox that will become exercisable upon consummation of the merger. |
(6) | The business address of Platinum Partners Value Arbitrage Fund LP is 152 West 57th Street, 54th Floor, New York, NY 10019. |
(7) | Platinum Partners Value Arbitrage Fund LP is controlled by Platinum Management, Inc. Oliver Jimenez is the chief compliance officer of Platinum Management, Inc. The foregoing information was derived from a Schedule 13G filed with the SEC on September 22, 2008. |
(8) | The business address of HBK Services LLC is 300 Crescent Court, Suite 700, Dallas, Texas 75201. |
(9) | Represents shares of common stock held by HBK Investments L.P. HBK Investments L.P. has delegated discretion to vote and dispose of these shares to HBK Services LLC. Such entities are controlled by HBK Management LLC. Each of Jamiel A. Akhtar, Richard L. Booth, David C. Haley, Lawrence H. Lebowitz, and William E. Rose is a managing member of HBK Management LLC. The foregoing information was derived from a Schedule 13G filed with the SEC on July 11, 2008. |
(10) | The business address of Fir Tree, Inc. is 505 Fifth Avenue, 23rd Floor, New York, NY, 10017. |
(11) | Represents (i) 608,965 shares of common stock held by Sapling, LLC (a Delaware limited liability company with address at 505 Fifth Avenue, 23rd Floor, New York, NY 10017) and (ii) 149,535 shares of common stock held by Fir Tree Capital Opportunity Master Fund, L.P. (a Cayman Islands exempted limited partnership, with address c/o Admiral Administration Ltd., Admiral Financial Center, 5th Floor, 90 Fort Street, Box 32021 SMB, Grand Cayman, Cayman Islands). Fir Tree, Inc. is the investment manager of both entities. Jeffrey Tannenbaum is the president of each of Fir Tree, Inc. The foregoing information was derived from a Schedule 13G/A filed with the SEC on February 14, 2008. |
(12) | The business address of Mr. Knott is 485 Underhill Boulevard, Suite 205, Syosset, New York 11791. |
(13) | Represents 400,000 shares beneficially held by Dorset Management Corporation and 100,000 shares owned by Ostra Capital Partners, L.P. (“Ostra”). The general partner of Ostra is Ostra GP, LLC and the manager of Ostra GP, LLC is an individual employed by one or more entities controlled by David M. Knott. Mr. Knott is the president of Dorset Management Corporation. The address of Dorset Management Corporation is the same as that for Mr. Knott, above. Does not include 1,000,000 shares of common stock issuable upon exercise of warrants held by Dorset Management Corporation and Ostra that are not exercisable and will not become exercisable within 60 days. The foregoing information was derived from a Schedule 13G/A filed with the SEC on February 13, 2008. |
(14) | The business address of Farallon Partners, L.L.C. is c/o Farallon Capital Management, L.L.C., One Maritime Plaza, Suite 2100, San Francisco, California 94111. |
(15) | Represents (i) 225,500 shares of common stock held by Farallon Capital Partners, L.P. (“FCP”), (ii) 15,400 shares of common stock held by Farallon Capital Institutional Partners, L.P. (“FCIP”), (iii) 9,300 shares of common stock held by Farallon Capital Institutional Partners II, L.P. (“FCIP II”), (iv) 3,100 shares of common stock held by Farallon Capital Institutional Partners III, L.P. (“FCIP III”), (v) 9,300 shares of common stock held by Tinicum Partners, L.P. (“Tinicum”) and (vi) 222,400 shares of common stock held by Farallon Capital Offshore Investors II, L.P. (“FCOI II”). The foregoing information was derived from a Schedule 13G/A filed with the SEC on September 20, 2007. |
(16) | The business address of QVT Financial GP LLC is 1177 Avenue of the Americas, 9th Floor, New York, New York 10036. |
(17) | Represents 364,185 shares of common stock beneficially owned by QVT Fund L.P. (the “Fund”); 40,737 shares of common stock held by Quintessance Fund L.P. (“Quintessance”); and 48,828 shares of common stock held in a discretionary account managed for Deutsche Bank AG (the “Separate Account”). QVT Financial LP as the investment manager for the Fund, Quintessence and the Separate Account, beneficially owns 453,750 shares of common stock. QVT Financial GP LLC, as the general partner of QVT Financial LP beneficially owns 453,750 shares of common stock. Does not include 728,370 warrants held by the Fund, 81,474 warrants held by Quintessance and 97,656 warrants held by the Separate Account, which warrants amounting to 907,500 warrants also beneficially owned by QVT Financial LP |
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and QVT Financial GP LLC that are not exercisable and will not become exercisable within 60 days. The foregoing information was derived from a Form 13 G/A filed with the SEC on January 31, 2008. |
(18) | The business address of Oasis Green Investments Limited, Plumpton Group Limited and Honest Joy Group Limited is c/o Henan Green Complex Materials Co. Ltd., No. 69 Hualibei Street, Longhai Middle Road, Henan, China. |
(19) | Includes 2,266,667 shares of common stock issuable upon exercise of Insider Warrants held by such individuals that will become exercisable upon consummation of the merger. |
At any time prior to the special meeting, during a period when they are not then aware of any material nonpublic information regarding COAC or its securities, the COAC Inside Stockholders, and/or their affiliates, may enter into a written plan to purchase COAC securities pursuant to Rule 10b5-1 of the Exchange Act, and may engage in other public market purchases, as well as private purchases, of securities at anytime prior to the special meeting of stockholders. The ownership percentages listed below do not include any such shares that may be purchased after _______ __, 2009.
At any time prior to the special meeting, during a period when they are not then aware of any material nonpublic information regarding COAC or its securities, the COAC Inside Stockholders, BVICo or BVICo’s shareholders and/or their respective affiliates may purchase shares from institutional and other investors, or execute agreements to purchase such shares from them in the future, or they or COAC may enter into transactions with such persons and others to provide them with incentives to acquire shares of COAC’s common stock or vote their shares in favor of the merger proposal. The purpose of such share purchases and other transactions would be to increase the likelihood of satisfaction of the requirements that the holders of a majority of the COAC Shares cast on the merger proposal vote in its favor and that holders of fewer than 40% of the Public Shares vote against the merger proposal and demand conversion of their Public Shares into cash where it appears that such requirements would otherwise not be met.
While the exact nature of any such incentives has not been determined as of the date of this proxy statement/prospectus, they might include, without limitation, arrangements to protect such investors or holders against potential loss in value of their shares, including the granting of put options, the transfer to such investors or holders of shares or warrants owned by the COAC Inside Stockholders for nominal value and the grant to such investors and holders of rights to nominate directors of COAC. COAC will not enter into any such arrangement that would have the effect of constituting a waiver of the voting requirement or the limitation on the maximum number of conversion shares and no funds in its trust account will be used to make such purchases or to fund other such arrangements.
Entering into any such arrangements may have a depressive effect on COAC’s stock. For example, as a result of these arrangements, an investor or holder may have the ability to effectively purchase shares at a price lower than market and may therefore be more likely to sell the shares he owns, either prior to or immediately after the special meeting.
If such transactions are effected, the consequence could be to cause the merger to be approved in circumstances where such approval could not otherwise be obtained. Purchases of shares by the persons described above would allow them to exert more influence over the approval of the merger proposal and other proposals and would likely increase the chances that such proposals would be approved. Moreover, any such purchases may make it less likely that the holders of 40% or more of the Public Shares will vote against the merger proposal and exercise their conversion rights.
As of the date of this proxy statement/prospectus, there have been no such discussions and no agreements to such effect have been entered into with any such investor or holder. COAC will file a Current Report on Form 8-K to disclose arrangements entered into or significant purchases made by any of the aforementioned persons that would affect the vote on the merger proposal or the conversion threshold. Any such report will include descriptions of any arrangements entered into or significant purchases by any of the aforementioned persons.
It is possible that the special meeting could be adjourned to provide time to seek out and negotiate such transactions if, at the time of the meeting, it appears that the requisite vote will not be obtained or that the limitation on conversion will be exceeded, assuming that an adjournment proposal is presented and approved.
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Also, under Delaware law, the board of directors may postpone the meeting at any time prior to it being called to order in order to provide time to seek out and negotiate such transactions.
In connection with COAC’s IPO, Mr. Edelson entered into an agreement with EarlyBirdCapital, which is intended to comply with Rule 10b5-1 under the Exchange Act, pursuant to which he, or an entity or entities he controls, will place limit orders for $3 million of COAC’s common stock commencing November 26, 2008 which, pursuant to such agreement, was ten business days after COAC filed its Current Report on Form 8-K announcing COAC’s execution of the merger agreement, and ending on the business day immediately preceding the record date for the special meeting of stockholders. Mr. Edelson may vote these shares any way he chooses. Mr. Edelson has agreed that he will not sell or transfer any shares of common stock purchased by him pursuant to this agreement until one year after COAC has completed the merger. It is intended that these purchases will comply with Rule 10b-18 under the Exchange Act and, accordingly, any purchases that are not permitted by Rule 10b-18 will not be made. These purchases will be made at a price equal to the per share amount held in COAC’s trust account as of November 12, 2008 (the date of the signing of the merger agreement) and will be made by EarlyBirdCapital or an independent broker dealer mutually agreed upon by Mr. Edelson and EarlyBirdCapital (including in the event that EarlyBirdCapital’s participation in the purchases would not comply with Rule 10b-18) in such amounts and at such times as EarlyBirdCapital or such other broker dealer may determine, in its sole discretion, so long as the purchase price does not exceed the above-referenced per share purchase price. As a result of EarlyBirdCapital’s interest in COAC’s consummation of a business combination, it may not be deemed to be independent for purposes of this agreement. Mr. Edelson has agreed to make available to EarlyBirdCapital monthly statements confirming that Mr. Edelson has sufficient funds to satisfy these transactions. Through December 19, 2008, Mr. Edelson purchased an aggregate of 120,000 shares of COAC common stock in accordance with such agreement at an average price of $5.70 per share.
All 1,500,000 Original Shares owned by the COAC Inside Stockholders have been placed in escrow with Continental Stock Transfer & Trust Company, as escrow agent, pursuant to an escrow agreement described below under the section entitled“Certain Relationships and Related Person Transactions — COAC Related Person Transactions.”
Interest of COAC Shareholders in the Merger
As a result of the merger, the present COAC stockholders (including the COAC Inside Stockholders) will own approximately from 22% of the BVICo Ordinary Shares outstanding after the merger (assuming that no holders of Public Shares vote against the merger proposal and elect to convert their Public Shares into cash in accordance with COAC’s certificate of incorporation to 16% of the BVICO Ordinary Shares outstanding after the merger (assuming that the holders of 39.99% of COAC’s Public Shares vote against the merger proposal and elect to convert their Public Shares into cash). If, after the merger, the holders of the warrants to acquire BVICo Ordinary Shares that will be issued as a result of the merger in exchange for the outstanding warrants to acquire shares of COAC’s common stock exercise all such warrants, the former COAC stockholders (or their transferees) and the holders of the BVICo Ordinary Shares issued upon exercise of the BVICo warrants will own approximately 43% of the outstanding BVICo Ordinary Shares (assuming no additional BVICo Ordinary Shares are issued after the merger).
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Code of Ethics and Related Person Policy
COAC’s Code of Ethics requires it to avoid, wherever possible, all related party transactions that could result in actual or potential conflicts of interest, except under guidelines approved by the board of directors (or the audit committee). Related-party transactions with respect to smaller reporting companies such as COAC are defined under SEC rules as transactions in which (1) the aggregate amount involved will or may be expected to exceed the lesser of $120,000 or one percent of the average of the smaller reporting company’s total assets at year end for the last two completed years, (2) COAC or any of its subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election as a director, (b) greater than 5 percent beneficial owner of COAC’s common stock, or (c) immediate family member, of the persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10 percent beneficial owner of another entity). A conflict of interest situation can arise when a person takes actions or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or her position. BVICo has adopted a similar Code of Ethics.
BVICo’s audit committee, pursuant to its written charter, will be responsible for reviewing and approving related-party transactions to the extent BVICo enters into such transactions. The audit committee will consider all relevant factors when determining whether to approve a related party transaction, including whether the related party transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related party’s interest in the transaction. No director may participate in the approval of any transaction in which he is a related party, but that director is required to provide the audit committee with all material information concerning the transaction. Additionally, BVICo will require each of its directors and executive officers to complete a directors’ and officers’ questionnaire on an annual basis that elicits information about related party transactions.
These procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part of a director, employee or officer.
COAC Related Person Transactions
Prior Issuances
In August 2006, COAC issued the 1,500,000 Original Shares to the individuals set forth below for an aggregate of $25,000 in cash, at a purchase price of approximately $0.009 per share, as follows:
Stockholders | Number of Shares | Relationship to COAC | ||
Harry Edelson | 1,130,000 | Chairman of the Board and Chief Executive Officer | ||
Nicholas Puro | 70,000 | President, Secretary and Director | ||
Barry M. Shereck | 70,000 | Chief Financial Officer and Director | ||
Rose-Marie Fox | 70,000 | Director | ||
Bailin Zheng | 60,000 | Special Advisor | ||
Daxi Li | 60,000 | Special Advisor | ||
China Investment Group LLC | 40,000 | Special Advisor |
In November 2006, Bailin Zheng transferred 60,000 shares of common stock to Shengyun Qiu, one of COAC’s special advisors, for $0.0167 per share (for a purchase price of $1,000). Mr. Zheng is no longer a special advisor of COAC. In February 2007, Harry Edelson transferred 30,000 shares of common stock to Rose-Marie Fox for $0.0167 per share (for a purchase price of $500).
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The following table reflects the current ownership of the Original Shares, accounting for the aforementioned transactions:
Name | Number of Shares | Relationship to COAC | ||
Harry Edelson | 1,100,000 | Chairman of the Board and Chief Executive Officer | ||
Nicholas Puro | 70,000 | President, Chief Financial Officer and Director | ||
Barry M. Shereck | 70,000 | Director | ||
Rose-Marie Fox | 100,000 | Director | ||
Shengyun Qiu | 60,000 | Special Advisor | ||
Daxi Li | 60,000 | Special Advisor | ||
China Investment Group LLC | 40,000 | Special Advisor |
Inside Stockholder Escrow
All of the Original Shares have been placed in escrow with Continental Stock Transfer & Trust Company, as escrow agent, until one year after the consummation of a business combination. The Original Shares may be released from escrow earlier than this date if, within the first year after COAC consummates a business combination, COAC consummates a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of its stockholders having the right to exchange their shares of common stock for cash, securities or other property. Additionally, if holders of more than 20% of the Public Shares vote against a proposed business combination and seek to exercise their conversion rights and such business combination is consummated, Harry Edelson and Rose-Marie Fox have agreed to forfeit and return to COAC for cancellation a number of shares so that the Inside Stockholders will collectively own no more than 23.81% of the BVICo Ordinary Shares that will be issued to the COAC stockholders upon consummation of the merger.
Initial Stockholder Warrant Purchase
In connection with the closing of the IPO, COAC sold 2,266,667 Insider Warrants to the individuals set forth below for $1,360,000 in cash, at a purchase price of $0.60 per warrant as follows:
Name of Holder | Number of Warrants | |||
Harry Edelson | 1,666,667 | |||
Nicholas Puro | 200,000 | |||
Barry M. Shereck | 50,000 | |||
Rose-Marie Fox | 100,000 | |||
Daxi Li | 150,000 | |||
Eliot Clauss(1) | 50,000 | |||
John Allen(1) | 50,000 |
(1) | Messrs. Clauss and Allen are members of China Investment Group LLC, one of COAC’s special advisors. |
These purchases took place on a private placement basis simultaneously with the consummation of the IPO. The Insider Warrants are identical to the warrants underlying the units offered in the IPO except that if COAC calls the warrants for redemption, the Insider Warrants will not be redeemable by COAC so long as they are held by these purchasers or their affiliates. The purchasers have agreed that the Insider Warrants will not be sold or transferred by them until after COAC has completed a business combination.
Registration Rights
The holders of the majority of the Original Shares and the holders of the majority the Insider Warrants (or underlying shares) each will be entitled to make up to two demands that COAC register such shares or warrants (or underlying shares) pursuant to a registration rights agreement entered into with COAC in connection with the IPO. The holders of the majority of the Original Shares can elect to exercise these registration
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rights at any time commencing nine months after the consummation of a business combination. The holders of a majority of the Insider Warrants (or underlying shares) can elect to exercise these registration rights at any time after COAC consummates the merger. In addition, these holders have certain “piggy-back” registration rights on registration statements filed subsequent to such date. COAC will bear the expenses incurred in connection with the filing of any such registration statements. As a result of the merger, the Insider Warrants will become warrants to purchase BVICo Ordinary Shares and the obligations of COAC will become similar obligations of BVICo.
Other Transactions
COAC reimburses its officers and directors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on COAC’s behalf such as identifying and investigating possible target businesses and business combinations. There is no limit on the amount of out-of-pocket expenses reimbursable by COAC, which are reviewed only by its board or a court of competent jurisdiction if such reimbursement is challenged, provided that no proceeds held in the trust account will be used to reimburse out-of-pocket expenses prior to the merger.
Other than reimbursable out-of-pocket expenses payable to the officers and directors of COAC, no compensation or fees of any kind, including finder’s fees, consulting fees or other similar compensation, has been or will be paid to any of the Inside Stockholders, including the officers and directors of COAC, or to any of their respective affiliates, prior to or with respect to the business combination (regardless of the type of transaction that it is), except for a $7,500 monthly fee paid by COAC to Edelson Technology Inc., an affiliate of Mr. Edelson, for office space and secretarial and administrative services. Such arrangement is solely for COAC’s benefit and is not intended to provide Mr. Edelson compensation in lieu of a salary. Payment of the fee will terminate upon consummation of the merger. Through September 30, 2008, a total of $129,194 has been paid to Edelson Technology Inc. pursuant to such arrangement.
In connection with COAC’s IPO, Mr. Edelson entered into an agreement with EarlyBirdCapital, which is intended to comply with Rule 10b5-1 under the Exchange Act, pursuant to which he, or an entity or entities he controls, will place limit orders for $3 million of COAC’s common stock commencing November 26, 2008 which, pursuant to such agreements was ten business days after COAC filed its Current Report on Form 8-K announcing COAC’s execution of the merger agreement, and ending on the business day immediately preceding the record date for the special meeting of stockholders. Mr. Edelson may vote these shares any way he chooses. Mr. Edelson has agreed that he will not sell or transfer any shares of common stock purchased by him pursuant to this agreement until one year after COAC has completed the merger. It is intended that these purchases will comply with Rule 10b-18 under the Exchange Act and, accordingly, any purchases that are not permitted by Rule 10b-18 will not be made. These purchases will be made at a price equal to the per share amount held in COAC’s trust account as of November 12, 2008 (the date of the signing of the merger agreement) and will be made by EarlyBirdCapital or an independent broker dealer mutually agreed upon by Mr. Edelson and EarlyBirdCapital (including in the event that EarlyBirdCapital’s participation in the purchases would not comply with Rule 10b-18) in such amounts and at such times as EarlyBirdCapital or such other broker dealer may determine, in its sole discretion, so long as the purchase price does not exceed the above-referenced per share purchase price. As a result of EarlyBirdCapital’s interest in COAC’s consummation of a business combination, it may not be deemed to be independent for purposes of this agreement. Mr. Edelson has agreed to make available to EarlyBirdCapital monthly statements confirming that Mr. Edelson has sufficient funds to satisfy these transactions. Through December 19, 2008, Mr. Edelson purchased an aggregate of 120,000 shares of COAC common stock in accordance with such agreement at an average price of $5.70 per share.
Prior to COAC’s IPO, Mr. Edelson advanced COAC $125,000 to cover expenses related to the IPO, which was repaid from the proceeds of the IPO that were not placed in the trust account. On October 28, 2008, Harry Edelson loaned COAC $125,000 to cover its expenses in connection with the merger. Such loan is unsecured, non-interest bearing and will be repaid at the closing of the merger. If the merger is not consummated and COAC is required to liquidate, such loan will not be repaid to Mr. Edelson. Mr. Edelson may make further loans with the same terms for this purpose in the future.
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Dr. J.P. Huang, who has acted as a consultant to COAC in connection with the transaction with BVICo and is a nominee for appointment to BVICo’s board of directors effective after the merger, was paid a total of $35,000 for his consulting services for the period from April through October 2008 and was reimbursed $4,158 for travel expenses in connection with his consulting activities.
COAC requires that all ongoing and future transactions between itself and any of its officers and directors or their respective affiliates, including loans by its officers and directors, will be on terms that COAC believes to be no less favorable to it than are available from unaffiliated third parties. Such transactions or loans, including any forgiveness of loans, require prior approval by a majority of COAC’s uninterested “independent” directors (to the extent it has any) or the shareholders of its board who do not have an interest in the transaction, in either case who had access, at COAC’s expense, to COAC’s attorneys or independent legal counsel. COAC will not enter into any such transaction unless its disinterested directors determine that the terms of such transaction are no less favorable to COAC than those that would be available to COAC with respect to such a transaction from unaffiliated third parties. BVICo will continue such policy after the merger.
BVICo Related Person Transactions
Before 2007, Zhengzhou No. 2 Iron and Steel Company Limited was one of the owners of Ge Rui with 76.93% of the total ownership. In December 2006, Zhengzhou No. 2 Iron and Steel Company Limited sold all of its ownership to Mingwang Lu and others, in which Mingwang Lu became a major owner holding 40% of the total ownership. In 2008, the holders transferred their ownership interests in Ge Rui to BVICo. Mingwang Lu was a common owner of Ge Rui and Zhengzhou No. 2 Iron and Steel Company Limited. Zhengzhou No. 2 Iron and Steel Company Limited engaged in the same type of industry as Ge Rui but ceased its processing and selling of steel operation in 2003. Zhengzhou No. 2 Iron and Steel Company Limited’s principal business activity after the cessation of its steel operations is receiving rental income from its investments.
In 2004, Ge Rui entered into a rental agreement for land use right with Zhengzhou No. 2 Iron and Steel Company Limited with the period from January 1, 2005 to December 30, 2014. Rental paid to Zhengzhou No. 2 Iron and Steel Company Limited for the nine months ended September 30, 2008 was USD 6,553 (RMB 45,675).
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires COAC’s directors and officers and persons owning more than 10% of COAC common stock to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Based on COAC’s review of the copies of such reports furnished to it, or representations from certain reporting persons that no other reports were required, COAC believes that all applicable filing requirements were complied with during the fiscal year ended December 31, 2007.
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DESCRIPTION OF COAC’s AND BVICo’S SECURITIES
General
On March 26, 2007, COAC closed its IPO of 6,900,000 units, with each unit consisting of one share of its common stock and two warrants, each to purchase one share of its common stock at an exercise price of $5.00 per share. On March 29, 2007, COAC closed the sale of 600,000 units which were subject to the underwriter’s over-allotment option. The units (including those subject to the over-allotment option) were sold at an offering price of $6.00 per unit, generating total gross proceeds of $41,400,000. COAC’s units, common stock and warrants are quoted on the Over-the-Counter Bulletin Board under the symbols CHNQU, CHNQ and CHNQW, respectively. The closing bid price for each unit, share of common stock, warrant of COAC on November 11, 2008, the last trading day before announcement of the execution of the merger agreement, was $5,85, $5.63 and $0.30, respectively.
The amended and restated certificate of incorporation of COAC authorizes the issuance of 30,000,000 shares of common stock, par value $0.0001 per share, and 1,000,000 shares of preferred stock, par value $0.0001 per share. As of the record date, 8,400,000 shares of common stock were outstanding and no shares of preferred stock were outstanding.
Upon the consummation of the merger, each holder of COAC common stock will receive a like number of Ordinary Shares of BVICo and BVICo will assume the outstanding COAC warrants and units, the terms and conditions of which will not change, except that, on exercise of the warrants, they will receive BVICo Ordinary Shares. BVICo’s memorandum and articles of association authorizes it to issue up to 100,000,000 Ordinary Shares and 1,000,000 Preferred Shares.
COAC Common Stock and BVICo Ordinary Shares
COAC’s stockholders of record are entitled to one vote for each share held on all matters to be voted on by stockholders. In connection with the vote required for any business combination, all of the Inside Stockholders, including all of its officers and directors, have agreed to vote the Original Shares owned by them in accordance with the majority of the Public Shares. This voting arrangement will not apply to shares included in units purchased in the IPO or purchased following this offering in the open market by any of the Inside Stockholders, including the officers and directors and COAC. The Inside Stockholders, including the officers and directors of COAC, will vote all of their shares in any manner they determine, in their sole discretion, with respect to any other items that come before a vote of COAC’s stockholders.
COAC will proceed with the business combination only if a majority of the Public Shares is voted in favor of the business combination and holders owning less than 40% of the Public Shares both exercise their conversion rights discussed below and vote against the business combination.
The board of directors of COAC is divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares eligible to vote for the election of directors can elect all of the directors. BVICo’s board of directors is similarly classified.
If COAC is forced to liquidate, the holders of the Public Shares will be entitled to share ratably in the trust fund, including any interest, and any net assets remaining available for distribution to them after payment of liabilities. The Inside Stockholders have agreed to waive their rights to share in any distribution with respect to the Original Shares.
COAC’s stockholders have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock, except that holders of the Public Shares (other than the Inside Stockholders) have the right to have their shares of common stock converted to cash equal to their pro rata share of the trust account if they vote against the business combination, properly demand conversion and the business combination is approved and completed. Public stockholders who convert their stock into their share of the trust account still have the right to exercise the warrants that they received as part of the units.
132
Upon consummation of the merger, the holders of BVICo Ordinary Shares will be entitled to one vote for each share held of record on all matters to be voted on by the stockholders.
Holders of BVICo Ordinary Shares will not have any conversion, preemptive or other subscription rights and there will be no sinking fund or redemption provisions applicable to the Ordinary Shares.
Preferred Stock
COAC’s certificate of incorporation authorizes the issuance of 1,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by its board of directors. No shares of preferred stock are being issued or registered in the merger. Accordingly, the board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of common stock. However, the underwriting agreement from its IPO prohibits COAC, prior to a business combination, from issuing preferred stock which participates in any manner in the proceeds of the trust account, or which votes as a class with the common stock on a business combination. COAC may issue some or all of the preferred stock to effect a business combination. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of COAC. There are no shares of preferred stock outstanding and COAC does not currently intend to issue any shares of preferred stock.
BVICo’s memorandum of association authorizes the issuance of up to 1,000,0000 preferred shares with such designations, rights and preferences as may be determined from time to time by BVICo’s board of directors. Accordingly, BVICo’s board of directors will be empowered, without shareholder approval, to issue preferred shares with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of ordinary shares. In addition, the preferred shares could be utilized as a method of discouraging, delaying or preventing a change in control of BVICo.
Warrants
COAC currently has 16,066,667 redeemable common stock purchase warrants outstanding, including the Insider Warrants. Upon the consummation of the merger, each outstanding common stock purchase warrant shall be automatically converted into a warrant of to purchase BVICo Ordinary Shares that will have terms that are substantially similar in all material respects to those of the COAC warrants. Consequently, each BVICo warrant will entitle the registered holder to purchase one BVICo Ordinary Share at a price of $5.00 per share, subject to adjustment as discussed below, at any time commencing after the completion of the merger. However, the warrants will be exercisable only if a registration statement relating to the ordinary shares issuable upon exercise of the warrants is effective and current, as described below. The warrants will expire on March 19, 2011 at 5:00 p.m., New York City time.
After the consummation of the merger, BVICo may call the warrants for redemption (excluding any Insider Warrants still held by the original purchasers of such warrants or their affiliates),
• | in whole and not in part, |
• | at a price of $0.01 per warrant at any time after the warrants become exercisable, |
• | upon not less than 30 days’ prior written notice of redemption to each warrant holder, and |
• | if, and only if, the reported last sale price of the ordinary shares equals or exceeds $12.00 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders. |
The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.
The redemption criteria for the warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing common stock price and the warrant exercise price so that if the stock price declines as a result of the redemption call, the redemption will not be expected to cause the stock price to drop below the exercise price of the warrants.
133
If BVICo calls the warrants for redemption as described above, its management will have the option to require all holders that wish to exercise warrants to do so on a “cashless basis.” If management takes advantage of this option, all holders would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of the common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. BVICo believes this feature is an attractive option to it if it does not need the cash from the exercise of the warrants after the business combination.
The warrants were issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and COAC. You should review a copy of the warrant agreement, which has been filed as an exhibit to the Registration Statement on Form S-1 for COAC’s IPO (SEC File No. 333-137716), for a complete description of the terms and conditions applicable to the warrants. The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of COAC common stock or BVICo Ordinary Shares at a price below their respective exercise prices.
The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to BVICo, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
No warrants will be exercisable and BVICo will not be obligated to issue Ordinary Shares unless at the time a holder seeks to exercise such warrant, a prospectus relating to the Ordinary Shares issuable upon exercise of the warrants is current and the Ordinary Shares have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, BVICo will use its best efforts to meet these conditions and to maintain a current prospectus relating to the Ordinary Shares issuable upon exercise of the warrants until the expiration of the warrants. However, BVICo cannot assure you that it will be able to do so and, if it does not maintain a current prospectus relating to the Ordinary Shares issuable upon exercise of the warrants, holders will be unable to exercise their warrants and BVICo will not be required to settle any such warrant exercise. If the prospectus relating to the Ordinary Shares issuable upon the exercise of the warrants is not current or if the Ordinary Shares are not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, BVICo will not be required to net cash settle or cash settle the warrant exercise, the warrants may have no value, the market for the warrants may be limited and the warrants may expire worthless.
No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, BVICo will, upon exercise, round up or down to the nearest whole number of Ordinary Shares.
Transfer Agent and Warrant Agent
The transfer agent for COAC’s securities and warrant agent is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004. Continental Stock Transfer & Trust Company is currently COAC’s transfer agent. After the merger, BVICo’s transfer agent and warrant agent will be _________________.
134
PRICE RANGE OF COAC SECURITIES AND DIVIDENDS
COAC’s units, common stock and warrants are quoted on the Over-the-Counter Bulletin Board under the symbols CHNQU, CHNQ and CHNQW, respectively. The following table sets forth the range of high and low closing bid prices for the units, common stock and warrants for the periods indicated since such units commenced public trading on March 22, 2007 and since such common stock and warrants commenced public trading on October April 18, 2007. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.
Units | Common Stock | Warrants | ||||||||||||||||||||||
High | Low | High | Low | High | Low | |||||||||||||||||||
2008: | ||||||||||||||||||||||||
Fourth Quarter (through December 19, 2008) | 6.00 | 5.40 | 5.80 | 5.40 | 0.30 | 0.03 | ||||||||||||||||||
Third Quarter | 6.75 | 5.60 | 5.85 | 5.60 | 0.50 | 0.23 | ||||||||||||||||||
Second Quarter | 6.95 | 6.51 | 5.75 | 5.52 | 0.62 | 0.46 | ||||||||||||||||||
First Quarter | 7.75 | 6.95 | 5.62 | 5.50 | 0.99 | 0.62 | ||||||||||||||||||
2007: | ||||||||||||||||||||||||
Fourth Quarter | 7.85 | 7.00 | 5.76 | 5.45 | 1.08 | 0.68 | ||||||||||||||||||
Third Quarter | 7.50 | 6.90 | 5.57 | 5.33 | 0.90 | 0.73 | ||||||||||||||||||
Second Quarter | 6.95 | 6.14 | 5.50 | 5.37 | 0.75 | 0.55 | ||||||||||||||||||
First Quarter | 6.20 | 6.05 | — | — | — | — |
The closing bid price for each share of common stock, warrant and unit of COAC on November 11, 2008, the last trading day before announcement of the execution of the merger agreement, was $5.63, $0.30 and $5.85, respectively. As of _______ __, 2009, the record date for the COAC special meeting, the closing bid price for each share of common stock, warrant and unit of COAC was $____, $____ and $____, respectively.
Holders of COAC common stock, warrants and units should obtain current market quotations for their securities. The market price of COAC common stock, warrants and units could vary at any time before the merger. After the closing of the transactions contemplated by the merger agreement, the securities of BVICo are expected to be listed on the Nasdaq Stock Market and the symbols will change to CHOP, CHOPW and CHOPU.
Holders
As of _______ __, 2009, there were __ holders of record of COAC units, __ holders of record of COAC common stock and __ holders of record of COAC warrants. COAC believes that the aggregate number of beneficial holders of its units, common stock and warrants is in excess of ____ persons.
Dividends
COAC has not paid any dividends on its common stock to date and does not intend to pay dividends prior to the completion of the merger. The payment of any dividends subsequent to the merger will be within the discretion of BVICo’s then board of directors, subject to the relevant provision of BVI law. The payment of dividends subsequent to the merger will be contingent upon BVICo’s revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of the merger, as well as contractual restrictions and other considerations deemed relevant by BVICo’s then board of directors.
135
SHAREHOLDER PROPOSALS
The BVICo 2009 annual meeting of shareholders will be held on or about _______ __, 2009 unless the date is changed by the board of directors. If you are a shareholder and you want to include a proposal in the proxy statement for the year 2009 annual meeting, you need to provide it to BVICo by no later than _______ __, 200_. You should direct any proposals to COAC’s secretary at BVICo’s principal office which will be located at _______________________________. If you want to present a matter of business to be considered at the year 2009 annual meeting, under BVICo’s articles of association you must give timely notice of the matter, in writing, to its secretary. To be timely, the notice has to be given between _______ __, 2009 and _______ __, 2009.
LEGAL MATTERS
Graubard Miller, The Chrysler Building, 405 Lexington Avenue, New York, New York 10174, will pass upon certain legal matters related to this proxy statement/prospectus. Conyers Dill & Pearman will pass upon the validity of theBVICo Ordinary Shares issued in connection with the merger and certain other legal matters related to this proxy statement/prospectus.
EXPERTS
The audited financial statements of Ge Rui as of December 31, 2007, December 31, 2006 and December 31, 2005 and for the years then ended included in this proxy statement/prospectus have been audited by UHY Vocation HK CPA Limited, an independent registered public accounting firm, as set forth in their report appearing elsewhere herein.
The audited financial statements of China Opportunity Acquisition Corp. as of December 31, 2007, and for the period then ended, included in this proxy statement/prospectus have been so included in the reliance on a report of WithumSmith+Brown, P.C., an independent registered public accounting firm, appearing elsewhere herein given on the authority of said firm, as experts in auditing and accounting.
Representatives of UHY Vocation HK CPA Limited and WithumSmith+Brown, P.C. will be present at the stockholder meeting or will be available by telephone with the opportunity to make statements and to respond to appropriate questions.
DELIVERY OF DOCUMENTS TO STOCKHOLDERS
Pursuant to the rules of the SEC, COAC and services that it employs to deliver communications to its stockholders are permitted to deliver to two or more stockholders sharing the same address a single copy of each of COAC’s annual report to stockholders and COAC’s proxy statement/prospectus. Upon written or oral request, COAC will deliver a separate copy of the annual report to stockholder and/or proxy statement/ prospectus to any stockholder at a shared address to which a single copy of each document was delivered and who wishes to receive separate copies of such documents in the future. Stockholders receiving multiple copies of such documents may likewise request that COAC deliver single copies of such documents in the future. Stockholders may notify COAC of their requests by calling or writing COAC at its principal executive offices at 300 Tice Boulevard, Woodcliff Lake, New Jersey 07677 (201) 930-8900.
136
WHERE YOU CAN FIND MORE INFORMATION
COAC files reports, proxy statements and other information with the SEC as required by the Exchange Act. You may read and copy reports, proxy statements and other information filed by COAC with the SEC at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of the materials described above at prescribed rates by writing to the SEC, Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549. You may access information on COAC at the SEC web site containing reports, proxy statement/prospectus and other information at:http://www.sec.gov.
Information and statements contained in this proxy statement/prospectus are qualified in all respects by reference to the copy of the relevant contract or other document included as an annex to this proxy statement/prospectus.
If you would like additional copies of this proxy statement/prospectus or if you have questions about the merger, you should contact via phone or in writing:
Nicholas Puro, Secretary
China Opportunity Acquisition Corp.
300 Tice Boulevard
Woodcliff Lake, New Jersey 07677
(201) 930-8900
137
INDEX TO FINANCIAL STATEMENTS
FS-1
HENAN GREEN COMPLEX MATERIALS CO., LTD
BALANCE SHEETS (Unaudited)
as at September 30 2008
September 30 2008 USD | December 31 2007 USD | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | 25,132,375 | 218,352 | ||||||
Restricted cash | 27,100,883 | 19,226,551 | ||||||
Accounts receivable | 18,046,501 | 10,176,454 | ||||||
Inventories | 5,335,428 | 8,660,623 | ||||||
Due from owners | — | 25,126,394 | ||||||
Prepayments | 32,193,186 | 10,609,492 | ||||||
Other receivables | 1,231,952 | 635,418 | ||||||
Total current assets | 109,040,325 | 74,653,284 | ||||||
Non-current assets | ||||||||
Property, plant and equipment, net | 16,691,059 | 15,816,962 | ||||||
Land use right, net | 1,431,294 | 1,346,895 | ||||||
Total non-current assets | 18,122,353 | 17,163,857 | ||||||
Total assets | 127,162,678 | 91,817,141 | ||||||
LIABILITIES AND OWNERS' EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | 13,373,846 | 5,886,523 | ||||||
Notes payable | 31,517,400 | 20,480,903 | ||||||
Short term loans | 25,375,926 | 17,355,303 | ||||||
Tax payable | 1,129,763 | 2,596,687 | ||||||
Receipts in advance | 18,632,185 | 8,448,965 | ||||||
Accrued liabilities and other payables | 9,977,394 | 5,289,171 | ||||||
Due to owner(s) | 6,520,089 | 61,688 | ||||||
Total current liabilities | 106,526,603 | 60,119,240 | ||||||
Non-current liabilities | ||||||||
Land use right payable, net | 28,658 | 154,125 | ||||||
Total non-current liabilities | 28,658 | 154,125 | ||||||
Total liabilities | 106,555,261 | 60,273,365 | ||||||
Owners' equity | ||||||||
Registered capital | 3,335,043 | 3,335,043 | ||||||
Retained earnings | 13,536,180 | 26,286,004 | ||||||
Accumulated other comprehensive income | 3,736,194 | 1,922,729 | ||||||
Total owners' equity | 20,607,417 | 31,543,776 | ||||||
Total liabilities and owners' equity | 127,162,678 | 91,817,141 |
See Accompanying Notes to the Unaudited Financial Statements.
FS-2
HENAN GREEN COMPLEX MATERIALS CO., LTD
STATEMENTS OF INCOME (Unaudited)
For the Periods Ended September 30, 2008 and 2007
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2008 USD | 2007 USD | 2008 USD | 2007 USD | |||||||||||||
Revenue | 55,881,554 | 38,726,699 | 156,860,563 | 106,517,004 | ||||||||||||
Cost of revenue | (41,223,269 | ) | (28,155,712 | ) | (112,999,500 | ) | (76,712,636 | ) | ||||||||
Gross profit | 14,658,285 | 10,570,987 | 43,861,063 | 29,804,368 | ||||||||||||
General and administrative expenses | (890,469 | ) | (641,491 | ) | (2,373,961 | ) | (2,038,274 | ) | ||||||||
Selling and marketing expenses | (175,762 | ) | (126,466 | ) | (581,108 | ) | (398,086 | ) | ||||||||
Operating income | 13,592,054 | 9,803,030 | 40,905,994 | 27,368,008 | ||||||||||||
Other income and (expense) | ||||||||||||||||
Interest income | 334,813 | 780,057 | 1,077,947 | 1,236,561 | ||||||||||||
Interest expenses | (1,007,838 | ) | (377,275 | ) | (2,969,819 | ) | (1,559,355 | ) | ||||||||
Sundry income | 888 | 1,046 | 84,910 | 1,073 | ||||||||||||
Income before income taxes | 12,919,917 | 10,206,858 | 39,099,032 | 27,046,287 | ||||||||||||
Income tax expense | (3,244,752 | ) | (3,191,802 | ) | (9,667,525 | ) | (8,862,958 | ) | ||||||||
Net income | 9,675,165 | 7,015,056 | 29,431,507 | 18,183,329 |
See Accompanying Notes to the Unaudited Financial Statements.
FS-3
HENAN GREEN COMPLEX MATERIALS CO., LTD
STATEMENTS OF OWNERS' EQUITY (Unaudited)
For the Nine Months Ended September 30, 2008
Registered Capital USD | Retained Earnings USD | Accumulated Other Comprehensive Income USD | Total Owners' Equity USD | |||||||||||||
Balance, December 31, 2007 | 3,335,043 | 26,286,004 | 1,922,729 | 31,543,776 | ||||||||||||
Comprehensive income: | ||||||||||||||||
Net income | 29,431,507 | 29,431,507 | ||||||||||||||
Foreign currency translation | 1,813,465 | 1,813,465 | ||||||||||||||
Total comprehensive income | 31,244,972 | |||||||||||||||
Dividend | (42,181,331 | ) | (42,181,331 | ) | ||||||||||||
Balance at September 30, 2008 | 3,335,043 | 13,536,180 | 3,736,194 | 20,607,417 |
See Accompanying Notes to the Unaudited Financial Statements.
FS-4
HENAN GREEN COMPLEX MATERIALS CO., LTD
STATEMENT OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2008 and 2007
For the Nine Months Ended September 30, | ||||||||
2008 USD | 2007 USD | |||||||
Cash flows from operating activities: | ||||||||
Net income | 29,431,507 | 18,183,329 | ||||||
Adjustments to reconcile net income to net cash provided by/(used in) operating activities | ||||||||
Depreciation of property, plant and equipment | 1,789,691 | 1,592,419 | ||||||
Amortization of land use right | 22,595 | 20,580 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (7,870,047 | ) | (7,052,630 | ) | ||||
Inventories | 3,325,195 | 1,579,663 | ||||||
Prepayments | (21,583,694 | ) | (1,867,985 | ) | ||||
Other receivables | (596,534 | ) | (402,861 | ) | ||||
Accounts payable | 7,487,323 | 3,263,605 | ||||||
Dividend payable | — | 8,644,076 | ||||||
Tax payable | (1,466,924 | ) | 1,262,787 | |||||
Receipts in advance | 10,183,220 | 2,920,820 | ||||||
Accrued liabilities and other payables | 4,688,223 | (41,987 | ) | |||||
Net cash provided by operating activities | 25,410,555 | 28,101,816 | ||||||
Cash flows from investing activities: | ||||||||
Capital expenditures on addition of property, plant and equipment | (2,663,788 | ) | (1,356,617 | ) | ||||
Dividend paid | (42,181,331 | ) | (16,134,445 | ) | ||||
Change in restricted cash | (7,874,332 | ) | (7,393,675 | ) | ||||
Due from owners | 25,126,394 | (737,842 | ) | |||||
Net cash used in investing activities | (27,593,057 | ) | (25,622,579 | ) | ||||
Cash flows from financing activities: | ||||||||
Repayment of short term loans | (21,037,242 | ) | (5,290,367 | ) | ||||
Short term loans raised | 29,057,865 | 8,657,375 | ||||||
Due to owner(s) | 6,458,401 | 230,706 | ||||||
Land use right | (125,467 | ) | (309,076 | ) | ||||
Proceeds from notes payable | 11,036,497 | 5,604,855 | ||||||
Net cash provided by financing activities | 25,390,054 | 8,893,493 | ||||||
Net increase in cash | 23,207,552 | 11,372,730 | ||||||
Effect on change of exchange rates | 1,706,471 | 609,350 | ||||||
Cash as of January 1 | 218,352 | 804,160 | ||||||
Cash as of September 30 | 25,132,375 | 12,786,240 | ||||||
Supplemental disclosures of cashflow and non-cash information: | ||||||||
Interest paid | 2,969,819 | 1,559,355 | ||||||
Income tax paid | 11,284,502 | 7,694,624 |
See Accompanying Notes to the Unaudited Financial Statements.
FS-5
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Unaudited)
For the Nine Months Ended September 30, 2008
1. Description of Business and Organization
Henan Green Complex Materials Co., Ltd (the “Company”) is a China-based company that processes and sells steel mill flat-rolled products which are extensively used in the manufacturing industry throughout mainland China. The Company conducts business directly with its customers in the People's Republic of China (PRC).
2. Basis of Presentation and Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying unaudited financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and Item 310(b) of Regulation S-B. 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 of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. These consolidated financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2007 and notes thereto in Form S-4. Interim results are not necessarily indicative of the results for the full year.
(b) Foreign Currency Translation
Assets and liabilities of foreign operation are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rate of exchange prevailing during the period. The period-end rates for September 30, 2008 and December 31, 2007 of Renminbi to one US dollar are 6.7899 and 7.2946 respectively; average rates for the nine months ended September 30, 2008 and 2007 are 6.9703 and 7.6530 respectively. The related translation adjustments are reflected in “Accumulated other comprehensive income” in the owners' equity section of the balance sheet. As of September 30, 2008 and December 31, 2007, the accumulated foreign currency translation gain was USD3,736,194 and USD1,922,729 respectively. Foreign currency gains and losses resulting from transactions are included in earnings.
(c) Cash
Cash represents cash in bank and cash on hand.
(d) Accounts Receivable
Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts sales returns, trade discounts and value added tax. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. Management determines the allowance based on historical write-off experience, customer specific facts and economic conditions. The Company has historically been able to collect all of its receivable balances, and accordingly, 2% allowance has been provided for doubtful accounts.
Outstanding account balances 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. The Company does not have any off-balance-sheet credit exposure to its customers.
(e) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. In the case of work in process and finished goods comprise of direct materials, direct labour and an appropriate proportion of overheads.
FS-6
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Unaudited)
For the Nine Months Ended September 30, 2008
2. Basis of Presentation and Summary of Significant Accounting Policies – (continued)
(f) Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to general and administrative expenses as incurred. Depreciation of property, plant and equipment is computed by the straight-line method over the assets estimated useful lives ranging from five to fifty years. Building improvements, if any, are amortized on a straight-line basis over the estimated useful life.
Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations.
Construction in progress represents the costs of property, plant and equipment under construction or installation. Depreciation commenced when the asset is places in service. The accumulated costs are reclassified as property, plant and equipment when installation or construction is completed.
The estimated useful lives of the assets are as follows:
Years | ||||
Land | 50 | |||
Buildings | 10 – 20 | |||
Machinery and equipment | 5 – 20 | |||
Vehicles | 5 | |||
Furniture fixtures and office equipment | 5 |
Expenditures for repairs and maintenance, which do not extend the useful life of the assets, are expensed as incurred.
(g) Land Use Right
Land use right is recorded at cost less accumulated amortization. Under SFAS 142, land use right classified as definite lived intangible assets and are amortized over its useful life. According to the laws of the PRC, the government owns all of the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the PRC government. Land use right is amortized using the straight-line method over the lease term of 50 years.
(h) Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet.
No impairment was recognized as at September 30, 2008.
(i) Revenue Recognition
The Company generates revenue primarily from sales of steel mill flat-rolled products.
FS-7
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Unaudited)
For the Nine Months Ended September 30, 2008
2. Basis of Presentation and Summary of Significant Accounting Policies – (continued)
Revenue is recognized when products have been delivered to the buyer and title and risk of ownership has passed to the buyer, the sales price is fixed and determinable and collectibility is reasonable assured.
In the PRC, value added tax (“VAT”) of 17% on invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Company; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities.
(j) Income Taxes
The Company accounts for income taxes under FASB Statement No. 109,Accounting for Income Taxes.Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be effective when the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of income in the period that includes the enactment date.
(k) Comprehensive Income
The Company has adopted SFAS No. 130,Reporting Comprehensive Income. This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income and foreign currency translation adjustments.
Comprehensive income consist of the following:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2008 USD | 2007 USD | 2008 USD | 2007 USD | |||||||||||||
Net income | 9,675,165 | 7,015,056 | 29,431,507 | 18,183,329 | ||||||||||||
Other comprehensive income | ||||||||||||||||
- Foreign currency translation adjustments | 281,213 | 302,745 | 1,813,465 | 660,254 | ||||||||||||
9,956,378 | 7,317,801 | 31,244,972 | 18,843,583 |
(l) Commitments and Contingencies
In the normal course of business, the Company is subject to contingencies, including legal proceedings and claims arising out of the businesses that relate to a wide range of matters, including among others, product liability. The Company records accruals for such contingencies based upon the assessment of the probability of occurrence and, where determinable, an estimate of the liability. Management may considers many factors in making these assessments including past history, scientific evidence and the specifics of each matter. As management has not become aware of any product liability claims arising from any incident over the last three years, the Company has not recognized a liability for product liability claims.
(m) Segment Information
Statement of Financial Accounting Standards No. 131,Disclosure About Segments of an Enterprise and Related Informationestablishes standards for reporting information on operating segments in interim and annual financial statements. The Company operates in one segment, which is the business of manufacturing and selling of steel mill flat-rolled products. Our chief operating decision-makers review our operating results on an aggregate basis and manage our operations as a single operating segment.
FS-8
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Unaudited)
For the Nine Months Ended September 30, 2008
2. Basis of Presentation and Summary of Significant Accounting Policies – (continued)
(n) Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” This Statement defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement does not require any new fair value measurement, rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this Statement are to be applied prospertively as of the begining of the fiscal year in which this Statement is initially applied, with any transition adjustment to the opening balance of retained earnings. The provisions of SFAS 157, as issued, are effective for fiscal years beginning after November 15, 2007. The Company expects the adoption of SFAS 157 to have no material impact on the financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities — including an amendment of FASB Statement No. 115 (SFAS 159).” This Statement creates a fair value option under which an entity may irrevocably elect fair value as the initial and subsequent measurement attribute for certain assets and liabilities, on an instrument-by-instrument basis. If the fair value option is elected for an instrument, all subsequent changes in fair value for that instrument shall be reported in earnings. The Statement is effective for fiscal years beginning after November 15, 2007. The Company does not anticipate that the adoption of SFAS No. 159 will have a material impact on its financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), which replaces FASB Statement no. 141, SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS 141R is effective as of the beginning of any entity's fiscal year that begins after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 141R on the Company's financial condition, results of operations and cash flows.
In December 2007, SAB 109 supersedes SAB 105, “Application of Accounting Principles to Loan Commitments”, provided that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment. The Company does not believe that the adoption of this statement will have a material effect on the Company's financial condition and results of operations.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS No. 142-3 (FSP FAS 142-3) “Determination of the Useful Life of Intangible Assets.” FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142, “Goodwill and Other Intangible Assets,” to include an entity's historical experience in renewing or extending similar arrangements, adjusted for entity-specific factors, even when there is likely to be “substantial cost or material modifications.” FSP FAS 142-3 states that in the absence of historical experience an entity should use assumptions that market participants would make regarding renewals or extensions, adjusted for entity-specific factors. The guidance for determining the useful life of intangible assets included in this FSP will be applied prospectively to intangible assets acquired after the effective date of January 1, 2009. The Company does not expect FSP FAS 142-3 to have a material impact on our financial statements.
In May 2008, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (FAS 162). Under FAS 162, the GAAP hierarchy will now reside in the accounting literature established by the FASB. FAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of
FS-9
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Unaudited)
For the Nine Months Ended September 30, 2008
2. Basis of Presentation and Summary of Significant Accounting Policies – (continued)
financial statements in conformity with GAAP. FAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” FAS 162 will not impact our financial statements.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
3. Cash
Cash represents cash in bank and cash on hand. Cash as of September 30, 2008 consists of the following:
Bank balances and cash | 52,233,258 | |||
Less: Restricted cash | (27,100,883 | ) | ||
25,132,375 |
Renminbi is not a freely convertible currency and the remittance of funds out of the PRC is subject to the exchange restrictions imposed by the PRC government.
As at September 30, 2008, the Company's cash of approximately USD27,100,883 was restricted and deposited in certain banks as guarantee deposits for the benefit of issuance of notes payable granted by the banks.
The restricted cash guaranteed USD31,517,400 notes payable at period ended September 30, 2008. It can only be released at the expiration date of corresponding notes payable.
4. Accounts Receivable
The Company performs ongoing credit evaluations of its customers' financial conditions. The Company generally encourages its customers to use its products and settle the outstanding balance within credit terms. As of September 30 2008, the provision on accumulated allowance for doubtful accounts was USD150,312.
5. Inventories
Inventories as of September 30, 2008 consist of the following:
Raw materials | 1,039,035 | |||
Work-in-process | 1,543,862 | |||
Finished goods | 2,752,531 | |||
5,335,428 |
6. Due From/(To) Owners
Amounts due from/(to) owners are unsecured, non-interest bearing and with no fixed repayment terms. Advance from the principal owner, Lu Mingwang, will be repaid in the view of the Company's current healthy cash position.
7. Prepayments
Prepayments as of September 30, 2008 consist of the following:
Prepaid purchases | 32,193,186 |
Prepaid purchases represent amounts prepaid for the purchase of raw materials and accessories to suppliers.
FS-10
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Unaudited)
For the Nine Months Ended September 30, 2008
8. Other Receivables
Other receivables as of September 30, 2008 consist of the following:
Other receivables | ||||
- Advances to staff | 387,472 | |||
- Others | 844,480 | |||
1,231,952 |
Other receivables represent advances to staff and petty cash to department staff for daily expenditures. These amounts are interest free and with no fixed repayment terms.
9. Property, Plant and Equipment
Property, plant and equipment as of September 30, 2008 consist of the following:
Buildings | 3,217,683 | |||
Leasehold importment | 20,280 | |||
Plant machinery and equipment | 21,754,945 | |||
Vehicles | 1,578,307 | |||
Office equipment | 137,386 | |||
Construction in progress | 161,989 | |||
26,870,590 | ||||
Accumulated depreciation | (10,179,531 | ) | ||
16,691,059 |
Depreciation charged to earnings for the period ended September 30, 2008 was USD1,789,691.
10. Land Use Right
Land use right as of September 30, 2008 consist of the following:
Land use right, net | 1,431,294 |
Amount represents prepaid lease payments to Local Government for land use right held for a period of 50 years from July 9, 2004 to June 30, 2054 in Zhengzhou, People's Republic of China. The Company's liability will be paid in full by the end of 2008. Land use right payable as at September 30, 2008 is USD28,658.
Land use right is amortized using the straight-line method over the lease term of 50 years. The amortization expense for the nine months ended September 30, 2008 was USD22,595.
11. Notes Payable
Classified by financial institutions: | ||||
China Citic Bank | 11,693,840 | |||
Commercial Bank of Zhengzhou | 1,472,775 | |||
Guangdong Development Bank | 5,508,181 | |||
Shanghai Pudong Development Bank | 8,836,654 | |||
China Merchants Bank | 4,005,950 | |||
31,517,400 |
FS-11
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Unaudited)
For the Nine Months Ended September 30, 2008
11. Notes Payable – (continued)
Additional information: | ||||
Maximum balance outstanding during the year | 55,722,470 | |||
Finance cost | 1,074,865 | |||
Finance charge per contract (basis point) | 4.25 – 5.7pt | |||
Weighted average interest rate | 2.07% |
All the above notes payable are secured by either 50% or 100% corresponding restricted cash. As at September 30, 2008, the Company's cash of approximately USD27,100,883 was restricted on the such purpose. All the notes payable have terms of six months. There are no financial covenants in the notes payable.
12. Short Term Loans
In order to smooth working capital of daily operations, the Company entered into the following short term loan agreements as of September 30, 2008:
Classified by financial institutions: | ||||
China Citic Bank | 3,681,939 | |||
China Merchants Bank | 4,418,327 | |||
Commercial Bank of Zhengzhou | 7,363,879 | |||
Guangdong Development Bank | 2,209,164 | |||
Shanghai Pudong Development Bank | 5,891,103 | |||
Zhengzhou City Rural Credit Cooperative | 736,388 | |||
Zhengzhou City Urban Credit Cooperative | 1,075,126 | |||
25,375,926 |
Additional information: | ||||
Maximum balance outstanding during the year | 25,817,758 | |||
Interest paid during the year | 1,889,892 | |||
Range of interest rate (basis point) | 51.0 – 96.5pt | |||
Weighted average interest rate | 3.67% |
All of the above short terms loans are fixed term loans with a period of 12 months or less. These short terms loans are either guaranteed and secured by the Company's fixed assets, including its machinery and land use right, or guaranteed and secured by a related party, Zhengzhou No.2 Iron and Steel Company Limited's fixed assets, or guaranteed by the Company's owners or other third parties.
13. Accrued Liabilities and Other Payables
Accrued liabilities and other payables as of September 30, 2008 consist of the following:
Accrued expenses | 1,101,292 | |||
Other payables | 7,751,354 | |||
Other tax payables | 1,124,748 | |||
9,977,394 |
Other tax payables represent payables other than income tax which consist of value added tax and city maintenance and construction tax.
FS-12
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Unaudited)
For the Nine Months Ended September 30, 2008
14. Owners' Equity and Retained Earnings
(a) Registered Capital
The Company was incorporated on December 31, 2000. The registered capital of the Company is USD3,335,043 originally contributed by thirteen natural persons.
On August 7, 2008, the Company has changed from a joint stock company to a company with limited liability. Then on October 21, 2008, the Company has become a wholly foreign owned enterprise. Its sole shareholder is Wealth Rainbow Development Limited.
(b) Retained Earnings
Retained earnings as of September 30, 2008 consist of the following:
Retained earnings | 11,953,278 | |||
Statutory surplus reserves | 1,582,902 | |||
13,536,180 |
In accordance with PRC Company Law, the Company is required to allocate at least 10% profit to the statutory surplus reserve. Appropriation to the statutory surplus reserve by the Company is based on profit arrived at under PRC accounting standards for business enterprises for each year.
The profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is made to the statutory surplus reserve. Appropriation to the statutory surplus reserve must be made before distribution of dividends to shareholders. The appropriation is required until the statutory surplus reserve reaches 50% of the owners' equity. This statutory surplus reserve is not distributable in the form of cash dividends.
As the statutory surplus reserve has reached 50% of the owners' equity in 2005, the Company ceased to allocate.
15. Income Taxes
All of the Company's income is generated in the PRC.
Current income tax expense | 9,667,525 |
The Company income tax provision in respect of operations in PRC is calculated at the applicable tax rates on the estimated assessable profits for the year based on existing legislation, interpretations and practices in respect thereof. The standard tax rate applicable to the Company changed from 33% to 25%, effective on January 1, 2008.
A reconciliation of the expected income tax expense to the actual income tax expense for the nine months ended September 30, 2008 is as follows:
Income before tax | 39,099,032 | |||
Expected PRC income tax expense at statutory tax rate of 25% | 9,774,758 | |||
Effect on exchange rate | (107,233 | ) | ||
Actual income tax expense | 9,667,525 |
The PRC tax system is subject to substantial uncertainties and has been subject to recently enacted changes, the interpretation and enforcement of which are also uncertain. There can be no assurance that changes in PRC tax laws or their interpretation or their application will not subject the Company to substantial PRC taxes in the future.
No deferred taxation has been provided as the effect of all temporary differences is immaterial.
FS-13
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS (Unaudited)
For the Nine Months Ended September 30, 2008
16. Related Party Transactions
Before 2007, Zhengzhou No.2 Iron and Steel Company Limited was one of owners of the Company with 76.93% of the total ownership. In December 2006, Zhengzhou No.2 Iron and Steel Company Limited sold all of its ownership to Lu Mingwang and others, in which Lu Mingwang becomes the majority owner holding 40% of the total ownership. Lu Mingwang is the common owner of the Company and Zhengzhou No.2 Iron and Steel Company Limited. Zhengzhou No.2 Iron and Steel Company Limited engaged in the same type of industry as the Company but ceased its processing and selling of steel operation in 2003. Zhengzhou No.2 Iron and Steel Company Limited's principal business activity after the cessation of its steel operations is receiving rental income from its investments.
In 2004, the Company entered into a rental agreement for land use right with Zhengzhou No.2 Iron and Steel Company Limited with the period from January 1, 2005 to December 31, 2014. Rental paid to Zhengzhou No.2 Iron and Steel Company Limited for the nine months ended September 30, 2008 was USD6,553 (RMB45,675).
17. Operating Lease Commitments
Rental expense for obligations under operating leases was USD18,520 (RMB130,450) for the nine months ended September 30, 2008. The total future minimum lease payments under non-cancellable operating leases in respect of premises as of September 30, 2008 are payable as follows:
September, 30 | Leasehold land | Reservoir rental | Total | |||||||||
2009 | 8,969 | 14,727 | 23,696 | |||||||||
2010 | 8,969 | 14,727 | 23,696 | |||||||||
2011 | 9,866 | 14,727 | 24,593 | |||||||||
2012 | 10,852 | 14,727 | 25,579 | |||||||||
2013 | 11,938 | 14,727 | 26,665 | |||||||||
Over five years | 20,849 | 77,316 | 98,165 | |||||||||
71,443 | 150,951 | 222,394 |
Land use right is granted by Zhengzhou No.2 Iron and Steel Company Limited, who sub-lets a part of its land with 27,066m2 to the Company for use. The rental period is from January 1, 2005 to December 31, 2014. Annual rental paid for the land use right was USD8,015 (RMB60,900) for the period of January 1, 2005 to December 31, 2009. The rental payment will increase by 10% annually from 2009 onwards.
18. Dividend
Subsequent to the balance sheet date, the second interim dividend of USD 9,675,125 was proposed by the directors and approved by the shareholders in the general meeting dated October 20, 2008.
FS-14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Owners of
Henan Green Complex Materials Co., Ltd
We have audited the accompanying balance sheets of Henan Green Complex Materials Co., Ltd (the “Company”) as of December 31, 2007, 2006 and 2005, and the related statements of income, owners’ equity, and cash flows for each of the years in the three years then ended. Henan Green Complex Materials Co., Ltd’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor are we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Henan Green Complex Materials Co., Ltd as of December 31, 2007, 2006 and 2005, and the results of its operations and its cash flows for each of the years in the three years ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
UHY VOCATION HK CPA LIMITED
Hong Kong, the People’s Republic of China,
November 10, 2008.
FS-15
HENAN GREEN COMPLEX MATERIALS CO., LTD
BALANCE SHEETS
As at December 31 2007, 2006 and 2005
2007 December 31 USD | 2006 December 31 USD | 2005 December 31 USD | ||||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash | 218,352 | 804,160 | 477,710 | |||||||||
Restricted cash | 19,226,551 | 27,562,435 | 48,822,926 | |||||||||
Accounts receivable | 10,176,454 | 5,738,889 | 761,499 | |||||||||
Inventories | 8,660,623 | 8,511,003 | 6,282,786 | |||||||||
Due from owners | 25,126,394 | 17,922,725 | 6,713,588 | |||||||||
Prepayments | 10,609,492 | 8,126,524 | 7,675,740 | |||||||||
Other receivables | 635,418 | 156,544 | 285,858 | |||||||||
Total current assets | 74,653,284 | 68,822,280 | 71,020,107 | |||||||||
Non-current assets | ||||||||||||
Property, plant and equipment, net | 15,816,962 | 15,679,581 | 13,412,027 | |||||||||
Land use right, net | 1,346,895 | 1,280,562 | 1,262,586 | |||||||||
Total non-current assets | 17,163,857 | 16,960,143 | 14,674,613 | |||||||||
Total assets | 91,817,141 | 85,782,423 | 85,694,720 | |||||||||
LIABILITIES AND OWNERS' EQUITY | ||||||||||||
Current liabilities | ||||||||||||
Accounts payable | 5,886,523 | 5,963,252 | 6,637,163 | |||||||||
Notes payable | 20,480,903 | 35,487,756 | 57,496,813 | |||||||||
Tax payable | 2,596,687 | 1,948,657 | 968,781 | |||||||||
Receipts in advance | 8,448,965 | 5,302,748 | 3,004,396 | |||||||||
Accrued liabilities and other payables | 5,289,171 | 5,806,175 | 1,243,421 | |||||||||
Due to owners | 61,688 | 122,371 | 212,418 | |||||||||
Short term loans | 17,355,303 | 8,149,562 | 1,970,211 | |||||||||
Total current liabilities | 60,119,240 | 62,780,521 | 71,533,203 | |||||||||
Non-current liabilities | ||||||||||||
Land use right payable | 154,125 | 458,590 | 517,816 | |||||||||
Total non-current liabilities | 154,125 | 458,590 | 517,816 | |||||||||
Total liabilities | 60,273,365 | 63,239,111 | 72,051,019 | |||||||||
Owners' equity | ||||||||||||
Registered capital | 3,335,043 | 3,335,043 | 3,335,043 | |||||||||
Retained earnings | 26,286,004 | 18,770,315 | 10,355,341 | |||||||||
Accumulated other comprehensive income/(loss) | 1,922,729 | 437,954 | (46,683 | ) | ||||||||
Total owners' equity | 31,543,776 | 22,543,312 | 13,643,701 | |||||||||
Total liabilities and owners' equity | 91,817,141 | 85,782,423 | 85,694,720 |
See Accompanying Notes to the Financial Statements.
FS-16
HENAN GREEN COMPLEX MATERIALS CO., LTD
STATEMENTS OF INCOME
For the Years Ended December 31, 2007, 2006 and 2005
2007 USD | 2006 USD | 2005 USD | ||||||||||
Revenue | 139,649,209 | 99,016,829 | 62,520,264 | |||||||||
Cost of revenue | (100,577,079 | ) | (72,653,972 | ) | (48,864,893 | ) | ||||||
Gross profit | 39,072,130 | 26,362,857 | 13,655,371 | |||||||||
General and administrative expenses | (2,766,623 | ) | (1,998,972 | ) | (1,556,436 | ) | ||||||
Selling and marketing expenses | (534,468 | ) | (470,706 | ) | (373,659 | ) | ||||||
Operating income | 35,771,039 | 23,893,179 | 11,725,276 | |||||||||
Other income and (expense) | ||||||||||||
Interest income | 1,432,019 | 1,068,434 | 869,902 | |||||||||
Interest expenses | (2,147,451 | ) | (1,312,256 | ) | (1,030,523 | ) | ||||||
Sundry income | 16,165 | 12 | 3,372 | |||||||||
Income before income taxes | 35,071,772 | 23,649,369 | 11,568,027 | |||||||||
Income tax expense | (11,421,638 | ) | (7,770,317 | ) | (3,780,287 | ) | ||||||
Net income | 23,650,134 | 15,879,052 | 7,787,740 |
See Accompanying Notes to the Financial Statements.
FS-17
HENAN GREEN COMPLEX MATERIALS CO., LTD
STATEMENTS OF OWNERS' EQUITY
For the Years Ended December 31, 2007, 2006 and 2005
Registered Capital USD | Retained Earnings USD | Accumulated Other Comprehensive Income/(Loss) USD | Total Owners' Equity USD | |||||||||||||
Balance, January 1, 2005 | 3,335,043 | 6,192,321 | (237,361 | ) | 9,290,003 | |||||||||||
Comprehensive income: | ||||||||||||||||
Net income | 7,787,740 | 7,787,740 | ||||||||||||||
Foreign currency translation | 190,678 | 190,678 | ||||||||||||||
Total comprehensive income | 7,978,418 | |||||||||||||||
Dividend | (3,624,720 | ) | (3,624,720 | ) | ||||||||||||
Balance, December 31, 2005 | 3,335,043 | 10,355,341 | (46,683 | ) | 13,643,701 | |||||||||||
Comprehensive income: | ||||||||||||||||
Net income | 15,879,052 | 15,879,052 | ||||||||||||||
Foreign currency translation | 484,637 | 484,637 | ||||||||||||||
Total comprehensive income | 16,363,689 | |||||||||||||||
Dividend | (7,464,078 | ) | (7,464,078 | ) | ||||||||||||
Balance, December 31, 2006 | 3,335,043 | 18,770,315 | 437,954 | 22,543,312 | ||||||||||||
Comprehensive income: | ||||||||||||||||
Net income | 23,650,134 | 23,650,134 | ||||||||||||||
Foreign currency translation | 1,484,775 | 1,484,775 | ||||||||||||||
Total comprehensive income | 25,134,909 | |||||||||||||||
Dividend | (16,134,445 | ) | (16,134,445 | ) | ||||||||||||
Balance, December 31, 2007 | 3,335,043 | 26,286,004 | 1,922,729 | 31,543,776 |
See Accompanying Notes to the Financial Statements.
FS-18
HENAN GREEN COMPLEX MATERIALS CO., LTD
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2007, 2006 and 2005
2007 USD | 2006 USD | 2005 USD | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | 23,650,134 | 15,879,052 | 7,787,740 | |||||||||
Adjustments to reconcile net income to net cash (used in)/provided by operating activities: | ||||||||||||
Depreciation of property, plant and equipment | 2,156,130 | 1,815,676 | 1,362,074 | |||||||||
Amortization of land use right | 27,641 | 26,388 | 38,496 | |||||||||
Gain on disposal of property, plant and equipment | (16,133 | ) | — | — | ||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivable | (4,400,574 | ) | (4,933,521 | ) | 2,622,380 | |||||||
Inventories | (149,620 | ) | (2,228,217 | ) | 372,659 | |||||||
Prepayments | (2,482,968 | ) | (450,784 | ) | (2,785,831 | ) | ||||||
Other receivables | (478,874 | ) | 129,314 | 1,414,031 | ||||||||
Accounts payable | (76,729 | ) | (673,911 | ) | 4,859,246 | |||||||
Tax payable | 648,030 | 979,876 | 494,572 | |||||||||
Receipts in advance | 3,146,217 | 2,298,352 | (3,233,384 | ) | ||||||||
Accrued liabilities and other payables | (517,004 | ) | 4,562,754 | (6,217,491 | ) | |||||||
Net cash provided by operating activities | 21,506,250 | 17,404,979 | 6,714,492 | |||||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures on addition of property, plant and equipment | (2,277,378 | ) | (4,083,230 | ) | (7,698,432 | ) | ||||||
Dividend paid | (16,134,445 | ) | (7,464,078 | ) | (3,624,720 | ) | ||||||
Change in restricted cash | 8,335,884 | 21,260,491 | (31,959,518 | ) | ||||||||
Due from owners | (7,203,669 | ) | (11,209,137 | ) | (108,139 | ) | ||||||
Net cash used in investing activities | (17,279,608 | ) | (1,495,954 | ) | (43,390,809 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Repayment of short term loans | (5,887,615 | ) | (4,404,828 | ) | (25,302,223 | ) | ||||||
Short term loans raised | 15,093,356 | 10,584,179 | 24,819,707 | |||||||||
Notes payable | (15,006,853 | ) | (22,009,057 | ) | 38,178,265 | |||||||
Land use right payable | (304,465 | ) | (59,226 | ) | (1,536,365 | ) | ||||||
Due to owners | (60,683 | ) | (90,047 | ) | 121,286 | |||||||
Net cash (used in)/provided by financing activities | (6,166,260 | ) | (15,978,979 | ) | 36,280,670 | |||||||
Net (decrease)/increase in cash | (1,939,618 | ) | (69,954 | ) | (395,647 | ) | ||||||
Effect on change of exchange rates | 1,353,810 | 396,404 | 39,527 | |||||||||
Cash as of January 1 | 804,160 | 477,710 | 833,830 | |||||||||
Cash as of December 31 | 218,352 | 804,160 | 477,710 | |||||||||
Supplemental disclosures of cashflow and non-cash information: | ||||||||||||
Interest paid | 2,147,451 | 1,312,256 | 1,030,523 | |||||||||
Income tax paid | 10,930,112 | 6,841,773 | 3,304,464 |
See Accompanying Notes to the Financial Statements.
FS-19
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2007, 2006 and 2005
1. Description of Business and Organization
Henan Green Complex Materials Co., Ltd (the “Company”) is a China-based company that processes and sells steel mill flat-rolled products which are extensively used in the manufacturing industry throughout mainland China. The Company conducts business directly with its customers in the People's Republic of China (PRC).
The Company was incorporated on December 31, 2000 with total registered capital Renminbi 26,000,000. Zhengzhou No. 2 Iron and Steel Company Limited contributed fixed assets of Renminbi 20,000,000 holding 76.93% of the total ownership. Other owners, Lu Baiwang held 11.54%, Yue Tiansui held 3.85%, Bai Zhensheng held 1.92%, Ren Shouze held 1.92%, Jiao Dahong held 1.92% and Li Xinhong held 1.92%.
In February 2005, Jiao Dahong and Li Xinhong sold their ownership to Lu Yi and Zhang Qihong. All other owner’s ownership remain unchanged.
In December 2006, Zhengzhou No. 2 Iron and Steel Company Limited sold all of its ownership, Lu Baiwang and Yue Tiansui sold part of their ownership. Lu Mingwang becomes the principal owner holding 40% of the total ownership. Other owners, Ren Shouze holds 10%, Lu Baiwang holds 9.53%, Liu Bingshen holds 7.41%, Chen Zheyu holds 7.26%, Zhang Shuiping holds 6.95%, Lu Yi holds 5.49%, Zhang Qihong holds 3.57%, Bai Zhensheng holds 3.4%, Yue Tiansui holds 3%, Miao Yanchao holds 1.7%, Qu Liyong holds 1.19% and Xu Maotong holds 0.5%.
On August 7, 2008, the Company has changed from a joint stock company to a company with limited liability. Then on October 21, 2008, the Company has become a wholly foreign owned enterprise. Its sole shareholder is Wealth Rainbow Development Limited.
2. Basis of Presentation and Summary of Significant Accounting Policies
(a) Basis of Presentation
The preparation of the financial statements in conformity with US generally accepted accounting principles (the “GAAP”) requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the years. Significant items subject to such estimates and assumptions include the recoverability of the carrying amount and the estimated useful lives of long-lived assets; valuation allowances for receivables, realizable values for inventories. Actual results could differ from those estimates.
(b) Foreign Currency Translation
Assets and liabilities of foreign operations are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rate of exchange prevailing during the year. For 2007, 2006 and 2005, the year-end rates of Renminbi to one US dollar are 7.2946, 7.8041 and 8.0702 respectively; average rates are 7.5973, 7.9579 and 8.1826 respectively. The related translation adjustments are reflected in “Accumulated other comprehensive income/(loss)” in the owners' equity section of the balance sheet. As of December 31, 2007, 2006 and 2005, the accumulated foreign currency translation gain/(loss) was USD1,922,729, USD437,954 and USD(46,683) respectively. Foreign currency gains and losses resulting from transactions are included in earnings.
(c) Cash
Cash represents cash in bank and cash on hand.
(d) Accounts Receivable
Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts sales returns, trade discounts and value added tax. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. Management
FS-20
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2007, 2006 and 2005
2. Basis of Presentation and Summary of Significant Accounting Policies – (continued)
determines the allowance based on historical write-off experience, customer specific facts and economic conditions. The Company has historically been able to collect all of its receivable balances, and accordingly, 2% allowance has been provided for doubtful accounts since year 2006.
Outstanding account balances 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. The Company does not have any off-balance-sheet credit exposure to its customers.
(e) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Work in process and finished goods comprise of direct materials, direct labour and an appropriate proportion of overheads.
(f) Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to general and administrative expenses as incurred. Depreciation of property, plant and equipment is computed by the straight-line method over the assets estimated useful lives ranging from five to fifty years. Building improvements, if any, are amortized on a straight-line basis over the estimated useful life.
Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations.
Construction in progress represents the costs of property, plant and equipment under construction or installation. Depreciation commenced when the asset is places in service. The accumulated costs are reclassified as property, plant and equipment when installation or construction is completed.
The estimated useful lives of the assets are as follows:
Years | ||||
Buildings | 10 – 20 | |||
Machinery and equipment | 5 – 20 | |||
Vehicles | 5 | |||
Furniture fixtures and office equipment | 5 |
Expenditures for repairs and maintenance, which do not extend the useful life of the assets, are expensed as incurred.
(g) Land Use Right
Land use right is recorded at cost less accumulated amortization. Under SFAS 142, land use right classified as definite lived intangible assets and are amortized over its useful life. According to the laws of the PRC, the government owns all of the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the PRC government. Land use right is amortized using the straight-line method over the lease term of 50 years.
(h) Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
FS-21
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2007, 2006 and 2005
2. Basis of Presentation and Summary of Significant Accounting Policies – (continued)
Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet.
No impairments were recognized in 2007, 2006 and 2005.
(i) Revenue Recognition
The Company generates revenue primarily from sales of steel mill flat-rolled products.
Revenue is recognized when products have been delivered to the buyer and title and risk of ownership has passed to the buyer, the sales price is fixed and determinable and collectibility is reasonable assured.
In the PRC, value added tax (“VAT”) of 17% on invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Company; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities.
(j) Income Taxes
The Company accounts for income taxes under FASB Statement No. 109,Accounting for Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be effective when the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of income in the year that includes the enactment date.
(k) Comprehensive Income
The Company has adopted SFAS No. 130,Reporting Comprehensive Income. This statement establishes rules for the reporting of comprehensive income/(loss) and its components. Comprehensive income/(loss) consists of net income/(loss) and foreign currency translation adjustments.
Comprehensive income consist of the following:
2007 USD | 2006 USD | 2005 USD | ||||||||||
Net income | 23,650,134 | 15,879,052 | 7,787,740 | |||||||||
Other comprehensive income | ||||||||||||
— Foreign currency translation adjustments | 1,484,775 | 484,637 | 190,678 | |||||||||
25,134,909 | 16,363,689 | 7,978,418 |
(l) Commitments and Contingencies
In the normal course of business, the Company is subject to contingencies, including legal proceedings and claims arising out of the businesses that relate to a wide range of matters, including among others, product liability. The Company records accruals for such contingencies based upon the assessment of the probability of occurrence and, where determinable, an estimate of the liability. Management may considers many factors in making these assessments including past history, scientific evidence and the specifics of each matter. As management has not become aware of any product liability claims arising from any incident over the last three years, the Company has not recognized a liability for product liability claims.
FS-22
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2007, 2006 and 2005
2. Basis of Presentation and Summary of Significant Accounting Policies – (continued)
(m) Segment Information
Statement of Financial Accounting Standards No. 131,Disclosure About Segments of an Enterprise and Related Information establishes standards for reporting information on operating segments in interim and annual financial statements. The Company operates in one segment, which is the business of manufacturing and selling of steel mill flat-rolled products. Our chief operating decision-makers review our operating results on an aggregate basis and manage our operations as a single operating segment.
(n) Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement.” This Statement defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement does not require any new fair value measurement, rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this Statement are to be applied prospertively as of the begining of the fiscal year in which this Statement is initially applied, with any transition adjustment to the opening balance of retained earnings. The provisions of SFAS 157, as issued, are effective for fiscal years beginning after November 15, 2007. The Company expects the adoption of SFAS 157 to have no material impact on the financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities — including an amendment of FASB Statement No. 115 (SFAS 159).” This Statement creates a fair value option under which an entity may irrevocably elect fair value as the initial and subsequent measurement attribute for certain assets and liabilities, on an instrument-by-instrument basis. If the fair value option is elected for an instrument, all subsequent changes in fair value for that instrument shall be reported in earnings. The Statement is effective for fiscal years beginning after November 15, 2007. The Company does not anticipate that the adoption of SFAS No. 159 will have a material impact on its financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), which replaces FASB Statement no. 141, SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS 141R is effective as of the beginning of any entity's fiscal year that begins after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 141R on the Company's financial condition, results of operations and cash flows.
In December 2007, SAB 109 supersedes SAB 105, “Application of Accounting Principles to Loan Commitments”, provided that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment. The Company does not believe that the adoption of this statement will have a material effect on the Company's financial condition and results of operations.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS No. 142-3 (FSP FAS 142-3) “Determination of the Useful Life of Intangible Assets.” FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142, “Goodwill and Other Intangible Assets,” to include an entity's historical experience in renewing or extending similar arrangements, adjusted for entity-specific factors, even when there is likely to be “substantial cost or material modifications.” FSP FAS 142-3 states that in the absence of historical experience an entity should use assumptions that market participants would make regarding renewals or extensions, adjusted for entity-specific factors. The guidance for determining the useful life of intangible assets included
FS-23
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2007, 2006 and 2005
2. Basis of Presentation and Summary of Significant Accounting Policies – (continued)
in this FSP will be applied prospectively to intangible assets acquired after the effective date of January 1, 2009. The Company does not expect FSP FAS 142-3 to have a material impact on our financial statements.
In May 2008, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (FAS 162). Under FAS 162, the GAAP hierarchy will now reside in the accounting literature established by the FASB. FAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements in conformity with GAAP. FAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” FAS 162 will not impact our financial statements.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
3. Cash
Cash represents cash in bank and cash on hand.
2007 USD | 2006 USD | 2005 USD | ||||||||||
Bank balances and cash | 19,444,903 | 28,366,595 | 49,300,636 | |||||||||
Less: Restricted cash | (19,226,551 | ) | (27,562,435 | ) | (48,822,926 | ) | ||||||
218,352 | 804,160 | 477,710 |
Renminbi is not a freely convertible currency and the remittance of funds out of the PRC is subject to the exchange restrictions imposed by the PRC government.
As at December 31, 2007, 2006, and 2005, the Company's cash of approximately USD19,226,551, USD27,562,435 and USD48,822,926 were restricted respectively and deposited in certain banks as guarantee deposits for the benefit of issuance of notes payable granted by the banks.
The restricted cash guaranteed USD20,480,903, USD35,487,756 and USD57,496,813 notes payable at years ended 2007, 2006 and 2005 respectively. It can only be released at the expiration date of corresponding notes payable.
4. Accounts Receivable
The Company performs ongoing credit evaluations of its customers' financial conditions. The Company generally encourages its customers to use its products and settle the outstanding balance within the credit terms. As of December 31, 2007, 2006 and 2005, the provision on accumulated allowance for doubtful accounts were USD86,384, USD44,733 and none respectively.
5. Inventories
Inventories as of December 31, 2007, 2006 and 2005 consist of the following:
2007 USD | 2006 USD | 2005 USD | ||||||||||
Raw materials | 4,763,939 | 3,295,859 | 3,111,204 | |||||||||
Work-in-process | 1,310,691 | 2,610,004 | 1,751,732 | |||||||||
Finished goods | 2,585,993 | 2,605,140 | 1,419,850 | |||||||||
8,660,623 | 8,511,003 | 6,282,786 |
FS-24
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2007, 2006 and 2005
6. Due from/(to) Owners
Amounts due from/(to) owners are unsecured, non-interest bearing and with no fixed repayment terms. Advances to owners will be set-off against dividends declared and paid in 2008.
7. Prepayments
Prepayments consist of the following:
2007 USD | 2006 USD | 2005 USD | ||||||||||
Prepaid purchases | 10,609,492 | 8,126,524 | 7,675,740 |
Prepaid purchases represent amounts prepaid for the purchase of raw materials and accessories to
suppliers.
8. Other Receivables
2007 USD | 2006 USD | 2005 USD | ||||||||||
Other receivables | ||||||||||||
– Advances to staff | 156,404 | 95,706 | — | |||||||||
– Others | 479,014 | 60,838 | 285,858 | |||||||||
635,418 | 156,544 | 285,858 |
Other receivables represent advances to staff and petty cash to department staff for daily expenditures. These amounts are interest free and with no fixed repayment terms.
9. Property, Plant and Equipment
Property, plant and equipment consist of:
2007 USD | 2006 USD | 2005 USD | ||||||||||
Buildings | 2,525,743 | 2,360,847 | 2,283,002 | |||||||||
Leasehold improvement | 18,877 | 14,799 | — | |||||||||
Plant machinery and equipment | 20,232,099 | 18,390,105 | 14,610,015 | |||||||||
Vehicles | 842,294 | 852,076 | 770,740 | |||||||||
Office equipment | 223,123 | 155,651 | 79,737 | |||||||||
Construction in progress | 364,666 | 156,669 | 103,423 | |||||||||
24,206,802 | 21,930,147 | 17,846,917 | ||||||||||
Accumulated depreciation | (8,389,840 | ) | (6,250,566 | ) | (4,434,890 | ) | ||||||
15,816,962 | 15,679,581 | 13,412,027 |
Depreciation charged to earnings for the years ended 2007, 2006 and 2005 were USD2,156,130, USD1,815,676 and USD1,362,074 respectively.
10. Land Use Right
2007 USD | 2006 USD | 2005 USD | ||||||||||
Land use right | 1,346,895 | 1,280,562 | 1,262,586 |
FS-25
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2007, 2006 and 2005
10. Land Use Right – (continued)
Amount represents prepaid lease payments to Local Government for land use right held for a period of 50 years from July 9, 2004 to June 30, 2054 in Zhengzhou, People's Republic of China. The Company's liability will be paid in full by the end of 2008.
Land use right is amortized using the straight-line method over the lease term of 50 years. The amortization expense for the years 2007, 2006 and 2005 was USD27,641, USD26,388 and USD38,496 respectively.
11. Notes Payable
Notes payable consist of:
2007 USD | 2006 USD | 2005 USD | ||||||||||
Classifed by financial institutions: | ||||||||||||
China Citic Bank | 3,194,143 | 13,826,065 | 10,434,782 | |||||||||
Zhengzhou City Rural Credit Cooperative | — | 2,562,755 | 20,953,631 | |||||||||
Commercial Bank of Zhengzhou | 411,263 | 11,429,889 | 12,948,873 | |||||||||
Guangdong Development Bank | 2,330,491 | 640,688 | 1,239,126 | |||||||||
Shanghai Pudong Development Bank | 8,842,157 | 4,869,235 | 7,248,890 | |||||||||
China Merchants Bank | 5,702,849 | 2,159,124 | 4,671,511 | |||||||||
20,480,903 | 35,487,756 | 57,496,813 | ||||||||||
Additional information: | ||||||||||||
Maximum balance outstanding during the year | 55,568,497 | 59,457,304 | 60,465,973 | |||||||||
Finance cost | 1,133,708 | 888,520 | 681,764 | |||||||||
Finance charge per contract (basis point) | 2.7 – 3.4pt | 1.6 – 3.6pt | 1.6pt | |||||||||
Weighted average interest rate | 1.56 | % | 1.24 | % | 0.71 | % |
All of the above notes payable are secured by either 50% or 100% corresponding restricted cash. As at December 31, 2007, 2006, and 2005, the Company's cash of approximately USD19,226,551, USD27,562,435 and USD48,822,926 were restricted on the such purpose respectively. All the notes payable have terms of six months. There are no financial covenants in the notes payable.
12. Accrued Liabilities and Other Payables
Accrued liabilities and other payables consist of the following:
2007 USD | 2006 USD | 2005 USD | ||||||||||
Accrued expenses | 989,030 | 668,235 | 439,604 | |||||||||
Other payables | 4,140,392 | 4,786,520 | 661,513 | |||||||||
Other tax payables | 159,749 | 351,420 | 142,304 | |||||||||
5,289,171 | 5,806,175 | 1,243,421 |
Other tax payables represent payables other than income tax which consist of value added tax and city maintainance and construction tax.
FS-26
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2007, 2006 and 2005
13. Short Term Loans
In order to smooth working capital of daily operations, the Company entered into the following short term loan agreements:
2007 USD | 2006 USD | 2005 USD | ||||||||||
Classifed by financial institutions: | ||||||||||||
China Citic Bank | 2,056,315 | — | — | |||||||||
China Merchants Bank | 1,370,877 | 1,281,378 | — | |||||||||
Commercial Bank of Zhengzhou | 6,854,385 | 3,203,444 | — | |||||||||
Guangdong Development Bank | 1,782,140 | 640,688 | — | |||||||||
Shanghai Pudong Development Bank | 4,112,631 | 1,922,067 | — | |||||||||
Zhengzhou City Rural Credit Cooperative | 1,178,955 | 1,101,985 | 1,065,648 | |||||||||
Zhengzhou City Urban Credit Cooperative | — | — | 904,563 | |||||||||
17,355,303 | 8,149,562 | 1,970,211 | ||||||||||
Additional information: | ||||||||||||
Maximum balance outstanding during the year | 17,355,303 | 8,149,562 | 6,963,891 | |||||||||
Interest paid during the year | 974,940 | 340,761 | 353,489 | |||||||||
Range of interest rate (basis point) | 52.2 – 96.0pt | 52.2 – 96.0pt | 74.4 – 96.0pt | |||||||||
Weighted average interest rate | 4.14 | % | 2.67 | % | 0.90 | % |
All of the above short terms loans are fixed term loans with a period of 12 months or less. These short terms loans are either secured by the Company's fixed assets, including its machinery and land use right, or guaranteed and secured by a related party — Zhengzhou No. 2 Iron and Steel Company Limited's fixed assets, or guaranteed the Company's owners or other third parties.
14. Owners’ Equity and Retained Earnings
(a) Registered Capital
The Company was incorporated on December 31, 2000. The registered capital of the Company is USD3,335,043 originally contributed by thirteen natural persons.
On August 7, 2008, the Company has changed from a joint stock company to a company with limited liability. Then on October 21, 2008, the Company has become a wholly foreign owned enterprise. Its sole shareholder is Wealth Rainbow Development Limited.
(b) Retained Earnings
2007 USD | 2006 USD | 2005 USD | ||||||||||
Retained earnings | 24,703,102 | 17,187,413 | 8,772,439 | |||||||||
Statutory surplus reserves | 1,582,902 | 1,582,902 | 1,582,902 | |||||||||
26,286,004 | 18,770,315 | 10,355,341 |
In accordance with PRC Company Law, the Company is required to allocate at least 10% profit to the statutory surplus reserve. Appropriation to the statutory surplus reserve by the Company is based on profit arrived at under PRC accounting standards for business enterprises for each year.
The profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is made to the statutory surplus reserve. Appropriation to the statutory surplus reserve
FS-27
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2007, 2006 and 2005
14. Owners’ Equity and Retained Earnings – (continued)
must be made before distribution of dividends to owners. The appropriation is required until the statutory surplus reserve reaches 50% of the owners' equity. This statutory surplus reserve is not distributable in the form of cash dividends.
As the statutory surplus reserve has reached 50% of the owners' equity in 2005, the Company ceased to allocate.
15. Income Taxes
All of the Company's income is generated in the PRC. Income tax expense for the years ended December 31, 2007, 2006 and 2005:
2007 USD | 2006 USD | 2005 USD | ||||||||||
Current income tax expense | 11,421,638 | 7,770,317 | 3,780,287 |
The Company income tax provision in respect of operations in PRC is calculated at the applicable tax rates on the estimated assessable profits for the year based on existing legislation, interpretations and practices in respect thereof. The standard tax rate applicable to the Company is 33%.
A reconciliation of the expected income tax expense to the actual income tax expense for the years ended December, 2007, 2006 and 2005 are as follows:
2007 USD | 2006 USD | 2005 USD | ||||||||||
Income before tax | 35,071,772 | 23,649,369 | 11,568,027 | |||||||||
Expected PRC income tax expense at statutory tax rate of 33% | 11,573,684 | 7,804,291 | 3,817,448 | |||||||||
Effect on exchange rate | (152,046 | ) | (33,974 | ) | (37,161 | ) | ||||||
Actual income tax expense | $ | 11,421,638 | $ | 7,770,317 | $ | 3,780,287 |
The PRC tax system is subject to substantial uncertainties and has been subject to recently enacted changes, the interpretation and enforcement of which are also uncertain. There can be no assurance that changes in PRC tax laws or their interpretation or their application will not subject the Company to substantial PRC taxes in the future.
No deferred taxation has been provided as the effect of all temporary differences is immaterial.
16. Related Party Transactions
Before 2007, Zhengzhou No. 2 Iron and Steel Company Limited was one of owners of the Company with 76.93% of the total ownership. In December 2006, Zhengzhou No. 2 Iron and Steel Company Limited sold all of its ownership to Lu Mingwang and others, in which Lu Mingwang becomes the principal owner holding 40% of the total ownership. Lu Mingwang is the majority owner of the Company and Zhengzhou No. 2 Iron and Steel Company Limited. Zhengzhou No. 2 Iron and Steel Company Limited engaged in the same type of industry as the Company but ceased its processing and selling of steel operation in 2003. Zhengzhou No. 2 Iron and Steel Company Limited's principal business activity after the cessation of its steel operations is receiving rental income from its investments.
In 2004, the Company entered into a rental agreement for land use right with Zhengzhou No. 2 Iron and Steel Company Limited with the period from January 1, 2005 to December 31, 2014. During the years ended 2007, 2006 and 2005, the rental paid to Zhengzhou No. 2 Iron and Steel Company Limited for the land use right was USD8,016 (RMB60,900), USD7,653 (RMB60,900) and USD7,443 (RMB60,900) respectively.
FS-28
HENAN GREEN COMPLEX MATERIALS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 2007, 2006 and 2005
17. Significant Concentrations
One customer accounted for 16% of net sales for the year ended December 31, 2007. This customer also accounted for 10% of receipts in advance for 2007. There are no other major customers with sales amount over 5% for the years ended December 31, 2006 and 2005.
All of the Company's suppliers locate in the PRC. Four suppliers represented 64%, 47% and 32% of total purchase for 2007, 2006 and 2005 respectively.
18. Operating Lease Commitments
Rental expense for obligations under operating leases was USD21,178 (RMB160,900), USD20,218 (RMB160,900) and USD19,663 (RMB160,900) for the years ended December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007, the total future minimum lease payments under non-cancellable operating leases are payable as follows:
December 31, | Land Use Right | Reservoir Rental | Total | |||||||||
2008 | 8,348 | 13,708 | 22,056 | |||||||||
2009 | 8,348 | 13,708 | 22,056 | |||||||||
2010 | 9,183 | 13,708 | 22,891 | |||||||||
2011 | 10,101 | 13,708 | 23,809 | |||||||||
2012 | 11,112 | 13,708 | 24,820 | |||||||||
2013 | 12,223 | 13,708 | 25,931 | |||||||||
Over five years | 13,445 | 68,540 | 81,985 | |||||||||
72,760 | 150,788 | 223,548 |
Land use right is granted by Zhengzhou No. 2 Iron and Steel Company Limited, who sub-lets part of its land with 27,066m2 to the Company for use. The rental period is from January 1, 2005 to December 31, 2014. Annual rental paid for the land use right was USD8,015 (RMB60,900) for the period of January 1, 2005 to December 31, 2009. The rental payment will increase 10% annually from 2009 onwards.
FS-29
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
BALANCE SHEETS
September 30, 2008 | December 31, 2007 | |||||||
(Unaudited ) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 70,903 | $ | 256,253 | ||||
Prepaid expenses. | 104,676 | 24,458 | ||||||
Deferred acquisition costs | 109,236 | — | ||||||
Total current assets | 284,815 | 280,711 | ||||||
Cash held in trust | 41,220,226 | 40,786,353 | ||||||
Total assets | $ | 41,505,041 | $ | 41,067,064 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 89,642 | $ | 33,141 | ||||
Taxes payable | 74,936 | 109,494 | ||||||
Deferred underwriters’ fees | 414,000 | 414,000 | ||||||
Common stock, subject to possible redemption, 2,759,310 shares at redemption value | 16,483,968 | 16,310,462 | ||||||
Total current liabilities | 17,062,546 | 16,867,097 | ||||||
Commitments | ||||||||
Stockholders’ equity | ||||||||
Preferred stock, $.0001 par value. Authorized 1,000,000 shares; none issued | — | — | ||||||
Common stock, $.0001 par value. Authorized 30,000,000 shares; issued and outstanding 5,640,690 shares (excluding 2,759,310 shares subject to possible redemption) | 564 | 564 | ||||||
Additional paid-in capital | 23,290,620 | 23,464,126 | ||||||
Retained earnings accumulated during the development stage | 1,151,311 | 735,277 | ||||||
Total stockholders’ equity | 24,442,495 | 24,199,967 | ||||||
Total liabilities and stockholders’ equity | $ | 41,505,041 | $ | 41,067,064 |
See Accompanying Notes to Unaudited Condensed Financial Statements.
FS-30
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
UNAUDITED STATEMENTS OF INCOME
Three Months Ended September 30, 2008 | Three Months Ended September 30, 2007 | |||||||
Operating expenses: | ||||||||
General and administrative costs | $ | 64,666 | $ | 67,265 | ||||
Operating loss | (64,666 | ) | (67,265 | ) | ||||
Other Income: | ||||||||
Interest income | 5 | 2,032 | ||||||
Interest on Trust Fund | 224,675 | 357,866 | ||||||
Other income | — | 1,071 | ||||||
Net income before provision for income taxes | 160,014 | 293,704 | ||||||
Provision for income taxes | 15,878 | — | ||||||
Net Income | 144,136 | 293,704 | ||||||
Accretion of trust fund relating to common stock subject to possible conversion | 89,847 | 143,111 | ||||||
Net income attributable to common stockholders | $ | 54,289 | $ | 150,593 | ||||
Weighted average shares outstanding subject to possible conversion | 2,759,310 | 2,759,310 | ||||||
Basic and diluted net income per share subject to possible conversion | $ | .03 | $ | .05 | ||||
Weighted average common shares outstanding (excluding shares subject to possible conversion) | 5,640,690 | 5,640,690 | ||||||
Basic and diluted net income per share | $ | .01 | $ | .03 |
See Accompanying Notes to Unaudited Condensed Financial Statements.
FS-31
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
UNAUDITED STATEMENTS OF INCOME
Nine Months Ended September 30, 2008 | Nine Months Ended September 30, 2007 | Period from August 7, 2006 (inception) to September 30, 2008 | ||||||||||
Operating expenses: | ||||||||||||
General and administrative costs | $ | 222,665 | $ | 175,618 | $ | 488,171 | ||||||
Operating loss | (222,665 | ) | (175,618 | ) | (488,171 | ) | ||||||
Other Income: | ||||||||||||
Interest income | 926 | 3,189 | 5,793 | |||||||||
Interest on Trust Fund | 683,874 | 731,081 | 1,753,227 | |||||||||
Other income | — | 1,071 | 1,071 | |||||||||
Net income before provision for income taxes | 462,135 | 559,723 | 1,271,920 | |||||||||
Provision for income taxes | 46,101 | — | 120,609 | |||||||||
Net Income | 416,034 | 559,723 | 1,151,311 | |||||||||
Accretion of trust fund relating to common stock subject to possible conversion | 173,506 | 292,359 | 601,140 | |||||||||
Net income attributable to common stockholders | $ | 242,528 | $ | 267,364 | $ | 550,171 | ||||||
Weighted average shares outstanding subject to possible conversion | 2,759,310 | 2,753,597 | ||||||||||
Basic and diluted net income per share subject to possible conversion | $ | .06 | $ | .11 | ||||||||
Weighted average common shares outstanding (excluding shares subject to possible conversion) | 5,640,690 | 4,360,696 | ||||||||||
Basic and diluted net income per share | $ | .04 | $ | .06 |
See Accompanying Notes to Unaudited Condensed Financial Statements.
FS-32
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) Accumulated During the Development Stage | Total Stockholders’ Equity | |||||||||||||||||
Shares | Amount | |||||||||||||||||||
Common shares issued August 7, 2006 at $.0167 per share | 1,500,000 | $ | 150 | $ | 24,850 | $ | — | $ | 25,000 | |||||||||||
Net Loss for the period ended December 31, 2006 | — | — | — | (1,594 | ) | (1,594 | ) | |||||||||||||
Balance at December 31, 2006 | 1,500,000 | 150 | 24,850 | (1,594 | ) | 23,406 | ||||||||||||||
Sale of 6,900,000 units at $6.00 per share, net of underwriters’ discount and offering expenses (2,759,310 shares subject to possible redemption) | 6,900,000 | 690 | 38,389,362 | — | 38,390,052 | |||||||||||||||
Proceeds from issuance of underwriters’ option | — | — | 100 | — | 100 | |||||||||||||||
Proceeds subject to possible redemption of 2,759,310 shares | (2,759,310 | ) | (276 | ) | (15,882,552 | ) | — | (15,882,828 | ) | |||||||||||
Sale of 2,266,667 warrants to initial stockholders | — | — | 1,360,000 | — | 1,360,000 | |||||||||||||||
Accretion of trust fund relating to common stock subject to possible conversion | — | — | (427,634 | ) | — | (427,634 | ) | |||||||||||||
Net income for the year ended December 31, 2007 | — | — | — | 736,871 | 736,871 | |||||||||||||||
Balance, December 31, 2007 | 5,640,690 | 564 | 23,464,126 | 735,277 | 24,199,967 | |||||||||||||||
Net income for the period ended September 30, 2008 (Unaudited) | 416,034 | 416,034 | ||||||||||||||||||
Accretion of trust fund relating to common stock subject to possible conversion | (173,506 | ) | (173,506 | ) | ||||||||||||||||
Balance, September 30, 2008 (Unaudited) | 5,640,690 | $ | 564 | $ | 23,290,620 | $ | 1,151,311 | $ | 24,442,495 |
See Accompanying Notes to Unaudited Condensed Financial Statements.
FS-33
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
UNAUDITED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2008 | Nine Months Ended September 30, 2007 | Period from August 7, 2006 (inception) to September 30, 2008 | ||||||||||
Cash flow from operating activities | ||||||||||||
Net income | $ | 416,034 | $ | 559,723 | $ | 1,151,311 | ||||||
Adjustments to reconcile net income to net cash used by operating activities | ||||||||||||
Dividend income earned on funds held in trust | (683,874 | ) | (731,081 | ) | (1,753,227 | ) | ||||||
(Increase)/decrease in prepaid expenses | (80,217 | ) | (32,768 | ) | (104,675 | ) | ||||||
Increase/(decrease) in accounts payable and accrued expense | 56,501 | 43,237 | 86,361 | |||||||||
Increase (decrease) in taxes payable | (34,558 | ) | — | 74,936 | ||||||||
Net cash used by operating activities | (326,114 | ) | (160,889 | ) | (545,294 | ) | ||||||
Cash flows from investing activities | ||||||||||||
Payments to trust fund | — | (42,760,000 | ) | (42,760,000 | ) | |||||||
(Increase)/decrease in deferred acquisition costs | (109,236 | ) | — | (109,236 | ) | |||||||
Withdrawals from trust fund | 250,000 | 3,043,000 | 3,293,000 | |||||||||
Net cash provided (used) by investing activities | 140,764 | (39,717,000 | ) | (39,576,236 | ) | |||||||
Cash flows from financing activities | ||||||||||||
Proceeds from sale of common shares to initial stockholders | — | — | 25,000 | |||||||||
Gross proceeds from public offering | — | 41,400,000 | 41,400,000 | |||||||||
Proceeds from underwriters’ purchase option | — | 100 | 100 | |||||||||
Repayment of note payable, stockholder | — | (125,000 | ) | (125,000 | ) | |||||||
Proceeds from note payable, stockholder | — | — | 125,000 | |||||||||
Proceeds from issuance of insider warrants | — | 1,360,000 | 1,360,000 | |||||||||
Deferred costs associated with public offering | — | — | (121,707 | ) | ||||||||
Payment of costs of public offering | — | (2,470,960 | ) | (2,470,960 | ) | |||||||
Net cash provided by financing activities | — | 40,164,140 | 40,192,433 | |||||||||
Net (decrease) increase in cash and cash equivalents | (185,350 | ) | 286,251 | 70,903 | ||||||||
Cash and cash equivalents at beginning of period | 256,253 | 26,699 | — | |||||||||
Cash and cash equivalents at end of period | $ | 70,903 | $ | 312,950 | $ | 70,903 | ||||||
Supplemental schedule of non-cash financing activity: | ||||||||||||
Fair value of underwriter purchase option included in offering costs | $ | — | $ | 2,259,000 | $ | 2,259,000 | ||||||
Increase (decrease) in accrual of offering costs | $ | — | $ | (17,719 | ) | $ | 3,281 | |||||
Reclass deferred offering cost to additional paid-in capital | $ | — | $ | 121,707 | $ | 121,707 | ||||||
Deferred underwriters’ fees | $ | — | $ | 414,000 | $ | 414,000 | ||||||
Accretion of trust fund relating to common stock subject to possible conversion | $ | 173,506 | $ | 292,359 | $ | 601,140 | ||||||
Cash paid for income taxes | $ | 138,525 | $ | 2,090 | $ | 140,615 |
See Accompanying Notes to Unaudited Condensed Financial Statements.
FS-34
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest shareholders’ annual report Form 10KSB filed on March 26, 2008.
All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected as required by Regulation S-X, Rule 10-01. All such adjustments made during the nine month periods ended September 30, 2008 and 2007 are of a normal, recurring nature. These results are not necessarily indicative of the results of operations for an entire year.
The financial statements include the accounts of the Company. The Company has not commenced operations. All activity through September 30, 2008 is related to the Company's formation and preparation for and consummation of the Offering as defined below and merger with, or acquisition of, an operating company with substantially all of its operations in the People’s Republic of China. The Company has selected December 31 as its fiscal year end.
2. Significant Accounting Policies
Organization and Business Operations
China Opportunity Acquisition Corp. (a Corporation in the development stage) (the “Company”) was incorporated in Delaware on August 7, 2006 as a blank check company whose objective is to acquire, through a stock exchange, asset acquisition or other similar business combination, an operating business, or control of such operating business through contractual arrangements, that has its principal operations located in the People’s Republic of China.
All activity from August 7, 2006 (inception) through March 26, 2007 relates to the Company’s formation and initial public offering described below. The Company is considered to be in the development stage as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7. Accounting and Reporting By Development Stage Enterprises,” and is subject to the risks associated with activities of development stage companies. The Company has selected December 31 as its fiscal year-end.
The registration statement for the Company’s initial public offering (“Offering”) was declared effective March 20, 2007. The Company consummated the offering on March 26, 2007 (Note 3). The Company’s management has broad discretion with respect to the specific application of the net proceeds of this Offering, although substantially all of the net proceeds of this Offering are intended to be generally applied toward consummating the acquisition, through a stock exchange, asset acquisition or other similar business combination, of an operating business, or the acquisition of control of such operating business through contractual arrangements, that has its principal operations located in the People’s Republic of China (“Business Combination”). Furthermore, there can be no assurance that the Company will be able to successfully effect a Business Combination. Upon the closing of the Offering, including the over-allotment option, an amount of $39,717,000 of the net proceeds was deposited in an interest/dividend-bearing trust fund (“Trust fund”) until the earlier of (i) the consummation of a Business Combination or (ii) liquidation of the Company. Under the agreement governing the Trust fund, funds will only be invested in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 with a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. The remaining net proceeds (not held in the Trust fund) may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses.
FS-35
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
2. Significant Accounting Policies – (continued)
The Company, after signing a definitive agreement for the acquisition of a target business, will submit such transaction for stockholder approval. In the event that stockholders owning 40% or more of the shares sold in the Offering vote against the Business Combination and exercise their conversion rights described below, the Business Combination will not be consummated.
All of the Company’s stockholders prior to the Offering, including all of the officers and directors of the Company (“Initial Stockholders”), have agreed to vote their 1,500,000 founding shares of common stock in accordance with the vote of the majority interest of all other stockholders of the Company (“Public Stockholders”) with respect to any Business Combination. After consummation of a Business Combination, these voting safeguards will no longer be applicable.
With respect to a Business Combination which is approved and consummated, any Public Stockholder who voted against the Business Combination may demand that the Company convert his shares. The per share conversion price will equal the amount in the Trust fund, calculated as of two business days prior to the consummation of the proposed Business Combination, divided by the number of shares of common stock held by Public Stockholders at the consummation of the Offering. Accordingly, Public Stockholders holding 39.99% of the aggregate number of shares owned by all Public Stockholders may seek conversion of shares in the event of a Business Combination. Such Public Stockholders are entitled to receive their per-share interest in the Trust fund computed without regard to the shares held by Initial Stockholders. Accordingly, a portion of the net proceeds from the offering, plus interest or dividend income earned (39.99% of the amount held in the Trust fund) has been classified as common stock subject to possible conversion in the accompanying September 30, 2008 and December 31, 2007 balance sheets.
The Company’s Certificate of Incorporation provides that the Company will continue in existence only until March 20, 2009. If the Company has not completed a Business Combination by such date, its corporate existence will cease and it will dissolve and liquidate for the purposes of winding up its affairs. In the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Fund assets) will be less than the initial public offering price per share in the Offering (assuming no value is attributed to the Warrants contained in the Units to be offered in the Offering discussed in Note 3).
We have identified a target business and have had extensive negotiations. Due to the additional costs with respect to these negotiations, we may have insufficient available funds outside of the trust fund to operate through March 20, 2009 and to complete the transaction as mentioned above, assuming that the transaction is consummated before March 20, 2009. However, the management has committed to raising additional funds through a private offering of debt or equity securities if such funds are required to consummate a business combination.
Net Income per Common Share
Basic income per share is computed by dividing net income applicable to common stock not subject to conversion by the weighted average common shares not subject to conversion outstanding during the period.
Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding for the period. Calculation of the weighted average common shares outstanding during the period is based on 1,500,000 initial shares outstanding throughout the period from August 7, 2006 (inception) to March 26, 2007 and 7,500,000 common shares outstanding after the effective date of the offering on March 26, 2007 and 8,400,000 after the exercise of the underwriters’ option. Net income per share subject to possible conversion is calculated by dividing accretion of trust fund relating to common stock subject to possible conversion by 2,759,310 common shares subject to possible conversion. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the
FS-36
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
2. Significant Accounting Policies – (continued)
issuance of common stock that then shared in the earnings of the entity. At September 30, 2008 and 2007, there were no such potentially dilutive securities.
Use of Estimates
The preparation of 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 at the date of the financial statements and the reported amounts of expenses during the reporting period including contingent assets and liabilities. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
The funds held in the trust account were deposited with Merrill Lynch & Co., Inc. Such funds have been continuously held by Merrill Lynch & Co., Inc. and are currently invested in an institutional tax-exempt fund managed by BlackRock Investment Advisors. The funds are held in a 2a-7 registered institutional money market fund that qualifies under the federal government’s Temporary Guarantee Program and is fully insured through December 18, 2008It is unknown at this time if the insurance will be extended.
Reclassifications
Certain reclassifications have been made to the prior year financial statements in order for them to be in conformity with current year presentation. Such reclassifications had no effect on prior reported net income.
Recent Accounting Pronouncements
Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (SFAS 157). In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
• | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
• | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
• | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
FS-37
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
2. Significant Accounting Policies – (continued)
The Company evaluated its financial assets (cash equivalents) and they are all measured at their carrying value. The Company has no financial assets (cash equivalents) measured at fair value on a recurring basis as of September 30, 2008 in accordance with SFAS 157.
The adoption of this statement did not have a material impact on the Company's consolidated results of operations and financial condition.
Effective January 1, 2008, the Company adopted SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to adopt the fair value option under this Statement.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations, or SFAS No. 141R. SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until January 1, 2009. We expect SFAS No. 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time. We are still assessing the impact of this pronouncement.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.
3. Initial Public Offering
On March 26, 2007, the Company sold 6,000,000 units (“Units”) in the Offering. On March 29, 2007, the Company consummated the closing of an additional 900,000 Units which were subject to the underwriters’ over-allotment option.Each Unit consists of one share of the Company’s common stock, $.0001 par value, and two Redeemable Common Stock Purchase Warrants (“Warrants”). Each Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.00 upon the completion of a Business Combination expiring March 19, 2011. The Warrants will be redeemable, at the Company’s option, with the prior consent of EarlyBird Capital, Inc., the representative of the underwriters in the Offering (“Representative”), at a price of $.01 per Warrant upon 30 days’ notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given. The Company paid the underwriters in the Offering an underwriting discount of 5.5% of the gross proceeds of the Offering and a non-accountable expense allowance of 0.5% of the gross proceeds of the Offering. However, the underwriters agreed that 1% of the underwriting discount would be deferred and would not be paid unless and until the Company consummated a Business Combination. In connection with this Offering, the Company also issued an option (“Option”), for $100, to the Representative to purchase 600,000 Units at an exercise price of $6.60 per Unit. The Company accounted for the fair value of the Option, inclusive of the receipt of the $100 cash payment, as an expense of the Offering resulting in a charge directly to stockholders’ equity. The Company estimated that the fair value of the Option was approximately $2,259,000 ($3.77 per Unit) using a Black-Scholes option-pricing model. The fair value of the Option granted to the Representative is estimated as of the date of grant using the following assumptions: (1) expected volatility of 75%, (2) risk-free interest rate of 4.8% and (3) expected life of 5 years. The Option may be exercised on a “cashless” basis, at the holder's option (except in the case of a forced cashless exercise upon the Company’s redemption of the Warrants, as described above), such that the holder may use the appreciated value of the
FS-38
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
3. Initial Public Offering – (continued)
Option (the difference between the exercise prices of the Option and the underlying Warrants and the market price of the Units and underlying securities) to exercise the option without the payment of any cash. In addition, the Warrants underlying such Units are exercisable at $5.00 per share.
4. Commitments
The Company occupies office space provided by an affiliate of the Company’s Chairman of the Board and Chief Executive Officer. Such affiliate has agreed that, until the Company consummates a Business Combination, it will make such office space, as well as certain office and secretarial services, available to the Company, as may be required by the Company from time to time. The Company has agreed to pay such affiliate $7,500 per month for such services commencing March 20, 2007. The Company paid the affiliate $67,500 and $47,903 for the nine months ended September 30, 2008 and 2007 respectively.
Pursuant to an agreement between Company and the Representative, underwriting fees of approximately $414,000 due to the underwriters of the Company’s initial public offering have been deferred and are payable to the underwriters only upon completion of a Business Combination. Management has concluded that since the primary business objective of the Company is to complete a business combination, it would be appropriate to reflect these deferred underwriting fees as an accounting estimate at the time of the initial public offering. However, there can be no assurance the Company will be successful in completing a business combination. In the event the Company has not completed a business combination by March 20, 2009, the Company will reverse the deferred underwriters’ fees payable against additional paid-in capital.
Pursuant to letter agreements dated as of August 15, 2006 with the Company and the Representative, the Initial Stockholders have waived their right to receive distributions with respect to their founding shares upon the Company’s liquidation.
The Company’s directors and certain special advisors and their members purchased 2,266,667 Warrants (“Insider Warrants”) at $0.60 per Warrant (for an aggregate purchase price of $1,360,000) privately from the Company. These purchases took place simultaneously with the consummation of the Offering. All of the proceeds received from these purchases were placed in the Trust fund. The Insider Warrants purchased by such purchasers are identical to the Warrants underlying the Units offered in the Offering except that if the Company calls the Warrants for redemption, the Insider Warrants will not be redeemable by the Company so long as such securities are held by such purchasers or their affiliates. Furthermore, the purchasers have agreed that the Insider Warrants will not be sold or transferred by them until after the Company has completed a Business Combination.
The Company’s Chairman of the Board and Chief Executive Officer has entered into an agreement with the Representative which is intended to comply with Rule 10b5-1 under the Exchange Act, pursuant to which he, or an entity or entities he controls, will place limit orders for $3 million of the Company’s common stock commencing ten business days after the Company files its Current Report on Form 8-K announcing its execution of a definitive agreement for a Business Combination and ending on the business day immediately preceding the record date for the meeting of stockholders at which such Business Combination is to be approved. The Company’s Chairman of the Board and Chief Executive Officer has agreed that he will not sell or transfer any shares of common stock purchased by him pursuant to this agreement until one year after the Company has completed the Business Combination. It is intended that these purchases will comply with Rule 10b-18 under the Exchange Act. These purchases will be made at a price equal to the per share amount held in the Company’s trust fund as reported in such Form 8-K and will be made by the Representative or another broker dealer mutually agreed upon between the parties in such amounts and at such times as the representative or such other broker dealer may determine, in its sole discretion, so long as the purchase price does not exceed the above-referenced per share purchase price.
FS-39
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
4. Commitments – (continued)
The Initial Stockholders and the holders of the Insider Warrants (or underlying securities) will be entitled to registration rights with respect to their founding shares or Insider Warrants (or underlying securities) pursuant to an agreement signed prior to the effective date of the Offering. The holders of the majority of the founding shares are entitled to demand that the Company register these shares at any time commencing three months prior to the first anniversary of the consummation of a Business Combination. The holders of the Insider Warrants (or underlying securities) are entitled to demand that the Company register these securities at any time after the Company consummates a Business Combination. In addition, the Initial Stockholders and holders of the Insider Warrants (or underlying securities) have certain “piggy-back” registration rights on registration statements filed after the Company’s consummation of a Business Combination.
The Representative has been engaged by the Company to act as the Company’s non exclusive investment banker in connection with a proposed Business Combination. For assisting the Company in structuring and negotiating the terms of a Business Combination, the Company will pay the Representative a cash transaction fee equal to 1% of the total consideration paid in connection with the Business Combination, with a maximum fee to be paid of $360,000. Additionally, the Company paid the fees and issued the securities to the underwriters in the Offering as described in Note 3 above.
5. Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors.
The agreement with the underwriters prohibits the Company, prior to a Business Combination, from issuing preferred stock which participates in the proceeds of the Trust fund or which votes as a class with the Common Stock on a Business Combination.
6. Common Stock
The Company is authorized to issue 30,000,000 shares of common stock, of which 8,400,000 were issued and outstanding as of September 30, 2008, including 2,759,310 common shares subject to possible conversion.
In connection with the issuance of 2,759,310 common shares subject to possible conversion, the Company has recorded the proceeds related to these shares in accordance with EITF Topic D-98.
The following is a summary of activity related to these shares:
Proceeds received related to the sale of 2,759,310 shares subject to possible redemption | $ | 15,882,828 | ||
Accretion of trust fund income related to possible redeemable shares | 601,140 | |||
Balance at September 30, 2008 | $ | 16,483,968 |
At September 30, 2008, 17,866,667 shares of common stock were reserved for issuance upon exercise of the Warrants and the Option.
The Company currently has no commitments to issue any shares of common stock other than as described herein; however, the Company will, in all likelihood, issue a substantial number of additional shares in connection with a Business Combination. To the extent that additional shares of common stock are issued, dilution to the interests of the Company’s stockholders who participated in the Offering is expected to occur.
7. Income Taxes
Deferred income taxes are provided for the differences between the bases of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
FS-40
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
7. Income Taxes – (continued)
A provision of $46,101 was made for state and local income taxes. Since the majority of the Company’s interest income is not subject to federal income taxes, the Company generated a net operating loss of approximately $267,840 in the nine months ended September 30, 2008 for federal income tax purposes. Since inception, the Company has incurred a cumulative net operating loss for federal tax purposes of approximately $601,916. A full valuation allowance was made for the resulting deferred tax asset, as it is uncertain if and when the Company will be able to utilize this net operating loss.
Franchise taxes incurred in the State of Delaware for the nine months ended September 30, 2008 of $30,400 are included in general and administrative expenses.
8. Subsequent Event
On November 12, 2008, the Company entered into an Agreement of Merger and Plan of Reorganization (“Merger Agreement”) with Golden Green Enterprises Limited (“BVICo”), Wealth Rainbow Development Limited (“HKCo”), which is a wholly owned subsidiary of BVICo, Henan Green Complex Materials Co., Ltd (“Ge Rui), which is a wholly owned subsidiary of HKCo, and the three current shareholders of BVICo. The Merger Agreement provides for (i) the merger of the Company into BVICo, with BVICo being the surviving entity of the merger and (ii) the holders of the Company’s securities to receive like securities of BVICo, on a one-to-one basis, in exchange for their existing securities. Immediately prior to the merger, the current shareholders of BVICo will own 30,000,000 BVICo ordinary shares, which they will continue to own after the merger is consummated. The current shareholders of BVICo will also be entitled to be issued 1,000,000 BVICo ordinary shares for each of the years ending on December 31, 2009, 2010 and 2011 in which BVICo has net after tax income that equals or exceeds the target specified for such year in the Merger Agreement ($45 million, $60 million and $80 million, respectively). In addition, if at least 75% of the warrants that BVICo will issue to the public holders of the Company’s current warrants are exercised, the current BVICo shareholders will be entitled to an aggregate cash payment of $5 million. The merger is subject to stockholder approval as described in the Company’s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on November 12, 2008.
FS-41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
China Opportunity Acquisition Corp.
We have audited the accompanying balance sheets of China Opportunity Acquisition Corp. (a corporation in the development stage) as of December 31, 2007 and 2006, and the related statements of operations, stockholders’ equity and cash flows for the periods from January 1, 2007 to December 31, 2007, August 7, 2006 (inception) to December 31, 2006, and August 7, 2006 (inception) to December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Opportunity Acquisition Corp. as of December 31, 2007, and the results of its operations and its cash flows for the periods from January 1, 2007 to December 31, 2007, August 7, 2006 (inception) to December 31, 2006, and from August 7, 2006 (inception) to December 31, 2007 in conformity with United States generally accepted accounting principles.
/s/ WithumSmith+Brown, P.C.
New Brunswick, New Jersey
March 25, 2008
FS-42
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
BALANCE SHEETS
December 31, 2007 | December 31, 2006 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 256,253 | $ | 26,699 | ||||
Prepaid expenses | 24,458 | — | ||||||
Total current assets | 280,711 | 26,699 | ||||||
Cash held in trust | 40,786,353 | — | ||||||
Deferred offering costs | — | 142,707 | ||||||
Total assets | $ | 41,067,064 | $ | 169,406 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 33,141 | $ | 21,000 | ||||
Taxes payable | 109,494 | — | ||||||
Note payable to stockholder | — | 125,000 | ||||||
Total current liabilities | 142,635 | 146,000 | ||||||
Deferred underwriters’ fees | 414,000 | — | ||||||
Common stock, subject to possible redemption, 2,759,310 shares at redemption value | 16,310,462 | — | ||||||
Commitments | ||||||||
Stockholders’ equity | ||||||||
Preferred stock, $.0001 par value | ||||||||
Authorized 1,000,000 shares; none issued | — | — | ||||||
Common stock, $.0001 par value. Authorized 30,000,000 shares; issued and outstanding 5,640,690 shares (excluding 2,759,310 shares subject to possible redemption) at December 31, 2007 and 1,500,000 shares at December 31, 2006 | 564 | 150 | ||||||
Additional paid-in capital | 23,464,126 | 24,850 | ||||||
Retained earnings (deficit) accumulated during the development stage | 735,277 | (1,594 | ) | |||||
Total stockholders’ equity | 24,199,967 | 23,406 | ||||||
Total liabilities and stockholders’ equity | $ | 41,067,064 | $ | 169,406 |
See Accompanying Summary of Significant Accounting Policies and Notes to Financial Statements.
FS-43
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
STATEMENTS OF OPERATIONS
Year Ended December 31, 2007 | Period from August 7, 2006 (Inception) to December 31, 2006 | Period from August 7, 2006 (Inception) to December 31, 2007 | ||||||||||
Operating expenses: | ||||||||||||
General and administrative costs (Notes 3 and 8) | $ | 263,912 | $ | 1,594 | $ | 265,506 | ||||||
Operating loss | (263,912 | ) | (1,594 | ) | (265,506 | ) | ||||||
Other Income: | ||||||||||||
Interest income | 4,867 | — | 4,867 | |||||||||
Interest on Trust Fund | 1,069,353 | — | 1,069,353 | |||||||||
Other income | 1,071 | — | 1,071 | |||||||||
Net income before provision for income taxes | 811,379 | (1,594 | ) | 809,785 | ||||||||
Provision for income taxes (Note 8) | 74,508 | — | 74,508 | |||||||||
Net Income | 736,871 | (1,594 | ) | 735,277 | ||||||||
Accretion of trust fund relating to common stock subject to possible conversion | 427,634 | — | 427,634 | |||||||||
Net income (loss) attributable to common stockholders | $ | 309,237 | $ | (1,594 | ) | $ | 307,643 | |||||
Shares outstanding subject to possible conversion | 2,759,310 | — | ||||||||||
Basic and diluted net income per share subject to possible conversion | $ | .15 | $ | — | ||||||||
Weighted average common shares outstanding | 4,683,325 | 1,500,000 | ||||||||||
Basic and diluted net income per share | $ | .07 | $ | — |
See Accompanying Summary of Significant Accounting Policies and Notes to Financial Statements.
FS-44
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
STATEMENTS OF STOCKHOLDERS’ EQUITY
Additional Paid-in Capital | Retained Earnings (Deficit) Accumulated During the Development Stage | Total Stockholders’ Equity | ||||||||||||||||||
Common Stock | ||||||||||||||||||||
Shares | Amount | |||||||||||||||||||
Common shares issued August 7, 2006 at $.0167 per share | 1,500,000 | $ | 150 | $ | 24,850 | $ | — | $ | 25,000 | |||||||||||
Net Loss for the period ended December 31, 2006 | — | — | — | (1,594 | ) | (1,594 | ) | |||||||||||||
Balance at December 31, 2006 | 1,500,000 | 150 | 24,850 | (1,594 | ) | 23,406 | ||||||||||||||
Sale of 6,900,000 units at $6.00 per share, net of underwriters’ discount and offering expenses (2,759,310 shares subject to possible redemption) | 6,900,000 | 690 | 38,389,362 | — | 38,390,052 | |||||||||||||||
Proceeds from issuance of underwriters’ option | — | — | 100 | — | 100 | |||||||||||||||
Proceeds subject to possible redemption of 2,759,310 shares | (2,759,310 | ) | (276 | ) | (15,882,552 | ) | — | (15,882,828 | ) | |||||||||||
Sale of 2,266,667 warrants to initial stockholders | — | — | 1,360,000 | — | 1,360,000 | |||||||||||||||
Accretion of trust fund relating to common stock subject to possible conversion | (427,634 | ) | (427,634 | ) | ||||||||||||||||
Net income for the year ended December 31, 2007 | — | — | — | 736,871 | 736,871 | |||||||||||||||
Balance, December 31, 2007 | 5,640,690 | $ | 564 | $ | 23,464,126 | $ | 735,277 | $ | 24,199,967 |
See Accompanying Summary of Significant Accounting Policies and Notes to Financial Statements.
FS-45
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS
Year Ended December 31, 2007 | Period from August 7, 2006 (Inception) to December 31, 2006 | Period from August 7, 2006 (Inception) to December 31, 2007 | ||||||||||
Cash flow from operating activities | ||||||||||||
Net income (loss) | $ | 736,871 | $ | (1,594 | ) | $ | 735,277 | |||||
Adjustments to reconcile net income (loss) to net cash used by operating activities | ||||||||||||
Dividend income earned on funds held in trust | (1,069,353 | ) | — | (1,069,353 | ) | |||||||
Increase in prepaid expenses | (24,458 | ) | — | (24,458 | ) | |||||||
Increase in accounts payable and accrued expense | 29,860 | — | 29,860 | |||||||||
Increase in taxes payable | 109,494 | 109,494 | ||||||||||
Net cash used by operating activities | (217,586 | ) | (1,594 | ) | (219,180 | ) | ||||||
Cash flows from investing activities | ||||||||||||
Payments to trust fund | (42,760,000 | ) | — | (42,760,000 | ) | |||||||
Withdrawals from trust fund | 3,043,000 | — | 3,043,000 | |||||||||
Net cash used by investing activities | (39,717,000 | ) | — | (39,717,000 | ) | |||||||
Cash flows from financing activities | ||||||||||||
Proceeds from sale of common shares to initial stockholders | — | 25,000 | 25,000 | |||||||||
Gross proceeds from public offering | 41,400,000 | — | 41,400,000 | |||||||||
Proceeds from underwriters’ purchase option | 100 | — | 100 | |||||||||
Repayment of note payable, stockholder | (125,000 | ) | — | (125,000 | ) | |||||||
Proceeds from note payable, stockholder | — | 125,000 | 125,000 | |||||||||
Proceeds from issuance of insider warrants | 1,360,000 | — | 1,360,000 | |||||||||
Deferred costs associated with public offering | — | (121,707 | ) | (121,707 | ) | |||||||
Payment of costs of public offering | (2,470,960 | ) | — | (2,470,960 | ) | |||||||
Net cash provided by financing activities | 40,164,140 | 28,293 | 40,192,433 | |||||||||
Net increase in cash and cash equivalents | 229,554 | 26,699 | 256,253 | |||||||||
Cash and cash equivalents at beginning of period | 26,699 | — | — | |||||||||
Cash and cash equivalents at end of period | $ | 256,253 | $ | 26,699 | $ | 256,253 | ||||||
Supplemental schedule of non-cash financing activity: | ||||||||||||
Fair value of underwriter purchase option included in offering costs | $ | 2,259,000 | $ | — | $ | 2,259,000 | ||||||
Increase (decrease) in accrual of offering costs | (17,719 | ) | 21,000 | 3,281 | ||||||||
Reclass deferred offering cost to additional paid-in capital | 121,707 | — | 121,707 | |||||||||
Deferred underwriters’ fees | 414,000 | — | 414,000 | |||||||||
Total | $ | 2,776,988 | $ | 21,000 | $ | 2,797,988 |
See Accompanying Summary of Significant Accounting Policies and Notes to Financial Statements.
FS-46
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Organization and Business Operations
China Opportunity Acquisition Corp. (a Corporation in the development stage) (the “Company”) was incorporated in Delaware on August 7, 2006 as a blank check company whose objective is to acquire, through a stock exchange, asset acquisition or other similar business combination, an operating business, or control of such operating business through contractual arrangements, that has its principal operations located in the People’s Republic of China.
All activity from August 7, 2006 (inception) through March 26, 2007 relates to the Company’s formation and initial public offering described below. The Company is considered to be in the development stage as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7. Accounting and Reporting By Development Stage Enterprises,” and is subject to the risks associated with activities of development stage companies. The Company has selected December 31 as its fiscal year-end.
The registration statement for the Company’s initial public offering (“Offering”) was declared effective March 20, 2007. The Company consummated the offering on March 26, 2007 (Note 3). The Company’s management has broad discretion with respect to the specific application of the net proceeds of this Offering, although substantially all of the net proceeds of this Offering are intended to be generally applied toward consummating the acquisition, through a stock exchange, asset acquisition or other similar business combination, of an operating business, or the acquisition of control of such operating business through contractual arrangements, that has its principal operations located in the People’s Republic of China (“Business Combination”). Furthermore, there is no assurance that the Company will be able to successfully effect a Business Combination. Upon the closing of the Offering, including the over-allotment option, an amount of $39,717,000 of the net proceeds was deposited in an interest/dividend-bearing trust fund (“Trust fund”) until the earlier of (i) the consummation of a Business Combination or (ii) liquidation of the Company. Under the agreement governing the Trust fund, funds will only be invested in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 with a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. The remaining net proceeds (not held in the Trust fund) may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses.
The Company, after signing a definitive agreement for the acquisition of a target business, will submit such transaction for stockholder approval. In the event that stockholders owning 40% or more of the shares sold in the Offering vote against the Business Combination and exercise their conversion rights described below, the Business Combination will not be consummated.
All of the Company’s stockholders prior to the Offering, including all of the officers and directors of the Company (“Initial Stockholders”), have agreed to vote their 1,500,000 founding shares of common stock in accordance with the vote of the majority interest of all other stockholders of the Company (“Public Stockholders”) with respect to any Business Combination. After consummation of a Business Combination, these voting safeguards will no longer be applicable.
With respect to a Business Combination which is approved and consummated, any Public Stockholder who voted against the Business Combination may demand that the Company convert his shares. The per share conversion price will equal the amount in the Trust fund, calculated as of two business days prior to the consummation of the proposed Business Combination, divided by the number of shares of common stock held by Public Stockholders at the consummation of the Offering. Accordingly, Public Stockholders holding 39.99% of the aggregate number of shares owned by all Public Stockholders may seek conversion of their shares in the event of a Business Combination. Such Public Stockholders are entitled to receive their per-share interest in the Trust fund computed without regard to the shares held by Initial Stockholders. Accordingly, a
FS-47
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies – (continued)
portion of the net proceeds from the offering, plus interest or dividend income earned (39.99% of the amount held in the Trust fund) has been classified as common stock subject to possible conversion in the accompanying December 31, 2007 balance sheet.
The Company’s Certificate of Incorporation provides that the Company will continue in existence only until March 20, 2009. If the Company has not completed a Business Combination by such date, its corporate existence will cease and it will dissolve and liquidate for the purposes of winding up its affairs. In the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Fund assets) will be less than the initial public offering price per share in the Offering (assuming no value is attributed to the Warrants contained in the Units to be offered in the Offering discussed in Note 3).
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109 (“SFAS No. 109”), “Accounting for Income Taxes” which is an asset and liability approach that has been recognized in the Company’s financial statements. The Company has a net operating loss carryforward of approximately $261,602 to reduce any future federal income taxes. The tax benefit of this loss, approximately $85,275, has been fully offset by a valuation allowance due to the uncertainty of its realization.
Net Income per Common Share
Basic income per share is computed by dividing net income applicable to common stock by the weighted average common shares outstanding during the period.
Basic earnings (loss) per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted average common shares outstanding for the period. Calculation of the weighted average common shares outstanding during the period is based on 1,500,000 initial shares outstanding throughout the period from August 7, 2006 (inception) to March 26, 2007 and 7,500,000 common shares outstanding after the effective date of the offering on March 26, 2007 and 8,400,000 after the exercise of the underwriters option. Net income per share subject to possible conversion is calculated by dividing accretion of trust fund relating to common stock subject to possible conversion by 2,759,310 common shares subject to possible conversion. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. At December 31, 2006 and 2007, there were no such potentially dilutive securities.
Use of Estimates
The preparation of 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 at the date of the financial statements and the reported amounts of expenses during the reporting period including contingent assets and liabilities. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. However, management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
FS-48
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies – (continued)
New Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations, or SFAS No. 141R. SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until January 1, 2009. We expect SFAS No. 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time. We are still assessing the impact of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51, or SFAS No. 160”. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We believe that SFAS 160 should not have a material impact on our financial position or results of operations.
In June 2007, the Financial Accounting Standards Board (FASB) ratified the Emerging Issues Task Force (EITF) consensus on EITF Issue No. 06-11, “Accounting for Income Tax Benefits on Dividends on Share-Based Payment Awards.” This EITF indicates that tax benefits of dividends on unvested restricted stock are to be recognized in equity as an increase in the pool of excess tax benefits. Should the related awards forfeit or no longer become expected to vest, the benefits are to be reclassified from equity to the income statement. The EITF is effective for fiscal years beginning after December 15, 2007. The Company will adopt the EITF as required and management does not expect it to have a significant impact on the Company’s results of operations, financial condition or liquidity.
In February 2007, the FASB issued Statement of Financial Accounting Standards (FAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” FAS No. 159 allows companies to elect to measure certain assets and liabilities at fair value and is effective for fiscal years beginning after November 15, 2007. This standard is not expected to have any impact on the Company’s results of operations, financial condition and liquidity.
In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements.” FAS No. 157 provides guidance for using fair value to measure assets and liabilities and only applies when other standards require or permit the fair value measurement of assets and liabilities. It does not expand the use of fair value measurement. FAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company will adopt this standard as required and adoption is not expected to have a significant impact on the Company’s results of operations, financial condition and liquidity.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109”. FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement classification, interest and penalties, accounting in interim periods, disclosure and transition. This standard, which became effective in 2007, did not have any impact on the Company’s results of operations, financial condition and liquidity.
FS-49
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies – (continued)
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.
2. Basis of Presentation
The financial statements include the accounts of the Company. The Company has not commenced operations. All activity through December 31, 2007, is related to the Company’s formation and preparation for and consummation of the Offering. The Company has selected December 31 as its fiscal year end.
3. Initial Public Offering
On March 26, 2007, the Company sold 6,000,000 units (“Units”) in the Offering. On March 29, 2007, the Company consummated the closing of an additional 900,000 Units which were subject to the underwriters’ over-allotment option. Each Unit consists of one share of the Company’s common stock, $.0001 par value, and two Redeemable Common Stock Purchase Warrants (“Warrants”). Each Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.00 commencing the later of the completion of a Business Combination expiring March 19, 2011. The Warrants will be redeemable, at the Company’s option, with the prior consent of EarlyBird Capital, Inc., the representative of the underwriters in the Offering (“Representative”), at a price of $.01 per Warrant upon 30 days’ notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given. The Company paid the underwriters in the Offering an underwriting discount of 5.5% of the gross proceeds of the Offering and a non-accountable expense allowance of 0.5% of the gross proceeds of the Offering. However, the underwriters agreed that 1% of the underwriting discount would be deferred and would not be paid unless and until the Company consummated a Business Combination. In connection with this Offering, the Company also issued an option (“Option”), for $100, to the Representative to purchase 600,000 Units at an exercise price of $6.60 per Unit. The Company accounted for the fair value of the Option, inclusive of the receipt of the $100 cash payment, as an expense of the Offering resulting in a charge directly to stockholders’ equity. The Company estimated that the fair value of the Option was approximately $2,259,000 ($3.77 per Unit) using a Black-Scholes option-pricing model. The fair value of the Option granted to the Representative is estimated as of the date of grant using the following assumptions: (1) expec- ted volatility of 75%, (2) risk-free interest rate of 4.8% and (3) expected life of 5 years. The Option may be exercised for cash or on a “cashless” basis, at the holder’s option (except in the case of a forced cashless exercise upon the Company’s redemption of the Warrants, as described above), such that the holder may use the appreciated value of the Option (the difference between the exercise prices of the Option and the underlying Warrants and the market price of the Units and underlying securities) to exercise the option without the payment of any cash. In addition, the Warrants underlying such Units are exercisable at $5.00 per share.
4. Note Payable Stockholder
The Company issued an unsecured promissory note in aggregate amount of $125,000 to an officer. The note was non-interest bearing and was repaid from the net proceeds of the Offering in 2007.
5. Commitment
The Company occupies office space provided by an affiliate of the Company’s chairman of the board and chief executive officer. Such affiliate has agreed that, until the Company consummates a Business Combination, it will make such office space, as well as certain office and secretarial services, available to the Company, as may be required by the Company from time to time. The Company has agreed to pay such affiliate $7,500 per month for such services commencing March 20, 2007. The Company paid the affiliate $70,403 for the twelve months ended December 31, 2007.
FS-50
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
5. Commitment – (continued)
Future minimum payments for the next five years are as follows:
Payment Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less Than 1 Year | 1 – 3 Years | 3 – 5 Years | More Than 5 Years | |||||||||||||||
Administrative services agreement | 109,597 | 90,000 | 19,597 | — | — | |||||||||||||||
Fee due to investment banker on completion of business combination | 414,000 | — | 414,000 | — | — | |||||||||||||||
Total | 523,597 | 90,000 | 433,597 | — | — |
Pursuant to letter agreements dated as of August 15, 2006 with the Company and the Representative, the Initial Stockholders have waived their right to receive distributions with respect to their founding shares upon the Company’s liquidation.
The Company’s directors and certain special advisors and their members purchased 2,266,667 Warrants (“Insider Warrants”) at $0.60 per Warrant (for an aggregate purchase price of $1,360,000) privately from the Company. These purchases took place simultaneously with the consummation of the Offering. All of the proceeds received from these purchases were placed in the Trust fund. The Insider Warrants purchased by such purchasers are identical to the Warrants underlying the Units offered in the Offering except that if the Company calls the Warrants for redemption, the Insider Warrants will not be redeemable by the Company so long as such securities are held by such purchasers or their affiliates. Furthermore, the purchasers have agreed that the Insider Warrants will not be sold or transferred by them until after the Company has completed a Business Combination.
The Company’s Chairman of the Board and Chief Executive Officer has entered into an agreement with the Representative which is intended to comply with Rule 10b5-1 under the Exchange Act, pursuant to which he, or an entity or entities he controls, will place limit orders for $3 million of the Company’s common stock commencing ten business days after the Company files its Current Report on Form 8-K announcing its execution of a definitive agreement for a Business Combination and ending on the business day immediately preceding the record date for the meeting of stockholders at which such Business Combination is to be approved. The Company’s Chairman of the Board and Chief Executive Officer has agreed that he will not sell or transfer any shares of common stock purchased by him pursuant to this agreement until one year after the Company has completed the Business Combination. It is intended that these purchases will comply with Rule 10b-18 under the Exchange Act. These purchases will be made at a price equal to the per share amount held in the Company’s trust fund as reported in such Form 8-K and will be made by the Representative or another broker dealer mutually agreed upon between the parties in such amounts and at such times as the representative or such other broker dealer may determine, in its sole discretion, so long as the purchase price does not exceed the above-referenced per share purchase price.
The Initial Stockholders and the holders of the Insider Warrants (or underlying securities) will be entitled to registration rights with respect to their founding shares or Insider Warrants (or underlying securities) pursuant to an agreement signed prior to the effective date of the Offering. The holders of the majority of the founding shares are entitled to demand that the Company register these shares at any time commencing three months prior to the first anniversary of the consummation of a Business Combination. The holders of the Insider Warrants (or underlying securities) are entitled to demand that the Company register these securities at any time after the Company consummates a Business Combination. In addition, the Initial Stockholders and holders of the Insider Warrants (or underlying securities) have certain “piggy-back” registration rights on registration statements filed after the Company’s consummation of a Business Combination.
The Representative has been engaged by the Company to act as the Company’s non exclusive investment banker in connection with a proposed Business Combination. For assisting the Company in structuring and
FS-51
CHINA OPPORTUNITY ACQUISITION CORP.
(A Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
5. Commitment – (continued)
negotiating the terms of a Business Combination, the Company will pay the Representative a cash transaction fee equal to 1% of the total consideration paid in connection with the Business Combination, with a maximum fee to be paid of $360,000. Additionally, the Company paid the fees and issued the securities to the underwriters in the Offering as described in Note 4 above.
6. Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors.
The agreement with the underwriters prohibits the Company, prior to a Business Combination, from issuing preferred stock which participates in the proceeds of the Trust fund or which votes as a class with the Common Stock on a Business Combination.
7. Common Stock
The Company is authorized to issue 30,000,000 shares of common stock, of which 8,400,000 were issued and outstanding as of December 31, 2007, including 2,759,310 common shares subject to possible conversion.
In connection with the issuance of 2,759,310 common shares subject to possible conversion, the Company has recorded the proceeds related to these shares in accordance with EITF Topic D-98.
The following is a summary of activity related to these shares:
Proceeds received related to the sale of 2,759,310 shares subject to possible redemption | $ | 15,882,828 | ||
Accretion of trust fund income related to possible redeemable shares | 427,634 | |||
Balance at December 31, 2007 | $ | 16,310,462 |
At December 31, 2007, 17,866,667 shares of common stock were reserved for issuance upon exercise of the Warrants and the Option.
The Company currently has no commitments to issue any shares of common stock other than as described herein; however, the Company will, in all likelihood, issue a substantial number of additional shares in connection with a Business Combination. To the extent that additional shares of common stock are issued, dilution to the interests of the Company’s stockholders who participated in the Offering is expected to occur.
8. Income Taxes
Deferred income taxes are provided for the differences between the bases of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
A provision of $74,508 was made for state and local income taxes. Since the majority of the Company’s interest income is not subject to federal income taxes, the Company generated a net operating loss of approximately $332,482 for federal income tax purposes. A full valuation allowance was made for the resulting deferred tax asset, as it is uncertain if and when the Company will be able to utilize this net operating loss.
Franchise taxes incurred in the State of Delaware of $36,928 are included in general and administrative expenses.
FS-52
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
BY AND AMONG
CHINA OPPORTUNITY ACQUISITION CORP.,
GOLDEN GREEN ENTERPRISES LIMITED,
WEALTH RAINBOW DEVELOPMENT LIMITED,
HENAN GREEN COMPLEX MATERIALS CO., LTD
and
THE SHAREHOLDERS OF
GOLDEN GREEN ENTERPRISES LIMITED
DATED AS OF NOVEMBER 12, 2008
A-1
TABLE OF CONTENTS
Page | ||||
INDEX OF EXHIBITS AND SCHEDULES | iv | |||
RECITALS | 1 | |||
ARTICLE I: THE MERGER | 1 | |||
1.1 The Merger | 1 | |||
1.2 Effective Time; Closing | 1 | |||
1.3 Effect of the Merger | 2 | |||
1.4 Memorandum of Association; Articles of Association | 2 | |||
1.5 Effect on COAC Securities | 2 | |||
1.6 Surrender of Certificates | 2 | |||
1.7 No Further Ownership Rights in COAC Stock | 4 | |||
1.8 Lost, Stolen or Destroyed Certificates | 4 | |||
1.9 Tax Consequences | 4 | |||
1.10 BVICo Recapitalization | 4 | |||
1.11 Escrow | 4 | |||
1.12 Additional Shares | 4 | |||
1.13 Shares Subject to Appraisal Rights | 5 | |||
1.14 Shareholder Matters | 6 | |||
1.15 Warrant Exercise Payment | 6 | |||
1.16 Lock-Up Agreement | 6 | |||
1.17 Further Assurances; Post-Closing Cooperation | 6 | |||
ARTICLE II: REPRESENTATIONS AND WARRANTIES REGARDING BVICo | 7 | |||
2.1 Organization | 7 | |||
2.2 Subsidiaries | 8 | |||
2.3 Capitalization | 8 | |||
2.4 Authority Relative to this Agreement | 8 | |||
2.5 No Conflict; Required Filings and Consents | 9 | |||
2.6 Compliance | 9 | |||
2.7 Financial Statements | 10 | |||
2.8 No Undisclosed Liabilities | 10 | |||
2.9 Absence of Certain Changes or Events | 10 | |||
2.10 Litigation | 11 | |||
2.11 [Intentionally Omitted.] | 11 | |||
2.12 [Intentionally Omitted.] | 11 | |||
2.13 Restrictions on Business Activities | 11 | |||
2.14 Property | 11 | |||
2.15 Taxes | 12 | |||
2.16 Environmental Matters | 13 | |||
2.17 Brokers; Third Party Expenses | 13 | |||
2.18 Intellectual Property | 13 | |||
2.19 Agreements, Contracts and Commitments | 14 | |||
2.20 Insurance | 15 |
i
Page | ||||
2.21 Governmental Actions/Filings | 15 | |||
2.22 Interested Party Transactions | 16 | |||
2.23 Board Approval | 16 | |||
2.24 No Illegal or Improper Transactions | 16 | |||
2.25 Representations and Warranties Complete | 16 | |||
2.26 Survival of Representations and Warranties | 17 | |||
ARTICLE III: REPRESENTATIONS AND WARRANTIES OF PARENT | 17 | |||
3.1 Organization and Qualification | 17 | |||
3.2 Subsidiaries | 17 | |||
3.3 Capitalization | 17 | |||
3.4 Authority Relative to this Agreement | 18 | |||
3.5 No Conflict; Required Filings and Consents | 18 | |||
3.6 Compliance | 19 | |||
3.7 SEC Filings; Financial Statements | 19 | |||
3.8 No Undisclosed Liabilities | 19 | |||
3.9 Absence of Certain Changes or Events | 19 | |||
3.10 Litigation | 20 | |||
3.11 Business Activities | 20 | |||
3.12 Brokers | 20 | |||
3.13 Indebtedness | 20 | |||
3.14 Board Approval | 20 | |||
3.15 Trust Fund | 20 | |||
3.16 Representations and Warranties Complete | 20 | |||
3.17 Survival of Representations and Warranties | 20 | |||
ARTICLE IV: CONDUCT PRIOR TO THE CLOSING | 21 | |||
4.1 Conduct of Business by BVICo, HKCo, Ge Rui and COAC | 21 | |||
ARTICLE V: ADDITIONAL AGREEMENTS | 23 | |||
5.1 Registration Statement; Special Meeting; Exchange Act Registration | 23 | |||
5.2 Directors and Officers of BVICo After Merger; Voting Agreement | 24 | |||
5.3 HSR Act | 24 | |||
5.4 Document Review | 24 | |||
5.5 Required Information | 24 | |||
5.6 Confidentiality; Access to Information | 25 | |||
5.7 Public Disclosure | 25 | |||
5.8 Best efforts | 25 | |||
5.9 Sale Restriction | 26 | |||
5.10 Certain Claims | 26 | |||
5.11 No Claim Against Trust Fund | 26 | |||
5.12 Disclosure of Certain Matters | 27 | |||
5.13 Securities Listing | 27 | |||
5.14 Non-Competition; Non-Solicitation; Non-Hire | 27 |
ii
Page | ||||
5.15 Exclusivity | 28 | |||
5.16 Charter Protections; Directors’ and Officers’ Liability Insurance | 28 | |||
5.17 Insider Loans; Equity Ownership in Subsidiaries | 29 | |||
5.18 Certain Financial Information | 29 | |||
5.19 Access to Financial Information | 29 | |||
5.20 COAC Borrowings | 29 | |||
5.21 Trust Fund Disbursement | 29 | |||
5.22 Ge Rui Chief Financial Officer | 29 | |||
ARTICLE VI: CONDITIONS TO THE TRANSACTION | 30 | |||
6.1 Conditions to Obligations of Each Party to Effect the Merger | 30 | |||
6.2 Additional Conditions to Obligations of BVICo and the Shareholders | 30 | |||
6.3 Additional Conditions to the Obligations of COAC | 31 | |||
ARTICLE VII: INDEMNIFICATION | 32 | |||
7.1 Indemnification of BVICo | 32 | |||
7.2 Indemnification of Third Party Claims | 33 | |||
7.3 Insurance Effect | 34 | |||
7.4 Limitations on Indemnification | 34 | |||
7.5 Exclusive Remedy | 35 | |||
7.6 Application of Indemnity Escrow Shares | 35 | |||
ARTICLE VIII: TERMINATION | 35 | |||
8.1 Termination | 35 | |||
8.2 Notice of Termination; Effect of Termination | 36 | |||
8.3 Fees and Expenses | 36 | |||
ARTICLE IX: GENERAL PROVISIONS | 36 | |||
9.1 Notices | 36 | |||
9.2 Interpretation | 38 | |||
9.3 Counterparts; Facsimile Signatures | 39 | |||
9.4 English Language Version Controls | 39 | |||
9.5 Entire Agreement; Third Party Beneficiaries | 39 | |||
9.6 Severability | 39 | |||
9.7 Other Remedies; Specific Performance | 39 | |||
9.8 Governing Law; Jurisdiction | 39 | |||
9.9 Rules of Construction | 39 | |||
9.10 Assignment | 40 | |||
9.11 Amendment | 40 | |||
9.12 Extension; Waiver | 40 | |||
9.13 Arbitration | 40 | |||
9.14 Currency | 40 |
iii
INDEX OF EXHIBITS AND SCHEDULES
Exhibits
Exhibit A | BVICo Memorandum and Articles of Association | |
Exhibit B | BVICo Share Ownership | |
Exhibit C | Form of Escrow Agreement | |
Exhibit D | Form of Lock-Up Agreement | |
Exhibit E | Form of Voting Agreement | |
Exhibit F | Form of Opinion of Graubard Miller | |
Exhibit G | Form of Opinion of PRC counsel to BVICo and Shareholders |
Schedules
Schedule 1.12 | Distribution of Shares Pursuant to Section 1.12 | |
Schedule 1.15 | Warrant Exercise Payments | |
Schedule 1.16 | Lock-Up Periods | |
Schedule 2 | BVICo Schedule | |
Schedule 3 | COAC Schedule | |
Schedule 5.2 | Directors and Officers of BVICo |
iv
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
THIS AGREEMENT OF MERGER AND PLAN OF REORGANIZATION is made and entered into as of November 12, 2008, by and among China Opportunity Acquisition Corp., a Delaware corporation (“COAC”), Golden Green Enterprises Limited, a British Virgin Islands company (“BVICo”), Wealth Rainbow Development Limited, a Hong Kong corporation (“HKCo”), Henan Green Complex Materials Co., Ltd, a People’s Republic of China limited liability company (“Ge Rui”), and each of the persons listed as “Shareholders” on the signature page hereof, such persons being all of the shareholders of BVICo (each a “Shareholder” and, collectively, the “Shareholders”).
RECITALS
A. Upon the terms and subject to the conditions of this Agreement (as defined in Section 1.1) and in accordance with the Delaware General Corporation Law (“DGCL”) and the BVI Business Companies Act, 2004, of the British Virgin Islands (“Companies Act”) and other applicable law, COAC and BVICo intend to enter into a business combination transaction by means of a merger in which COAC will merge into BVICo and BVICo will be the surviving entity.
B. The Shareholders own all of the outstanding shares of BVICo and HKCo is a wholly owned subsidiary of BVICo.
C. The boards of directors of each of COAC and BVICo have determined that the Merger (as defined in Section 1.1) is fair to, and in the best interests of, their respective companies and their respective shareholders.
D. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Section 368(a)(1)(A) of the United States Internal Revenue Code of 1986, as amended (the “Code”), and the United States Income Tax regulations thereunder.
NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
THE MERGER
1.1The Merger. At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement and the applicable provisions of the DGCL and the Companies Act, COAC shall be merged with and into BVICo (the “Merger”), the separate corporate existence of COAC shall cease and BVICo shall continue as the surviving corporation. BVICo as the surviving corporation after the Merger is hereinafter sometimes referred to as the “Surviving Corporation.” The term “Agreement” as used herein refers to this Agreement of Merger and Plan of Reorganization, as the same may be amended from time to time, and all schedules hereto (including the BVICo Schedule and the COAC Schedule, as defined in the preambles to Articles II and III hereof, respectively).
1.2Effective Time; Closing. Subject to the conditions of this Agreement, the parties hereto shall cause the Merger to be consummated by (a) filing Articles of Merger (the “Articles of Merger”) with the Registrar of Corporate Affairs of the British Virgin Islands in accordance with the applicable provisions of the Companies Act and (b) filing a Certificate of Merger (the “Certificate of Merger”) with the Secretary of State of the State of Delaware in accordance with applicable provisions of the DGCL (the time of such filing with the Registrar of Corporate Affairs of the British Virgin Islands, or such later time as may be agreed in writing by COAC and BVICo and specified in the Articles of Merger, being the “Effective Time”) as soon as practicable on or after the Closing Date (as herein defined). Unless this Agreement shall have been terminated pursuant to Section 8.1, the closing of the Merger (the “Closing”) shall take place at the offices of Graubard Miller, counsel to COAC, 405 Lexington Avenue, New York, New York 10174-1901 or at such other place as the parties mutually agree in writing at a time and date to be specified by the parties, which shall be no later than the second business day after the satisfaction or waiver of the conditions set forth in Article VI, or at such other time, date and location as the parties hereto agree in writing (the “Closing Date”). Closing signatures may be transmitted by facsimile or as an e-mail pdf attachment.
1
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in this Agreement and the applicable provisions of Companies Act and the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of COAC shall vest in the Surviving Corporation, and all debts, liabilities and duties of COAC shall become the debts, liabilities and duties of the Surviving Corporation.
1.4Memorandum of Association; Articles of Association. At the Effective Time, the Memorandum and Articles of Association of BVICo shall be amended and restated substantially in the form ofExhibit A, which shall be the Memorandum and Articles of Association of the Surviving Corporation until thereafter amended as provided by law.
1.5Effect on COAC Securities. Subject to the terms and conditions of this Agreement, at the Effective Time, by virtue of the Merger and this Agreement and without any action on the part of COAC or the holders of any of the securities of COAC, the following shall occur:
(a)Conversion of COAC Common Stock. Other than any shares to be canceled pursuant to Section 1.5(c), each share of common stock, par value $.0001, of COAC (“COAC Common Stock”) issued and outstanding immediately prior to the Effective Time will be automatically converted (subject to Section 1.5(e)) into one (1) Ordinary Share of BVICo (“BVICo Ordinary Shares”). The numbers of BVICo Ordinary Shares that would otherwise be issuable pursuant to this Section 1.5(a) to Persons who hold Dissenting Shares (as defined in Section 1.13(b)) and exercise their appraisal rights pursuant to applicable Delaware Law shall not be issued to such Persons and shall be canceled.
(b)Uncertificated COAC Shares. All shares of COAC Common Stock that are not certificated that are converted into BVICo Ordinary Shares pursuant to Section 1.5(a) shall be replaced by uncertificated BVICo Ordinary Shares on the books and records of COAC’s transfer agent and all other entities that maintain records with respect thereto.
(c)Certificates for Shares. Certificates representing the BVICo Ordinary Shares issuable pursuant to Section 1.5(a) shall be issued to the holders of certificates representing the shares of COAC Common Stock (“COAC Certificates”) upon surrender of COAC Certificates in the manner provided in Section 1.6 (or in the case of a lost, stolen or destroyed certificate, upon delivery of an affidavit (and indemnity, if required) in the manner provided in Section 1.8).
(d) Cancellation of Treasury and BVICo-Owned Stock. Each share of COAC Common Stock held by COAC or owned by BVICo or any direct or indirect wholly-owned subsidiary of COAC or of BVICo immediately prior to the Effective Time shall be canceled and extinguished without any conversion or payment in respect thereof.
(e)Adjustments to Exchange Ratios. The numbers of BVICo Ordinary Shares that the holders of COAC Common Stock are entitled to receive as a result of the Merger shall be equitably adjusted to reflect appropriately the effect of any stock split, reverse stock split, stock dividend (including any dividend or distribution of securities convertible into BVICo Ordinary Shares or COAC Common Stock), extraordinary cash dividends, reorganization, recapitalization, reclassification, combination, exchange of shares or other like change with respect to BVICo Ordinary Shares or COAC Common Stock occurring on or after the date hereof and prior to the Effective Time except that no such adjustment shall be made as a result of the recapitalization provided for in Section 1.10.
(f)Fractional Shares. No fraction of a BVICo Ordinary Share will be issued by virtue of the Merger, and each holder of shares of COAC Common Stock who would otherwise be entitled to a fraction of BVICO Ordinary Share (after aggregating all fractional BVICo Ordinary Shares that otherwise would be received by such holder) shall, upon compliance with Section 1.6, receive from BVICo, in lieu of such fractional share, one (1) BVICo Ordinary Share.
(g)Conversion of COAC Warrants. Each warrant (“COAC Warrant”) to purchase shares of COAC Common Stock issued and outstanding immediately prior to the Effective Time shall be automatically converted into a warrant (“BVICo Warrant”) to purchase the equivalent number of BVICo Ordinary
2
Shares having terms and conditions substantially identical in all material respects to the terms and conditions pertaining to the COAC Warrants. The BVICo Warrants shall be governed by the Warrant Agreement dated March 20, 2007 between COAC and Continental Stock Transfer & Trust Company (“Continental”), as Warrant Agent.
(h)Conversion of COAC Units. Each unit (“COAC Unit”) consisting of one (1) share of COAC Common Stock and two (2) COAC Warrants issued and outstanding immediately prior to the Effective Time shall be automatically converted into a unit (“BVICo Unit”) consisting of one (1) BVICo Ordinary Share and two (2) BVICo Warrants.
(i)Conversion of COAC Unit Purchase Option. The unit purchase option issued by COAC to EarlyBirdCapital, Inc. (the “COAC Unit Purchase Option”) to purchase six hundred thousand (600,000) COAC Units, if outstanding immediately prior to the Effective Time, shall be automatically converted into a unit purchase option to purchase six hundred thousand (600,000) BVICo Units having terms and conditions substantially identical in all material respects to the terms and conditions pertaining to the COAC Unit Purchase Option.
(a)Exchange Procedures. Upon surrender of COAC Certificates at the Closing, the holders of such COAC Certificates shall receive in exchange therefor certificates representing the BVICo Ordinary Shares into which their shares of COAC Common Stock shall be converted at the Effective Time and COAC Certificates so surrendered shall forthwith be canceled. Until so surrendered, outstanding COAC Certificates will be deemed, from and after the Effective Time, to evidence only the right to receive the applicable number of BVICo Ordinary Shares issuable pursuant to Section 1.5(a).
(b)Distributions With Respect to Unexchanged Shares. No dividends or other distributions declared or made after the date of this Agreement with respect to BVICo Ordinary Shares with a record date after the Effective Time will be paid to the holders of any unsurrendered COAC Certificates with respect to the BVICo Ordinary Shares to be issued upon surrender thereof until the holders of record of such COAC Certificates shall surrender such COAC Certificates. Subject to applicable law, following surrender of any such COAC Certificates with a properly completed letter of transmittal, BVICo shall promptly deliver to the record holders thereof, without interest, the certificates representing BVICo Ordinary Shares issued in exchange therefor and the amount of any such dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such BVICo Ordinary Shares.
(c)Transfers of Ownership. If certificates representing BVICo Ordinary Shares are to be issued in a name other than that in which COAC Certificates surrendered in exchange therefor are registered, it will be a condition of the issuance thereof that COAC Certificates so surrendered will be properly endorsed and otherwise in proper form for transfer and that the persons requesting such exchange will have paid to BVICo or any agent designated by it any transfer or other taxes required by reason of the issuance of certificates representing BVICo Ordinary Shares in any name other than that of the registered holder of COAC Certificates surrendered, or established to the satisfaction of BVICo or any agent designated by it that such tax has been paid or is not payable.
(d)Required Withholding. BVICo and the Surviving Corporation shall each be entitled to deduct and withhold from any consideration payable or otherwise deliverable pursuant to this Agreement to any holder or former holder of COAC Common Stock such amounts as are required to be deducted or withheld therefrom under the Code or under any provision of state, local or foreign tax law or under any other applicable legal requirement. To the extent such amounts are so deducted or withheld, such amounts shall be treated for all purposes under this Agreement as having been paid to the person to whom such amounts would otherwise have been paid.
(e)No Liability. Notwithstanding anything to the contrary in this Section 1.6, neither BVICo, COAC, the Surviving Corporation nor any other party hereto shall be liable to a holder of BVICo Ordinary Shares or COAC Common Stock, whether or not certificated, for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law.
3
1.7No Further Ownership Rights in COAC Stock. All BVICo Ordinary Shares issued in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to shares of COAC Common Stock and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of COAC Common Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, COAC Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I.
1.8Lost, Stolen or Destroyed Certificates. In the event that any COAC Certificates shall have been lost, stolen or destroyed, BVICo shall issue in exchange for such lost, stolen or destroyed COAC Certificates, upon the making of an affidavit of that fact by the holder thereof, the certificates representing the BVICo Ordinary Shares that the shares of COAC Common Stock formerly represented by such COAC Certificates were converted into and any dividends or distributions payable pursuant to Section 1.6(b); provided, however, that, as a condition precedent to the issuance of such certificates representing BVICo Ordinary Shares and other distributions, the owner of such lost, stolen or destroyed COAC Certificates shall indemnify BVICo against any claim that may be made against BVICo or the Surviving Corporation with respect to COAC Certificates alleged to have been lost, stolen or destroyed.
1.9Tax Consequences. It is intended by the parties hereto that the Merger shall constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Code and the United States Income Tax Regulations thereunder. The parties hereto adopt this Agreement as a “plan of reorganization” within the meaning of the United States Income Tax Regulations issued with respect to Section 368(a)(1)(A).
1.10BVICo Recapitalization. On or before the Closing Date, BVICo shall recapitalize so that there are thirty million (30,000,000) BVICo Ordinary Shares issued and outstanding immediately prior to the Closing, owned by the Shareholders as set forth inExhibit B under the column entitled “Share Ownership on Closing Date.” No other BVICo Ordinary Shares shall be outstanding immediately prior to the Closing and, except as provided for in this Agreement, there shall be no options, warrants or other rights to purchase or otherwise acquire BVICo Ordinary Shares outstanding on the Closing Date or commitments for any thereof.
1.11Escrow. As security for the indemnity obligations set forth in Article VII, at the Closing, Oasis Green Investments Limited (“Oasis Green”) shall deposit in escrow three million (3,000,000) of the BVICo Ordinary Shares owned by it on the Closing Date (the “Indemnity Escrow Shares”), all in accordance with the terms and conditions of the Escrow Agreement to be entered into at the Closing between BVICo, Oasis Green and Continental, as Escrow Agent, in the form annexed hereto asExhibit C (the “Escrow Agreement”). On the date (the “Indemnity Escrow Termination Date”) that is the later of (i) thirty (30) days after the date on which BVICo has filed its Annual Report on Form 10-K pursuant to the United States Securities Exchange Act of 1934, as amended (“Exchange Act”), or, if BVICo is deemed to be a “foreign private issuer” (as defined in the Exchange Act), its Annual Report of Form 20-F pursuant to the Exchange Act (in either case, hereinafter referred to as the “Annual Report”), for its 2009 fiscal year or (ii) one year after the Closing Date, the Escrow Agent shall release the Indemnity Escrow Shares, less that number of Indemnity Escrow Shares applied in satisfaction of or reserved with respect to indemnification claims made prior to such date, to Oasis Green. Any Indemnity Escrow Shares held with respect to any unresolved claim for indemnification and not applied as indemnification with respect to such claim upon its resolution shall be delivered to Oasis Green promptly upon such resolution.
(a)2009 Shares. If, for the fiscal year ending December 31, 2009 BVICo has net income after tax (“After Tax Income”) of at least Forty Five Million Dollars ($45,000,000.00), BVICo shall issue One Million (1,000,000) BVICo Ordinary Shares to the Shareholders as set forth onSchedule 1.12.
(b)2010 Shares. If, for the fiscal year of BVICo ending December 31, 2010, BVICo has After Tax Income of at least Sixty Million Dollars ($60,000,000.00), BVICo shall issue One Million (1,000,000) BVICo Ordinary Shares to the Shareholders as set forth onSchedule 1.12.
(c)2011 Shares. If, for the fiscal year of BVICo ending December 31, 2011, BVICo has After Tax Income of at least Eighty Million Dollars ($80,000,000.00), BVICo shall issue One Million (1,000,000) BVICo Ordinary Shares to the Shareholders as set forth onSchedule 1.12.
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(d)Share Adjustments. The number of BVICo Ordinary Shares issuable pursuant to Sections 1.12(a), 1.12(b) and 1.12(c) shall be adjusted from time to time as follows:
(i)Subdivision; Combination. If the outstanding BVICo Ordinary Shares shall be subdivided or reclassified into a greater number of shares of BVICo Ordinary Shares, the number of BVICo Ordinary Shares issuable pursuant to any of Sections 1.12(a), 1.12(b) and 1.12(c) after the occurrence of such event shall be equitably and proportionately increased, and conversely, in the outstanding BVICo Ordinary Shares shall be combined or reclassified into a smaller number of BVICo Ordinary Shares, the number of BVICo Ordinary Shares issuable pursuant to any of Sections 1.12(a), 1.12(b) and 1.12(c) after the occurrence of such event shall be equitably and proportionately reduced.
(ii)Other Business Combinations. If all outstanding BVICo Ordinary Shares are acquired for, exchanged for or converted into securities (other than BVICo Ordinary Shares) or into a combination of securities and/or other property in a transaction or series of related transactions (whether by exchange offer, merger or otherwise), the board of directors of BVICo shall make an appropriate equitable adjustment in the number of BVICo Ordinary Shares issuable pursuant to any of Sections 1.12(a), 1.12(b) and 1.12(c) after the occurrence of such event, as determined in the good faith judgment of the board of directors of BVICo.
(iii)General. Without limiting the specificity of any of the foregoing, it is the intent of the parties to provide for fair and equitable adjustments to the number of BVICo Ordinary Shares to preserve the economic benefits intended to be provided to the Shareholders under the terms of this Agreement in the event there is any change in or conversion of the BVICo Ordinary Shares, including as a result of any merger, reorganization, acquisition or other business combination transaction, and accordingly, the board of directors of BVICo, as determined in its good faith judgment, shall make appropriate equitable adjustments in connection therewith.
(e)Determination of After Tax Income. After Tax Income shall be determined in accordance with United States generally accepted accounting principles by the independent accountants serving BVICo based on the audited financial statements of BVICo included in the Annual Report filed by BVICo for each applicable fiscal year. After Tax Income shall not take into account revenues or expenses attributable to businesses acquired by BVICo in return for equity securities of BVICo.
(f) Issuance of Additional Shares. BVICo Ordinary Shares issuable to Oasis Green pursuant to this Section 1.12 shall be issued by BVICo to Oasis Green within thirty (30) days after the Annual Report for the applicable fiscal year has been filed by BVICo.
(g) Termination on Disposition. Upon any disposition of Ge Rui by BVICo, whether directly or indirectly, by means of sale of stock of HKCo or Ge Rui or sale of assets of Ge Rui or merger or otherwise, the obligation of BVICo is issue additional Ordinary Shares to Oasis Green pursuant to this Section 1.12 shall terminate with respect to all fiscal years ending on or after the date of disposition.
1.13Shares Subject to Appraisal Rights.
(a) Notwithstanding Section 1.5 hereof, Dissenting Shares (as defined in Section 1.13(b)) shall not be converted into a right to receive BVICo Ordinary Shares. The holders thereof shall be entitled only to such rights as are granted by the DGCL. Each holder of Dissenting Shares who becomes entitled to payment for such shares pursuant to the DGCL shall receive payment therefor from the Surviving Corporation in accordance with the DGCL, provided, however,that (i) if any stockholder of COAC who asserts appraisal rights in connection with the Merger (a “Dissenter”) shall have failed to establish his entitlement to such rights as provided in the DGCL, or (ii) if any such Dissenter shall have effectively withdrawn his demand for payment for such shares or waived or lost his right to payment for his shares under the appraisal rights process under the DGCL, the shares of COAC Common Stock held by such Dissenter shall be treated as if they had been converted, as of the Effective Time, into a right to receive BVICo Ordinary Shares as provided in Section 1.5. COAC shall give BVICo prompt notice of any demands for payment received by COAC from a person asserting appraisal rights, and BVICo shall have
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the right to participate in all negotiations and proceedings with respect to such demands. COAC shall not, except with the prior written consent of BVICo, make any payment with respect to, or settle or offer to settle, any such demands.
(b) As used herein, “Dissenting Shares” means any shares of COAC Common Stock held by stockholders of COAC who are entitled to appraisal rights under the DGCL, and who have properly exercised, perfected and not subsequently withdrawn or lost or waived their rights to demand payment with respect to those shares in accordance with the DGCL.
(a) Each Shareholder, for himself, herself or itself only, represents, warrants and acknowledges as follows:
(i) such Shareholder has had both the opportunity to ask questions and receive answers from the officers and directors of COAC and BVICo and all persons acting on their behalf concerning the business and operations of COAC and BVICo and to obtain any additional information to the extent COAC or BVICo possesses or may possess such information or can acquire it without unreasonable effort or expense necessary to verify the accuracy of such information;
(ii) such Shareholder has had access to the COAC SEC Reports (as defined in Section 3.7) filed prior to the date of this Agreement;
(iii) the execution and delivery of this Agreement by such Shareholder does not, and the performance of such Shareholder’s obligations hereunder will not, require any consent, approval, authorization or permit of, or filing with or notification to, any court, administrative agency, commission, governmental or regulatory authority, domestic or foreign (a “Governmental Entity”), except (A) for applicable requirements, if any, of the United States Securities Act of 1933, as amended (the “Securities Act”), the Exchange Act, United States state securities laws (“Blue Sky Laws”), and the rules and regulations thereunder, and (B) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect (as defined in Section 9.2(a)) on such Shareholder, BVICo, HKCo or Ge Rui or prevent consummation of the Merger or otherwise prevent the parties hereto from performing their obligations under this Agreement.
(b) Each Shareholder that is an entity, for itself, represents, warrants and acknowledges, with respect to each holder of its equity interests, to the same effect as the provisions of Section 1.14(a).
1.15 Warrant Exercise Payment. Upon the exercise of at least 75% of the BVICo Warrants at an exercise price not less than the exercise price in effect on the Closing Date, BVICo shall pay to the Shareholders the amounts as set forth onSchedule 1.15.
1.16 Lock-Up Agreement. At the Closing, the Shareholders and each Person (as defined in Section 9.2(c)) who was a stockholder of COAC prior to COAC’s initial public offering (“COAC Insiders”) shall execute a Lock-Up Agreement substantially in the form ofExhibit D providing that they shall not sell or otherwise dispose of any BVICo Ordinary Shares they owned immediately prior to the Effective Time or they receive in the Merger, as the case may be, during the period following the Closing Date that is specified next to such Person’s name inSchedule 1.16; provided that such Lock-Up Agreement shall not apply to BVICo Ordinary Shares received by any COAC Insider in exchange for shares of COAC Common Stock that were originally issued in COAC’s initial public offering.
1.17 Assignment of Rights. HKCo hereby assigns, conveys and transfers to BVICo all of HKCo’s rights pursuant to the Equity Transfer Agreement of Henan Green Complex Materials Co., Ltd. dated August 10, 2008 entered into among Lu Mingwang and twelve other shareholders as one party, HKCo and Ge Rui, including without limitation HKCo’s rights to indemnification pursuant to such agreement and the enforcement thereof.
1.18 Further Assurances; Post-Closing Cooperation. Subject to the terms and conditions of this Agreement, at any time or from time to time after the Closing, each of the parties shall execute and deliver such
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other documents and instruments, provide such materials and information and take such other actions as may reasonably be necessary, proper or advisable, to the extent permitted by law, to fulfill its obligations under this Agreement and the other documents relating to the transactions contemplated by this Agreement to which it is a party.
ARTICLE II
REPRESENTATIONS AND WARRANTIES REGARDING BVICo
Subject to the exceptions set forth inSchedule 2 (the “BVICo Schedule”) and the opinion of Jingtian & Congcheng dated the date of this Agreement and delivered to COAC (the “PRC Counsel Signing Opinion”), BVICo, HKCo, Ge Rui and Oasis Green hereby represent and warrant to, and covenant with, COAC as follows:
(a) BVICo is a corporation duly incorporated, validly existing and in good standing under the laws of the British Virgin Islands and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being or currently planned to be conducted. BVICo is not engaged in any business operations and its only activity is being the holder of all of the outstanding capital stock of HKCo. BVICo has no liabilities and its only asset is all of the outstanding capital stock of HKCo. Complete and correct copies of the memorandum and articles of association (or other comparable governing instruments with different names) (collectively referred to herein as “Charter Documents”) of BVICo, as amended and currently in effect, have been heretofore made available to COAC or COAC’s counsel. BVICo is not in violation of any of the provisions of its Charter Documents.
(b) HKCo is a corporation duly incorporated, validly existing and in good standing under the laws of Hong Kong and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being or currently planned to be conducted. HKCo is not engaged in any business operations and its only activity is being the holder of all of the registered capital of Ge Rui. HKCo has no liabilities and its only asset is all of the registered capital of Ge Rui. Complete and correct copies of the Charter Documents of HKCo, as amended and currently in effect, have been heretofore made available to COAC or COAC’s counsel. HKCo is not in violation of any of the provisions of its Charter Documents.
(c) Ge Rui is a limited liability company, duly organized, validly existing and in good standing under the laws of the Peoples Republic of China (“PRC”) and has the requisite power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being or currently planned by Ge Rui to be conducted. Ge Rui is in possession of all franchises, grants, authorizations, licenses, permits, easements, consents, certificates, approvals and orders (“Approvals”) necessary to own, lease and operate the properties it purports to own, operate or lease and to carry on its business as it is now being or currently planned to be conducted, except where the failure to have such Approvals could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Ge Rui. Complete and correct copies of the articles of association (or other comparable governing instruments with different names) of Ge Rui, as amended and currently in effect, have been heretofore made available to COAC or COAC’s counsel. Ge Rui is not in violation of any of the provisions of its Charter Documents.
(d) The minute books of BVICo, HKCo and Ge Rui contain true, complete and accurate records of all meetings and consents in lieu of meetings of its board of directors (and any committees thereof), similar governing bodies and shareholders (“Corporate Records”) since the times of their respective incorporations. Copies of such Corporate Records have been made available to COAC or COAC’s counsel.
(e) The stock transfer, warrant and option transfer and ownership records of BVICo, HKCo and Ge Rui contain true, complete and accurate records of the securities ownership as of the date of such records
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and the transfers involving the capital stock, shares and other securities of such corporations since the times of their respective incorporations. Copies of such records have been made available to COAC or COAC’s counsel.
2.2Subsidiaries. BVICo has no direct or indirect subsidiaries other than HKCo and Ge Rui. HKCo has no direct or indirect subsidiaries other than Ge Rui. Ge Rui has no direct or indirect subsidiaries or participations in joint ventures or other entities and does not own, directly or indirectly, any ownership, equity, profits or voting interest in any Person or has any agreement or commitment to purchase any such interest, and has not agreed and is not obligated to make nor is bound by any written, oral or other agreement, contract, subcontract, lease, binding understanding, instrument, note, option, warranty, purchase order, license, sublicense, insurance policy, benefit plan, commitment or undertaking of any nature, as of the date hereof or as may hereafter be in effect under which it may become obligated to make, any future investment in or capital contribution to any other entity.
(a) The authorized shares of BVICo consists of 50,000 Ordinary Shares, par value $1.00, of which 100 shares are issued and outstanding as of the date of this Agreement and all of which are validly issued, fully paid and nonassessable. Other than BVICo Ordinary Shares, BVICo has no class or series of securities authorized by its Charter Documents. Exhibit B contains a list of all of the shareholders of BVICo (who constitute all of the Shareholders) and the number of BVICo Ordinary Shares owned by each shareholder on the date of this Agreement. No BVICo Ordinary Shares are reserved for issuance upon the exercise of outstanding options, warrants or other securities to purchase BVICo Ordinary Shares. All outstanding BVICo Ordinary Shares have been issued and granted in compliance with (x) all applicable securities laws and (in all material respects) other applicable laws and regulations, and (y) all requirements set forth in any applicable contracts to which BVICo is a party.
(b) Except as contemplated by this Agreement, there are no subscriptions, options, warrants, equity securities, partnership interests or similar ownership interests, calls, rights (including preemptive rights), commitments or agreements of any character to which BVICo is a party or by which it is bound obligating BVICo to issue, deliver or sell, or cause to be issued, delivered or sold, or repurchase, redeem or otherwise acquire, or cause the repurchase, redemption or acquisition of, any shares of capital stock, partnership interests or similar ownership interests or obligating BVICo to grant, extend, accelerate the vesting of or enter into any such subscription, option, warrant, equity security, call, right, commitment or agreement.
(c) Except as contemplated by this Agreement, there are no registration rights, and there is no voting trust, proxy, rights plan, antitakeover plan or other agreement or understanding to which BVICo is a party or by which BVICo is bound with respect to any equity security of any class of BVICo.
(d) No outstanding BVICo Ordinary Shares are unvested or subjected to a repurchase option, risk of forfeiture or other condition under any applicable agreement to which BVICo is a party or by which it is bound.
(e) The registered capital of Ge Rui is RMB26 million (an equivalent of approximately US$3,808,017). HKCo owns all of the registered capital of Ge Rui, free and clear of all Liens. There are no outstanding options, warrants or other rights to purchase securities of Ge Rui.
(f) The authorized capital of HKCo is 10,000 shares, HK$1.00, of which two shares are issued and outstanding and are owned by BVICo. There are no outstanding options, warrants or other rights to purchase securities of HKCo. All outstanding shares of capital stock of HKCo have been issued and granted in compliance with (x) all applicable securities laws and (in all material respects) other applicable laws and regulations, and (y) all requirements set forth in any applicable contracts to which HKCo is a party.
2.4Authority Relative to this Agreement. Each of BVICo, HKCo and Ge Rui has all necessary corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and, to consummate the transactions contemplated hereby (including the Merger). The execution and delivery of
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this Agreement and the consummation by each of BVICo, HKCo and Ge Rui of the transactions contemplated hereby (including the Merger) have been duly and validly authorized by all necessary corporate action on the part of each of BVICo, HKCo and Ge Rui (including the approval by its board of directors and shareholders, subject in all cases to the satisfaction of the terms and conditions of this Agreement, including the conditions set forth in Article VI), and no other corporate proceedings on the part of any of BVICo, HKCo or Ge Rui or any of their respective shareholders are necessary to authorize this Agreement or to consummate the transactions contemplated hereby pursuant to applicable law and the terms and conditions of this Agreement. This Agreement has been duly and validly executed and delivered by each of BVICo, HKCo and Ge Rui and, assuming the due authorization, execution and delivery thereof by the other parties hereto other than the Shareholders, constitutes the legal and binding obligation of each of BVICo, HKCo and Ge Rui enforceable against each of BVICo, HKCo and Ge Rui in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors’ rights generally and by general principles of equity.
2.5No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by each of BVICo, HKCo and Ge Rui does not, and the performance of this Agreement by each of BVICo, HKCo and Ge Rui shall not, (i) conflict with or violate the Charter Documents of each of BVICo, HKCo and Ge Rui, (ii) conflict with or violate any Legal Requirements (as defined in Section 9.2(c)), (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or materially impair the rights of any of BVICo, HKCo and Ge Rui or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of their properties or assets pursuant to, any Company Contracts (as defined in Section 2.19(a)) or contract to which BVICo, HKCo or Ge Rui is a party or by which it is bound or (iv) result in the triggering, acceleration or increase of any payment to any Person pursuant to any Company Contract, including any “change in control” or similar provision of any Company Contract, or contract to which BVICo, HKCo or Ge Rui is a party or by which it is bound except, with respect to clauses (ii), (iii) or (iv), for any such conflicts, violations, breaches, defaults, triggerings, accelerations, increases or other occurrences that would not, individually and in the aggregate, have a Material Adverse Effect on any of BVICo, HKCo or Ge Rui.
(b) The execution and delivery of this Agreement by each of BVICo, HKCo and Ge Rui does not, and the performance of their respective obligations hereunder will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity or other third party (including, without limitation, lenders and lessors), except (i) the filing of the Articles of Merger with the Registrar of Corporate Affairs in the British Virgin Islands, (ii) for applicable requirements, if any, of the Securities Act, the Exchange Act or Blue Sky Laws, and the rules and regulations thereunder, and appropriate documents received from or filed with the relevant authorities where each of BVICo, HKCo and Ge Rui is licensed or qualified to do business, (iii) for the filing of any notifications required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and the expiration of the required waiting period thereunder, (iv) the consents, approvals, authorizations and permits described inSchedule 2.5, all of which have been obtained and are in full force and effect, and (v) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on any of BVICo, HKCo or Ge Rui or prevent consummation of the Merger or otherwise prevent the parties hereto from performing their obligations under this Agreement.
2.6 Compliance. Each of BVICo, HKCo and Ge Rui has complied with and is not in violation of any Legal Requirements with respect to the conduct of its business, or the ownership or operation of its business, except for failures to comply or violations which, individually or in the aggregate, have not had and are not reasonably likely to have a Material Adverse Effect on HKCo or Ge Rui. The businesses and activities of BVICo, HKCo and Ge Rui have not been and are not being conducted in violation of any Legal Requirements. Neither BVICo, HKCo nor Ge Rui is in default or violation of any term, condition or provision of any applicable Charter Documents. No written notice of non-compliance with any Legal Requirements has been received by BVICo, HKCo or Ge Rui (and neither BVICo, HKCo nor Ge Rui has any knowledge of any such
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notice delivered to any other Person). Ge Rui is not in violation of any term of any Company Contract, except for failures to comply or violations which, individually or in the aggregate, have not had and are not reasonably likely to have a Material Adverse Effect on BVICo, HKCo or Ge Rui.
(a) BVICo has provided to COAC a correct and complete copy of the audited financial statements (including any related notes thereto) of Ge Rui for the fiscal years endedDecember 31, 2007, December 31, 2006 and December 31, 2005 (the “Audited Financial Statements”). The Audited Financial Statements were prepared in accordance with the published rules and regulations of all applicable Governmental Entities and United States generally accepted accounting principles (“U.S. GAAP”) applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and each fairly presents in all material respects the financial position of Ge Rui at the respective dates thereof and the results of their operations and cash flows for the periods indicated.
(b) Ge Rui has provided to COAC a correct and complete copy of the unaudited financial statements of Ge Rui for the six month period ended June 30, 2008 (including any notes related thereto) (the “Unaudited Financial Statements”). The Unaudited Financial Statements comply as to form in all material respects, and were prepared in accordance, with the published rules and regulations of all applicable Governmental Entities and U.S. GAAP applied on a consistent basis throughout the periods involved and in a manner consistent with the preparation of the Audited Financial Statements, and fairly present in all material respects the financial position of Ge Rui at the date thereof and the results of its operations and cash flows for the period indicated, except that such statements are subject to normal audit adjustments that are not expected to have a Material Adverse Effect on Ge Rui.
(c) The books of account, minute books, stock certificate books and stock transfer ledgers and other similar books and records of Ge Rui have been maintained in accordance with good business practice, are complete and correct in all material respects and there have been no material transactions that are required to be set forth therein and which have not been so set forth.
(d) Except as otherwise noted in the Audited Financial Statements or the Unaudited Financial Statements, the accounts and notes receivable of Ge Rui reflected on the balance sheets included in the Audited Financial Statements and the Unaudited Financial Statements: (i) arose from bona fide sales transactions in the ordinary course of business and are payable on ordinary trade terms, (ii) are legal, valid and binding obligations of the respective debtors enforceable in accordance with their terms, except as such may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting creditors’ rights generally, and by general equitable principles, (iii) are not subject to any valid set-off or counterclaim except to the extent set forth in such balance sheet contained therein, (iv) are collectible in the ordinary course of business consistent with past practice in the aggregate recorded amounts thereof, net of any applicable reserve reflected in such balance sheet referenced above, and (v) are not the subject of any actions or proceedings brought by or on behalf of Ge Rui.
2.8No Undisclosed Liabilities. Ge Rui has no liabilities (absolute, accrued, contingent or otherwise) of a nature required to be disclosed on a balance sheet or in the related notes to financial statements that are, individually or in the aggregate, material to the business, results of operations or financial condition of Ge Rui, except: (i) liabilities provided for in or otherwise disclosed in the interim balance sheet included in the Unaudited Financial Statements or in the notes to the Audited Financial Statements, and (ii) such liabilities arising in the ordinary course of Ge Rui’s business since December 31, 2007, none of which, individually or in the aggregate, would have a Material Adverse Effect on Ge Rui.
2.9Absence of Certain Changes or Events. Except as set forth in the Unaudited Financial Statements or inSchedule 2.9, since December 31, 2007, there has not been: (i) any Material Adverse Effect on BVICo, HKCo or Ge Rui, (ii) any declaration, setting aside or payment of any dividend on, or other distribution (whether in cash, stock or property) in respect of, any of BVICo’s, HKCo’s or Ge Rui’s stock, or any purchase, redemption or other acquisition by BVICo, HKCo or Ge Rui of any of BVICo’s, HKCo’s or Ge Rui’s capital stock or any other securities of BVICo, HKCo or Ge Rui or any options, warrants, calls or rights to acquire any such shares or other securities, (iii) any split, combination or reclassification of any of BVICo’s,
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HKCo’s or Ge Rui’s capital stock, (iv) any granting by Ge Rui of any increase in compensation or fringe benefits, except for normal increases of cash compensation in the ordinary course of business consistent with past practice, or any payment by Ge Rui of any bonus, except for bonuses made in the ordinary course of business consistent with past practice, or any granting by Ge Rui of any increase in severance or termination pay or any entry by Ge Rui into any currently effective employment, severance, termination or indemnification agreement or any agreement the benefits of which are contingent or the terms of which are materially altered upon the occurrence of a transaction involving Ge Rui of the nature contemplated hereby, (v) entry by Ge Rui into any licensing or other agreement with regard to the acquisition or disposition of any Intellectual Property (as defined in Section 2.18) other than licenses in the ordinary course of business consistent with past practice or any amendment or consent with respect to any licensing agreement filed or required to be filed by Ge Rui with respect to any Governmental Entity, (vi) any material change by BVICo, HKCo or Ge Rui in its accounting methods, principles or practices, (vii) any change in the auditors of BVICo, HKCo or Ge Rui, (viii) any issuance of capital stock of BVICo, HKCo or Ge Rui, (ix) any revaluation by BVICo, HKCo or Ge Rui of any of its assets, including, without limitation, writing down the value of capitalized inventory or writing off notes or accounts receivable or any sale of assets of BVICo, HKCo or Ge Rui other than in the ordinary course of business, or (x) any agreement, whether written or oral, to do any of the foregoing.
2.10 Litigation. There are no claims, suits, actions or proceedings pending or, to the knowledge of BVICo and the Shareholders, threatened against BVICo, HKCo or Ge Rui before any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator.
2.13 Restrictions on Business Activities. There is no agreement, commitment, judgment, injunction, order or decree binding upon any of BVICo, HKCo and Ge Rui or their respective assets or to which any of them is a party which has or could reasonably be expected to have the effect of prohibiting or materially impairing any business practice of any of BVICo, HKCo and Ge Rui, any acquisition of property by each of BVICo, HKCo and Ge Rui or the conduct of business by each of BVICo, HKCo and Ge Rui as currently conducted other than such effects, individually or in the aggregate, which have not had and could not reasonably be expected to have a Material Adverse Effect on any of BVICo, HKCo and Ge Rui.
(a) Neither BVICo nor HKCo owns, leases or occupies any real property. All real property owned by Ge Rui (including improvements and fixtures thereon, easements and rights of way) is shown or reflected on the balance sheet of Ge Rui included in the Unaudited Financial Statements. Ge Rui has good, legal and marketable title to the real property owned by it, and except as set forth in the Audited Financial Statements or onSchedule 2.14(a) hereto, all of such real property is held free and clear of (i) all leases, licenses and other rights to occupy or use such real property and (ii) all Liens, rights of way, easements, restrictions, exceptions, variances, reservations, covenants or other title defects or limitations of any kind, other than liens for taxes not yet due and payable and such liens or other imperfections of title, if any, as do not materially detract from the value of or materially interfere with the present use of the property affected thereby.Schedule 2.14(a) hereto also contains a list of all options or other contracts under which Ge Rui has a right to acquire or the obligation to sell any interest in real property. Ge Rui neither owns, nor has any other interest in, real property located in the United States.
(b) All leases of real property held by Ge Rui, and all personal property and other property and assets of Ge Rui owned, used or held for use in connection with the business of Ge Rui (the “Personal Property”) are shown or reflected on the balance sheet included in the Audited Financial Statements or the Unaudited Financial Statements, to the extent required by IFRS, as of the dates of such Audited Financial Statements and Unaudited Financial Statements, other than those entered into or acquired on or after the date of the Unaudited Financial Statements in the ordinary course of business.Schedule 2.14(b) contains a list of all leases of real property and Personal Property held by Ge Rui. Ge Rui has good and marketable title to the Personal Property owned by it, and all such Personal Property is in each case held free and clear of all Liens, except for Liens disclosed in the Audited Financial Statements or inSchedule
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2.14(b), none of which Liens is reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on such property or on the present or contemplated use of such property in the businesses of Ge Rui.
(c) All leases pursuant to which Ge Rui leases from others material real property or Personal Property are valid and effective in accordance with their respective terms, and there is not, under any of such leases, any existing material default or event of default of Ge Rui or, to the knowledge of BVICo and the Shareholders, any other party (or any event which with notice or lapse of time, or both, would constitute a material default), except where the lack of such validity and effectiveness or the existence of such default or event of default could not reasonably be expected to have a Material Adverse Effect on Ge Rui.
(d) Ge Rui is in possession of, or has valid and effective rights to, all properties, assets and rights (including Intellectual Property) required, in all material respects for the effective conduct of its business, as it is currently operated and expected to be operated in the future, in the ordinary course.
(a)Definition of Taxes. For the purposes of this Agreement, “Tax” or “Taxes” refers to any and all British Virgin Islands (“BVI”), Hong Kong, PRC, national and local taxes, including, without limitation, gross receipts, income, profits, sales, use, occupation, value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, assessments, governmental charges and duties together with all interest, penalties and additions imposed with respect to any such amounts and any obligations under any agreements or arrangements with any other Person with respect to any such amounts and including any liability of a predecessor entity for any such amounts.
(b) Tax Returns and Audits.
(i) BVICo, HKCo and Ge Rui each has timely filed all BVI, Hong Kong, PRC, national and local returns, estimates, information statements and reports relating to Taxes (“Returns”) required to be filed by them with any Tax authority prior to the date hereof, except such Returns that are not material to BVICo, HKCo or Ge Rui. All such Returns are true, correct and complete in all material respects. Each of BVICo, HKCo and Ge Rui has paid all Taxes shown to be due and payable on such Returns.
(ii) All Taxes that BVICo, HKCo or Ge Rui is required by law to withhold or collect have been duly withheld or collected, and have been timely paid over to the proper governmental authorities to the extent due and payable.
(iii) Neither BVICo, HKCo nor Ge Rui has been delinquent in the payment of any Tax nor is there any Tax deficiency outstanding, proposed or assessed against it, nor has BVICo, HKCo or Ge Rui executed any unexpired waiver of any statute of limitations on or extending the period for the assessment or collection of any Tax. Each of BVICo, HKCo and Ge Rui has complied with all Legal Requirements with respect to payments made to third parties and the withholding of any payment of withheld Taxes and has timely withheld from employee wages and other payments and timely paid over in full to the proper taxing authorities all amounts required to be so withheld and paid over for all periods.
(iv) To the knowledge of BVICo and Oasis Green, no audit or other examination of any Return of BVICo, HKCo or Ge Rui by any Tax authority is presently in progress, nor has BVICo, HKCo or Ge Rui been notified of any request for such an audit or other examination.
(v) No adjustment relating to any Returns filed by BVICo, HKCo or Ge Rui has been proposed in writing, formally or informally, by any Tax authority to BVICo, HKCo or Ge Rui or any representative thereof.
(vi) Neither BVICo, HKCo nor Ge Rui has any liability for any unpaid Taxes that have not been accrued for or reserved on the balance sheets included in the Audited Financial Statements or the Unaudited Financial Statements, whether asserted or unasserted, contingent or otherwise, other
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than any liability for unpaid Taxes that may have accrued since the end of the most recent fiscal year in connection with the operation of the business of Ge Rui in the ordinary course of business.
(a) Except for such matters that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect: (i) Ge Rui has complied with all applicable Environmental Laws (as defined below); (ii) the properties currently operated or being constructed by Ge Rui (including soils, groundwater, surface water, air, buildings or other structures) are not contaminated with any Hazardous Substances (as defined below); (iii) the properties formerly owned, operated or constructed by Ge Rui were not contaminated with Hazardous Substances during the period of ownership, operation or construction by Ge Rui or, to Ge Rui’s knowledge, during any prior period; (iv) Ge Rui is not subject to liability for any Hazardous Substance disposal or contamination on any third party or public property (whether above, on or below ground or in the atmosphere or water); (v) Ge Rui has not been associated with any release or threat of release of any Hazardous Substance; (vi) Ge Rui has not received any notice, demand, letter, claim or request for information alleging that Ge Rui may be in violation of or liable under any Environmental Law; and (vii) Ge Rui is not subject to any orders, decrees, injunctions or other arrangements with any Governmental Entity or subject to any indemnity or other agreement with any third party relating to liability under any Environmental Law or relating to Hazardous Substances.
(b) As used in this Agreement, the term “Environmental Law” means any national or local law, regulation, order, decree, permit, authorization, opinion, common law or agency requirement of the PRC or any other jurisdiction to which Ge Rui is subject relating to: (A) the protection, investigation or restoration of the environment, health and safety, or natural resources; (B) the handling, use, presence, disposal, release or threatened release of any Hazardous Substance or (C) noise, odor, wetlands, pollution, contamination or any injury or threat of injury to persons or property.
(c) As used in this Agreement, the term “Hazardous Substance” means any substance that is: (i) listed, classified or regulated pursuant to any Environmental Law; (ii) any petroleum product or by-product, asbestos-containing material, lead-containing paint or plumbing, polychlorinated biphenyls, radioactive materials or radon; or (iii) any other substance which is the subject of regulatory action by any Governmental Entity pursuant to any Environmental Law.
2.17Brokers; Third Party Expenses. Neither BVICo nor, to the knowledge of BVICo and Oasis Green, any Shareholder has incurred, nor will BVICo, HKCo, Ge Rui nor any Shareholder incur, directly or indirectly, any liability for brokerage, finders’ fees, agent’s commissions or any similar charges in connection with this Agreement or any transactions contemplated hereby. Except as contemplated by this Agreement, no shares of capital stock, options, warrants or other securities of any of BVICo, HKCo, Ge Rui, or COAC are issuable or payable to any third party by BVICo, HKCo or Ge Rui or, to the knowledge of BVICo and Oasis Green, any Shareholder as a result of the Merger.
(a)Schedule 2.18 contains a description of all material Intellectual Property of Ge Rui. HKCo neither owns nor licenses (as licensor or licensee) any Intellectual Property. For the purposes of this Agreement, “Intellectual Property” means any or all of the following and all worldwide common law and statutory rights in, arising out of, or associated therewith: (i) patents and applications therefor and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof; (ii) inventions (whether patentable or not), invention disclosures, improvements, trade secrets, proprietary information, know how, technology, technical data and customer lists, and all documentation relating to any of the foregoing; (iii) copyrights, copyrights registrations and applications therefor, and all other rights corresponding thereto throughout the world; (iv) software and software programs; (v) domain names, uniform resource locators and other names and locators associated with the Internet (vi) industrial designs and any registrations and applications therefor; (vii) trade names, logos, common law trademarks and service marks, trademark and service mark registrations and applications therefor; (viii) all databases and data collections and all rights therein; (ix) all moral and economic rights of authors and inventors, however denominated, and (x) any similar or equivalent rights to any of the foregoing (as applicable).
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(b) Ge Rui owns or has enforceable rights to use all Intellectual Property required for the conduct of its business as presently conducted or as presently contemplated to be conducted. No Intellectual Property owned, licensed or otherwise used by Ge Rui is subject to any material proceeding or outstanding decree, order, judgment, contract, license, agreement or stipulation restricting in any manner the use, transfer or licensing thereof by Ge Rui, or which may affect the validity, use or enforceability of such Intellectual Property, which in any such case could reasonably be expected to have a Material Adverse Effect on Ge Rui.
(c) Ge Rui owns and has good and exclusive title to each material item of Company Intellectual Property owned by it free and clear of any Liens (excluding non-exclusive licenses and related restrictions granted by it in the ordinary course of business); and Ge Rui is the exclusive owner of all material registered Intellectual Property registered under the Legal Requirements of any country and used in connection with the operation or conduct of the business of Ge Rui including the sale of any products or the provision of any services by Ge Rui.
(d) The operation of the business of Ge Rui as such business currently is conducted, including Ge Rui’s use of any product, device or process, has not and does not infringe or misappropriate the Intellectual Property of any third party or constitute unfair competition or trade practices under the laws of any jurisdiction and Ge Rui has not received any claims or threats from third parties alleging any such infringement, misappropriation or unfair competition or trade practices.
2.19 Agreements, Contracts and Commitments.
(a)Schedule 2.19 sets forth a complete and accurate list of all Material Company Contracts (as hereinafter defined), specifying the parties thereto. For purposes of this Agreement, (i) the term “Company Contracts” shall mean all contracts, agreements, leases, mortgages, indentures, notes, bonds, licenses, permits, franchises, purchase orders, sales orders, and other understandings, commitments and obligations (including, without limitation, outstanding offers and proposals) of any kind, whether written or oral, to which any of BVICo, HKCo or Ge Rui is a party or by or to which any of their properties or assets may be bound, subject or affected (including without limitation notes or other instruments payable to Ge Rui) and (ii) the term “Material Company Contracts” shall mean (x) each Company Contract (A) providing for payments (present or future) to BVICo, HKCo or Ge Rui in excess of $100,000 in the aggregate or (B) under or in respect of which any of BVICo, HKCo or Ge Rui presently has any liability or obligation of any nature whatsoever (absolute, contingent or otherwise) in excess of $100,000, (y) each Company Contract that otherwise is or may be material to the businesses, operations, assets, condition (financial or otherwise) or prospects of BVICo, HKCo or Ge Rui, and (z) the limitations of subclause (x) and subclause (y) notwithstanding, each of the following Company Contracts:
(i) any mortgage, indenture, note, installment obligation or other instrument, agreement or arrangement for or relating to any borrowing of money by or from BVICo, HKCo or Ge Rui and by or to any officer, director, employee, shareholder or holder of derivative securities of BVICo, HKCo or Ge Rui (“BVICo Insider”);
(ii) any mortgage, indenture, note, installment obligation or other instrument, agreement or arrangement for or relating to any borrowing of money from a BVICo Insider by BVICo, HKCo or Ge Rui;
(iii) any guaranty, direct or indirect, by BVICo, HKCo or Ge Rui or any BVICo Insider of any obligation for borrowings, or otherwise, excluding endorsements made for collection in the ordinary course of business;
(iv) any Company Contract of employment or management;
(v) any Company Contract made other than in the ordinary course of business or (x) providing for the grant of any preferential rights to purchase or lease any asset of BVICo, HKCo or Ge Rui or (y) providing for any right (exclusive or non-exclusive) to sell or distribute, or otherwise relating to the sale or distribution of, any product or service of BVICo, HKCo or Ge Rui;
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(vi) any obligation to register any shares of the capital stock or other securities of BVICo, HKCo or Ge Rui with any Governmental Entity;
(vii) any obligation to make payments, contingent or otherwise, arising out of the prior acquisition of the business, assets or stock of other Persons;
(viii) any collective bargaining agreement with any labor union;
(ix) any lease or similar arrangement for the use by BVICo, HKCo or Ge Rui of real property or Personal Property where the annual lease payments are greater than $100,000 (other than any lease of vehicles, office equipment or operating equipment made in the ordinary course of business);
(x) any Company Contract granting or purporting to grant, or otherwise in any way relating to, any mineral rights or any other interest (including, without limitation, a leasehold interest) in real property;
(xi) any Company Contract to which any BVICo Insider or any entity owned or controlled by a BVICo Insider, is a party; and
(xii) any offer or proposal which, if accepted, would constitute any of the foregoing.
(b) Each Material Company Contract was entered into at arms’ length and in the ordinary course, is in full force and effect and, to the knowledge of BVICo and the Shareholders, is valid and binding upon and enforceable against each of the parties thereto, except insofar as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally or by principles governing the availability of equitable remedies. To the knowledge of BVICo and Oasis Green, no other party to a Material Company Contract is the subject of a bankruptcy or insolvency proceeding. True, correct and complete copies of all Material Company Contracts and all offers and proposals that, if accepted, would constitute Material Company Contracts (or written summaries in the case of oral Material Company Contracts or offers or proposals) have been heretofore delivered to COAC or COAC’s counsel.
(c) Except as set forth inSchedule 2.19, neither BVICo, HKCo or Ge Rui nor, to the knowledge of BVICo and Oasis Green, any other party thereto is in breach of or in default under, and no event has occurred which with notice or lapse of time or both would become a breach of or default under, any Company Contract, and no party to any Company Contract has given any written notice of any claim of any such breach, default or event, which, individually or in the aggregate, are reasonably likely to have a Material Adverse Effect on BVICo, HKCo or Ge Rui. Each Material Company Contract that has not expired by its terms is in full force and effect.
2.20 Insurance. Schedule 2.20 sets forth Ge Rui’s insurance policies and fidelity and surety bonds covering the assets, business, equipment, properties, operations, employees, officers and directors (collectively, the “Insurance Policies”). The insurances provided by such Insurance Policies are adequate in amount and scope for Ge Rui’s business and operations, including any insurance required to be maintained by Company Contracts. HKCo maintains no insurance.
2.21 Governmental Actions/Filings.
(a) Each of BVICo, HKCo and Ge Rui has been granted and holds, and has made, all Governmental Actions/Filings (as defined below) (including, without limitation, Governmental Actions/Filings required for emission or discharge of effluents and pollutants into the air and the water) necessary to the conduct of its business (as presently conducted and as presently proposed to be conducted) or used or held for use by BVICo, HKCo or Ge Rui, and true, complete and correct copies of which have heretofore been delivered to COAC. Each such Governmental Action/Filing is in full force and effect and will not expire prior to December 31, 2009 and each of BVICo, HKCo and Ge Rui is in substantial compliance with all of its obligations with respect thereto. No event has occurred and is continuing which requires or permits, or after notice or lapse of time or both would require or permit, and consummation of the transactions contemplated by this Agreement or any ancillary documents will not require or permit (with or without notice or lapse of time, or both), any modification or termination of any such Governmental
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Actions/Filings except such events which, either individually or in the aggregate, would not have a Material Adverse Effect upon BVICo, HKCo or Ge Rui.
(b) No Governmental Action/Filing is necessary to be obtained, secured or made by BVICo, HKCo or Ge Rui to enable it to continue to conduct its businesses and operations and use its properties after the Closing in a manner which is consistent with current practice.
(c) For purposes of this Agreement, the term “Governmental Action/Filing” shall mean any franchise, license, certificate of compliance, authorization, consent, order, permit, approval, consent or other action of, or any filing, registration or qualification with, any national, provincial, municipal, foreign or other governmental, administrative or judicial body, agency or authority.
2.22Interested Party Transactions. Except as set forth in theSchedule 2.22, no employee, officer, director or shareholder of BVICo, HKCo or Ge Rui or a member of his or her immediate family is indebted to BVICo, HKCo or Ge Rui, nor is BVICo, HKCo or Ge Rui indebted (or committed to make loans or extend or guarantee credit) to any of such Persons, other than (i) for payment of salary for services rendered, (ii) reimbursement for reasonable expenses incurred on behalf of any of BVICo, HKCo or Ge Rui, and (iii) for other employee benefits made generally available to all employees. Except as set forth in Schedule 2.22, to the knowledge of BVICo and Oasis Green, none of such individuals has any direct or indirect ownership interest in any Person with whom BVICo, HKCo or Ge Rui is affiliated or with whom BVICo, HKCo or Ge Rui has a contractual relationship, or in any Person that competes with Ge Rui, except that each BVICo Insider and members of their respective immediate families may own less than 5% of the outstanding stock in publicly traded companies that may compete with Ge Rui. Except as set forth inSchedule 2.22, to the knowledge of BVICo and Oasis Green, no BVICo Insider or any member of a BVICo Insider’s immediate family is, directly or indirectly, interested in any Material Company Contract with BVICo, HKCo or Ge Rui (other than such contracts as relate to any such Person’s ownership of capital stock or other securities of BVICo, HKCo or Ge Rui or such Person’s employment with BVICo, HKCo or Ge Rui).
2.23 Board Approval. The boards of directors of BVICo, HKCo and Ge Rui (including any required committee or subgroup thereof) have, as of the date of this Agreement, duly approved this Agreement and the transactions contemplated hereby.
2.24No Illegal or Improper Transactions. Since January 1, 2002, neither BVICo, HKCo or Ge Rui, or, to the knowledge of BVICo and Oasis Green, any Shareholder, nor any officer, director, employee, agent or Affiliate of BVICo, HKCo or Ge Rui on its behalf has offered, paid or agreed to pay to any person or entity (including any governmental official) or solicited, received or agreed to receive from any such person or entity, directly or indirectly, any money or anything of value for the purpose or with the intent of (a) obtaining or maintaining business for BVICo, HKCo or Ge Rui, (b) facilitating the purchase or sale of any product or service, or (c) avoiding the imposition of any fine or penalty, in any manner which is in violation of any applicable ordinance, regulation or law, the effect of which, individually or in the aggregate, would reasonably be expected to be materially adverse to the business, assets, prospects or financial condition of BVICo, HKCo and Ge Rui, taken as a whole. To the knowledge of BVICo and the Shareholders, no employee of BVICo, HKCO or Ge Rui has provided or is providing information to any law enforcement agency regarding the commission or possible commission of any crime or the violation or possible violation of any applicable law. Neither BVICo, HKCo or Ge Rui nor any officer, employee, contractor, subcontractor or agent of BVICo, HKCo or Ge Rui has discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against an employee of BVICo, HKCo or Ge Rui in the terms and conditions of employment because of any act of such employee described in 18 U.S.C. § 1514A(a).
2.25 Equity Transfer Agreement. The Equity Transfer Agreement (the “Equity Transfer Agreement”) dated August 10, 2008 between HKCo and Lu Mingwang et al. is valid, binding and enforceable under, and will not result in any violation of, the Legal Requirements. All necessary PRC government approvals have been obtained for (a) the Equity Transfer Agreement, (b) the acquisition of the entire equity interest in Ge Rui contemplated thereunder and (c) the conversion of Ge Rui into a wholly foreign-owned enterprise with limited liability. The representation and warranties made therein by the parties to the Equity Transfer Agreement are true, accurate and not misleading in any material respect.
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2.26 Representations and Warranties Complete. The representations and warranties of BVICo and the Shareholders included in this Agreement and any list, statement, document or information set forth in, or attached to, any Schedule provided pursuant to this Agreement or delivered hereunder, are true and complete in all material respects and do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading, under the circumstance under which they were made.
2.27Survival of Representations and Warranties. The representations and warranties of BVICo and the Shareholders set forth in this Agreement shall survive the Closing as set forth in Section 7.4(a).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COAC
Subject to the exceptions set forth inchedule 3 (the “COAC Schedule”), COAC represents and warrants to, and covenants with, BVICo, HKCo and the Shareholders, as follows:
3.1Organization and Qualification.
(a) COAC is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being or currently planned by COAC to be conducted. COAC is in possession of all Approvals necessary to own, lease and operate the properties it purports to own, operate or lease and to carry on its business as it is now being or currently planned by COAC to be conducted, except where the failure to have such Approvals could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on COAC. Complete and correct copies of the Charter Documents of COAC, as amended and currently in effect, have been heretofore delivered to Ge Rui. COAC is not in violation of any of the provisions of COAC’s Charter Documents.
(b) COAC is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except for such failures to be so duly qualified or licensed and in good standing that could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on COAC.
3.2Subsidiaries. COAC has no subsidiaries and does not own, directly or indirectly, any ownership, equity, profits or voting interest in any Person or have any agreement or commitment to purchase any such interest, and COAC has not agreed and is not obligated to make nor is bound by any written, oral or other agreement, contract, subcontract, lease, binding understanding, instrument, note, option, warranty, purchase order, license, sublicense, insurance policy, benefit plan, commitment or undertaking of any nature, as of the date hereof or as may hereafter be in effect under which it may become obligated to make, any future investment in or capital contribution to any other entity.
(a) As of the date of this Agreement, the authorized capital stock of COAC consists of 30,000,000 shares of common stock, par value $0.0001 per share (“COAC Common Stock”) and 1,000,000 shares of preferred stock, par value $0.0001 per share (“COAC Preferred Stock”), of which 8,400,000 shares of COAC Common Stock and no shares of COAC Preferred Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable.
(b) Except as set forth inSchedule 3.3, (i) no shares of COAC Common Stock or COAC Preferred Stock are reserved for issuance upon the exercise of outstanding options to purchase COAC Common Stock or COAC Preferred Stock granted to employees of COAC or other parties (“COAC Stock Options”) and there are no outstanding COAC Stock Options; (ii) no shares of COAC Common Stock or COAC Preferred Stock are reserved for issuance upon the exercise of outstanding warrants to purchase COAC Common Stock or COAC Preferred Stock (“COAC Warrants”) and there are no outstanding COAC Warrants; and (iii) no shares of COAC Common Stock or COAC Preferred Stock are reserved for
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issuance upon the conversion of the COAC Preferred Stock or any outstanding convertible notes, debentures or securities (“COAC Convertible Securities”). All shares of COAC Common Stock and COAC Preferred Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instrument pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable. All outstanding shares of COAC Common Stock and all outstanding COAC Warrants have been issued and granted in compliance with all applicable securities laws and (in all material respects) other applicable laws and regulations. COAC has heretofore delivered to HKCo true, complete and accurate copies of the COAC Warrants, including any and all documents and agreements relating thereto.
(c) Except as set forth inSchedule 3.3 or as contemplated by this Agreement or the COAC SEC Reports (as defined in Section 3.7), there are no registration rights, and there is no voting trust, proxy, rights plan, antitakeover plan or other agreements or understandings to which COAC is a party or by which COAC is bound with respect to any equity security of any class of COAC.
(d) Except as contemplated by this Agreement or as set forth inSchedule 3.3, as a result of the consummation of the transactions contemplated hereby, no shares of capital stock, warrants, options or other securities of COAC are issuable and no rights in connection with any shares, warrants, options or other securities of COAC accelerate or otherwise become triggered (whether as to vesting, exercisability, convertibility or otherwise).
3.4Authority Relative to this Agreement. COAC has full corporate power and authority to: (i) execute, deliver and perform this Agreement, and each ancillary document that COAC has executed or delivered or is to execute or deliver pursuant to this Agreement, and (ii) carry out COAC’s obligations hereunder and thereunder and, to consummate the transactions contemplated hereby and thereby (including the Merger). The execution and delivery of this Agreement by COAC and the consummation by COAC of the transactions contemplated hereby (including the Merger) have been duly and validly authorized by all necessary corporate action on the part of each of COAC (including the approval by its board of directors), and no other corporate proceedings on the part of COAC are necessary to authorize this Agreement or to consummate the transactions contemplated hereby, other than the COAC Stockholder Approval (as defined in Section 5.1(a)). This Agreement has been duly and validly executed and delivered by COAC and, assuming the due authorization, execution and delivery thereof by the other parties hereto, constitutes the legal and binding obligation of COAC, enforceable against COAC in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors’ rights generally and by general principles of equity.
3.5No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by COAC do not, and the performance of this Agreement by COAC shall not: (i) conflict with or violate COAC’s Charter Documents, (ii) conflict with or violate any Legal Requirements, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or materially impair COAC’s rights or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a Lien on any of the properties or assets of COAC pursuant to, any contract to which COAC is a party or to which either of them is bound, except, with respect to clauses (ii) or (iii), for any such conflicts, violations, breaches, defaults or other occurrences that would not, individually and in the aggregate, have a Material Adverse Effect on COAC.
(b) The execution and delivery of this Agreement by COAC o does not, and the performance of its obligations hereunder will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except (i) for applicable requirements, if any, of the Securities Act, the Exchange Act, Blue Sky Laws, and the rules and regulations thereunder, and appropriate documents with the relevant authorities of other jurisdictions in which COAC is qualified to do business, (ii) for the filing of any notifications required under the HSR Act and the expiration of the required waiting period thereunder, and (iii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on COAC or BVICo, or prevent consummation of the Merger or otherwise prevent the parties hereto from performing their obligations under this Agreement.
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3.6 Compliance. COAC has complied with, and is not in violation of, any Legal Requirements with respect to the conduct of its business, or the ownership or operation of its business, except for failures to comply or violations which, individually or in the aggregate, have not had and are not reasonably likely to have a Material Adverse Effect on COAC. The business and activities of COAC and BVICo have not been and are not being conducted in violation of any Legal Requirements. COAC is not in default or violation of any term, condition or provision of its Charter Documents. No written notice of non-compliance with any Legal Requirements has been received by COAC.
3.7SEC Filings; Financial Statements.
(a) COAC has made available to BVICo and the Shareholders a correct and complete copy of each report, registration statement and definitive proxy statement filed by COAC with the SEC (the “COAC SEC Reports”), which are all the forms, reports and documents required to be filed by COAC with the SEC prior to the date of this Agreement. All COAC SEC Reports required to be filed by COAC in the twelve (12) month period prior to the date of this Agreement were filed in a timely manner. As of their respective dates the COAC SEC Reports: (i) were prepared in accordance and complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such COAC SEC Reports, and (ii) did not at the time they were filed (and if amended or superseded by a filing prior to the date of this Agreement then on the date of such filing and as so amended or superseded) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except to the extent set forth in the preceding sentence, COAC makes no representation or warranty whatsoever concerning any COAC SEC Report as of any time other than the date or period with respect to which it was filed.
(b) Except as set forth inSchedule 3.7, each set of financial statements (including, in each case, any related notes thereto) contained in COAC SEC Reports, including each COAC SEC Report filed after the date hereof until the Closing, complied or will comply as to form in all material respects with the published rules and regulations of the SEC with respect thereto, was or will be prepared in accordance with U.S. GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited statements, do not contain footnotes as permitted by Form 10-Q of the Exchange Act) and each fairly presents or will fairly present in all material respects the financial position of COAC at the respective dates thereof and the results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were, are or will be subject to normal adjustments which were not or are not expected to have a Material Adverse Effect on COAC taken as a whole.
3.8No Undisclosed Liabilities. COAC has no liabilities (absolute, accrued, contingent or otherwise) of a nature required to be disclosed on a balance sheet or in the related notes to the financial statements included in COAC SEC Reports that are, individually or in the aggregate, material to the business, results of operations or financial condition of COAC, except (i) liabilities provided for in or otherwise disclosed in COAC SEC Reports filed prior to the date hereof, and (ii) liabilities incurred since June 30, 2008 in the ordinary course of business, none of which would have a Material Adverse Effect on COAC.
3.9 Absence of Certain Changes or Events. Except as set forth in COAC SEC Reports filed prior to the date of this Agreement, and except as contemplated by this Agreement, since June 30, 2008, there has not been: (i) any Material Adverse Effect on COAC, (ii) any declaration, setting aside or payment of any dividend on, or other distribution (whether in cash, stock or property) in respect of, any of COAC’s capital stock, or any purchase, redemption or other acquisition by COAC of any of COAC’s capital stock or any other securities of COAC or any options, warrants, calls or rights to acquire any such shares or other securities, (iii) any split, combination or reclassification of any of COAC’s capital stock, (iv) any granting by COAC of any increase in compensation or fringe benefits, except for normal increases of cash compensation in the ordinary course of business consistent with past practice, or any payment by COAC of any bonus, except for bonuses made in the ordinary course of business consistent with past practice, or any granting by COAC of any increase in severance or termination pay or any entry by COAC into any currently effective employment,
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severance, termination or indemnification agreement or any agreement the benefits of which are contingent or the terms of which are materially altered upon the occurrence of a transaction involving COAC of the nature contemplated hereby, (v) entry by COAC into any licensing or other agreement with regard to the acquisition or disposition of any Intellectual Property other than licenses in the ordinary course of business consistent with past practice or any amendment or consent with respect to any licensing agreement filed or required to be filed by COAC with respect to any Governmental Entity, (vi) any material change by COAC in its accounting methods, principles or practices, except as required by concurrent changes in U.S. GAAP, (vii) any change in the auditors of COAC, (vii) any issuance of capital stock of COAC, or (viii) any revaluation by COAC of any of its assets, including, without limitation, writing down the value of capitalized inventory or writing off notes or accounts receivable or any sale of assets of COAC other than in the ordinary course of business.
3.10Litigation. There are no claims, suits, actions or proceedings pending or to COAC’s knowledge, threatened against COAC, before any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator.
3.11 Business Activities. Since its organization, COAC has not conducted any business activities other than activities directed toward the accomplishment of a business combination. Except as set forth in the COAC Charter Documents, there is no agreement, commitment, judgment, injunction, order or decree binding upon COAC or to which COAC is a party which has or could reasonably be expected to have the effect of prohibiting or materially impairing any business practice of COAC, any acquisition of property by COAC or the conduct of business by COAC as currently conducted other than such effects, individually or in the aggregate, which have not had and could not reasonably be expected to have, a Material Adverse Effect on COAC.
3.12 Brokers. Except as set forth inSchedule 3.12, COAC has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders’ fees or agent’s commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby.
3.13 Indebtedness. COAC has no indebtedness for borrowed money.
3.14 Board Approval. The board of directors of COAC (including any required committee or subgroup of the board of directors of COAC) have, as of the date of this Agreement, unanimously (i) declared the advisability of the Merger and approved this Agreement and the transactions contemplated hereby, (ii) determined that the Merger is in the best interests of the stockholders of COAC, and (iii) determined that the fair market value of BVICo is equal to at least 80% of COAC’s net assets.
3.15Trust Fund. As of the date hereof and at the Closing Date, COAC has and will have more than $40,000,000 invested in United States Government securities or money market funds meeting certain conditions under Rule 2a-7 promulgated under the United States Investment Company Act of 1940 in a trust account administered by Continental (the “Trust Fund”), less such amounts, if any, as COAC is required to pay to (i) stockholders who elect to have their shares converted to cash in accordance with the provisions of COAC’s Charter Documents, (ii) deferred underwriters’ compensation in connection with COAC’s initial public offering, (iii) repayment of loans made to COAC pursuant to Section 5.20, and (iv) third parties (e.g., professionals, printers, etc.) who have rendered services to COAC in connection with its efforts to effect a business combination, including the Merger.
3.16Representations and Warranties Complete. The representations and warranties of COAC included in this Agreement and any list, statement, document or information set forth in, or attached to, any Schedule provided pursuant to this Agreement or delivered hereunder, are true and complete in all material respects and do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading, under the circumstance under which they were made.
3.17Survival of Representations and Warranties. The representations and warranties of COAC set forth in this Agreement shall survive until the Closing.
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ARTICLE IV
CONDUCT PRIOR TO THE CLOSING
4.1Conduct of Business by BVICo, HKCo, Ge Rui and COAC. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement pursuant to its terms or the Closing, each of BVICo, HKCo, Ge Rui and COAC shall, except to the extent that COAC, with respect to BVICo, HKCo and Ge Rui, and BVICo, with respect to COAC, shall otherwise consent in writing, carry on its business in the usual, regular and ordinary course consistent with past practices, in substantially the same manner as heretofore conducted and in compliance with all applicable laws and regulations (except where noncompliance would not have a Material Adverse Effect), pay its debts and taxes when due subject to good faith disputes over such debts or taxes, pay or perform other material obligations when due, and use its best efforts consistent with past practices and policies to (i) preserve substantially intact its present business organization, (ii) keep available the services of its present officers and employees and (iii) preserve its relationships with customers, suppliers, distributors, licensors, licensees, and others with which it has significant business dealings. In addition, except as required or permitted by the terms of this Agreement, without the prior written consent of COAC, with respect to BVICo, HKCo and Ge Rui, and BVICo, with respect to COAC, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement pursuant to its terms or the Closing, none of BVICo, HKCo, Ge Rui or COAC shall do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or (except as specifically provided for herein) change the period of exercisability of options or restricted stock, or reprice options granted under any employee, consultant, director or other stock plans or authorize cash payments in exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer or employee except pursuant to applicable law, written agreements outstanding, or policies existing on the date hereof and as previously or concurrently disclosed in writing or made available to the other party, or adopt any new severance plan, or amend or modify or alter in any manner any severance plan, agreement or arrangement existing on the date hereof;
(c) Transfer or license to any person or otherwise extend, amend or modify any material rights to any of its Intellectual Property or enter into grants to transfer or license to any person future patent rights, other than in the ordinary course of business consistent with past practices provided that in no event shall any of them license on an exclusive basis or sell any of its Intellectual Property;
(d) Declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock, equity securities or property) in respect of any capital stock or split, combine or reclassify any capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any capital stock;
(e) Purchase, redeem or otherwise acquire, directly or indirectly, any shares of its capital stock;
(f) Issue, deliver, sell, authorize, pledge or otherwise encumber, or agree to any of the foregoing with respect to, any shares of capital stock or any securities convertible into or exchangeable for shares of capital stock, or subscriptions, rights, warrants or options to acquire any shares of capital stock or any securities convertible into or exchangeable for shares of capital stock, or enter into other agreements or commitments of any character obligating it to issue any such shares or convertible or exchangeable securities;
(g) Amend its Charter Documents;
(h) Acquire or agree to acquire by merging or consolidating with, or by purchasing any equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to its business or enter into any joint ventures, strategic partnerships or alliances or other arrangements that provide for exclusivity of territory or otherwise restrict such party’s ability to compete or to offer or sell any products or services.
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For purposes of this paragraph, “material” includes the requirement that, as a result of such transaction, financial statements of the acquired, merged or consolidated entity be included in the Registration Statement (as defined in Section 5.1);
(i) Sell, lease, license, encumber or otherwise dispose of any properties or assets, except (A) sales of inventory in the ordinary course of business consistent with past practice, and (B) the sale, lease or disposition (other than through licensing) of property or assets that are not material, individually or in the aggregate, to the business of such party;
(j) Except, with respect to COAC, as permitted pursuant to Section 5.20, incur any indebtedness for borrowed money or guarantee any such indebtedness of another Person or Persons, issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities, enter into any “keep well” or other agreement to maintain any financial statement condition or enter into any arrangement having the economic effect of any of the foregoing;
(k) Adopt or amend any employee benefit plan, policy or arrangement, any employee stock purchase or employee stock option plan, or enter into any employment contract or collective bargaining agreement (other than offer letters and letter agreements entered into in the ordinary course of business consistent with past practice with employees who are terminable “at will”), pay any special bonus or special remuneration to any director or employee, or increase the salaries or wage rates or fringe benefits (including rights to severance or indemnification) of its directors, officers, employees or consultants, except in the ordinary course of business consistent with past practices;
(l) Pay, discharge, settle or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), or litigation (whether or not commenced prior to the date of this Agreement) other than the payment, discharge, settlement or satisfaction, in the ordinary course of business consistent with past practices or in accordance with their terms, or liabilities recognized or disclosed in the Unaudited Financial Statements or in the most recent financial statements included in the COAC SEC Reports filed prior to the date of this Agreement, as applicable, or incurred since the date of such financial statements, or waive the benefits of, agree to modify in any manner, terminate, release any person from or knowingly fail to enforce any confidentiality or similar agreement to which it is a party or of which it is a beneficiary;
(m) Except in the ordinary course of business consistent with past practices, modify, amend or terminate any Material Company Contract or waive, delay the exercise of, release or assign any material rights or claims thereunder;
(n) Except as required by U.S. GAAP or as set forth in Schedule 4.1, revalue any of its assets or make any change in accounting methods, principles or practices;
(o) Except in the ordinary course of business consistent with past practices, incur or enter into any agreement, contract or commitment requiring such party to pay in excess of $100,000 in any 12 month period;
(p) Settle any litigation where the consideration given is other than monetary or to which an COAC Insider or BVICo Insider is a party;
(q) Make or rescind any Tax elections that, individually or in the aggregate, could be reasonably likely to adversely affect in any material respect the Tax liability or Tax attributes of such party, settle or compromise any material income tax liability or, except as required by applicable law, materially change any method of accounting for Tax purposes or prepare or file any Return in a manner inconsistent with past practice;
(r) Form, establish or acquire any subsidiary except as contemplated by this Agreement;
(s) Permit any Person to exercise any of its discretionary rights under any plan to provide for the automatic acceleration of any outstanding options, the termination of any outstanding repurchase rights or the termination of any cancellation rights issued pursuant to such plans;
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(t) Make capital expenditures except in accordance with prudent business and operational practices consistent with prior practice;
(u) Make or omit to take any action which would be reasonably anticipated to have a Material Adverse Effect;
(v) Enter into any transaction with or distribute or advance any assets or property to any of its officers, directors, partners, stockholders or other affiliates other than the payment of salary and benefits in the ordinary course of business consistent with prior practice; or
(w) Agree in writing or otherwise agree, commit or resolve to take any of the actions described in Section 4.1 (a) through (v).
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Registration Statement; Special Meeting; Exchange Act Registration.
(a) As soon as is reasonably practicable after receipt by COAC from BVICo and the Shareholders of all financial and other information relating to BVICo, HKCo and Ge Rui as COAC may reasonably request for its preparation, COAC and BVICo shall prepare and file with the SEC under the Securities Act, and with all other applicable regulatory bodies, a registration statement on Form S-4 (“Registration Statement”) with respect to the BVICo Ordinary Shares to be issued to the holders of COAC Common Stock, which shall include proxy materials for the purpose of soliciting proxies from holders of COAC Common Stock to vote at a meeting of holders of COAC Common Stock to be called and held for such purpose (the “Special Meeting”), in favor of the adoption of this Agreement and the approval of the Merger (“COAC Stockholder Approval”). Such proxy materials shall be in the form of a proxy statement/prospectus to be used for the purpose of soliciting proxies from holders of COAC Common Stock for the matters to be acted upon at the Special Meeting and also for the purpose of issuing BVICo Ordinary Shares to the holders of the COAC Common Stock (the “Proxy Statement/Prospectus”). BVICo and the Shareholders shall furnish to COAC all information concerning BVICo, HKCo, Ge Rui and the Shareholders as COAC may reasonably request in connection with the preparation of the Registration Statement. BVICo and the Shareholders and their counsel shall be given an opportunity to review and comment on the Registration Statement prior to its filing with the SEC. COAC, with the assistance of BVICo and the Shareholders, shall promptly respond to any SEC comments on the Registration Statement and shall otherwise use best efforts to cause the Registration Statement to be declared effective by the SEC as promptly as practicable. COAC shall also take any and all actions required to satisfy the requirements of the Securities Act and the Exchange Act.
(b) As soon as practicable following the declaration of effectiveness of the Registration Statement by the SEC, COAC shall distribute the Proxy Statement/Prospectus to the holders of COAC Common Stock and, pursuant thereto, shall call the Special Meeting in accordance with the DGCL and, subject to the other provisions of this Agreement, solicit proxies from such holders to vote in favor of the adoption of this Agreement and the approval of the Merger and the other matters presented to the stockholders of COAC for approval or adoption at the Special Meeting, including, without limitation, the matters described in Section 5.1(a).
(c) COAC shall comply with all applicable provisions of and rules under the Securities Act, the Exchange Act and all applicable provisions of the DGCL in the preparation, filing and distribution of the Registration Statement and the Proxy Statement/Prospectus, the solicitation of proxies thereunder, and the calling and holding of the Special Meeting. Without limiting the foregoing, COAC shall ensure that the Proxy Statement/Prospectus does not, as of the date on which the Registration Statement is declared effective, and as of the date of the Special Meeting, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading (provided that COAC shall not be responsible for the accuracy or completeness of any information relating to BVICo, HKCo, Ge Rui or the Shareholders or any other information furnished by BVICo or the Shareholders for inclusion in the Proxy
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Statement/Prospectus). BVICo and each of the Shareholders represents and warrants that the information relating to them supplied by them for inclusion in the Proxy Statement/Prospectus will not as of the date on which the Registration Statement is declared effective or as the date on which the Proxy Statement/Prospectus (or any amendment or supplement thereto) is first distributed to holders of COAC Common Stock or at the time of the Special Meeting contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omits to state any material fact required to be stated therein or necessary in order to make the statement therein not false or misleading.
(d) COAC, acting through its board of directors, shall include in the Proxy Statement/Prospectus the recommendation of its board of directors that the holders of COAC Common Stock vote in favor of the adoption of this Agreement and the approval of the Merger, and shall otherwise use best efforts to obtain the COAC Stockholder Approval.
(e) As soon as practicable after the date of this Agreement, BVICo shall file a registration statement on Form 8-A to register the BVICo Ordinary Shares under the Exchange Act.
5.2 Directors and Officers of BVICo After Merger; Voting Agreement. The parties shall take all necessary action so that the persons listed inSchedule 5.2 are elected to the positions of officers and directors of BVICo, as set forth therein, to serve in such positions effective immediately after the Closing. If any Person listed inSchedule 5.2 is unable to serve, the party appointing such Person shall designate a successor; provided that, if such designation is to be made after the Closing, any successor to a Person designated by COAC shall be made by the Person serving in the capacity of Chairman of COAC immediately prior to the Closing. The Shareholders and those holders of COAC Common Stock stated to be parties thereto shall enter into a Voting Agreement in the form ofExhibit E on or before the Closing Date.
5.3 HSR Act. If required pursuant to the HSR Act, as promptly as practicable after the date of this Agreement, COAC and Oasis Green Investments Limited shall each prepare and file the notification required of it thereunder in connection with the transactions contemplated by this Agreement and shall promptly and in good faith respond to all information requested of it by the Federal Trade Commission and Department of Justice in connection with such notification and otherwise cooperate in good faith with each other and such Governmental Entities. COAC and Oasis Green Investments Limited shall (a) promptly inform the other of any communication to or from the Federal Trade Commission, the Department of Justice or any other Governmental Entity regarding the transactions contemplated by this Agreement, (b) give the other prompt notice of the commencement of any action, suit, litigation, arbitration, proceeding or investigation by or before any Governmental Entity with respect to such transactions and (c) keep the other reasonably informed as to the status of any such action, suit, litigation, arbitration, proceeding or investigation. Filing fees with respect to the notifications required under the HSR Act shall be paid by BVICo.
5.4 Document Review. Subject to applicable laws relating to the exchange of information and the preservation of any applicable attorney-client privilege, work-product doctrine, self-audit privilege or other similar privilege, each of BVICo, the Shareholders and COAC shall have the right to review and comment on in advance, and to the extent practicable each will consult the other on, all the information relating to such party, that appears in any filing made with, or written materials, including press releases, submitted to, any third party and/or any Governmental Entity in connection with the Merger and the other transactions contemplated hereby. In exercising the foregoing right, each of BVICo, the Shareholders and COAC shall act reasonably and as promptly as practicable. Any language included in any such materials that reflects comments of BVICo and the Shareholders, as well as any text as to which BVICo and the Shareholders have not commented upon being given a reasonable opportunity to comment, shall, notwithstanding the provisions of Section 5.1(a) and Section 5.7, be deemed to have been approved by BVICo and the Shareholders and may henceforth be used by COAC in other filings made by it with the SEC and in other documents distributed by COAC in connection with the transactions contemplated by this Agreement without further review or consent of BVICo or the Shareholders.
5.5 Required Information. In connection with the preparation of the Registration Statement or any other statement, filing notice or application made by or on behalf of COAC and/or BVICo or any of the Shareholders to any Government Entity or other third party in connection with Merger and the other transactions
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contemplated hereby, and for such other reasonable purposes, BVICO, the Shareholders and COAC each shall, upon request by the other, furnish the other with all information concerning themselves, their respective directors, officers and stockholders (including the directors of BVICo, HKCo and Ge Rui to be elected effective as of the Closing pursuant to Section 5.2) and such other matters as may be reasonably necessary or advisable in connection with the Merger. Each party warrants and represents to the other party that all such information shall be true and correct in all material respects and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading.
5.6 Confidentiality; Access to Information.
(a)Confidentiality. Any confidentiality agreement previously executed by the parties shall be superseded in its entirety by the provisions of this Agreement. Subject to the provisions of Section 5.7, each party agrees to maintain in confidence any non-public information received from the other party, and to use such non-public information only for purposes of consummating the transactions contemplated by this Agreement. Such confidentiality obligations will not apply to (i) information which was known to the one party or their respective agents prior to receipt from the other party; (ii) information which is or becomes generally known; (iii) information acquired by a party or their respective agents from a third party who was not bound to an obligation of confidentiality; and (iv) disclosure required by law or stock exchange or regulatory authority rule. In the event this Agreement is terminated as provided in Article VIII hereof, each party (i) will destroy or return or cause to be destroyed or returned to the other all documents and other material obtained from the other in connection with the Merger contemplated hereby, and (ii) will use its best efforts to delete from its computer systems all documents and other material obtained from the other in connection with the Merger contemplated hereby.
(b)Access to Information. BVICo and the Shareholders will afford COAC and its financial advisors, accountants, counsel and other representatives reasonable access during normal business hours, upon reasonable notice, to the properties, books, records and personnel of HKCo and Ge Rui during the period prior to the Closing to obtain all information concerning the business, including the status of business development efforts, properties, results of operations and personnel of HKCo and Ge Rui, as COAC may reasonably request. No information or knowledge obtained by COAC in any investigation pursuant to this Section 5.6 will affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Merger.
5.7 Public Disclosure. From the date of this Agreement until Closing or termination, the parties shall cooperate in good faith to jointly prepare all press releases and public announcements pertaining to this Agreement and the transactions governed by it, and no party shall issue or otherwise make any public announcement or communication pertaining to this Agreement or the transaction without the prior consent of COAC (in the case of BVICo or the Shareholders) or BVICo (in the case of COAC), except as required by any legal requirement or by the rules and regulations of, or pursuant to any agreement of a stock exchange or trading system. Each party will not unreasonably withhold approval from the others with respect to any press release or public announcement. If any party determines with the advice of counsel that it is required to make this Agreement and the terms of the transaction public or otherwise issue a press release or make public disclosure with respect thereto, it shall, at a reasonable time before making any public disclosure, consult with the other party regarding such disclosure, seek such confidential treatment for such terms or portions of this Agreement or the transaction as may be reasonably requested by the other party and disclose only such information as is legally compelled to be disclosed. This provision will not apply to communications by any party to its counsel, accountants and other professional advisors.
5.8 Best Efforts. Upon the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use its best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement, including using best efforts to accomplish the following: (i) the taking of all reasonable acts necessary to cause the conditions precedent set forth in Article VI to be satisfied,
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(ii) the obtaining of all necessary actions, waivers, consents, approvals, orders and authorizations from Governmental Entities and the making of all necessary registrations, declarations and filings (including registrations, declarations and filings with Governmental Entities, if any) and the taking of all reasonable steps as may be necessary to avoid any suit, claim, action, investigation or proceeding by any Governmental Entity, (iii) the obtaining of all consents, approvals or waivers from third parties required as a result of the transactions contemplated in this Agreement, including the consents referred to inSchedule 2.5 of the BVICo Schedule, (iv) the defending of any suits, claims, actions, investigations or proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Entity vacated or reversed and (v) the execution or delivery of any additional instruments reasonably necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement. This obligation shall include, on the part of COAC, sending a termination letter to Continental in substantially the form of Exhibit A attached to the Investment Management Trust Agreement by and between COAC and Continental dated as of March 19, 2007. In connection with and without limiting the foregoing, COAC and its board of directors and BVICo, HKCo, Ge Rui and their boards of directors shall, if any takeover statute or similar statute or regulation is or becomes applicable to the Merger, this Agreement or any of the transactions contemplated by this Agreement, use its best efforts to enable the Merger and the other transactions contemplated by this Agreement to be consummated as promptly as practicable on the terms contemplated by this Agreement. Notwithstanding anything herein to the contrary, nothing in this Agreement shall be deemed to require COAC, BVICo, HKCo or Ge Rui to agree to any divestiture by itself or any of its affiliates of shares of capital stock or of any business, assets or property, or the imposition of any material limitation on the ability of any of them to conduct their business or to own or exercise control of such assets, properties and stock.
5.9 Sale Restriction. No public market sales of BVICo Ordinary Shares owned by the Shareholders or issued to the COAC Insiders as a result of the Merger, including shares issued pursuant to Section 1.12, shall be made for a period of twelve (12) months following the date of their issuance other than as permitted pursuant to the Lock-Up Agreement in the form ofExhibit D executed by such Person prior to or on the Closing Date. No private sales, transfers or other dispositions of BVICo Ordinary Shares owned by the Shareholders or issued to COAC Insiders as a result of the Merger shall be made unless the purchaser or other recipient acknowledges and agrees to the restriction stated in the preceding sentence by delivery to BVICo of a written document to such effect. Certificates representing BVICo Ordinary Shares owned by the Shareholders or issued to COAC Insiders as a result of the Merger shall bear a prominent legend to such effect.
5.10 Certain Claims. As additional consideration for the issuance of COAC Common Stock pursuant to this Agreement, each of the Shareholders hereby releases and forever discharges, effective as of the Closing Date, BVICo, HKCo, Ge Rui and their respective directors, officers, employees and agents, from any and all rights, claims, demands, judgments, obligations, liabilities and damages, whether accrued or unaccrued, asserted or unasserted, and whether known or unknown arising out of or resulting from such Shareholder’s (i) status as a holder of an equity interest in BVICo; and (ii) employment, service, consulting or other similar agreement entered into with BVICo, HKCo or Ge Rui prior to Closing to the extent that the basis for claims under any such agreement that survives the Closing arise prior to the Closing, provided, however, the foregoing shall not release any obligations of COAC set forth in this Agreement or any of the other documents executed in connection with the transactions contemplated hereby.
5.11 No Claim Against Trust Fund. Notwithstanding anything else in this Agreement, BVICo and each of the Shareholders acknowledge that they have read COAC’s final prospectus dated March 20, 2007 and understand that COAC has established the Trust Fund for the benefit of COAC’s public stockholders and that COAC may disburse monies from the Trust Fund only (a) to COAC’s public stockholders in the event they elect to convert their shares into cash in accordance with COAC’s Charter Documents and/or the liquidation of COAC or (b) to COAC after, or concurrently with, the consummation of a business combination. BVICo and the Shareholders further acknowledge that, if the transactions contemplated by this Agreement, or, upon termination of this Agreement, another business combination, are not consummated by March 20, 2009, COAC will be obligated to return to its stockholders the amounts being held in the Trust Fund. Accordingly,
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BVICo and each of the Shareholders, for themselves and their subsidiaries, affiliated entities, directors, officers, employees, stockholders, representatives, advisors and all other associates and affiliates, hereby waives all rights, title, interest or claim of any kind against COAC to collect from the Trust Fund any monies that may be owed to it by COAC for any reason whatsoever, including but not limited to a breach of this Agreement by COAC or any negotiations, agreements or understandings with COAC (whether in the past, present or future), and will not seek recourse against the Trust Fund at any time for any reason whatsoever. This Section 5.11 will survive this Agreement and will not expire and will not be altered in any way without the express written consent of COAC.
5.12 Disclosure of Certain Matters. Each of COAC and BVICo and the Shareholders will provide the others with prompt written notice of any event, development or condition that (a) would cause any of such party’s representations and warranties to become untrue or misleading or which may affect its ability to consummate the transactions contemplated by this Agreement, (b) had it existed or been known on the date hereof would have been required to be disclosed under this Agreement, (c) gives such party any reason to believe that any of the conditions set forth in Article VI will not be satisfied, (d) is of a nature that is or may be materially adverse to the operations, prospects or condition (financial or otherwise) of BVICo, HKCo or Ge Rui, or (e) would require any amendment or supplement to the Registration Statement or the Proxy Statement/Prospectus. The parties shall have the obligation to supplement or amend the BVICo Schedule and the COAC Schedule (the “Disclosure Schedules”) being delivered concurrently with the execution of this Agreement with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Disclosure Schedules. The obligations of the parties to amend or supplement the Disclosure Schedules being delivered herewith shall terminate on the Closing Date. Notwithstanding any such amendment or supplementation, for purposes of Sections 6.2(a), 6.3(a), 7.1(a)(i), 8.1(d) and 8.1(e), the representations and warranties of the parties shall be made with reference to the Disclosure Schedules as they exist at the time of execution of this Agreement, subject to such anticipated changes as are set forth in Schedule 4.1 or otherwise expressly contemplated by this Agreement or that are set forth in the Disclosure Schedules as they exist on the date of this Agreement.
5.13 Securities Listing. COAC, BVICo and the Shareholders shall use best efforts to obtain the listing for trading of the BVICo Ordinary Shares, the BVICo Warrants and the BVICo Units on the Nasdaq Stock Market. If such listing is not obtained by the Closing, the parties shall continue to use their best efforts after the Closing to obtain such listing.
5.14 Non-Competition; Non-Solicitation; Non-Hire.
(a) For a period of three (3) years from the Closing Date, no Shareholder shall, directly or indirectly, individually or as an employee, partner, officer, director or shareholder or in any other capacity whatsoever of or for any Person other than BVICo, HKCo, Ge Rui or their respective subsidiaries or Affiliates own, manage, operate, sell, control or participate in the ownership, management, operation, sales or control of or be connected in any manner, including as an employee, advisor or consultant or similar role, with any business engaged, in the geographical areas referred to in Section 5.14(b), in the management or operation of metal rolling and fabrication facilities or the provision of products or services that are substantially similar to or competitive with the business of BVICo, HKCo, Ge Rui or any of their respective subsidiaries or Affiliates.
(b) The geographical areas in which the restrictions provided for in this Section 5.14 apply include the PRC and all other countries in which BVICo, HKCo, Ge Rui (or any of their respective subsidiaries or Affiliates) are conducting business at the time in question, whether or not any of BVICo, HKCo, Ge Rui (or such subsidiary or Affiliate) has an actual physical presence in such location. Each Shareholder acknowledges that (i) the scope and period of restrictions and the geographical area to which the restrictions imposed in this Section applies are fair and reasonable and are reasonably required for the protection of BVICo, HKCo, Ge Rui and their respective subsidiaries and Affiliates, (ii) this Agreement accurately describes the business to which the restrictions are intended to apply and (iii) the obligations and restrictions provided for herein are an integral part of the consideration motivating COAC to enter into this Agreement.
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(c) In addition to, and not in limitation of, the non-competition covenants set forth above in this Section 5.14, each Shareholder agrees with BVICo, HKCo and Ge Rui that, for a period of three (3) years from the Closing Date, he, she or it will not, either for himself, herself or itself or for any other Person or entity, directly or indirectly (other than for BVICo, HKCo or Ge Rui and any of their respective subsidiaries and Affiliates), solicit business from, or attempt to sell, license or provide the same or similar products or services as are then provided, by BVICo, HKCo, Ge Rui or any subsidiary or Affiliate thereof to any customer of BVICo, HKCo, Ge Rui or their respective subsidiaries or Affiliates.
(d) In addition to, and not in limitation of, the non-competition covenants set forth above in this Section, each Shareholder agrees that, for a period of three (3) years from the Closing, he, she or it will not, either for himself, herself or itself or for any other Person or entity, directly or indirectly, recruit, attempt to hire, solicit, induce or attempt to induce any executive, employee, consultant or contractor of BVICo, HKCo, Ge Rui or any subsidiary or Affiliate thereof, to terminate his, her or its employment or his, her or its services with, BVICo, HKCo, Ge Rui or any subsidiary or Affiliate thereof or to take employment with another Person.
(e) It is the intent of the parties that the provisions of this Section will be enforced to the fullest extent permissible under applicable law. If any particular provision or portion of this Section 5.14 is adjudicated to be invalid or unenforceable, this Agreement will be deemed amended to revise that provision or portion to the minimum extent necessary to render it enforceable. Such amendment will apply only with respect to the operation of this Section 5.14(e) in the particular jurisdiction in which such adjudication is made.
(a) None of BVICo or any Shareholder shall, and each of them shall use its best efforts to cause each of its officers, directors, employees, representatives and agents not to, directly or indirectly, (i) encourage, solicit, initiate, engage or participate in negotiations with any person or entity (other than COAC) concerning any Acquisition Transaction (as defined below) or (ii) take any other action intended or designed to facilitate the efforts of any Person (other than COAC) relating to a possible Acquisition Transaction. For purposes of this Agreement, the term “Acquisition Transaction” shall mean any of the following involving BVICo, HKCo, Ge Rui or any subsidiary thereof: (i) any merger, consolidation, share exchange, business combination or other similar transaction; or (ii) any sale, lease, exchange, transfer or other disposition of any of the assets of BVICo, HKCo, Ge Rui or their subsidiaries (other than in the normal course of business consistent with past practice) or any shares of the capital stock of BVICo, HKCo, Ge Rui or any subsidiary thereof in a single transaction or series of transactions.
(b) In the event that there is an unsolicited proposal for, or an unsolicited indication of a serious interest in entering into, an Acquisition Transaction, communicated to BVICo or any Shareholder or any of their representatives or agents, such Person shall immediately (and in no more than 48 hours) give written notice thereof to COAC.
5.16 Charter Protections; Directors’ and Officers’ Liability Insurance.
(a) All rights to indemnification for acts or omissions occurring through the Closing Date now existing in favor of the current directors and officers of COAC as provided in the Charter Documents of COAC or in any indemnification agreements shall survive the Merger and shall continue in full force and effect in accordance with their terms.
(b) For a period of six (6) years after the Closing Date, BVICo shall cause to be maintained in effect the current policies of directors’ and officers’ liability insurance maintained by COAC (or policies of at least the same coverage and amounts containing terms and conditions which are no less advantageous), with respect to claims arising from facts and events that occurred prior to the Closing Date.
(c) If BVICo or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, in each such case,
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to the extent necessary, proper provision shall be made so that the successors and assigns of BVICo assume the obligations set forth in this Section 5.16.
(d) The provisions of this Section 5.16 are intended to be for the benefit of, and shall be enforceable by, each Person who will have been a director or officer of COAC for all periods ending on or before the Closing Date and may not be changed without the consent of the Person who served as Chairman of COAC immediately prior to the Closing Date.
5.17 Insider Loans; Equity Ownership in Subsidiaries. Each Shareholder and each present or former shareholder of Ge Rui and HKCo, at or prior to Closing, shall (i) repay to BVICo, HKCo or Ge Rui any loan by BVICo, HKCo or Ge Rui to such Shareholder or present or former shareholder and any other amount owed by the Shareholder or present or former shareholder to BVICo, HKCo or Ge Rui; (ii) cause any guaranty or similar arrangement pursuant to which BVICo, HKCo or Ge Rui has guaranteed the payment or performance of any obligations of such Shareholder or present or former shareholder to a third party to be terminated; and (iii) cease to own any direct equity interests in any subsidiary of BVICo, HKCo or Ge Rui or in any other Person that utilizes the names “Henan Green Complex Materials” or “Ge Rui.” BVICo, HKCo and Ge Rui shall each use its best efforts to enable the Shareholders and present and former shareholders to accomplish the foregoing.
5.18 Certain Financial Information. Within fifteen (15) business days after the end of each month between the date hereof and the earlier of the Closing Date and the date on which this Agreement is terminated, BVICo shall deliver to COAC unaudited consolidated financial statements of BVICo, HKCo and Ge Rui for such month, including a balance sheet, statement of operations, statement of cash flows and statement of shareholders’ equity, that are certified as correct and complete by the Chief Executive Officer and Chief Financial Officer of BVICo, prepared in accordance with U.S. GAAP applied on a consistent basis to prior periods (except as may be indicated in the notes thereto) and fairly present in all material respects the financial position of BVICo, HKCo and Ge Rui at the date thereof and the results of its operations and cash flows for the period indicated, except that such statements need not contain notes and may be subject to normal adjustments that are not expected to have a Material Adverse Effect on BVICo, HKCo or Ge Rui.
5.19 Access to Financial Information. BVICo, HKCo and Ge Rui will, and will cause their auditors to, (a) continue to provide COAC and its advisors full access to all of BVICo’s, HKCo’s and Ge Rui’s financial information used in the preparation of its Audited Financial Statements and Unaudited Financial Statements and the financial information furnished pursuant to Section 5.18 hereof and (b) cooperate fully with any reviews performed by COAC or its advisors of any such financial statements or information.
5.20 COAC Borrowings. Through the Closing, COAC shall be allowed to borrow funds from its directors, officers and/or stockholders to meet its reasonable capital requirements, with any such loans to be made only as reasonably required by the operation of COAC in due course on a non-interest bearing basis and repayable at Closing. The proceeds of such loans shall not be used for the payment of salaries, bonuses or other compensation to any of COAC’s directors, officers or stockholders.
5.21 Trust Fund Disbursement. COAC shall cause the Trust Fund to be disbursed to BVICo immediately upon the Closing. All liabilities of COAC due and owing or incurred at or prior to the Effective Time shall be paid as and when due, including all COAC tax liabilities and the payment at Closing of deferred underwriting discounts and commissions, professional fees related to these transactions, and adequate reserves shall be made against amounts distributed from the Trust Fund therefor.
5.22 Ge Rui Chief Financial Officer. Prior to the commencement of presentations to investors by COAC with respect to the transactions contemplated by this Agreement, BVICo shall cause Ge Rui to hire a chief financial officer or other senior executive who is fluent in English and who will be able to participate in such presentations.
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ARTICLE VI
CONDITIONS TO THE TRANSACTION
6.1 Conditions to Obligations of Each Party to Effect the Merger. The respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction at or prior to the Closing Date of the following conditions:
(a)COAC Stockholder Approval. The COAC Stockholder Approval shall have been duly approved and adopted by the stockholders of COAC by the requisite vote under the law of the State of Delaware and the COAC Charter Documents.
(b)COAC Common Stock. Holders of less than forty percent (40%) of the shares of COAC Common Stock issued in COAC’s initial public offering of securities and outstanding immediately before the Closing shall have voted against the Merger and correspondingly exercised their rights to convert their shares into a pro rata share of the Trust Fund in accordance with COAC’s Charter Documents.
(c)HSR Act; No Order. All specified waiting periods under the HSR Act shall have expired and no Governmental Entity shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is in effect and which has the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger, substantially on the terms contemplated by this Agreement.
(d)Registration Statement Effective. The Registration Statement shall have been declared effective by the SEC.
6.2 Additional Conditions to Obligations of BVICo and the Shareholders. The obligations of BVICo and the Shareholders to consummate and effect the Merger shall be subject to the satisfaction at or prior to the Closing Date of each of the following conditions, any of which may be waived, in writing, exclusively by BVICo:
(a)Representations and Warranties. Each representation and warranty of COAC contained in this Agreement that is (i) qualified as to materiality shall have been true and correct (A) as of the date of this Agreement and (B) subject to the provisions of the last sentence of Section 5.12, on and as of the Closing Date with the same force and effect as if made on the Closing Date, and (ii) not qualified as to materiality shall have been true and correct (C) as of the date of this Agreement and (D) subject to the provisions of the last sentence of Section 5.12, in all material respects on and as of the Closing Date with the same force and effect as if made on the Closing Date. BVICo shall have received a certificate with respect to the foregoing signed on behalf of COAC by an authorized officer of COAC (“COAC Closing Certificate”).
(b)Agreements and Covenants. COAC shall have performed or complied with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date, except to the extent that any failure to perform or comply (other than a willful failure to perform or comply or failure to perform or comply with an agreement or covenant reasonably within the control of COAC) does not, or will not, constitute a Material Adverse Effect with respect to COAC, and the COAC Closing Certificate shall include a provision to such effect.
(c)No Litigation. No action, suit or proceeding shall be pending or threatened before any Governmental Entity which is reasonably likely to (i) prevent consummation of any of the transactions contemplated by this Agreement or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation and no order, judgment, decree, stipulation or injunction to any such effect shall be in effect.
(d)Consents. COAC shall have obtained all consents, waivers and approvals required to be obtained by COAC in connection with the consummation of the transactions contemplated hereby, other than consents, waivers and approvals the absence of which, either alone or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on COAC and the COAC Closing Certificate shall include a provision to such effect.
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(e)Material Adverse Effect. No Material Adverse Effect with respect to COAC shall have occurred since the date of this Agreement.
(f)SEC Compliance. Immediately prior to Closing, COAC shall be in compliance with the reporting requirements under the Exchange Act.
(g)Opinion of Counsel. BVICo shall have received from (i) Graubard Miller, United States counsel to COAC, an opinion of counsel in substantially the form of Exhibit G.
(h)Voting Agreement. The Voting Agreement substantially in the form of Exhibit E shall be in full force and effect.
(i)Other Deliveries. At or prior to Closing, COAC shall have delivered to BVICo (i) copies of resolutions and actions taken by COAC’s board of directors in connection with the approval of this Agreement and the transactions contemplated hereunder, and (ii) such other documents or certificates as shall reasonably be required by BVICo and its counsel in order to consummate the transactions contemplated hereunder.
(j)Trust Fund. COAC shall have made appropriate arrangements to have the Trust Fund, which shall contain no less than the amount referred to in Section 3.25, disbursed to BVICo immediately upon the Closing.
6.3 Additional Conditions to the Obligations of COAC. The obligations of COAC to consummate and effect the Merger shall be subject to the satisfaction at or prior to the Closing Date of each of the following conditions, any of which may be waived, in writing, exclusively by COAC:
(a)Representations and Warranties. Each representation and warranty of BVICo and the Shareholders contained in this Agreement that is (i) qualified as to materiality shall have been true and correct (A) as of the date of this Agreement and (B) subject to the provisions of the last sentence of Section 5.12, on and as of the Closing Date with the same force and effect as if made on the Closing Date, and (ii) not qualified as to materiality shall have been true and correct (C) as of the date of this Agreement and (D) subject to the provisions of the last sentence of Section 5.12, in all material respects on and as of the Closing Date with the same force and effect as if made on the Closing Date. COAC shall have received a certificate with respect to the foregoing signed on behalf of BVICo by an authorized officer of BVICo and by the Shareholders (“BVICo Closing Certificate”).
(b)Agreements and Covenants. BVICo and the Shareholders shall have performed or complied with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing Date except to the extent that any failure to perform or comply (other than a willful failure to perform or comply or failure to perform or comply with an agreement or covenant reasonably within the control of BVICo or the Shareholders) does not, or will not, constitute a Material Adverse Effect on BVICo, HKCo and Ge Rui, and the BVICo Closing Certificate shall include a provision to such effect.
(c)No Litigation. No action, suit or proceeding shall be pending or threatened before any Governmental Entity which is reasonably likely to (i) prevent consummation of any of the transactions contemplated by this Agreement, (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation or (iii) affect materially and adversely the right of BVICo to own, operate or control any of the assets and operations of BVICo, HKCo and Ge Rui following the Merger and no order, judgment, decree, stipulation or injunction to any such effect shall be in effect.
(d)Consents. BVICo and the Shareholders shall have obtained all consents, waivers, permits and approvals required to be obtained by them in connection with the consummation of the transactions contemplated hereby, other than consents, waivers and approvals the absence of which, either alone or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on BVICo, HKCo and Ge Rui and the BVICo Closing Certificate shall include a provision to such effect.
(e)Material Adverse Effect. No Material Adverse Effect with respect to BVICo, HKCo and Ge Rui shall have occurred since the date of this Agreement.
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(f)Ancillary Agreements. The Escrow Agreement substantially in the form ofExhibit C, the Lock-Up Agreements substantially in the form ofExhibit D and the Voting Agreement substantially in the form ofExhibit E shall be in full force and effect.
(g)Opinion of PRC Counsel. COAC shall have received from PRC counsel to BVICo and the Shareholders an opinion of counsel in substantially the form ofExhibit G.
(h)Opinion of Other Counsel. COAC shall have received from United States, British Virgin Islands and Hong Kong counsel to BVICo and the Shareholders (each of which counsel shall be reasonably acceptable to COAC) opinions reasonable satisfactory in form and substance confirming the matters referred to in Sections 2.1(a), 2.1(b), 2.1(c), 2.3(a), 2.4, 2.5, 2.6 and 2.21 (as appropriate for each such jurisdiction) and addressing such other matters as are customary for transactions of the type contemplated by this Agreement and as COAC may reasonably request.
(i)Other Deliveries. At or prior to Closing, BVICo and the Shareholders shall have delivered to COAC: (i) copies of resolutions and actions taken by BVICo’s board of directors and stockholders in connection with the approval of this Agreement and the transactions contemplated hereunder, and (ii) such other documents or certificates as shall reasonably be required by COAC and its counsel in order to consummate the transactions contemplated hereunder.
(j) [Intentionally Omitted.]
(k)Derivative Securities. There shall be outstanding no options, warrants or other derivative securities entitling the holders thereof to acquire BVICo Ordinary Shares or other securities of BVICo, HKCo or Ge Rui.
(l)Appraisal Rights. The holders of no more than (i) 5% of the outstanding shares of COAC Common Stock or (ii) 39.99% of the outstanding shares of COAC Common Stock on a cumulative basis with any stockholder seeking conversion rights shall have taken action to exercise their appraisal rights pursuant to the DGCL.
(m)Insider Loans; Equity Ownership in Subsidiaries. All outstanding indebtedness owed by BVICo Insiders and present and former shareholders of HKCo and Ge Rui to BVICo, HKCo or Ge Rui shall have been repaid in full, including the indebtedness and other obligations described onSchedule 2.22; all outstanding guaranties and similar arrangements pursuant to which BVICo, HKCo or Ge Rui has guaranteed the payment or performance of any obligations of any BVICo Insider or present or former shareholder of HKCo or Ge Rui to a third party shall have been terminated; and (iii) no BVICo Insider or present or former shareholder of HKCo or Ge Rui shall own any direct equity interests in any Person that utilizes in its name “Henan Green Complex Materials” or “Ge Rui.”
ARTICLE VII
INDEMNIFICATION
(a) Subject to the terms and conditions of this Article VII (including without limitation the limitations set forth in Section 7.4), BVICo, HKCo, Ge Rui and their respective representatives, successors and permitted assigns (the “BVICo Indemnitees”) shall be indemnified, defended and held harmless by Oasis Green from and against all Losses asserted against, resulting to, imposed upon, or incurred by any BVICo Indemnitee by reason of, arising out of or resulting from:
(i) the inaccuracy or breach of any representation or warranty of BVICo or the Shareholders contained in or made pursuant to this Agreement, any Schedule or any certificate delivered by BVICo or the Shareholders to COAC pursuant to this Agreement with respect hereto or thereto in connection with the Closing;
(ii) the non-fulfillment or breach of any covenant or agreement of BVICo or the Shareholders contained in this Agreement;
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(iii) any assessment or penalty against BVICo, HKCo or Ge Rui for Taxes for any period ending prior to the Closing Date;
(iv) the operation of Ge Rui, HKCo and BVICo prior to the Closing Date;
(v) the matters referred to in Appendix III of the PRC Counsel Signing Opinion; and
(vi) the matters referred to inSchedule 2.20 hereto and Section 2.25 herein.
(b) As used in this Article VII, the term “Losses” shall include all losses, liabilities, damages, judgments, awards, orders, penalties, settlements, costs and expenses (including, without limitation, interest, penalties, court costs and reasonable legal fees and expenses) including those arising from any demands, claims, suits, actions, costs of investigation, notices of violation or noncompliance, causes of action, proceedings and assessments whether or not made by third parties or whether or not ultimately determined to be valid. Solely for the purpose of determining the amount of any Losses (and not for determining any breach) for which a BVICo Indemnitee may be entitled to indemnification pursuant to Article VII, any representation or warranty contained in this Agreement that is qualified by a term or terms such as “material,” “materially,” or “Material Adverse Effect” shall be deemed made or given without such qualification and without giving effect to such words.
7.2 Indemnification of Third Party Claims. The indemnification obligations and liabilities under this Article VII with respect to actions, proceedings, lawsuits, investigations, demands or other claims brought against a BVICo Indemnitee by a Person other than a Shareholder (a “Third Party Claim”) shall be subject to the following terms and conditions:
(a)Notice of Claim. BVICo will give Oasis Green prompt written notice after receiving written notice of any Third Party Claim or discovering the liability, obligation or facts giving rise to such Third Party Claim (a “Notice of Claim”) which Notice of Third Party Claim shall set forth (i) a brief description of the nature of the Third Party Claim, (ii) the total amount of the actual out-of-pocket Loss or the anticipated potential Loss (including any costs or expenses which have been or may be reasonably incurred in connection therewith), and (iii) whether such Loss may be covered (in whole or in part) under any insurance and the estimated amount of such Loss which may be covered under such insurance, and Oasis Green shall be entitled to participate in the defense of Third Party Claim at its expense.
(b)Defense. Oasis Green shall have the right, at its option (subject to the limitations set forth in Section 7.2(c)) and at its expense, by written notice to BVICo, to assume the entire control of, subject to the right of BVICo to participate (at its expense and with counsel of its choice) in, the defense, compromise or settlement of the Third Party Claim as to which such Notice of Claim has been given, and shall be entitled to appoint a recognized and reputable counsel reasonably acceptable to BVICo to be the lead counsel in connection with such defense. If Oasis Green is permitted and elects to assume the defense of a Third Party Claim:
(i) it shall diligently and in good faith defend such Third Party Claim and shall keep BVICo reasonably informed of the status of such defense; provided, however, that BVICo shall have the right to approve any settlement, which approval will not be unreasonably withheld, delayed or conditioned; and
(ii) BVICo shall cooperate fully in all respects with Oasis Green in any such defense, compromise or settlement thereof, including, without limitation, the selection of counsel, and BVICo shall make available to Oasis Green all pertinent information and documents under its control.
(c)Limitations of Right to Assume Defense. Oasis Green shall not be entitled to assume control of such defense and shall pay the fees and expenses of counsel retained by BVICo if (i) the Third Party Claim relates to or arises in connection with any criminal proceeding, action, indictment, allegation or investigation; (ii) the Third Party Claim seeks an injunction or equitable relief against a BVICo Indemnitee; or (iii) there is a reasonable probability that a Third Party Claim may materially and adversely affect a BVICo Indemnitee other than as a result of money damages or other money payments.
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(d)Other Limitations. Failure to give prompt Notice of Claim or to provide copies of relevant available documents or to furnish relevant available data shall not constitute a defense (in whole or in part) to the obligations of Oasis Green to defend against any Third Party Claim and shall not affect Oasis Green’ duty or obligations under this Article VII, except to the extent (and only to the extent that) such failure shall have adversely affected the ability of Oasis Green to defend against or reduce its liability or caused or increased such liability or otherwise caused the damages for which Oasis Green is obligated to be greater than such damages would have been had BVICo given Oasis Green prompt notice hereunder. So long as Oasis Green is defending any such action actively and in good faith, BVICo shall not settle such action. BVICo shall make available to Oasis Green all relevant records and other relevant materials required by them and in the possession or under the control of BVICo, for the use of Oasis Green and its representatives in defending any such action, and shall in other respects give reasonable cooperation in such defense.
(e) Failure to Defend. If Oasis Green, promptly after receiving a Notice of Claim, fails to defend such Third Party Claim actively and in good faith, BVICo, at the reasonable cost and expense of Oasis Green, will (upon further written notice) have the right to undertake the defense, compromise or settlement of such Third Party Claim as it may determine in its reasonable discretion, provided that Oasis Green shall have the right to approve any settlement, which approval will not be unreasonably withheld, delayed or conditioned.
(f) BVICo’s Rights. Anything in this Section 7.2 to the contrary notwithstanding, Oasis Green shall not, without the written consent of BVICo, settle or compromise any action or consent to the entry of any judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to BVICo of a full and unconditional release from all liability and obligation in respect of such action without any payment by BVICo.
(g) Oasis Green Consent. Unless Oasis Green has consented to a settlement of a Third Party Claim, the amount of the settlement shall not be a binding determination of the amount of the Loss and such amount shall be determined in accordance with the provisions of the Escrow Agreement.
7.3 Insurance Effect. To the extent that any Losses that are subject to indemnification pursuant to this Article VII are covered by insurance paid for by BVICo, HKCo or Ge Rui prior to the Closing, BVICo shall use best efforts to obtain the maximum recovery under such insurance; provided that BVICo shall nevertheless be entitled to bring a claim for indemnification under this Article VII in respect of such Losses and the time limitations set forth in Section 7.4 for bringing a claim of indemnification under this Agreement shall be tolled during the pendency of such insurance claim. The existence of a claim by BVICo for monies from an insurer or against a third party in respect of any Loss shall not, however, delay any payment pursuant to the indemnification provisions contained herein and otherwise determined to be due and owing by Oasis Green. If BVICo has received the payment required by this Agreement from Oasis Green in respect of any Loss and later receives proceeds from insurance or other amounts in respect of such Loss, then it shall hold such proceeds or other amounts in trust for the benefit of Oasis Green and shall pay to Oasis Green, as promptly as practicable after receipt, a sum equal to the amount of such proceeds or other amount received, up to the aggregate amount of any payments received from Oasis Green pursuant to this Agreement in respect of such Loss. Notwithstanding any other provisions of this Agreement, it is the intention of the parties that no insurer or any other third party shall be (i) entitled to a benefit it would not be entitled to receive in the absence of the foregoing indemnification provisions, or (ii) relieved of the responsibility to pay any claims for which it is obligated.
7.4 Limitations on Indemnification.
(a)Survival; Time Limitation. The representations, warranties, covenants and agreements in this Agreement or in any writing delivered by BVICo or the Shareholders to BVICo or COAC in connection with this Agreement (including the BVICo Closing Certificate) and the indemnification obligations of Oasis Green pursuant to Section 7.1(a)(iii),Section 7.1(a)(iv), Section 7.1(a)(v) and Section7.1(a)(vi) shall survive the Closing for the period that ends on the Indemnity Escrow Termination Date. Notwithstanding the foregoing, the representations, warranties and covenants in each of Section 1.14 (Shareholder Matters), Sections 2.1(a), (b) and (c) (Organization), Section 2.2 (Subsidiaries), Section 2.3 (Capitalization)
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and Section 2.4 (Authority Relative to this Agreement) shall survive without limitation as to time and the representations, warranties and covenants in each of Section 2.14 (Title to Property) and Section 2.15 (Taxes) shall survive the Closing until the sixtieth day following the expiration of the applicable statute of limitations.
(b) A claim for indemnification under this Article VII may be brought at any time prior to the end of the relevant period specified in Section 7.4(a) notwithstanding the release of any Indemnity Escrow Shares to Oasis Green upon the expiration of the Indemnity Escrow Termination Date; provided that any indemnification claim made subsequent to the Indemnity Escrow Termination Date shall be limited to the number of Indemnity Escrow Shares so released to Oasis Green. Any indemnification claim made prior to the termination of the applicable period shall be preserved despite the subsequent termination of such period and any claim set forth in a Notice of Claim sent prior to the expiration of such period shall survive until final resolution thereof.
(c)Deductible. No amount shall be payable under Article VII unless and until the aggregate amount of all indemnifiable Losses otherwise payable exceeds Two Hundred Fifty Thousand Dollars ($250,000.00) (the “Deductible”), in which event the amount payable shall be the full amount of all Indemnifiable Losses from the first dollar thereof, and all future amounts that become payable under Section 7.1 from time to time thereafter. Notwithstanding the foregoing, the Deductible shall not apply to Losses resulting with respect to the representations, warranties and covenants referred to in the last sentence of Section 7.4(a) or an indemnification claim made pursuant to Section 7.1(a)(iii), Section 7.1(a)(v) or Section 7.1(a)(vi), all of which shall be indemnifiable as to all Losses that so arise from the first dollar thereof.
7.5 Exclusive Remedy. BVICo, on behalf of itself and the other BVICo Indemnitees, hereby acknowledges and agrees that, from and after the Closing, the sole remedy of the BVICo Indemnitees with respect to any and all claims for money damages arising out of or relating to this Agreement shall be pursuant and subject to the requirements of the indemnification provisions set forth in this Article VII. Notwithstanding any of the foregoing, nothing contained in this Article VII shall in any way impair, modify or otherwise limit a BVICo Indemnitee’s right to bring any claim, demand or suit against the other party based upon such other party’s actual fraud or intentional or willful misrepresentation or omission, it being understood that a mere breach of a representation and warranty, without intentional or willful misrepresentation or omission, does not constitute fraud.
7.6 Application of Indemnity Escrow Shares. The Escrow Agent, pursuant to the Escrow Agreement after the Closing, may apply all or a portion of the Indemnity Escrow Shares to satisfy any claim for indemnification pursuant to this Article VII. The Escrow Agent will hold the remaining portion of the Indemnity Escrow Shares until final resolution of all claims for indemnification or disputes relating thereto.
ARTICLE VIII
TERMINATION
8.1 Termination. This Agreement may be terminated at any time prior to the Closing:
(a) by mutual written agreement of COAC and BVICo at any time;
(b) by either COAC or BVICo if the Merger shall not have been consummated by March 19, 2009 for any reason; provided, however, that the right to terminate this Agreement under this Section 8.1(b) shall not be available to any party whose action or failure to act has been a principal cause of or resulted in the failure of the Merger to occur on or before such date and such action or failure to act constitutes a breach of this Agreement;
(c) by either COAC or BVICo if a Governmental Entity shall have issued an order, decree, judgment or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger, which order, decree, ruling or other action is final and nonappealable;
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(d) by BVICo, upon a material breach of any representation, warranty, covenant or agreement on the part of COAC set forth in this Agreement, or if any representation or warranty of COAC shall have become untrue, in either case such that the conditions set forth in Article VI would not be satisfied as of the time of such breach or as of the time such representation or warranty shall have become untrue, provided, that if such breach by COAC is curable by COAC prior to the Closing Date, then BVICo may not terminate this Agreement under this Section 8.1(d) for thirty (30) days after delivery of written notice from BVICo to COAC of such breach, provided COAC continues to exercise best efforts to cure such breach (it being understood that BVICo may not terminate this Agreement pursuant to this Section 8.1(d) if it shall have materially breached this Agreement or if such breach by COAC is cured during such thirty (30)-day period);
(e) by COAC, upon a material breach of any representation, warranty, covenant or agreement on the part of BVICo or the Shareholders set forth in this Agreement, or if any representation or warranty of BVICo or the Shareholders shall have become untrue, in either case such that the conditions set forth in Article VI would not be satisfied as of the time of such breach or as of the time such representation or warranty shall have become untrue, provided, that if such breach is curable by BVICo or the Shareholders prior to the Closing Date, then COAC may not terminate this Agreement under this Section 8.1(e) for thirty (30) days after delivery of written notice from COAC to BVICo of such breach, provided BVICo and the Shareholders continue to exercise best efforts to cure such breach (it being understood that COAC may not terminate this Agreement pursuant to this Section 8.1(e) if it shall have materially breached this Agreement or if such breach by BVICo or the Shareholders is cured during such thirty (30)-day period); or
(f) by either COAC or BVICo, if, at the Special Meeting (including any adjournments thereof), this Agreement and the transactions contemplated thereby shall fail to be approved and adopted by the affirmative vote of the holders of COAC Common Stock required under COAC’s certificate of incorporation, or the holders of 40% or more of the number of shares of COAC Common Stock issued in COAC’s initial public offering and outstanding as of the date of the record date of the Special Meeting vote against the Merger and correspondingly exercise their rights to convert the shares of COAC Common Stock held by them into cash in accordance with COAC’s certificate of incorporation.
8.2 Notice of Termination; Effect of Termination. Any termination of this Agreement under Section 8.1 will be effective immediately upon (or, if the termination is pursuant to Section 8.1(d) or Section 8.1(e) and the proviso therein is applicable, thirty (30) days after) the delivery of written notice of the terminating party to the other parties hereto. In the event of the termination of this Agreement as provided in Section 8.1, this Agreement shall be of no further force or effect and the Merger shall be abandoned, except for and subject to the following: (i) Sections 5.6, 5.11, 8.2 and 8.3 and Article X (General Provisions) shall survive the termination of this Agreement, and (ii) nothing herein shall relieve any party from liability for any breach of this Agreement, including a breach by a party electing to terminate this Agreement pursuant to Section 8.1(b) caused by the action or failure to act of such party constituting a principal cause of or resulting in the failure of the Merger to occur on or before the date stated therein.
8.3 Fees and Expenses. All fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses whether or not the Merger is consummated.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or sent via telecopy (receipt confirmed) to the parties at the following addresses or facsimile numbers (or at such other address or facsimile numbers for a party as shall be specified by like notice):
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if to COAC, to:
China Opportunity Acquisition Corp.
300 Tice Boulevard
Woodcliff Lake, NJ 07677
Attention: Harry Edelson,
Chief Executive Officer
Telephone: 201-930-9898
Facsimile: 201-930-8899
with a copy to:
David Alan Miller, Esq.
Graubard Miller
405 Lexington Avenue
New York, New York 10174-1901
Telephone: 212-818-8661
Facsimile: 212-818-8881
if to BVICo, or the Shareholders, to:
Lu Yu Ying
c/o Lu Ming Wang
Henan Green Complex Materials Co., Ltd
Henan Zhengzhou Xinzheng
Shuanghujingjikaifaqu 1 hao
Xinzheng City Zip Code 451191
Henan Province
People's Republic of China
Phone: 86-371-62568634
Fax: 86-371-62568683
with a copy to:
Wong Kwok Keung,
Block 12, Unit 902,
1555, Kai Xuan Bei Lu,
Shanghai, Zip Code 200063
Shanghai,
People's Republic of China
Phone: 86-13918955538
Fax: 86-21-52680233
Email:kkwong1612gmail.com
if to HKCo, to:
Lu Yu Ying
c/o Lu Ming Wang
Henan Green Complex Materials Co., Ltd
Henan Zhengzhou Xinzheng
Shuanghujingjikaifaqu 1 hao
Xinzheng City Zip Code 451191
Henan Province
People's Republic of China
Phone: 86-371-62568634
Fax: 86-371-62568683
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with a copy to:
Wong Kwok Keung
Block 12, Unit 902,
1555, Kai Xuan Bei Lu
Shanghai, Zip Code 200063
Shanghai,
People's Republic of China
Phone: 86-13918955538
Fax: 86-21-52680233
Email:kkwong1612gmail.com
9.2 Interpretation. The definitions of the terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context shall require, any pronoun shall include the corresponding masculine, feminine and neuter forms. When a reference is made in this Agreement to an Exhibit or Schedule, such reference shall be to an Exhibit or Schedule to this Agreement unless otherwise indicated. When a reference is made in this Agreement to Sections or subsections, such reference shall be to a Section or subsection of this Agreement. Unless otherwise indicated the words “include,” “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation.” The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When reference is made herein to “the business of” an entity, such reference shall be deemed to include the business of all direct and indirect subsidiaries of such entity. Reference to the Subsidiaries of an entity shall be deemed to include all direct and indirect subsidiaries of such entity. For purposes of this Agreement:
(a) the term “Material Adverse Effect” when used in connection with an entity means any change, event, violation, inaccuracy, circumstance or effect, individually or when aggregated with other changes, events, violations, inaccuracies, circumstances or effects, that is materially adverse to the business, assets (including intangible assets), revenues, financial condition, prospects or results of operations of such entity, it being understood that none of the following alone or in combination shall be deemed, in and of itself, to constitute a Material Adverse Effect: (i) changes attributable to the public announcement or pendency of the transactions contemplated hereby, (ii) changes in general national or regional economic conditions that do not adversely affect the businesses of BVICo, HKCo, Ge Rui or the business of COAC, as the case may be, any more than such changes generally affect other businesses, or (iii) any SEC rulemaking requiring enhanced disclosure of reverse merger transactions with a public shell;
(b) the term “Legal Requirements” means any national, provincial, local, municipal, foreign or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Entity and all requirements set forth in applicable Company Contracts;
(c) the term “Person” shall mean any individual, corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization, entity or Governmental Entity;
(d) the term “knowledge” means actual knowledge or awareness, after due inquiry, as to a specified fact or event of a Person that is an individual or of an executive officer or director of a Person that is a corporation or of a Person in a similar capacity of an entity other than a corporation;
(e) the term “Lien” means any mortgage, pledge, security interest, encumbrance, lien, restriction or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof, any sale with recourse against the seller or any Affiliate of the seller, or any agreement to give any security interest); and
(f) the term “Affiliate” means, as applied to any Person, any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with, such Person. For purposes of
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this definition, “control” (including with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.
9.3 Counterparts; Facsimile and E-Mail Signatures. This Agreement and each other document executed in connection with the transactions contemplated hereby, and the consummation thereof, may be executed in one or more counterparts, all of which shall be considered one and the same document and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. Delivery by facsimile or as an e-mail pdf attachment to a party or its counsel of a counterpart executed by a party shall be deemed to meet the requirements of the previous sentence.
9.4 English Language Version Controls. Notwithstanding that both English language and Chinese language versions of this Agreement are executed by the parties hereto, the English language version shall control for all purposes of interpretation and enforcement hereof.
9.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the documents and instruments and other agreements among the parties hereto as contemplated by or referred to herein, including the Exhibits and Schedules hereto (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, it being understood that the Term Sheet between COAC and Ge Rui dated June 12, 2008 is hereby terminated in its entirety and shall be of no further force and effect (except to the extent expressly stated to survive the execution of this Agreement and the consummation of the transactions contemplated hereby); and (b) are not intended to confer upon any other person any rights or remedies hereunder (except as specifically provided in this Agreement).
9.6 Severability. In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision.
9.7 Other Remedies; Specific Performance. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity.
9.8 Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the law of the State of New York regardless of the law that might otherwise govern under applicable principles of conflicts of law thereof. Each party hereby consents to the exclusive jurisdiction of the federal and state courts located in the State of New York, County of New York, with respect to any action or proceeding that may arise out of this Agreement or the interpretation thereof and agrees that service of process in any such action or proceeding may be made by registered mail.
9.9 Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
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9.10 Assignment. No party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other parties. Subject to the first sentence of this Section 9.9, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.
9.11 Amendment. This Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of the parties.
9.12 Extension; Waiver. At any time prior to the Closing, any party hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. Delay in exercising any right under this Agreement shall not constitute a waiver of such right.
9.13 Arbitration. Any disputes or claims arising under or in connection with this Agreement or the transactions contemplated hereunder shall be resolved by binding arbitration. Notice of a demand to arbitrate a dispute by either party shall be given in writing to the other at their last known address. Arbitration shall be commenced by the filing by a party of an arbitration demand with the American Arbitration Association (“AAA”) in its office in New York City, New York. The arbitration and resolution of the dispute shall be resolved by a single arbitrator appointed by the AAA pursuant to AAA rules. The arbitration shall in all respects be governed and conducted by applicable AAA rules, and any award and/or decision shall be conclusive and binding on the parties. The arbitration shall be conducted in New York City or such other place as the parties shall agree. The arbitrator shall supply a written opinion supporting any award, and judgment may be entered on the award in any court of competent jurisdiction. Each party shall pay its own fees and expenses for the arbitration, except that any costs and charges imposed by the AAA and any fees of the arbitrator for his services shall be assessed against the losing party by the arbitrator. In the event that preliminary or permanent injunctive relief is necessary or desirable in order to prevent a party from acting contrary to this Agreement or to prevent irreparable harm prior to a confirmation of an arbitration award, then either party is authorized and entitled to commence a lawsuit solely to obtain equitable relief against the other pending the completion of the arbitration in a court having jurisdiction over the parties. Each party hereby consents to the exclusive jurisdiction of the federal and state courts located in the State of New York, New York County, for such purpose. All rights and remedies of the parties shall be cumulative and in addition to any other rights and remedies obtainable from arbitration.
9.14 Currency. All references to currency amounts in this Agreement shall mean United States dollars.
[Signatures are on the following two pages.]
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