As filed with the Securities and Exchange Commission on January 8, 2008
Registration No. 333-147086
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
AMENDMENT NO. 3 TO
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
ON
FORM S-4
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Tongxin International, LTD. Asia Automotive Acquisition Corporation
(Exact Name of Co-registrant as (Exact Name Of Co-registrant as
Specified in its Charter) Specified in Its Charter)
British Virgin Islands Delaware
(State or Other Jurisdiction of (State or Other Jurisdiction of
Incorporation or Organization) Incorporation or Organization)
6770 6770
(Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number)
Not Applicable 20-3022552
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
----------
199 Pierce, Suite 202
Birmingham Michigan 48009
(248) 593-8330
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------
William R. Herren Chairman
199 Pierce Street, Suite 202
Birmingham, Michigan 48009
(248) 593-8330
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------
Copies to:
Scott D Norton
NORTON & NORTON
199 PIERCE STREET, SUITE 202
BIRMINGHAM, MICHIGAN 48009
TELEPHONE: (248)203-9940
FAX:(248)203-9950
PAUL M. KAVANAUGH
JOHN SHARP
STROBL & SHARP
300 EAST LONG LAKE ROAD, SUITE 200
BLOOMFIELD, MICHIGAN, 48304
TELEPHONE (248)540-2300
FAX:(248)645-2690
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 acquisition contemplated by the Agreement and Plan of Merger
described in the enclosed proxy statement/prospectus have been satisfied or
waived.
If any of 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: [ ]
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. [ ] _____
If this form is a post-effective amendment filed 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. [ ] _____
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Title of each Class of Security Amount being Offering Price Aggregate Amount of
being registered Registered Per Security(l) Offering Price(l) Registration Fee
Units, each consisting of one
share of Common Stock, $.001 par
value, and one Warrants (1) 5,031,250 Units $ 8.00(4) $ 40,250,000 $ 1,228
Shares of Common Stock included as
part of the Units 5,031,250 Shares (2)
Warrants included as part of the Units 5,031,250 Warrants (2)
Shares of Common Stock underlying
the Warrants included in the Units (3) 5,031,250 Shares $ 5.00 $ 25,156,250 $ 772
Representative's Unit Purchase Option 1 $ 100 $ 100.00 (2)
Units underlying the
Representative's Unit Purchase
Option ("Underwriter's Units")(3) 350,000 Units $ 10.00 $ 3,500,000 $ 107
Shares of Common Stock included as
part of the Underwriter's Units(3) 350,000 Shares (2)
Warrants included as part of the
Underwriter's Units(3) 350,000 Warrants (2)
Shares of Common Stock underlying
the Warrants included in the
Underwriter's Units(3) 350,000 Shares $ 6.65 $ 2,327,500 $ 71
Total Fee Due $ 2,178
- ------------
(1) Based on the market price of the Units or exercise price for the purpose of
calculating the registration fee pursuant to Rule 457(f) (l) and Rule
457(g) (l).
(2) 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 Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
================================================================================
[X] Filed by the Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to section 240.14a-12
ASIA AUTOMOTIVE ACQUISITION CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined)
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
3
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid
(2) Form, Schedule or Registration Statement No.
(3) Filing Party
(4) Date Filed
4
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS OF
ASIA AUTOMOTIVE ACQUISITION CORPORATION
PROSPECTUS FOR UP TO 5,031,250 UNITS, 5,031,250 SHARES OF COMMON STOCK, AND
5,031,250 WARRANTS OF TONGXIN INTERNATIONAL LTD. AND ONE REPRESENTATIVE UNIT
PURCHASE OPTION
The board of directors of Asia Automotive Acquisition Corporation ("AAAC")
and its wholly-owned subsidiary, Tongxin International Ltd. ("TXI") have
unanimously approved the acquisition of the shares of Hunan Tongxin Enterprise
Co, Ltd. ("Hunan Tongxin") in the People's Republic of China, pursuant to a
Equity Acquisition Agreement whereby AAAC will purchase all of the outstanding
shares of common stock of Hunan Tongxin held by the stockholders (the "Hunan
Tongxin Stockholders"). The board of directors of AAAC also has unanimously
approved the simultaneous reincorporation of AAAC from the State of Delaware to
the British Virgin Islands, through a redomestication merger with TXI.
In the redomestication merger, TXI will issue its securities in exchange
for the. outstanding securities of AAAC. This prospectus covers an aggregate of
5,031,250 units, 5,031,250 shares of common stock, 5,031,250 warrants and one
representative unit purchase option. The common stock and warrants issuable upon
exercise of the aforementioned securities are included in the aggregate amounts
stated above, TXI will issue its securities on the same terms as the equivalent
securities had been issued by AAAC.
AAAC was organized to serve as a vehicle for the acquisition of an
automotive supplier operating business that has its primary operating facilities
based in the Peoples Republic of China, India or the Association of
Southeastern Asian Nations. Hunan Tongxin is the largest independent supplier of
Engineered Vehicle Body Structures industry in China.
AAAC's common stock, warrants and units are currently listed on the
Over-the-Counter Bulletin Board under the symbols AAAC, AAACW and AAACU,
respectively. TXI has applied to have its securities listed on the Nasdaq Global
Market effective at the time of the redomestication merger. The proposed
symbols are TXIC, TXICW and TXICU.
This proxy statement/prospectus provides you with detailed information
about the acquisition of Hunan Tongxin, the redomestication merger and the
special meeting of stockholders. We encourage you to read this entire document
and the documents incorporated by reference carefully. YOU SHOULD ALSO CAREFULLY
CONSIDER THE RISK FACTORS BEGINNING ON PAGE 38.
The acquisition of Hunan Tongxin and the redomestication merger will be
completed upon approval of at least a majority of the shares of common stock
outstanding present in person or by proxy and entitled to vote at the special
meeting on January 24, 2008.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT/PROSPECTUS IS DATED JANUARY 8, 2008. AND IS FIRST
BEING MAILED TO AAAC STOCKHOLDERS ON OR ABOUT JANUARY 14, 2008.
5
ASIA AUTOMOTIVE ACQUISITION CORPORATION
199 PIERCE STREET, SUITE 202
BIRMINGHAM, MICHIGAN 48009
To the Stockholders of Asia Automotive Acquisition Corporation:
You are cordially invited to attend a special meeting of the stockholders of
Asia Automotive Acquisition Corporation. ("AAAC"), relating to its proposed
Equity Acquisition of Hunan Tongxin Enterprise Co. Ltd. ("Hunan Tongxin"), a
Chinese company engaged in the design, manufacturing and sales of Engineered
Vehicle Body Structures ("EVBS"), body panels and die design and fabrication in
the Peoples Republic of China ("PRC"). The meeting will be held at 9AM
Eastern Time, on January 24, 2008, 199 Pierce Street, Suite 202, Birmingham,
Michigan, 48009. At this meeting, you will be asked to consider and vote upon
the following proposals:
1. To approve the Equity Acquisition Agreement ("EAA"), and the agreements
contemplated by the EAA dated as of July 24, 2007 among AAAC, Hunan Tongxin and
the Hunan Tongxin Stockholders (collectively, the "Hunan Tongxin Parties"). The
Hunan Tongxin Parties have already approved the EAA and the required approvals
of the Chinese government and regulatory agencies have been obtained.
2. To approve the merger of AAAC with and into a wholly owned subsidiary formed
under the laws of British Virgin Islands ("BVI") with the name Tongxin
International, Ltd. ("TI") for the purposes of redomestication of the company to
the BVI (the "Redomestication").
If these proposals are approved:
* We will acquire an operating business in China;
* We will change our corporate domicile from the State of Delaware to the BVI
which means we will be governed by the laws of the BVI;
* We will change our corporate name to "Tongxin International, Ltd." as a
result of the Redomestication;
* Initially, and for a period of two (2) years, the majority of our board of
directors will be comprised of AAAC officers and their designees;
* The BVI Articles of Association and Memorandum of Association will become
the equivalent of our certificate of incorporation and by-laws,
respectively;
* Each share of common stock of AAAC will automatically convert into one
share of TI;
* Each outstanding warrant of AAAC will be assumed by TI with the same terms,
but exercisable for common stock of TI.
6
TI will report under the Securities Exchange Act of 1934, with its units, common
stock and warrants trading on the OTCBB (unless the TI application for listing
on NASDAQ Global Market is approved as part of the Redomestication, in which
case TI units, common stock and warrants will be traded on NASDAQ Global
Market).
We will not consummate the transactions described under Proposal 1 unless the
Redomestication in Proposal 2 is also approved. Similarly, the Redomestication
will not take place if the Equity Acquisition Agreement is not approved.
At the closing, and pursuant to the EAA, the Hunan Tongxin Shareholders and
their designees will be paid an aggregate of $13,000,000 in cash for all the
outstanding common stock of Hunan Tongxin. The Hunan Tongxin Shareholders shall
sell, transfer, assign and convey to TI, and TI shall purchase from the Hunan
Tongxin Shareholders, all of the right, title and interest of the Hunan Tongxin
Shareholders representing all of the common stock of Hunan Tongxin.
As part of the purchase price, Hunan Tongxin management will receive an
aggregate of 4,500,000 unregistered shares of TI common stock.
In addition, in order to retain Hunan Tongxin Executive Management for a period
of two years, AAAC and Hunan Tongxin have executed a Key Employees Employment
Agreement ("KEEA").
In 2008, pursuant to the Performance Earn Out Agreement ("PEOA"), Hunan Tongxin
Management will be issued up to an aggregate of 2,000,000 shares of common stock
of TI (on an all-or-none basis) if, on a consolidated basis, TI generates
after-tax profits of $9,500,000 in fiscal year 2007 (excluding one time costs
associated with the transaction and corporate costs).
The affirmative vote of the holders of a majority of the outstanding shares of
AAAC common stock is required to approve each of the Equity Acquisition
Agreement and the Redomestication Proposals.
Each AAAC stockholder who holds shares of common stock issued in AAAC's initial
public offering has the right to vote against the Equity Acquisition proposal
and at the same time demand that AAAC convert such stockholder's shares into
cash equal to a pro rata portion of the funds held in the trust account into
which a substantial portion of the net proceeds of AAAC's initial public
offering was deposited. These shares will be converted into cash only if the
Equity Acquisition Agreement is consummated. However, if the holders of
1,006,250 or more shares of common stock issued in AAAC's initial public
offering vote against the Equity Acquisition Proposal and demand conversion of
their shares, then AAAC will not consummate the Equity Acquisition Agreement.
AAAC's initial stockholders who purchased their shares of common stock prior to
AAAC's initial public offering and presently own an aggregate of approximately
1,349,000 of the outstanding shares of AAAC common stock (approximately 21%),
have agreed to vote with the majority of the shares of common stock voted by the
public shareholders.
Immediately after consummation of the Equity Acquisition Agreement, if no holder
of shares of AAAC common stock demands that AAAC convert these shares into a pro
rata portion of the trust account, AAAC stockholders will own approximately 59%
of AAAC's issued and outstanding shares of common stock, and Hunan Tongxin
management will own approximately 41%.
7
If one or more of AAAC's stockholders vote against the Equity Acquisition
proposal and demand that AAAC convert their shares into a pro rata portion of
the trust account, then AAAC's stockholders will own less than approximately 59%
of AAAC's issued and outstanding shares of common stock.
AAAC's shares of common stock, warrants and units currently are listed on the
Over-the-Counter Bulletin Board under the symbols AAAC, AAACW and AAACU. AAAC,
however, will seek listing of the units, common stock and warrants on NASDAQ
Global Market. If the securities are not listed on NASDAQ Global Market, they
will be traded on the OTCBB.
After careful consideration of the terms and conditions of the proposed Equity
Acquisition Agreement, and the Redomestication, the board of directors of AAAC
has determined that the Equity Acquisition Agreement, the transactions
contemplated thereby, and the Redomestication are fair to and in the best
interests of AAAC and its stockholders. The board of directors of AAAC
unanimously recommends that you vote "FOR" the approval of the Equity
Acquisition Agreement and the Redomestication.
Enclosed is a notice of special meeting and proxy statement containing detailed
information concerning the Equity Acquisition Agreement, the transactions
contemplated thereby, and the Redomestication. Whether or not you plan to attend
the special meeting, we urge you to read this material carefully.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING,
PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE
ENVELOPE PROVIDED.
I look forward to seeing you at the meeting.
Sincerely,
- -------------------------------------
William R. Herren
Chairman of the Board
This proxy statement/prospectus is dated January 8, 2008 and is first being
mailed to shareholders on or about January 14, 2008.
ASIA AUTOMOTIVE ACQUISITION CORPORATION
199 PIERCE STREET, SUITE 202
BIRMINGHAM, MICHIGAN 48009
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON January 24, 2008
8
TO ALL THE STOCKHOLDERS OF ASIA AUTOMOTIVE ACQUISITION CORPORATION
NOTICE IS HEREBY GIVEN that a special meeting of stockholders, of Asia
Automotive Acquisition Corporation ("AAAC"), a Delaware corporation, will be
held on January 24, 2008, eastern time, on 9AM, 2007, at 199 Pierce Street
Birmingham, Michigan 48009.
At this meeting, you will be asked to consider and vote upon the following
proposals:
1. To approve an Equity Acquisition Agreement ("EAA"),and the agreements
contemplated by the EAA dated as of July 24, 2007 among AAAC, Hunan Tongxin and
the Hunan Tongxin Stockholders (collectively, the "Hunan Tongxin Parties").The
Hunan Tongxin Parties have already approved the EAA and the required approvals
of the Chinese government and regulatory agencies have been obtained.
2. To approve the merger of AAAC with and into a wholly owned subsidiary formed
under the laws of BVI with the name Tongxin International, Ltd. ("TI") for the
purposes of redomestication of the company to the BVI (the "Redomestication") .
The board of directors has fixed the close of business on January 14, 2008 as
the date for which AAAC stockholders are entitled to receive notice of, and to
vote at, the AAAC special meeting . Only the holders of record of AAAC common
stock on that date are entitled to have their votes counted at the AAAC special
meeting
AAAC will not transact any other business at the special meeting, except for
business properly brought before the special meeting by AAAC's board of
directors.
Your vote is important. Please sign, date and return your proxy card as soon as
possible to make sure that your shares are represented at the special meeting.
If you are a stockholder of record of AAAC 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. 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 Equity Acquisition
Agreement and the Redomestication.
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 David J. Brophy, AAAC's Secretary, in writing before the
special meeting that you have revoked your proxy; and
* You may attend the special meeting, revoke your proxy, and vote in person,
as indicated above.
To exercise conversion rights an AAAC stockholder must:
* vote against the Equity Acquisition proposal.
* contemporaneous with that vote against the Equity Acquisition proposal send
written demand to AAAC (Attn: Corporate Secretary) at 199 Pierce Street,
Suite 202, Birmingham, MI 48009, Which demand must state:
(a) the name and address of the stockholder;
(b) that the stockholder has voted against the Equity Acquisition
proposal;
(c) that the stockholder demands conversion of the stockholder's shares
into cash; and
(d) the address for delivery of the check for the aggregate conversion
payment to be received by the stockholder if the shares are converted
to cash.
9
THE BOARD OF DIRECTORS OF AAAC UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
APPROVAL OF THE EQUITY ACQUISITION AGREEMENT AND THE Redomestication.
By Order of the Board of Directors
William R. Herren
Chairman of the Board January 24, 2008
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS OF ASIA AUTOMOTIVE
ACQUISITION CORPORATION
The board of directors of Asia Automotive Acquisition Corporation("AAAC") has
unanimously approved the acquisition of Hunan Tongxin Enterprise Co., Ltd.
("Hunan Tongxin"), an operating company in the People's Republic of China,
pursuant to an Equity Acquisition Agreement whereby AAAC will purchase 100% of
the shares of Hunan Tongxin held by the stockholders (the "Hunan Tongxin
Stockholders"). The board of directors of AAAC also has unanimously approved the
simultaneous reincorporation of AAAC from the State of Delaware to the British
Virgin Islands through a Redomestication with TI.
In the Redomestication, AAAC will exchange its securities for the outstanding
securities of TI.
AAAC was organized to serve as a vehicle for the acquisition of an automotive
operating business that has its primary operating facilities based in the
Peoples Republic of China, India or ASEAN . Hunan Tongxin through its Chinese
operating companies, is a leader in the automotive stamping, die fabrication,
and vehicle enclosure/interior industry in China.
AAAC's common stock, warrants and units are currently listed on the
Over-the-Counter Bulletin Board under the symbols AAAC, AAACW and AAACU,
respectively. AAAC intends to apply to have its securities listed on the NASDAQ
Global Market effective at the time of the Redomestication merger. The
proposed symbols are TXIC, TXICW, and TXICU for the common stock, warrants and
units, respectively.
This proxy statement provides you with detailed information about the
acquisition of Hunan Tongxin and Redomestication and the special meeting of
stockholders. We encourage you to read this entire document and the documents
incorporated by reference carefully. YOU SHOULD ALSO CAREFULLY CONSIDER THE RISK
FACTORS BEGINNING ON PAGE 30.
The equity acquisition of Hunan Tongxin and Redomestication will be completed
upon approval of at least a majority of the shares of common stock outstanding
present in person or by proxy and entitled to vote at the special meeting on
January 19, 2008.
THIS PROXY STATEMENT IS DATED JANUARY 8, 2008, AND IS FIRST BEING MAILED
TO AAAC STOCKHOLDERS ON OR ABOUT JANUARY 14, 2008.
10
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this document, including AAAC's and Hunan
Tongxin's consolidated financial statements, Management's Discussion and
Analysis of Financial Condition and Results of Operations and in documents
incorporated into this document by reference that are not historical facts,
including, without limitation, statements of future expectations, projections of
results of operations and financial condition, statements of future economic
performance and other forward-looking statements are subject to known and
unknown risks, uncertainties and other factors which may cause the actual future
results, performance or achievements of Hunan Tongxin and/or its subsidiaries
and other operating units to differ materially from those contemplated in such
forward-looking statements. The words "intend," "expect," "project," "estimate,"
"predict," "anticipate," "should," "believe," and similar expressions also are
intended to identify forward-looking statements. Important factors which may
cause actual results to differ from those contemplated in such forward-looking
statements include, but are not limited to: (i) the results of AAAC's efforts to
implement its business strategy, (ii) changes in interest rates, (iii)
legislation or regulatory requirements adversely impacting Hunan Tongxin's
business and/or strategy, (iv) adverse changes in business conditions or
inflation, (v) general economic conditions, either nationally or
internationally, which are less favorable than expected and that result in,
among other things, a deterioration in credit quality and/or collectability,
(vi) competitive pressures, (vii) changes in securities markets, (viii) actions
of competitors of Hunan Tongxin and Hunan Tongxin's ability to respond to such
actions, (ix) the cost of capital, which may depend in part on Hunan Tongxin's
prospects and outlook, (x) changes in governmental regulation, tax rates and
similar matters, and (xi) other risks detailed in AAAC's other filings with the
Securities and Exchange Commission.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual outcomes may vary materially from
those indicated. All subsequent written or oral forward-looking statements
attributable to AAAC and Hunan Tongxin or persons acting on their behalf are
expressly qualified in their entirety by the foregoing factors. Investors and
other interested parties are cautioned not to place undue reliance on such
statements, which speak as of the date of such statements. AAAC and Hunan
Tongxin undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of unanticipated events.
11
TABLE OF CONTENTS
Page
-----
FORWARD LOOKING STATEMENTS ............................................. 11
SUMMARY ................................................................ 19
SELECTED HISTORICAL FINANCIAL DATA ..................................... 30
HUNAN TONGXIN HISTORICAL FINANCIAL DATA ................................ 31
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION ............ 32
COMPARATIVE PER SHARE INFORMATION ...................................... 34
MARKET PRICE INFORMATION ............................................... 36
RISK FACTORS ........................................................... 38
THE AAAC SPECIAL MEETING ............................................... 47
CONSIDERATION OF THE EQUITY ACQUISITION TRANSACTION .................... 52
THE EQUITY ACQUISITION AGREEMENT ....................................... 52
AAAC REDOMESTICATION ................................................... 67
INFORMATION ABOUT HUNAN TONGXIN ENTERPRISE CO. LTD ..................... 79
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS .......................................................... 83
QUANATATIVE AND QUALITATIVE MARKET RISK ................................ 102
INFORMATION ABOUT AAAC ................................................. 102
PRO FORMA UNAUDITED COMBINED FINANCIAL STATEMENTS ...................... 109
DIRECTORS AND MANAGEMENT ............................................... 125
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ......................... 131
BENEFICIAL OWNERSHIP OF SECURITIES ..................................... 133
PRICE RANGE OF SECURITIES .............................................. 138
SHARES ELIGIBLE FOR FUTURE SALE ........................................ 139
DESCRIPTION OF THE COMBINED COMPANY'S SECURITIES FOLLOWING THE
EQUITY ACQUISITION ..................................................... 140
STOCKHOLDER PROPOSALS .................................................. 143
LEGAL MATTERS .......................................................... 143
EXPERTS ................................................................ 144
DELIVERY OF DOCUMENTS TO STOCKHOLDERS .................................. 145
WHERE YOU CAN FIND MORE INFORMATION .................................... 145
EXHIBITS -- OPINION LETTERS ............................................ 146
ANNEXES ................................................................ A-1
CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF ASIA AUTOMOTIVE ACQUISITION
CORPORATION ............................................................ FI-1
CONSOLIDATED FINANCIAL STATEMENTS OF HUNAN TONGXIN ENTERPRISE CO., LTD . FII-1
FORM OF PROXY .......................................................... PR-1
12
ATTACHMENTS
A - KING AND WOOD OPINION LETTER
B - STROBL & SHARP OPINION LETTER
FINANCIAL STATEMENTS
A. ASIA AUTOMOTIVE ACQUISITION CORPORATION AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 2006
B. ASIA AUTOMOTIVE ACQUISITION CORPORATION INTERIM CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER 30, 2007
C. HUNAN TONGXIN ENTERPRISE CO., LTD., INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2007
D. HUNAN TONGXIN ENTERPRISE CO., LTD AUDITED CONSOLIDATED FINANCIAL STATEMENTS
ENDED DECEMBER 31, 2004, 2005 AND 2006
ANNEXES
A - EQUITY ACQUISITION AGREEMENT
B - KEY EMPLOYEES EMPLOYMENT AGREEMENT
C - MEMORANDUM OF ASSOCIATION OF TONGXIN INTERNATIONAL
D - ARTICLES OF ASSOCIATION OF TONGXIN INTERNATIONAL
E - TONGXIN INTERNATIONAL CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF
DIRECTORS
F - TONGXIN INTERNATIONAL CODE OF CONDUCT AND POLICY REGARDING REPORTING OF
POSSIBLE VIOLATIONS
G - TONGXIN INTERNATIONAL CHARTER OF THE NOMINATING AND GOVERNANCE COMMITTEE OF
THE BOARD OF DIRECTORS
H - DELAWARE GENERAL CORPORATION LAW-SECTION 262 APPRAISAL RIGHTS
I - PERFORMANCE ORIENTED EARN-OUT AGREEMENT
J - CLARIFICATION AGREEMENT (UPO)
This proxy statement incorporates important business and financial information
about AAAC and Hunan Tongxin that is not included in or delivered with the
document. This information is available without charge to security holders upon
written or oral request. The request should be sent to:
Dr. David J. Brophy
c/o Asia Automotive Acquisition Corporation
199 Pierce Street, Suite 202,
Birmingham, Michigan, 48009
(248) 593-8330
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 January 14, 2008.
The financial statements of Hunan Tongxin are prepared using Renminbi, the
currency of the Peoples Republic of China ("PRC"). For convenience, the Renminbi
amounts have been converted throughout the text of the proxy statement into
United States dollars. Until recently, the Renminbi was controlled currency, and
the exchange rate maintained by the PRC was approximately 8.11 Renminbi to one
United States dollar. The Chinese government has recently altered its policy
toward the rate of exchange of the Renminbi versus the US dollar. Changing from
a previously fixed rate policy regarding the dollar, the Renminbi has recently
been permitted to float within a fixed range against a basket of currencies,
including the US dollar, Japanese Yen and European Euro, which has resulted in
the Renminbi being allowed to appreciate 2% +/- 0.3% vs. the dollar. Since
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the company's business is primarily in the PRC, with some exports to Vietnam,
this change will have no effect on the company's business, but may result in a
concomitant increase in its after-tax earnings when stated in dollar terms. In
the future, the company's earnings stated in US dollars will fluctuate in
accordance with the change in exchange rate.
Under the law of the BVI, TI. is authorized to issue "ordinary shares" and
holders of ordinary shares are "members." References to ordinary shares and
members have been translated to common stock and stockholders, which are terms
more familiar to United States persons, whom AAAC believes are the majority of
its stockholders.
QUESTIONS AND ANSWERS ABOUT THE SPECIAL SHAREHOLDERS MEETING
Q. Why is AAAC proposing the Equity Acquisition?
A. AAAC was organized to affect a merger, capital stock exchange, equity
acquisition or other similar business combination with one or more
operating businesses within the global automotive component industry that
have their primary operating facilities in India, the Association of
Southeast Asian Nations or the People's Republic of China. Hunan Tongxin is
the leading independent Chinese automotive supplier of EVBS. Hunan Tongxin
has demonstrated significant growth since commencing operations in 1984 and
AAAC believes that Hunan Tongxin is in a position to increase its business
through the development of additional products and the expansion of its
customer base, including entry into the international market. As a result,
AAAC believes that a business combination with Hunan Tongxin will provide
AAAC stockholders with an opportunity to participate in a combined company
with significant growth potential.
Q. Why is AAAC proposing the Redomestication?
A. In order to facilitate the purchase of Hunan Tongxin, AAAC is proposing the
redomestication of itself into a company formed under the laws of the BVI.
In addition, as all of the business operations of TI will be conducted
outside the United States, this will minimize operating expenses including
the tax burden of TI and its stockholders. The redomestication is intended
to permit greater flexibility in structuring acquisitions or creating
subsidiaries in China and other countries as the business of TI expands.
This also will avoid double taxation of dividends declared at the TI level,
should the company elect to do so. AAAC believes that TI will only be taxed
on profits earned by its operations in the jurisdiction in which they are
located and undertaken and will not be subject to additional income taxes
merely by virtue of the location of its place of incorporation.
Q. What is being voted on?
A. There are two proposals that you are being asked to vote on. The first
proposal is to adopt the Equity Acquisition Agreement and related Key
Employees Employment Agreement and Performance Earn Out Agreement dated
July 24, 2007 and the transactions contemplated thereby. We refer to this
proposal as the Equity Acquisition Proposal.
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The second proposal is to approve the merger of AAAC with and into TI for
purposes of redomestication to the BVI. We refer to this proposal as the
Redomestication proposal.
Q. What vote is required in order to adopt the Equity Acquisition and the
Redomestication Proposals?
A. Both proposals legally requires the affirmative vote of a majority of the
outstanding public shares of AAAC's common stock. However, the insiders who
purchased their shares prior to the initial public offering (including the
officers and directors of AAAC) have agreed to vote the shares held by them
on the Equity Acquisition and Redomestication proposals in accordance with
the vote of the majority of the shares of common stock issued in AAAC's
initial public offering. Therefore the required vote is a majority of those
shares purchased in AAAC's initial public offering.
Q. What will I receive in the Redomestication ?
A. AAAC security holders will receive an equal number of shares of common
stock of Tongxin International in exchange for their AAAC common stock, and
Tongxin International will assume the outstanding AAAC warrants, the terms
and conditions of which will not change, except that on exercise, the
holders will receive TI common stock.
Q. How will the Redomestication be accomplished?
A. AAAC will merge into TI, AAAC's wholly owned subsidiary that will be
incorporated as a BVI Company. As a result of the Redomestication, each
currently issued outstanding share of common stock of AAAC will
automatically convert into a share of common stock of TI. This procedure
will result in you becoming a stockholder in TI instead of AAAC.
Q. Will the AAAC stockholders be taxed as a result of the Redomestication?
A. Generally for United States federal income tax purposes, stockholders who
are United States holders should not recognize any gain or loss as a result
of the Redomestication. We urge you to consult your own tax advisors with
regard to your particular tax consequences of the Redomestication.
Q. Will AAAC be taxed on the Redomestication?
A. AAAC will recognize gain, but not loss, as a result of the Redomestication
equal to the difference, if any, between the adjusted tax basis of any AAAC
equity and such equity's fair market value at the effective time of the
Redomestication.
Q. What will the name of the surviving company be after the Equity
Acquisition?
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A. The name of the surviving company following completion of the equity
acquisition and redomestication will be "Tongxin International, Ltd."
Q. Do I have dissenter or appraisal rights?
A. In connection with the Redomestication, the AAAC stockholders have
appraisal rights under Delaware corporate law.
Q. Do I have conversion rights?
A. If you hold shares of common stock issued in AAAC's initial public
offering, then you have the right to vote against the Equity Acquisition
Proposal and demand that AAAC convert these shares into a pro rata portion
of the trust account in which a substantial portion of the net proceeds of
AAAC's initial public offering are held. We sometimes refer to these rights
to vote against the Equity Acquisition and demand conversion of the shares
into a pro rata portion of the trust account as conversion rights.
Q. If I have conversion rights, how do I exercise them?
A. If you wish to exercise your conversion rights, you must vote against the
Equity Acquisition Proposal and at the same time demand that AAAC convert
your shares into cash. If, notwithstanding your vote, the Equity
Acquisition is completed, then you will be entitled to receive a pro rata
portion of the trust account, including any interest earned thereon through
the record date. You will be entitled to convert each share of common stock
that you hold into approximately $7.85 as of December 31, 2007. If you
exercise your conversion rights, then you will be exchanging your shares of
AAAC common stock for cash and will no longer own these shares. You will be
entitled to receive cash for these shares only if you continue to hold
these shares through the closing of the Equity Acquisition and then tender
your stock certificate. If the Equity Acquisition is not completed, then
your shares cannot be converted to cash until either you vote against a
subsequently proposed combination and exercise your conversion rights or
unless AAAC fails to achieve a business combination in a timely manner, at
which time your shares will be automatically converted to cash.
Q. What happens to the funds deposited in the trust account after consummation
of the Equity Acquisition?
A. Upon consummation of the Equity Acquisition Proposal:
* the stockholders electing to exercise their conversion rights will
receive their pro rata portion of the funds in the trust account; and
* remainder of the funds in the trust account will be retained by TI for
use as operating capital subsequent to the closing of the business
combination.
Q. Who will manage the day-to-day operations of Hunan Tongxin?
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A. Mr. Zhang Duanxiang will continue as the chief executive officer of Hunan
Tongxin, and a director of Tongxin International, Ltd. Mr. Peng Weiwu, will
continue as the chief operating officer of Hunan Tongxin, and a director of
TI. The daily operations of Hunan Tongxin will be managed by the current
management of Hunan Tongxin.
Q. What happens if the Equity Acquisition is not consummated?
A. AAAC will be liquidated if it does not consummate a business combination by
April 19, 2008. In any liquidation, the funds held in the trust account,
plus any interest earned thereon, together with any remaining net equity
outside of the trust, will be distributed pro rata to AAAC's common
stockholders, excluding the AAAC initial stockholders, each of whom has
waived any right to any liquidation distribution.
Q. When do you expect the Equity Acquisition to be completed?
A. Pending receipt of the required stockholder vote it is currently
anticipated that the Equity Acquisition will be completed promptly
following the AAAC special meeting on or around January 24, 2008.
Q. If I am not going to attend the AAAC special meeting in person, should I
return my proxy card instead?
A. Yes. After carefully reading and considering the information contained in
this proxy statement/prospectus, please fill out and sign your proxy card.
Then return the enclosed proxy card in the return envelope as soon as
possible, so that your shares may be represented at the AAAC special
meeting.
Q. What will happen if I abstain from voting or fail to vote?
A. An abstention or failure to vote will have the same effect as a vote
against the Equity Acquisition Proposal, but will not have the effect of
converting your shares into a pro rata portion of the trust account. An
abstention or failure to vote will also have the effect of voting against
the Redomestication.
Q. What do I do if I want to change my vote?
A. Send a later-dated, signed proxy card to AAAC's secretary prior to the date
of 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 AAAC's
secretary at the address of AAAC's corporate headquarters.
Q. If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A. No. Your broker can vote your shares only if you provide instructions on
how to vote. You should instruct your broker to vote your shares, following
the directions provided by your broker.
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Q. Do I need to turn in my old certificates?
A. No. If you hold your securities in AAAC in certificate form, as opposed to
holding them through your broker, you do not need to exchange them for
certificates issued by TI. Your current certificates will represent your
rights in TI. You may exchange them by contacting the transfer agent,
Continental Stock Transfer & Trust Company, Reorganization Department, and
following their requirements for reissuance. If you elect conversion or
appraisal, you will need to deliver your old certificate to AAAC.
Q. Who can answer my questions?
A. If you have questions about the Equity Acquisition and/or the
Redomestication Proposals, you may write or call David J. Brophy at Asia
Automotive Acquisition Corporation, 199 Pierce Street, Suite 202,
Birmingham, Michigan, 48009. The phone number is (248) 593-8330.
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
TI is incorporated under the laws of the BVI, and its operating company, Hunan
Tongxin is
incorporated under the laws of the PRC and operates only in the PRC.
Substantially all of the equity of TI and its Chinese operating company will be
located in the PRC. All of the officers of the
operating company, Hunan Tongxin, will be located in the PRC. Although China and
the United States are signatories to the 1965 Hague Convention on the Service
Abroad of Judicial and Extra Judicial Documents in Civil and Commercial Matters,
service under this treaty is cumbersome and time consuming and may not result in
adequate notice, such that any judgment based on service thereunder may be
reopened, relitigated and overturned. Therefore, an investor should understand
it is not likely that service of process upon the company or its subsidiaries,
its officers and directors, its equity and experts will be obtainable within the
United States or for actions originating in the United States.
The difficulty of enforcing a judgment of a United States court in the PRC where
most of the equity of the company is located and which is the residence of some
of the directors , stems from the lack of any official arrangement providing for
judicial assistance to the enforcement of judgments of courts of the United
States in the PRC. The PRC does not have treaties providing for the reciprocal
recognition and enforcement of judgments of courts within the United States. In
the absence of such a treaty, judgments of United States courts may not be
enforced in the PRC
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without review of the merits of the claims and the claims brought in the
original action in the United States court may have to be re-litigated on their
merits.
Likewise, administrative actions brought by regulatory authorities, such as the
SEC, and other actions that result in foreign court judgments, could (assuming
such actions are not required by PRC law to be arbitrated) only be enforced in
the PRC if such judgments or rulings do not violate the basic principles of the
law of the PRC or the sovereignty, security and public interest of the society
of China, as determined by a People's Court of China that has jurisdiction for
recognition and enforcement of judgments.
We have been advised that there is doubt as to the enforceability in the PRC of
any judgments of United States, BVI or other non-PRC courts arising out of or
based on the ownership of securities on the civil liability provisions of United
States federal or state securities laws, and as to whether PRC courts would
enforce, in original actions, judgments solely upon the federal securities laws
of the United States. An original action may be brought in the PRC against TI or
its subsidiaries or its directors and officers and experts named in this proxy
statement only if the actions are not required to be arbitrated by PRC law and
only if the facts alleged in the complaint give rise to a cause of action under
PRC law. In connection with such an original action, a PRC court may award civil
liability, including monetary damages.
SUMMARY
This section summarizes material items related to the proposals to be voted on.
These items are described in greater detail elsewhere in this proxy statement.
You should carefully read this proxy statement and the other documents to which
this proxy statement refers you.
See "Where You Can Find More Information."
THE COMPANIES
AAAC
AAAC is a blank check company organized under the laws of the State of Delaware
on June 21, 2005. We were formed with the purpose of effecting a merger, capital
stock exchange, equity acquisition or other similar business combination with
one or more operating businesses within the global automotive component industry
that have their primary operating facilities located in China, India or the
Association of South Eastern Asian Nations ("ASEAN"). To date, our efforts have
been limited to organizational activities. We will not be able to implement our
business plan until the consummation of the transaction described by this proxy
statement.
In April 2006, AAAC successfully consummated an initial public offering of its
equity securities from which it derived net proceeds of approximately $38.2
million. The prices of AAAC's common stock,
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warrants to purchase common stock and units (each unit consisting of one share
of common stock and one warrant to purchase common stock) are quoted on the
Over-the-Counter Bulletin Board under the symbols AAAC for the common stock,
AAACW for the warrants and AAACU for the units. Approximately $37.4 million of
the net proceeds of the initial public offering was placed in a trust account
and will be released to AAAC upon consummation of the Equity Acquisition,
subject to the exercise of conversion rights by holders of less than 20% of the
AAAC stock issued in the initial public offering. The balance of the net
proceeds from the initial public offering of approximately $1.1 million has been
used by, or is available to, AAAC to pay the expenses incurred in its pursuit of
a business combination. Through December 31, 2007 AAAC had incurred a total of
approximately $1.03 million in expenses including $744,000 in paid expenses and
$383,000 in approved expenses (see Plan of Operations on page 107). The most
significant expenses incurred to date include approximately $450,000 for due
diligence reviews of business combination targets, approximately $150,000
legal/tax expenses, office expenses of $150,000 payable to Asia Development
Capital LLC, and premiums for officer and director liability insurance of
approximately $145,000. Other than its initial public offering and the pursuit
of a business combination, AAAC has not engaged in any business to date. If a
business combination has not been consummated by April 19, 2008, then, pursuant
to its certificate of incorporation, AAAC's officers must take all actions
necessary to dissolve and liquidate AAAC within 60 days.
The mailing address of AAAC's principal executive office is Asia Automotive
Acquisition Corporation, 199 Pierce Street, Suite 202, Birmingham, Michigan,
48009 and its telephone number is (248) 593-8330.
HUNAN TONGXIN ENTERPRISE CO., LTD.
Hunan Tongxin Enterprise Co Ltd. ("Hunan Tongxin") was established under the
laws of the PRC on November 27, 1984 as Changsha Meihua Automobile Factory Co.,
Ltd. On November 2, 2000, Hunan Tongxin was converted into a stock holding
company. Currently Hunan Tongxin conducts its business operations, which include
design, development, manufacturing, sales and services of automotive EVBS, body
panels, and dies, primarily in the PRC, with some exports to Vietnam.
For the fiscal years ended December 31, 2004, 2005, and 2006, Hunan Tongxin
generated approximately $46.3 million, $58.6 million and $66.2 million in
revenue, respectively, principally from its sales of EVBS to Chinese customers
in the automotive commercial vehicle market. Hunan Tongxin is the largest
independent Chinese supplier of EVBS. It is capable of providing exterior body
panels for both passenger and commercial vehicles in addition to designing,
fabricating and testing stamping dies for processing of body panels. Hunan
Tongxin also manufactures complete cab structures for commercial vehicles. EVBS
consists of exterior body panels including doors, hoods, side panels and
fenders. The components must meet exacting dimensions for fit and finish before
they are assembled and finally painted. These capabilities enable Hunan Tongxin
to participate effectively in all sectors of the Chinese automotive market
including passenger cars and commercial vehicles. The overall market in 2006
reached 7.2 million vehicles, surpassing Japan as the second largest vehicle
market (China Trends: Michael Tchong; February 2, 2007) in terms of production,
and is anticipated to grow to 10.6 million by 2011. Hunan Tongxin also
anticipates increasing its presence in international markets, based on what it
perceives to be products that are comparable to those of other EVBS companies
but selling at prices that will give it a
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competitive advantage.
The current management of Hunan Tongxin is led by Mr. Zhang Duanxiang and Mr.
Peng Weiwu. Each of these gentlemen will become a director of TI and Mr. Zhang
will become vice-chairman of TI. The current management team under Mr. Zhang and
Mr. Peng team will continue to manage the day to day operations of Hunan
Tongxin.
The mailing address of Hunan Tongxin's principal executive offices is Hunan
Tongxin Enterprise Co., Ltd., Jiangbei Village, Changsha County, 410135,
People's Republic of China, and the phone number is : (86)-731-62900470
THE BUSINESS COMBINATION
AAAC formed a wholly owned subsidiary under the laws of the British Virgin
Islands, under the name "TI". At the time of closing of the Equity Acquisition
Agreement, AAAC will merge with and into TI for the purpose of redomestication
out of the United States to secure future tax benefits and greater corporate
flexibility to structure the business of Hunan Tongxin within China and effect
acquisitions and reorganizations under Chinese law. Simultaneously with the
Redomestication merger, TI will acquire all of the equity of Hunan Tongxin,
pursuant to existing Equity Acquisition Agreement, dated July 24, 2007.
Following consummation of the Equity Acquisition Agreement and the
Redomestication, TI will continue as the surviving company. Pursuant to the
Redomestication merger, all of the AAAC common stock held by AAAC's
stockholders will be converted into common stock in TI on a one-to-one basis and
the outstanding warrants issued by AAAC will be assumed by TI.
Under the Equity Acquisition Agreement, the Hunan Tongxin Stockholders and their
designees will be paid an aggregate of $13,000,000 in cash for all the
outstanding common stock of Hunan Tongxin. The Hunan Tongxin Shareholders shall
sell, transfer, assign and convey to TI, and TI shall purchase from the Hunan
Tongxin Shareholders, all of the rights, title and interest of the Hunan Tongxin
Shareholders representing all of the common stock of Hunan Tongxin.
As part of the purchase price, Hunan Tongxin Management will be issued an
aggregate of 4,500,000 shares of TI common stock.
In addition, in order to retain Hunan Tongxin Executive Management for a period
of two years, AAAC and Hunan Tongxin have executed a KEEA.
Additionally, Hunan Tongxin has agreed, pursuant to the Equity Acquisition
Agreement, and subsequent to the close of the transaction to cause Changsha
Meihua Automobile Company to form a 50%/50% joint venture in China with TI.
In the first quarter 2008, pursuant to the Performance Earn Out Agreement, Hunan
Tongxin Management will be issued an aggregate of 2,000,000 shares of common
stock of TI (on an all-or-none basis) if, on a consolidated basis, TI generates
after-tax profits of $9,500,000 in fiscal year 2007 (excluding one time costs
associated with the transaction and corporate costs).
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AAAC and the Hunan Tongxin Stockholders plan to complete the Equity Acquisition
promptly after the AAAC special meeting, provided that:
* AAAC's stockholders have approved the Equity Acquisition Agreement and the
Redomestication proposals;
* holders of less than 20% of the shares of common stock issued in AAAC's
initial public offering vote against the Equity Acquisition proposal and
demand conversion of their shares into cash; and
* the other conditions specified in the Equity Acquisition Agreement have
been satisfied or waived.
FOREIGN PRIVATE ISSUER
Being a foreign private issuer exempts us from certain Securities and Exchange
Commission requirements that provide stockholders the protection of information
that must be made available to stockholders of United States public companies.
See page 46, Risk Factors Section, for associated risks.
Upon consummation of the redomestication merger we will be a foreign private
issuer within the meaning of the rules promulgated under the Securities Exchange
Act of 1934. As such, we will be exempt from certain provisions applicable to
United States public companies including:
- - The rules requiring the filing with the SEC of quarterly reports on Form
10-Q or current reports on Form 8-K;
- - The sections of the Securities Exchange Act regulating the solicitation of
proxies, consents or authorizations with respect to a security registered
under the Securities Exchange Act;
- - Provisions of Regulation FD aimed at preventing issuers from making
selective disclosures of material information; and
- - The sections of the Securities Exchange Act requiring insiders to file
public reports of their stock ownership and trading activities and
establishing insider liability for profits realized from any "short swing"
trading transactions (i.e., a purchase and sale, or a sale and purchase, of
the issuer's equity securities within less than six months).
Because of these exemptions, our stockholders will not be afforded the same
protections or information generally available to investors holding shares in
public companies organized in the United States.
THE EQUITY ACQUISITION AGREEMENT
The Equity Acquisition Agreement is included as Annex A to this proxy
statement/prospectus.
We encourage you to read the Equity Acquisition Agreement. It is the legal
document that governs the Equity Acquisition and the other transactions
contemplated by the Equity Acquisition Agreement. It is also described in detail
elsewhere in this proxy statement.
BOARD OF DIRECTORS AND MANAGEMENT
From Close through a period of two (2) calendar years ("Initial Board Period" )
the board of directors will be comprised of 9 directors with the following
composition:
(a) Four (4) directors appointed by Hunan Tongxin including Mr. Zhang (Vice-
Chairman), Mr. Peng, and two (2) independent directors
(b) Five (5) directors appointed by AAAAC including Mr. Herren (Chairman), Mr.
Wilson ,and three (3) independent directors.
Following the Initial Board Period, the BOD will be comprised of 7 directors
with the following composition:
(a) Four (4) directors nominated by Hunan Tongxin including Mr. Zhang, Mr. Peng
and two (2) independent directors; and
(b) Three (3) directors nominated by ADC including two (2) independent
directors:
Each of Mr. Zhang Duanxiang and Mr. Peng Weiwu and their executive management
team will enter into a Key Employees Employment Agreement with TI.
SPECIAL MEETING OF AAAC'S STOCKHOLDERS
The special meeting of the stockholders of AAAC will be held at 9AM, Eastern
Daylight Time, on January 24, 2008, at 199 Pierce Street, Suite 202 Birmingham,
Michigan, 48009 to approve the Equity Acquisition, and the Redomestication
proposals
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APPROVAL OF THE HUNAN TONGXIN STOCKHOLDERS
All of the Hunan Tongxin Stockholders have approved the Equity Acquisition
Proposal and the transactions contemplated thereby by virtue of the execution of
the Equity Acquisition Agreement.
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 AAAC common stock at the close of business on December
13, 2007, which is the record date for the special meeting. You will have one
vote for each share of AAAC common stock you owned at the close of business on
the record date. AAAC warrants do not have voting rights. On the record date,
there were 6,380,250 outstanding shares of AAAC common stock including 1,349,000
insider shares.
VOTE REQUIRED TO APPROVE THE PROPOSALS
The approval of the Equity Acquisition Agreement proposal will require the
affirmative vote of the holders of a majority of the outstanding shares of AAAC
common stock on the record date.
The approval of the Redomestication proposal will require the affirmative vote
of the holders of a majority of the outstanding shares of AAAC common stock on
the record date.
The insiders who purchased their shares prior to the initial public
offering(including the officers and directors of AAAC) have agreed to vote the
shares held by them on the Equity Acquisition and Redomestication proposals in
accordance with the vote of the majority of the shares of common stock issued in
AAAC's initial public offering.
RELATION OF PROPOSALS
The Equity Acquisition proposal will not be consummated unless the
Redomestication proposal is approved, and the Redomestication proposal will not
be consummated unless the Equity Acquisition proposal is approved.
CONVERSION RIGHTS
Pursuant to AAAC's Certificate of Incorporation, a holder of shares of AAAC's
common stock issued in its initial public offering may, if the stockholder votes
against the Equity Acquisition Proposal, demand that AAAC convert such shares
into cash. This demand must be made in writing at the same time that the
stockholder votes against the Equity Acquisition proposal. If so demanded, AAAC
will convert each share of common stock into a pro rata portion of the trust
account as based on 2 days prior to the consummation of the business
transaction. If you exercise your
conversion rights, then you will be exchanging your shares of AAAC common stock
for cash and will no longer own these shares. You will be entitled to receive
cash for these shares only if you continue to hold these shares through the
effective time of the Equity Acquisition and then tender your stock certificate
to the combined company. If the Equity Acquisition is not completed, then these
shares will not be converted into cash at that time.
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The Equity Acquisition will not be consummated if the holders of 20% or more of
common stock issued in AAAC's initial public offering (1,006,250 shares or more)
exercise their conversion rights.
You will lose your conversion rights if you submit an incomplete or untimely
demand for conversion. To exercise conversion rights an AAAC stockholder must:
- vote against the stock purchase proposal;
- contemporaneous with that vote against the Equity Acquisition
proposal, send a written demand to AAAC (Attn: Corporate Secretary) at
199 Pierce Street, Suite 202, Birmingham, MI 48009, which demand must
state:
(a) the name and address of the stockholder;
(b) that the stockholder has voted against the Equity
Acquisition proposal ;
(c) that the stockholder demands conversion of the stockholder's
shares into cash; and
(d) the address for delivery of the check for the aggregate
conversion payment to be received by the stockholder if the
shares are converted to cash
If the Equity Acquisition proposal purchase is approved by the AAAC stockholders
and is consummated, AAAC will promptly pay to any holder who properly and timely
demanded conversion and who has submitted the holder's stock certificate(s) to
AAAC, the stockholder's pro rata portion of funds in the trust account. Any such
payment will only be made after the holder submits his or her stock certificates
to AAAC. The certificate(s) representing the shares being converted need not be
submitted prior to the meeting or at the time that the converting shareholder
votes against the transaction and submits the written demand for conversion, but
only after the Equity Acquisition proposal has been approved. (AAAC recommends
sending the certificate by registered mail with proper insurance, since risk of
loss will remain with the stockholder until the certificate is received by
AAAC). AAAC will not charge any stockholder for costs incurred by AAAC with
respect to the exercise of conversion rights, such as the costs of converting
shares from street name to a physical certificate.
Prior to exercising conversion rights, AAAC stockholders should verify the
market price of AAAC'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
value.
APPRAISAL RIGHTS
Appraisal rights are available under the Delaware General Corporation Law for
the stockholders of AAAC in connection with the Redomestication proposal. The
procedure to exercise appraisal rights is described in detail elsewhere in this
proxy statement. For a more complete discussion of appraisal rights including
dissenters rights, see Annex H.
PROXIES
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Proxies may be solicited by mail, telephone, internet via email, or in person.
If you grant a proxy, you may still vote your shares in person if you revoke
your proxy, by notifying the Secretary of AAAC, David J. Brophy at or before the
special meeting.
STOCK OWNERSHIP
At the close of business on the record date, Asia Development Capital LLC and
other insiders beneficially owned and were entitled to vote approximately
1,349,000 shares of AAAC common stock, or approximately 21% of the then
outstanding shares of AAAC common stock, which includes all of the shares held
by the directors, executive officers of AAAC and their affiliates and other
insiders. These persons, who were stockholders of AAAC prior to its initial
public offering of securities, have agreed to vote their shares on the Equity
Acquisition and Redomestication proposals in accordance with the majority of the
votes cast by the holders of shares issued in AAAC's initial public offering.
AAAC'S BOARD OF DIRECTORS' RECOMMENDATION
After careful consideration, AAAC's board of directors has determined
unanimously that the Equity Acquisition proposal and the Redomestication
proposal, are fair to, and in the best interests of, AAAC and its stockholders.
AAAC's board has unanimously approved and declared advisable the Equity
Acquisition proposal, and the Redomestication proposal, and unanimously
recommends that you vote or instruct your vote to be cast "FOR" the adoption of
the Equity Acquisition proposal, and the Redomestication proposal. The board of
directors did not obtain a third party fairness opinion.
INTERESTS OF AAAC DIRECTORS AND OFFICERS IN THE EQUITY ACQUISITION PROPOSAL
When you consider the recommendation of AAAC's board of directors that you vote
in favor of adoption of the Equity Acquisition proposal, you should keep in mind
that a number of AAAC's executives and members of AAAC's board have interests in
the Equity Acquisition Agreement that are different from, or in addition to,
your interests as a stockholder. These interests include, among other things:
* If the Equity Acquisition is not approved and AAAC fails to consummate an
alternative transaction within the time allotted pursuant to its
Certificate of Incorporation, AAAC will be required to liquidate.
In such event, the shares of common stock held by AAAC's officers and
directors will be worthless because AAAC's officers, directors and initial
stockholders are not entitled to receive any liquidation proceeds. Additionally,
any warrants held by such persons will expire worthless in the event of
liquidation; and
* AAAC's executives and directors own a total 1,149,000 shares of AAAC common
asset that have a market value of $9,421,800 based on AAAC's share price of
$8.20 as of December 31, 2007. However, as AAAC's directors and executives
are contractually prohibited from selling their shares prior to April 19,
2008 (during which time the value of the shares may increase or decrease),
it is impossible to determine what the financial impact of the equity
acquisition will be on AAAC's directors and executives;
25
* AAAC's executives and directors own a total 290,000 warrants of AAAC that
have a market value of $812,000 based on AAAC's warrant price of $3.06
as of December 31, 2007. However, as AAAC's directors and executives are
contractually prohibited from selling their warrants prior to the
completion of the equity acquisition (during which time the value of the
warrants may increase or decrease), it is impossible to determine what the
financial impact of the Equity Acquisition will be on AAAC's directors and
executives;
After the completion of the Equity Acquisition, Mr. William R. Herren,
(Chairman), Mr. Rudy Wilson, and David Brophy will serve as members of the
board of directors of TI. Additionally, Messrs. Herren, and Wilson will serve
as Chief Executive Officer, and Chief Operating Officer of TI, respectively.
After completion of the business transaction, based upon the market price of
AAAC common stock and warrants as of December 31, 2007 ($8.20/share and
$2.80/warrant, respectively), Mr. Herren owns 448,000 shares of common stock and
90,400 warrants worth a total of $3.93 million, Mr. Wilson will own 448,000
shares of common stock and 90,400 warrants worth a total of $3.93 million, and
Mr. Brophy will own 60,000 shares worth $492,000.
CONDITIONS TO THE COMPLETION OF THE EQUITY ACQUISITION PROPOSAL
Each of AAAC's and the Hunan Tongxin Stockholders' obligation to effect the
Equity Acquisition proposal is subject to the satisfaction or waiver of
specified conditions, including the following:
CONDITIONS TO AAAC'S AND THE HUNAN TONGXIN STOCKHOLDERS' OBLIGATIONS
* Approval by AAAC's stockholders of the Equity Acquisition and
Redomestication proposals;
* The absence of any order or injunction preventing consummation of the
Equity Acquisition;
* The absence of any suit or proceeding by any governmental entity or any
other person challenging the Equity Acquisition or seeking to obtain from
the Hunan Tongxin Parties or AAAC any damages;
* At AAAC's stockholders' meeting, holders of less than 1,006,250 shares of
common stock issued in AAAC's initial public offering, vote against the
Equity Acquisition proposal and demand that AAAC convert their shares into
a pro rata portion of the trust account; and
* Certain key members of the management team of the Hunan Tongxin will have
entered into employment agreements in form and substance acceptable to
AAAC, providing, among other things, for a term of three years and
including intellectual property assignment and non-competition provisions
to be in effect for a period of three years following termination of
employment.
CONDITIONS TO AAAC'S OBLIGATIONS
* Hunan Tongxin Stockholders' representations and warranties that are
qualified as to materiality must be true and correct in all respects, and
those not qualified as to materiality must be true and correct in all
material respects, as of the date of closing of the Equity Acquisition,
except representations and warranties that address matters as of another
date, which must be true and correct as of that other date, and AAAC must
have received an officer's certificate from the Hunan Tongxin Stockholders
to that effect;
* Hunan Tongxin Stockholders must have performed in all material respects all
obligations required to be performed by them;
26
* TI will have acquired ownership or control of Hunan Tongxin
* Hunan Tongxin Stockholders must have received all required and
unconditional approvals or consents of Chinese governmental authorities,
and AAAC must have received written confirmation that such approvals and
consents have been received;
* AAAC must have received a written opinion, dated as of the closing date,
from King & Wood PC, counsel to Hunan Tongxin relating to, among other
things, the validity and enforceability of the Equity Acquisition
Agreement;
* There must not have occurred since the date of the Equity Acquisition
Agreement any Hunan Tongxin Material Adverse Effect, as defined in the
Equity Acquisition Agreement; and
* The Proxy Statement Information, as defined in the Equity Acquisition
Agreement, accurately describes Hunan Tongxin, and the business in which
they are engaged, and the Hunan Tongxin Stockholders, and the Proxy
Statement Information does not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements in the Proxy Statement information not misleading.
CONDITIONS TO THE HUNAN TONGXIN STOCKHOLDERS' OBLIGATION
* AAAC's representation and warranty regarding the compliance of the Equity
Acquisition Agreement and the agreements contemplated by the Equity
Acquisition Agreement with the applicable provisions in AAAC's Certificate
of Incorporation must be true and correct in all respects, as of the date
of completion of the Equity Acquisition;
* AAAC must have performed in all material respects all obligations required
to be performed by them under the Equity Acquisition Agreement; and
* there must not have occurred since the date of the Equity Acquisition
Agreement any AAAC Material Adverse Effect, as defined in the Equity
Acquisition Agreement.
NO SOLICITATION
The Equity Acquisition Agreement contains detailed provisions prohibiting each
of AAAC and the Hunan Tongxin Stockholders from seeking an alternative
transaction. These covenants generally prohibit AAAC and the Hunan Tongxin
Stockholders, as well as their officers, directors, subsidiaries, employees,
agents and representatives, from taking any action to solicit an alternative
acquisition proposal. The Equity Acquisition Agreement does not, however,
prohibit AAAC from considering an unsolicited bona fide written superior
proposal from a third party. The approval of the Equity Acquisition Agreement by
the Hunan Tongxin Stockholders has already been given, and approval of the
Changsha Ministry of Commerce has been obtained.
TERMINATION, AMENDMENT AND WAIVER
27
The Equity Acquisition Agreement may be terminated at any time prior to the
consummation of the Equity Acquisition, whether before or after receipt of the
AAAC stockholder vote as follows:
* By mutual written consent of AAAC and the Hunan Tongxin Stockholders;
* By either party if the other party amends a schedule and such amendment or
supplement reflects a material adverse change in the condition, operations
or prospects of its business;
* By either party if the closing has not occurred by February 6, 2008 (unless
such terminating party is in breach of any of its material covenants,
representations or warranties);
* By either party 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 ten business days of the notice of an intent to
terminate, provided that the terminating party is itself not in breach;
* By the Hunan Tongxin Stockholders, if the board of directors of AAAC (or
any committee thereof) shall have failed to recommend or withdraw or modify
in a manner adverse to Hunan Tongxin its approval or recommendation of the
Equity Acquisition Agreement and any of the transactions contemplated
thereby;
* By AAAC if its board of directors shall have determined in good faith,
based upon the advice of outside legal counsel, that failure to terminate
the Equity Acquisition Agreement is reasonably likely to result in the
board of directors breaching its fiduciary duties to stockholders by reason
of a pending, unsolicited, bona fide written proposal for a superior
transaction; or
* By either party if, at the AAAC stockholder meeting, the Equity Acquisition
Agreement and the Redomestication shall fail to be approved and adopted by
the affirmative vote of the holders of AAAC's common stock, or 20% or more
of the shares sold in AAAC's initial public offering request conversion of
their shares into the pro rata portion of the trust account in accordance
with the AAAC Certificate of Incorporation.
The Hunan Tongxin Stockholders have no right to damages from AAAC and no right
to any amount held in the trust account. The Hunan Tongxin Stockholders have
agreed not to make any claim against AAAC that would adversely affect the
business, operations or prospects of AAAC or the amount of the funds held in the
trust account.
QUOTATION OR LISTING
AAAC's outstanding common stock, warrants and units are quoted on the
Over-the-Counter Bulletin Board. AAAC intends to apply to have the AAAC common
stock, warrants and units quoted on the NASDAQ Global Market at the consummation
of the Equity Acquisition. The proposed NASDAQ Global Market symbols are TXIC,
TXICW and TXICU. for the common stock, warrants, and units, respectively.
Seeking the NASDAQ Global Market listing is an obligation of TI under the Equity
Acquisition Agreement. If NASDAQ listing is not achieved, management anticipates
that the common stock, warrants and units will trade on the OTCBB.
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GOVERNANCE AFTER THE ACQUISITION
As provided in the Equity Acquisition Agreement, the board of the combined
company will initially consist of nine members, four of whom are designated by
Hunan Tongxin and five of whom are designated by AAAC. Five of the nine
directors must satisfy the NASDAQ standards for director independence.
INDEMNIFICATION BY HUNAN TONGXIN STOCKHOLDERS
The Hunan Tongxin Stockholders have agreed to indemnify AAAC for breaches of
their representations, warranties and covenants.
COMPARISON OF STOCKHOLDERS RIGHTS
In connection with the consummation of the Equity Acquisition Agreement, AAAC
will form a wholly owned subsidiary under the laws of the British Virgin Islands
, under the name of Tongxin International. AAAC will, if the Equity Acquisition
Proposal and Redomestication proposal are approved, merge with TI, effectively
changing its jurisdiction of incorporation from Delaware to the BVI. AAAC's
common stock will be converted into common stock of Tongxin International. The
rights of AAAC stockholders will change accordingly. A comparison of the rights
of stockholders under Delaware and British Virgin Islands law is included
elsewhere in this proxy statement.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE EQUITY ACQUISITION
AAAC expects that the Redomestication will qualify as a reorganization merger
for United States federal income tax purposes. Accordingly, no gain or loss
should be recognized by AAAC stockholders as a result of their exchange of AAAC
common stock for the common stock of TI. Nevertheless, as a result of the
Redomestication, AAAC will be treated for United States federal income tax
purposes as if it sold all of its assets to TI. As a result, AAAC will recognize
gain (but not loss) as a result of the Redomestication equal to the difference,
if any, between the adjusted tax basis in AAAC's equity and such equity's fair
market value at the effective time of the Redomestication. AAAC will not,
however, recognize any gain or loss as a result of the acquisition of Hunan
Tongxin stock, pursuant to the Equity Acquisition Agreement.
ANTICIPATED ACCOUNTING TREATMENT
The acquisition will be accounted for using the purchase method of accounting
with AAAC treated as the acquirer. Under this method of accounting, Hunan
Tongxin's assets and liabilities will be recoded by AAAC at their respective
fair values as of the closing date of the acquisition (including any
identifiable intangible assets). Any excess of purchase price over the net fair
values of Hunan Tongxin's assets and liabilities will be recorded as goodwill.
Financial statements of AAAC after the acquisition will reflect these values.
The results of operations of Hunan Tongxin will be included in the results of
operations of AAAC beginning on the effective date of the acquisition.
29
REGULATORY MATTERS
The Equity Acquisition and the transactions contemplated by the Equity
Acquisition Agreement are not subject to any federal or state regulatory
requirement or approval, including the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, or HSR Act, except for filings necessary to effectuate the
transactions contemplated by the Equity Acquisition and Redomestication
proposals with the State of Delaware and the BVI.
BOARD SOLICITATION
Your proxy is being solicited by the board of directors of AAAC on each of the
two proposals being presented to the stockholders at the special meeting.
SELECTED HISTORICAL FINANCIAL DATA
We are providing the following financial information to assist you in your
analysis of the financial aspects of the Equity Acquisition. We derived Hunan
Tongxin historical information from the audited consolidated financial
statements of Hunan Tongxin as of and for each of the years ended December 31,
2004, 2005 and 2006. The selected historical financial data for the years ended
December 31, 2002 and December 31, 2003 and for the nine months ended September
30, 2007 is unaudited. We derived the AAAC historical information from the
audited financial statements for the year ended December 31, 2006. The selected
financial data information is only a summary and should be read in conjunction
with each company's historical consolidated financial statements and related
notes contained elsewhere herein. The historical results included below and
elsewhere in this proxy statement are not indicative of the future performance
of Hunan Tongxin, AAAC or the combined company resulting from the business
combination.
30
HUNAN TONGXIN HISTORICAL FINANCIAL DATA
$ THOUSANDS EXCEPT INCOME/SHARE NINE MONTHS
AND DIVIDENDS/SHARE YEAR ENDED DECEMBER 31 OF ENDED SEPTEMBER 30
- ------------------------------- -------------------------------------------------------------------------- OF 2007
STATEMENT OF INCOME DATA 2002 (UNAUDITED) 2003 (UNAUDITED) 2004 2005 2006 (UNAUDITED)
- ------------------------------- ---------------- ---------------- ---------- ---------- ---------- ------------------
Revenue (net) 25,603 42,741 46,296 58,578 66,205 62,922
Gross margin 22% 19% 17.65% 16.01% 27.89% 31.56%
Operating income 585 1,795 637 2,361 10,349 12,586
Net income (loss) (1) 180 60 (941) 752 5,719 7,521
Weighted average common shares 42,743,400 42,743,400 42,743,400 68,493,335 72,521,705 72,521,705
Income (loss) per share (1) 0.0042 0.0014 (0.0217) 0.0112 0.0788 0.1037
Cash dividends declared per share -- -- 0.0092 0.0257 0.1188 --
YEAR ENDED DECEMBER 31 OF NINE MONTHS
$ THOUSANDS --------------------------------------------------------- ENDED SEPTEMBER
- ------------------ 2002 2003 2004 30 OF 2007
BALANCE SHEET DATA (UNAUDITED) (UNAUDITED) (UNAUDITED) 2005 2006 (UNAUDITED)
- ------------------ ----------- ----------- ----------- ------ ------ ---------------
Total current assets 17,416 18,287 21,944 30,503 42,654 59,421
Total assets 28,660 30,093 36,112 50,198 65,455 90,524
Total current liabilities 19,680 20,663 24,796 34,444 48,191 63,114
Long-term liability -- -- -- 5 3,983 5,024
Stockholders' equity 8,980 9,430 11,316 15,749 13,319 22,386
(1) Hunan Tongxin had no discontinued operations, therefore net income (loss)
and net income (loss) per share has been provided in lieu of income (loss)
from continuing operations and income (loss) from continuing operations per
share.
31
AAAC HISTORICAL FINANCIAL INFORMATION
June 20, 2005
(date of inception FOR THE YEAR For the
to September 30, 2007 ENDED Nine Months Ended
(Unaudited) DECEMBER 31, 2006 September 30, 2007
--------------------- ----------------- ------------------
Revenue $ -- -- --
In Interest income on trust account $ 2,685,704 1,308,883 1,376,821
Net Income (loss) $(1,151,165) (3,569,613) 2,254,004
Net Income (Loss) per share $ (0.25) (0.73) 0.35
Dividends paid per share $ -- -- --
Total assets (including cash deposited in trust Account) $39,610,811 39,111,045 39,610,811
Common shares subject to possible conversion $ 7,828,825 7,649,928 7,828,825
Stockholders' equity $20,833,681 18,758,574 20,833,681
Notes:
(1) AAAC had no operations, therefore net income (loss) and net income (loss)
per share has been provided in lieu of income (loss) from continuing
operations and income (loss) from continuing operations per share.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The equity acquisition transaction will result in those shareholders in Hunan
Tongxin obtaining approximately 41% of the voting interests in TI. The
transaction has been accounted for as a purchase. The equity acquisition
transaction utilizes the capital structure of AAAC, and the assets and
liabilities of Hunan Tongxin recorded at fair market value.
AAAC will be deemed to be the acquiring company for accounting and financial
reporting purposes. The Company has determined that AAAC would be the accounting
acquirer under SFAS 141 paragraph 17(a) which states that "consideration should
be given to the existence of any unusual or special voting arrangements and
options, warrants or convertible securities". Immediately prior to the
acquisition the Company will have 6,380,250 shares outstanding and 5,031,250
warrants outstanding (not including the Representative's Unit Purchase Option
for 350,000 shares and 350,000 warrants). On a fully diluted basis the Company
would control 12,111,500 shares prior to the acquisition. The proposed
acquisition includes 4,500,000 shares to be issued to Hunan Tangxin management,
which would indicate that directly after the acquisition the shareholders of
AAAC would retain approximately 72.9% of the combined entity on a fully diluted
basis (58.6% on a non diluted basis).
The Company has also determined that the 4,500,000 shares issued to the
management of Hunan Tongxin would be treated as part of the acquisition under
SFAS 141 paragraph 26 where it states that "Cash and other assets distributed,
securities issued unconditionally, and amount of contingent consideration that
are determinable at the date of acquisition shall be included in the
determining the cost of an acquired entity and recorded at that date." The
Company has also determined the 2,000,000 contingent shares in the Performance
Earn Out Agreement (earnings contingency) will be recorded when the contingency
is resolved and recorded at fair value of the consideration issued as an
additional cost of the acquired entity (outlined in SFAS 141 paragraph 28).
We have presented below selected unaudited pro forma combined financial
information that reflects the result of the Equity Acquisition transaction and
is intended to provide you with a better picture of what
32
our businesses might have looked like had they actually been combined. The
combined financial information may have been different had the companies
actually been combined. The selected unaudited pro forma combined financial
information does not reflect the effect of asset dispositions, if any, or cost
savings that may result from the Equity Acquisition. You should not rely on the
selected unaudited pro forma combined financial information as being indicative
of the historical results that would have occurred had the companies been
combined or the future results that may be achieved after the Equity
Acquisition. The following selected unaudited pro forma combined financial
information has been derived from, and should be read in conjunction with, the
unaudited pro forma condensed combined financial statements and related notes
thereto included elsewhere in this proxy statement.
Year Ended Nine Months Ended
December 31, 2006 September 30, 2007
----------------------- ----------------------
Maximum Minimum Maximum Minimum
($Thousands) Approval Approval Approval Approval
- ------------ -------- -------- -------- --------
Revenue 66,205 66,205 66,922 62,922
Net income (5,928) (6,030) 8,833 8,623
Net income per share-basic .5449 .6107 .8118 .8733
Net income per share-diluted .5449 .6107 .7004 .7431
Cash dividends declared per share .1190 .1190 -- --
September 30, 2007
----------------------
Maximum Minimum
Approval Approval
-------- --------
Total Assets 142,626 134,638
Long-term debt excluding current portion 5,024 5,024
Stockholders Equity 64,106 56,518
COMPARATIVE PER SHARE INFORMATION
The following table sets forth selected historical per share information of
Hunan Tongxin and AAAC and unaudited pro forma combined per share ownership
information of Hunan Tongxin and AAAC after giving effect to the Equity
Acquisition Proposal of Hunan Tongxin, assuming a maximum level and a minimum
level of approval of the Equity Acquisition by AAAC stockholders who exercise
their conversion and/or appraisal right.
You should read this information in conjunction with the selected historical
financial information, included elsewhere in this proxy statement, and the
historical financial statements of Hunan Tongxin and AAAC and related notes that
are included elsewhere in this proxy statement. The unaudited Hunan Tongxin and
AAAC pro forma combined per share information is derived from, and should be
read in conjunction with, the Unaudited Pro Forma Combined Financial Information
and related notes included elsewhere in this proxy statement. The historical per
share information of Hunan Tongxin was derived from its audited financial
statements as of and for the years ended December 31, 2004, 2005 and 2006, and
the nine months ended September 30, 2007
The unaudited pro forma combined per share information does not purport to
represent what the actual results of operations of Hunan Tongxin and AAAC would
have been had the companies been combined or to project the Hunan Tongxin and
AAAC results of operations that may be achieved after the equity acquisition.
34
HUNAN COMBINED
AAAC TONGXIN COMPANY
(1) (2) (2)
---------- ----------- ----------
Assuming maximum approval 100% 100% 100%
Weighted Average Shares Outstanding 6,380,250 72,521,705 6,380,250
Shares to be issued to Hunan Tongxin Management 4,500,000 4,500,000 4,500,000
Total assuming maximum approval (2) 10,880,250 -- 10,880,250
Assuming minimum approval (2) 80.01% 80.01% 80.01%
Weighted average shares outstanding 5,374,504 72,521,705 5,374,504
Shares to be issued to Hunan Tongxin Management 4,500,000 4,500,000 4,500,000
Total assuming minimum approval (2) 9,874,504 8,525,000 9,874,504
Net income (loss) per share - historical on weighted average basis
35
Year ended December 31, 2004: $ $ (0.0217)
Year ended December 31, 2005: $ $ 0.0112
Year ended December 31 2006: $ (0.7283) $ 0.0786 $ 0.2724
Nine Months Ended September 30, 2007 $ 0.3533 $ 0.1037 $ 0.7821
Net income per share - pro forma on weighted average
basis - diluted
Twelve Months ended December, 31, 2006
Under maximum approval assumption $ (0.7283) $ 0.0786 $ (0.5449)
Under minimum approval assumption $ (0.7283) $ 0.0786 $ .5449
Nine Months Ended September 30, 2007
under maximum approval $ 0.3533 $ 0.1037 $ .8118
under minimum approval $ 0.2779 $ 0.1037 $ .7004
Cash dividends declared per share:
Year ended December 31, 2006 $ -- $ 0.119 $ 0.119
Nine Months Ended September 30, 2007 -- -- --
Book value per share - December 31, 2006 (3) $ 2.939 $ 0.1837 $ --
Book value per share - September 30, 2007 (3) $ 3.273 $ 0.3090 $ 10.110
Notes:
(1) Operations of AAAC are for the period from June 20, 2005 (inception) to
December 31, 2006 and September 30, 2007.
(2) Historical per share amounts for AAAC were determined based upon the actual
weighted average shares outstanding at December 31, 2006 and combined pro
forma per share amounts for AAAC and Hunan Tongxin were determined based
upon the assumed number of shares to be outstanding under the two different
levels of approval.
(3) Calculated based on the minimum approval to record refund of funds
($7,828,825 plus $348,967 for related interest) to converting stockholders.
MARKET PRICE INFORMATION
AAAC's common stock, warrants and units are each quoted on the Over-the-Counter
Bulletin Board under the symbols AAAC, AAACW and AAACU, respectively. AAAC's
units commenced public trading on April 19, 2006 and its common stock and
warrants commenced public trading on June 12, 2006. The closing price for each
share of common stock, warrant and unit of AAAC on July 24, 2007, the last
trading day before announcement of the execution of the Equity Acquisition
Agreement was $7.95, $2.80 and $11.15, respectively.
In connection with the Equity Acquisition, AAAC intends to apply for the
quotation of the combined company's common stock, warrants and units on the
NASDAQ Global Market. The proposed symbols are TXIC, TXICW and TXICU for TI's
common stock, warrants and units, respectively. Management anticipates that, if
NASDAQ Global approves this listing, it will be concurrent with the consummation
of the Redomestication. If the listing on NASDAQ Global is not finally approved,
management expects that the common stock, warrants and units will trade on the
OTCBB. Currently there is no trading market for any securities of Hunan Tongxin,
and there can be no assurance that a trading market will develop. There are 53
holders of Hunan Tongxin's class of common stock as of September 30, 2007.
Dividends were declared and paid by Hunan Tongxin in the aggregate amounts of
approximately $400,000, $1.8 million and $8.6 million in fiscal years 2004, 2005
and 2006, respectively.
36
The table below sets forth, for the calendar quarters indicated, the high and
low bid prices of the AAAC common stock, warrants and units as reported on the
Over-the-Counter Bulletin Board. The over-the-counter market quotations reported
below reflect inter-dealer prices, without markup, markdown or commissions and
may not represent actual transactions.
Over-the-Counter Bulletin Board
AAAC AAAC AAAC
Common Stock Warrants Units
------------- ------------- --------------
High Low High Low High Low
----- ----- ----- ----- ------ -----
2006 Second Quarter $8.65 $7.00 $1.50 $1.35 $10.16 $8.35
2006 Third Quarter $7.17 $7.00 $2.05 $1.56 $ 9.22 $8.56
2006 Fourth Quarter $8.08 $7.21 $2.14 $1.35 $10.22 $8.56
2007 First Quarter $8.40 $7.50 $2.16 $1.82 $10.56 $9.32
2007 Second Quarter $7.74 $7.42 $2.40 $1.97 $ 9.96 $9.38
2007 Third Quarter $8.15 $7.40 $2.95 $1.76 $10.70 $9.15
2007 Fourth Quarter $8.65 $7.64 $3.30 $1.90 $11.68 $9.42
HOLDERS
As of December 13, 2007, there were 115 holders of record of the units, 150
holders of record of the common stock and 124 holders of record of the warrants.
AAAC believes that the beneficial holders of the units, common stock and
warrants to be in excess of 314 persons each. It is anticipated that the number
of holders of TI common stock after the Redomestication will be the same as the
number of holders of AAAC common stock.
DIVIDENDS
Although Hunan Tongxin has paid dividends on its common stock, AAAC has not paid
any dividends on its common stock to date and does not intend to pay dividends
prior to the completion of a business combination.
37
The payment of dividends by TI in the future will be contingent upon revenues
and earnings, if any, capital requirements and general financial condition of TI
subsequent to completion of a business combination. The payment of any dividends
subsequent to a business combination will be within the discretion of the then
board of directors. It is the present intention of the board of directors to
retain all earnings, if any, for use in the business operations and,
accordingly, the board does not anticipate declaring any dividends in the
foreseeable future.
RISK FACTORS
You should carefully consider the following risk factors, together with all of
the other information included in this proxy statement, before you decide
whether to vote or instruct your vote to be cast to adopt the Equity Acquisition
and the Redomestication Proposals. The company has described all material risks
that are currently known and reasonably foreseeable.
If we complete the Equity Acquisition of Hunan Tongxin, TI will be subject to a
number of risks. You should carefully consider the risks we describe below and
the other information included in this proxy statement before you decide how you
want to vote on the Equity Acquisition Proposal. Following the closing of the
Equity Acquisition, the market price of our common stock could decline due to
any of these risks, in which case you could lose all or part of your investment.
In assessing these risks, you should also refer to the other information
included in this proxy statement, including our consolidated financial
statements and the accompanying notes. You should pay particular attention to
the fact that we would become a BVI company with substantial operations in the
People's Republic of China ("PRC"). As a result, we would be subject to legal
and regulatory environments that differ in many respects from those of the
United States. Our business financial condition or results of operations could
be affected materially and adversely by any of the risks discussed below. . This
discussion contains forward-looking statements.
RISKS RELATED TO THE BUSINESS OF HUNAN TONGXIN
A DECREASE IN THE RATE OF GROWTH IN THE CHINESE AUTOMOTIVE INDUSTRY AND THE
CHINESE ECONOMY IN GENERAL MAY ADVERSELY AFFECT THE OPERATING RESULTS OF HUNAN
TONGXIN
Automotive Original Equipment Manufacturers ("OEMs") operating in China are the
sole current source of revenues for Hunan Tongxin. Its business has benefited in
the past from the rapid expansion of China's automotive industry, which has
created additional demand from existing companies and led to the formation of
additional companies that have need for Hunan Tongxin's products and services.
The Chinese economy may not be able to sustain this rate of growth in the future
and any reduction in the rate of China's automotive growth could adversely
affect its revenues.
HUNAN TONGXIN DOES NOT HAVE LONG-TERM PURCHASE COMMITMENTS FROM ITS CUSTOMERS.
Hunan Tongxin is engaged in the design, manufacturing, sales and aftermarket
services of EVBS and related components. As a result, its revenues result from
over 130 individual OEMs contracts that are renewed yearly. Furthermore, OEMs
may change or delay or terminate orders for EVBS without notice
38
for any number of reasons unrelated to it, including lack of market acceptance
for the OEMs' vehicles. As a result, in order to maintain and expand its
business, Hunan Tongxin must be able to replenish the orders in its pipeline on
a yearly basis. It is possible that some of its potential customers could choose
the products of its competitors. Should they do so, it would suffer a decline in
the rate of increase of growth of revenues and profitability.
HUNAN TONGXIN FACES COMPETITION FROM BOTH DOMESTIC COMPETITORS AND FROM IN-HOUSE
OPERATIONS OF SEVERAL LARGE CUSTOMERS
Hunan Tongxin operates in a competitive environment. It competes with two
domestic independent suppliers in addition to the in-house operations of several
large customers. These in-house operations are capable of matching the products
and services of HunanTongxin and have substantially greater financial resources
to compete effectively with Hunan Tongxin by, for example, reducing their
prices, which could force it to reduce its prices.
IF HUNAN TONGXIN IS NOT ABLE TO DEVELOP NEW PRODUCTS, ITS SALES WILL SUFFER.
Hunan Tongxin success depends, in significant part, on its ability to develop
products that customers will accept. It may not be able to develop successful
new products in a timely fashion. Its commitment to customizing products to
address particular needs of its customers could burden its resources or delay
the delivery of its products.
HUNAN TONGXIN'S PLAN TO ENTER OTHER INTERNATIONAL MARKETS MAY NOT PROVE
SUCCESSFUL.
To date Hunan Tongxin has conducted nearly all of its business within China with
limited exports to South East Asia including Vietnam. However, it has plans to
enter other international markets in the near future. While the manner in which
it plans to do so will likely not involve large amounts of capital and
resources, it will require meaningful amounts of management time and attention.
Hunan Tongxin's products and its overall approach to EVBS may not be accepted in
other markets to the extent needed to make that effort profitable. Also, the
additional demands on its management from these activities may detract from
their efforts in the domestic Chinese market, causing the operating results in
its principal market to be adversely affected.
Hunan Tongxin will also face international competitors who are much better
established and more experienced than it, have substantially greater financial
resources, operate in many international markets and are much more diversified
than Hunan Tongxin. As a result, they are in a strong position to compete
effectively with it by, for example, reducing their prices, which could force
Hunan Tongxin to reduce its prices. These large competitors are also in a better
position than Hunan Tongxin is to weather any extended weaknesses in the
international markets for their products.
WE MAY NOT BE ABLE TO SECURE FINANCING FOR FUTURE OPERATING NEEDS ON ACCEPTABLE
TERMS, OR ON ANY TERMS AT ALL.
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From time to time, we may seek additional equity or debt financing, within the
PRC or outside the PRC, to provide the capital required to maintain or expand
Hunan Tongxin's design and production facilities and equipment and/or working
capital, if its cash flow from operations is insufficient to do so. We cannot
predict with certainty the timing or amount of any such capital requirements. If
such financing is not available with satisfactory terms, we may be unable to
expand Hunan Tongxin's business or to develop new business at the rate desired,
and its operating results may suffer.
FAILURE TO MANAGE TI'S GROWTH EFFECTIVELY COULD ADVERSELY AFFECT ITS OPERATIONS.
Hunan Tongxin has increased the number of its manufacturing and product programs
and intends to expand further the number and diversity of its programs. It may
also increase the number of its manufacturing locations. Its ability to manage
its planned growth effectively will require it to:
* enhance its quality, operational, financial and management systems;
* expand its facilities and equipment; and
* successfully hire, train and motivate additional employees, including
technical personnel necessary to operate its die design and fabrication
facility.
An expansion of its product range, manufacturing and sales, will result in
increases in its overhead and selling expenses. It may also be required to
increase staffing and other expenses as well as its expenditures on plant,
equipment and property in order to meet the anticipated demand of its customers.
Customers, however, generally do not commit to firm production schedules for
more than a short time in advance. Any increase in expenditures in anticipation
of future orders that do not materialize would adversely affect its
profitability. Customers also may require rapid increases in design and
production services that would place an excessive short-term burden on its
resources and could reduce its profitability.
HUNAN TONGXIN MAY NOT BE ABLE TO RETAIN, RECRUIT AND TRAIN ADEQUATE DIE DESIGN
AND FABRICATION TECHNICAL PERSONNEL.
Hunan Tongxin's continued operations are dependent upon its ability to identify
and recruit adequate technical personnel for die design and fabrication. It
requires trained personnel of varying levels and experience and a flexible work
force of semi-skilled operators. With the current rate of economic growth in
China, competition for qualified personnel will be substantial. The favorable
employment climate may not continue and the wage rates it must offer to attract
qualified technical personnel may not enable it to remain competitive.
RISKS RELATED TO INTERNATIONAL OPERATIONS
IF THE PRC DOES NOT CONTINUE ITS POLICY OF ECONOMIC REFORMS, IT COULD, AMONG
OTHER THINGS, RESULT IN AN INCREASE IN TARIFFS AND TRADE RESTRICTIONS ON
PRODUCTS TI PRODUCES OR SELLS.
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The PRC government has been reforming its economic system since the late 1970s.
The economy of the PRC has historically been a nationalistic, "planned economy,"
meaning it has functioned and produced according to governmental plans and
pre-set targets or quotas.
However, in recent years, the PRC government has implemented measures
emphasizing the utilization of market forces for economic reform and the
reduction of state ownership in business enterprises. Hunan Tongxin's business
has benefited greatly from that new outlook. Although we believe that the
changes adopted by the PRC government have had a positive effect on the economic
development of the PRC, additional changes still need to be made. For example, a
substantial portion of productive assets in the PRC are still owned by
government entities. Additionally, the government continues to play a
significant role in regulating automotive development. We cannot predict the
timing or extent of any future economic reforms that may be proposed.
A positive economic change has been the PRC's entry into the World Trade
Organization, the global international organization dealing with the rules of
trade between nations. Many observers believe that the PRC's entry will
ultimately result in a reduction of tariffs for automotive products, a reduction
in trade restrictions and an increase in international trade with China.
However, the PRC has not yet fully complied with all of obligations that it must
meet prior to being admitted as a full member of the World Trade Organization
(WTO), including fully opening its markets to goods from other countries,
currency exchange requirements and other measures designed to ease the current
trade imbalance that China has with many of its trading partners. If the
scheduled actions to rectify these problems are not completed, trade relations
between China and some of its trading partners may be strained. While the
majority of its business currently is conducted solely within China, this may
have a negative impact on China's economy generally, which would adversely
affect its business. It could also reduce or eliminate any benefits that it
hopes to achieve by expanding TI's business internationally.
THE CHINESE GOVERNMENT COULD CHANGE ITS POLICIES TOWARD, OR EVEN NATIONALIZE
PRIVATE ENTERPRISE, WHICH COULD HARM TI'S OPERATIONS.
Over the past several years, the Chinese government has pursued economic reform
policies, including the encouragement of private economic activities and
decentralization of economic regulation. The Chinese government may not continue
to pursue these policies or may significantly alter them to Hunan Tongxin's
detriment from time to time without notice. Changes in policies by the Chinese
government that result in a change of laws, regulations, their interpretation,
or the imposition of high levels of taxation, restrictions on currency
conversion or imports and sources of supply could materially and adversely
affect its business and operating results. The nationalization or other
expropriation of private enterprises by the Chinese government could result in
the total loss of its investment in China.
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BECAUSE OUR OPERATIONS WILL BE INTERNATIONAL, WE WILL BE SUBJECT TO
SIGNIFICANT WORLDWIDE POLITICAL, ECONOMIC, LEGAL AND OTER UNCERTAINTIES.
Upon consummation of the proposed transactions, we will be incorporated in the
BVI and will have our principal operations in China. Because Hunan Tongxin
manufactures all of its products in China, substantially all of the net book
value of our total consolidated fixed assets will be located there. While until
now nearly all of Hunan Tongxin's sales have been within China, it is expanding
its efforts to sell them internationally as well. As a result, it expects to
have receivables from and goods in transit outside of China in the near future.
Protectionist trade legislation in the United States or other countries, such as
a change in export or import legislation, tariff or duty structures, or other
trade policies, could adversely affect its ability to sell products in these
markets.
Hunan Tongxin is also subject to numerous national, state and local governmental
regulations, including environmental, labor, waste management, health and safety
matters and product specifications. It is subject to laws and regulations
governing its relationship with its employees, including: wage and hour
requirements, working and safety conditions, citizenship requirements, work
permits and travel restrictions. These include local labor laws and regulations,
which may require substantial resources for compliance. It is subject to
significant government regulation with regard to property ownership and use in
connection with its leased facilities in China, import restrictions, currency
restrictions and restrictions on the volume of domestic sales and other areas of
regulation, all of which impact its profits and operating results.
BECAUSE TI PLANS TO INCREASE THE AMOUNT OF INTERNATIONAL BUSINESS IT CONDUCTS
AND MAY USE CURRENCIES OTHER THAN THE RENMINBI, TI MAY EXPERIENCE A DECREASE IN
EARNINGS BECAUSE OF THE FLUCTUATION OF THE RENMINBI AGAINST OTHER CURRENCIES.
The value of the Renminbi, the main currency used in the PRC, 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
dollar has been generally based on rates set by the People's
42
Bank of China, which are set daily based on the previous day's interbank
foreign exchange market rates and currency exchange rates on the world financial
markets. While the official exchange rate had remained stable over the past
several years, the PRC recently adopted a floating rate with respect to the
Renminbi, with permitted ranges of fluctuation. Since Hunan Tongxin is planning
to increase the amount of business that it conducts internationally, and may use
currencies other than the Renminbi, any fluctuation in the value of the Renminbi
could have various adverse effects on TI's business.
CHANGES IN FOREIGN EXCHANGE REGULATIONS IN THE PRC MAY AFFECT HUNAN TONGXIN'S
ABILITY TO PAY DIVIDENDS IN FOREIGN CURRENCY OR CONDUCT OTHER FOREIGN EXCHANGE
BUSINESS.
Renminbi, or RMB, is not presently a freely convertible currency, and the
restrictions on currency exchanges may limit our ability to use revenues
generated in RMB to fund our business activities outside the PRC or to make
dividends or other payments in United States dollars. The PRC government,
through the State Administration for Foreign Exchange ("SAFE"), regulates
conversion of RMB into foreign currencies. Currently, Foreign Invested
Enterprises ("FIE") are required to apply for "Foreign Exchange Registration
Certificates" and to renew those certificates annually. A FIE is any one of a
number of legal structures under which a company can participate in the Chinese
economy. These entities tend to have tight government regulation at nearly every
important business juncture, which limits the efficiency at which any foreign
company can profit from foreign ventures as well as the amount of control that a
foreign parent has over the FIE. However, even with that certification,
conversion of currency in the "capital account" (e.g. for capital items such as
direct investments or loans) still requires the approval of SAFE. There is no
assurance that SAFE approval will be obtained, and if it is not, it could impede
its business activities.
AAAC'S BOARD APPROVED THE TRANSACTION WITHOUT OBTAINING A FAIRNESS OPINION.
Based upon the directors' experience in performing due diligence of acquisition
targets and in valuing companies, AAAC did not obtain a fairness opinion with
respect to the Equity Acquisition transaction. If the AAAC Board erred in
concluding that the Equity Acquisition Agreement is in the best interest of the
AAAC stockholders, then the AAAC stockholders could suffer adverse consequences
as a result of the consummation of the transaction. In the event of litigation
over the Board's exercise of its fiduciary duties, AAAC may be required to
indemnify its directors. At a minimum, any litigation would divert management's
time and attention from completing the transactions described herein, and would
likely also involve the expenditure of substantial amounts for legal fees.
WE ARE SUBJECT TO VARIOUS TAX REGIMES.
Upon consummation of the Equity Acquisition transaction, we will have
subsidiaries and/or operations in the PRC, and the BVI. As a result, we will be
subject to the tax regimes of these countries. Any change in tax laws and
regulations or the interpretation or application thereof, either internally in
one of those jurisdictions or as between those jurisdictions, may adversely
affect our profitability and tax liabilities.
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BECAUSE CHINESE LAW WILL GOVERN ALMOST ALL OF TI'S MATERIAL AGREEMENTS, WE MAY
NOT BE ABLE TO ENFORCE OUR LEGAL RIGHTS WITHIN THE PRC.
Chinese law will govern all of our material agreements with respect to Hunan
Tongxin after the equity acquisition. Our PRC subsidiary may not be able to
enforce their material agreements, and remedies may not be available outside of
the PRC. The system of laws and the enforcement of existing laws 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 our future agreements could result in a significant loss of business,
business opportunities or capital.
IT WILL BE EXTREMELY DIFFICULT TO ACQUIRE JURISDICTION AND ENFORCE LIABILITIES
AGAINST OUR OFFICERS, DIRECTORS AND ASSETS BASED IN THE PRC.
Because all of our officers of Hunan Tongxin will reside outside the United
States, as well as some of our directors, it may be difficult, if not
impossible, to acquire jurisdiction over these persons in the event a lawsuit is
initiated against us and/or our officers and directors by a shareholder or group
of shareholders in the United States. Also, because our executive officers of
Hunan Tongxin will likely be residing in the PRC at the time such a suit is
initiated, achieving service of process against such persons would be extremely
difficult. Furthermore, because the majority of our assets are located in the
PRC it would also be extremely difficult to access those assets to satisfy an
award entered against us in United States court. Moreover, we have been advised
that the PRC does not have treaties with the United States providing for the
reciprocal recognition and enforcement of judgments of courts.
WE MAY HAVE DIFFICULTY ESTABLISHING ADEQUATE FINANCIAL CONTROLS IN THE PRC.
Most PRC companies historically have been less focused on establishing Western
style financial reporting concepts and practices, as well as in modern banking,
and other internal control systems. We may have difficulty in hiring and
retaining a sufficient number of qualified internal control employees to work in
the PRC. As a result of these factors, we may experience difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet USGAAP standards.
RISKS RELATED TO THE OWNERSHIP OF OUR STOCK
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THE MARKET PRICE OF OUR SHARES IS SUBJECT TO PRICE AND VOLUME FLUCTUATIONS.
The markets for equity securities have been volatile. The price of our common
shares may be subject to wide fluctuations in response to variations in
operating results, news announcements, trading volume, general market trends
both domestically and internationally, currency movements and interest rate
fluctuations or sales of common shares by our officers, directors and our
principal shareholders, customers, suppliers or other publicly traded companies.
Certain events, such as the issuance of common shares upon the exercise of our
outstanding warrants, could also materially and adversely affect the prevailing
market price of our common shares. Further, the stock markets in general have
recently experienced price and volume fluctuations that have affected the market
prices of equity securities of many companies and that have been unrelated or
disproportionate to the operating performance of such companies. These
fluctuations may materially and adversely affect the market price of our common
shares and the ability to resell shares at or above the price paid, or at any
price.
FOLLOWING THE EQUITY ACQUISITION, A LIMITED NUMBER OF STOCKHOLDERS WILL
COLLECTIVELY OWN APPROXIMATELY 41% OF OUR COMMON STOCK AND MAY ACT, OR PREVENT
CERTAIN TYPES OF CORPORATE ACTIONS, TO THE DETRIMENT OF OTHER STOCKHOLDERS.
Immediately after the consummation of the equity acquisition transaction, the
former holders of Hunan Tongxin will own approximately 41% of our outstanding
common stock. Accordingly, these stockholders (some of whom serve as, or are
affiliated with, our directors and officers) may, if they act together, exercise
significant influence over all matters requiring stockholder approval, including
the election of a majority of the directors and the determination of significant
corporate actions. This concentration could also have the effect of delaying or
preventing a change in control that could otherwise be beneficial to our
stockholders.
IN THE REDOMESTICATION TRANSACTION, WE WILL BECOME A BVI COMPANY AND, BECAUSE
THE RIGHTS OF SHAREHOLDERS UNDER BVI LAW DIFFER FROM THOSE UNDER UNITED STATES
LAW, YOU MAY HAVE FEWER PROTECTIONS AS A SHAREHOLDER.
Following the Redomestication, our corporate affairs will be governed by our
Memorandum and Articles of Association, the Business Companies Act of the BVI
and the common law of the BVI. The rights of shareholders to take action against
the directors, actions by minority shareholders and the fiduciary responsibility
of the directors under BVI law are to a large extent governed by the common law
of the BVI. The common law of the BVI is derived in part from comparatively
limited judicial precedent in the BVI as well as from British common law, which
has persuasive, but not binding, authority on a court in the BVI. The rights of
our shareholders and the fiduciary responsibilities of our directors under BVI
law are not as clearly established as they would be under statutes or judicial
precedent in some jurisdictions in the United States. In particular, the BVI has
a less developed body of securities laws as compared to the United States, and
some states (such as Delaware) have more fully developed and judicially
interpreted bodies of corporate law.
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BVI COMPANIES MAY NOT BE ABLE TO INITIATE SHAREHOLDER DERIVATIVE ACTIONS,
THEREBY DEPRIVING SHAREHOLDERS OF THE ABILITY TO PROTECT THEIR INTERESTS.
Shareholders of BVI companies may not have standing to initiate a shareholder
derivative action in a federal court of the United States. The circumstances in
which any such action may be brought, and the procedures and defenses that may
be available in respect to any such action, may result in the rights of
shareholders of a BVI company being more limited than those of shareholders of a
company organized in the United States. Accordingly, shareholders may have fewer
alternatives available to them if they believe that corporate wrongdoing has
occurred. The BVI courts are also unlikely to recognize or enforce against us
judgments of courts in the United States based on certain liability provisions
of United States securities law; and to impose liabilities against us, in
original actions brought in the BVI, based on certain liability provisions of
United States securities laws that are penal in nature. There is no statutory
recognition in the BVI of judgments obtained in the United States, although the
courts of the BVI will generally recognize and enforce the non-penal judgment of
a foreign court of competent jurisdiction without retrial on the merits. This
means that even if shareholders were to sue us successfully, they may not be
able to recover anything to make up for the losses suffered.
BEING A FOREIGN PRIVATE ISSUER EXEMPTS US FROM CERTAIN SECURITIES AND EXCHANGE
COMMISSION REQUIREMENTS THAT PROVIDE STOCKHOLDERS THE PROTECTION OF INFORMATION
THAT MUST BE MADE AVAILABLE TO STOCKHOLDERS OF UNITED STATES PUBLIC COMPANIES.
Upon consummation of the redomestication merger we will be a foreign private
issuer within the meaning of the rules promulgated under the Securities Exchange
Act of 1934. As such, we will be exempt from certain provisions applicable to
United States public companies including:
- - The rules requiring the filing with the SEC of quarterly reports on Form
10-Q or current reports on Form 8-K;
- - The sections of the Securities Exchange Act regulating the solicitation of
proxies, consents or authorizations with respect to a security registered
under the Securities Exchange Act;
- - Provisions of Regulation FD aimed at preventing issuers from making
selective disclosures of material information; and
- - The sections of the Securities Exchange Act requiring insiders to file
public reports of their stock ownership and trading activities and
establishing insider liability for profits realized from any "short swing"
trading transactions (i.e., a purchase and sale, or a sale and purchase, of
the issuer's equity securities within less than six months).
Because of these exemptions, our stockholders will not be afforded the same
protections or information generally available to investors holding shares in
public companies organized in the United States.
COMPENSATION ARRANGEMENTS RELATING TO TONGXIN INTERNATIONAL OFFICERS ARE UNKNOWN
Shareholders will not know the scope and cost of compensation agreements
relating to Tongxin International employment of William Herren or Rudy Wilson,
at the time shareholders vote on this transaction. The costs of
such arrangements are not included in this proxy statement/prospectus.
THERE MAY NOT BE AN ACTIVE, LIQUID TRADING MARKET FOR OUR COMMON STOCK,
46
AND THE TRADING PRICE FOR OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY.
Our common stock is currently traded on the Over the Counter Bulletin Board, and
we intend to file an application for listing on The NASDAQ Global Market. Our
listing application may not be accepted. If we do not succeed in securing a
listing on the NASDAQ Global Market, it could limit the ability to trade our
common stock and result in a reduction of the price that can be obtained for
shares being sold.
Compliance with all of the applicable provisions of the Sarbanes-Oxley Act will
likely be a further condition of continued listing or trading. There is no
assurance that if we are granted a listing on the NASDAQ Global Market we will
always be able to meet the NASDAQ Global Market listing requirements, or that
there will be an active, liquid trading market for our common stock in the
future. Failure to meet the NASDAQ Global Market listing requirements could
result in the delisting of our common stock from the NASDAQ Global Market,
which may adversely affect the liquidity of our shares, the price that can be
obtained for them, or both.
WE MAY NOT PAY CASH DIVIDENDS.
Although Hunan Tongxin has paid dividends on its common stock AAAC has never
paid any cash dividends on our common stock. TI expects to apply earnings toward
the further expansion and development of its business. Thus, the liquidity of
your investment is dependent upon your ability to sell stock at an acceptable
price, rather than receiving an income stream from it. The price of our stock
can go down as well as up, and fluctuations in market price may limit your
ability to realize any value from your investment, including recovering the
initial purchase price.
CONSIDERATION OF RISK FACTORS
Before you grant your proxy or instruct how your vote should be cast or vote on
the adoption of the Equity Acquisition Agreement you should be aware that the
occurrence of the events described in the "Risk Factors" section and elsewhere
in this proxy statement could have a material adverse effect on AAAC, Hunan
Tongxin, or the combined company.
THE AAAC SPECIAL MEETING
AAAC SPECIAL MEETING
We are furnishing this proxy statement to you as part of the solicitation of
proxies by the AAAC board of directors for use at the special meeting in
connection with the proposed Equity Acquisition, Redomestication. This document
provides you with the 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
We will hold the special meeting at 9AM on January 24, 2008 at 199 Pierce
Street, Suite 202 Birmingham, Michigan, 48009, to vote on the proposals to
approve the Equity Acquisition Agreement, and the Redomestication.
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PURPOSE OF THE SPECIAL MEETING
* At the special meeting, we are asking holders of AAAC common stock to:
* Approve the Equity Acquisition Proposal; and
* Approve the Redomestication proposal.
THE AAAC BOARD OF DIRECTORS:
* Has unanimously determined that the Equity Acquisition Proposal, and the
Redomestication proposal are fair to and in the best interests of AAAC and
its stockholders;
* Has unanimously approved the Equity Acquisition Proposal, and the
Redomestication Proposal;
* Unanimously recommends that AAAC common stockholders vote "FOR" the
proposals to adopt the Equity Acquisition Agreement; and
* Unanimously recommends that AAAC common stockholders vote "FOR" the
proposal to redomesticate in the BVI.
RECORD DATE; WHO IS ENTITLED TO VOTE
The "record date" for the special meeting is December 13, 2007. Record holders
of AAAC common stock at the close of business on the record date are entitled to
vote or have their votes cast at the special meeting. On the record date, there
were 5,031,250 outstanding shares of AAAC common stock., excluding 1,349,000
shares of common stock held by its officer, directors and other insiders. Each
share of AAAC common stock is entitled to one vote per share at the special
meeting.
Pursuant to agreements with AAAC, any shares of AAAC common stock held by
stockholders who purchased their shares of common stock prior to the initial
public offering (except for shares those holders may have purchased in the
public market) will be voted in accordance with the majority of the votes cast
at the special meeting on the Equity Acquisition and Redomestication proposals.
AAAC's outstanding warrants do not have any voting rights, and record holders of
AAAC warrants will not be entitled to vote at the special meeting.
VOTING YOUR SHARES
Each share of AAAC common stock that you own in your name entitles you to one
vote. Your proxy card shows the number of shares of AAAC common stock that you
own.
There are three ways to vote your shares of AAAC common stock at the special
meeting:
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* 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 the AAAC board "FOR" the
adoption of the Equity Acquisition Proposal, and the Redomestication
Proposal.
* You can vote by telephone or on the internet by following the telephone or
Internet voting instructions that are included with your proxy card. If you
vote by telephone or by the Internet, you should not return the proxy card.
* You can attend the special meeting and vote in person. We 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 we can be sure that the broker,
bank or nominee has not already voted your shares.
IF YOU DO NOT VOTE YOUR SHARES OF AAAC COMMON STOCK IN ANY OF THE WAYS DESCRIBED
ABOVE, IT WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE ADOPTION OF THE EQUITY
ACQUISITION PROPOSAL AND THE REDOMESTICATION PROPOSAL, BUT WILL NOT HAVE THE
EFFECT OF A DEMAND OF CONVERSION OF YOUR SHARES INTO A PRO RATA SHARE OF THE
TRUST ACCOUNT IN WHICH A SUBSTANTIAL PORTION OF THE PROCEEDS OF AAAC'S INITIAL
PUBLIC OFFERING ARE HELD OR A DEMAND FOR APPRAISAL RIGHTS UNDER DELAWARE LAW.
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
AAAC common stock, you may call Mr. David J. Brophy, AAAC's Corporate Secretary,
(248) 593-8330.
NO ADDITIONAL MATTERS MAY BE PRESENTED AT THE SPECIAL MEETING
This special meeting has been called only to consider the adoption of the Equity
Acquisition Proposal, and the Redomestication proposal. Under AAAC's by-laws,
other than procedural matters incident to the conduct of the meeting, no other
matters may be considered at the special meeting, if they are not included in
the notice of the meeting.
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 David J. Brophy, AAAC's Secretary, in writing before the
special meeting that you have revoked your proxy; and
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* You may attend the special meeting, revoke your proxy, and vote in person,
as indicated above.
VOTE REQUIRED
The presence, in person or by proxy, of a majority of all the outstanding shares
of common stock constitutes a quorum at the special meeting. Proxies that are
marked "abstain" and proxies relating to "street name" shares that are returned
to AAAC but marked by brokers as "not voted" will be treated as shares present
for purposes of determining the 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 by the broker ("broker non-votes"). If you do not
give the broker voting instructions, under the rules of the NASD, your broker
may not vote your shares on the proposals to approve the Equity Acquisition, and
the Redomestication.
The approval of the Equity Acquisition and Redomestication proposals will
require the affirmative vote of the holders of a majority of the AAAC common
stock outstanding on the record date. Because each of these proposals require
the affirmative vote of a majority of the shares of common stock outstanding and
entitled to vote, abstentions and shares not entitled to vote because of a
broker non-vote will have the same effect as a vote against the proposals.
For consummation of the Equity Acquisition proposal, the Redomestication
proposal must be approved by the stockholders. For the Redomestication proposal
to be implemented, the Equity Acquisition proposal must be approved by the
stockholders.
CONVERSION RIGHTS
Any stockholder of AAAC holding shares of common stock issued in AAAC's initial
public offering who votes against the Equity Acquisition Proposal may, at the
same time, demand that AAAC convert his or her shares into a pro rata portion of
the trust account as of the record date. If the stockholder makes that demand
and the Equity Acquisition is consummated, AAAC will convert these shares into a
pro rata portion of funds held in the trust account plus interest, as of two
business days prior to the consummation of the proposed transaction.
Prior to exercising conversion rights, AAAC stockholders
should verify the market price of AAAC'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. The conversion value will be calculated as of two business
days prior to the consummation of the business combination.
If the holders of 1,006,250 or more shares of common stock issued in AAAC's
initial public offering (an amount equal to 20% or more of these shares), vote
against the Equity Acquisition and demand conversion of their shares, AAAC will
not be able to consummate the Equity Acquisition.
If you exercise your conversion rights, then you will be exchanging your shares
of AAAC common stock for cash and will no longer own these shares. You will be
entitled to receive cash for these shares
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only if you continue to hold these shares through the effective time of the
Equity Acquisition and then tender your stock certificate to the combined
company.
APPRAISAL RIGHTS
Under Delaware corporate law, the Redomestication of AAAC causes the
stockholders of AAAC to have appraisal rights in connection with the
transactions for which approval is sought. This right is separate from the
conversion rights of the holders of shares of AAAC common stock issued in the
initial public offering. However, because the exercise of the appraisal right
and the conversion rights both require a tender of the holder's shares to AAAC,
only one right may be elected in respect of the shares. See Annex H for more
information about appraisal rights.
SOLICITATION COSTS
AAAC is soliciting proxies on behalf of the AAAC board of directors. This
solicitation is being made by mail but also may be made by telephone or in
person. AAAC and its respective directors, officers and employees may also
solicit proxies in person, by telephone or by internet via email.
The proxy solicitations will comply with Rule 14a-4, regulation 14.
AAAC has not hired a firm to assist in the proxy solicitation process, but may
do so if it deems this assistance necessary. AAAC will pay all fees and expenses
related to the retention of any proxy solicitation firm. In the event the
Company engages a firm to assist it with the proxy Solicitation, the company
will disclose to its stockholders the information required by Item 4(a)(iii) of
Schedule 14A.
AAAC 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.
STOCK OWNERSHIP
At the close of business on the record date, William Herren, Rudy Wilson, Chun
Hao, David Brophy, Don Runkle and other insiders beneficially owned and were
entitled to vote approximately 1,349,000 shares of AAAC common stock, or
approximately 21% of the then outstanding shares of AAAC common stock, which
includes all of the shares held by the directors, executive officers of AAAC and
their affiliates and other insiders. Those persons, who were stockholders of
AAAC prior to its initial public offering of securities, have agreed to vote
their shares on the Equity Acquisition and Redomestication proposals in
accordance with the majority of the votes cast by the holders of shares issued
in AAAC's initial public offering.
FAIRNESS OPINION
AAAC did not obtain a fairness opinion in respect to the acquisition of Hunan
Tongxin or the Redomestication. The AAAC board of directors believes because of
the financial skills and background of several of its members, it was qualified
to make an analysis itself and conclude that the acquisition of Hunan Tongxin
met the 80% asset test requirement without recourse to an fairness opinion from
an independent source.
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CONSIDERATION OF THE EQUITY ACQUISITION AGREEMENT
The following discussion of the principal terms of the Equity Acquisition
Agreement dated July 24, 2007 among AAAC and the Hunan Tongxin Equity Holders is
subject to, and is qualified in its entirety by reference to, the Equity
Acquisition Agreement, the Key Employees Employment Agreement and the
Performance Earn Out Agreement. A copy of each Agreement is attached as an Annex
to this proxy statement and is incorporated in this proxy statement by
reference.
GENERAL DESCRIPTION OF THE EQUITY ACQUISITION AGREEMENT
Pursuant to the Equity Acquisition Agreement, AAAC will establish a wholly owned
subsidiary, Tongxin International, Ltd., under the laws of the British Virgin
Islands, and AAAC will merge with and into TI concurrently with the closing of
the Equity Acquisition. TI will be the surviving entity, and the separate
corporate existence of AAAC will cease at the effective time of the merger.
Simultaneously with the merger, TI will purchase all of the issued and
outstanding common stock of Hunan Tongxin, We refer to TI Ltd., after giving
effect to completion of the Equity Acquisition, as "TI" or "the combined
company." As a result of the Equity Acquisition, Hunan Tongxin Equity Holders
will own approximately 41% of the outstanding shares of the combined company's
common stock, assuming full participation in the exchange offer and no
conversions or exercise of appraisal rights and before any issuance of shares
pursuant to the earn out provisions of the Performance Earn Out Agreement.
If TI issues the additional earn out shares as additional consideration to Hunan
Tongxin, Hunan Tongxin will then own approximately 50% of the issued and
outstanding common stock of TI, and existing AAAC stockholders will own
approximately 50% of the issued outstanding common stock of TI. None of the
foregoing percentages reflects the effect that an exercise of the currently
outstanding warrants would have.
ARBITRATION
Any dispute, controversy or claim arising out of or relating to this Equity
Acquisition Agreement, or the interpretation, breach, termination or validity,
shall be resolved through consultation. Consultation shall begin immediately
after one party hereto has delivered to the other party a written request for
consultation. If within thirty (30) days following the date on which notice is
given the dispute cannot be resolved, the dispute shall be submitted to
arbitration upon the request of either party with notice to the other.
The arbitration shall be conducted in Hong Kong by the Hong Kong International
Arbitration Center in accordance with its arbitration rules then in effect. The
arbitration proceedings shall be conducted in Chinese.
The award of the arbitration tribunal shall be final and binding upon the
disputing parties, and the awarded party may apply to a court of competent
jurisdiction for enforcement of the award.
NEW TI MEMORANDUM AND ARTICLES OF ASSOCIATION
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As part of the Redomestication AAAC will present the New TI Memorandum and
Articles of Association for approval at the AAAC Special Shareholders' Meeting.
The AAAC Shareholders shall approve, and if necessary, shall cause the board of
directors of TI to approve, the New TI Memorandum and Articles of Association
and shall cause the New TI Memorandum and Articles of Association to take effect
on the date of the Closing.
BACKGROUND OF THE EQUITY ACQUISITION AGREEMENT
The terms of the Equity Acquisition Agreement are the result of arm's-length
negotiations between representatives of AAAC, and Mr. Zhang Duanxiang who was
given full authority by the Hunan Tongxin Equity Holders. Mr. Zhang is Chairman
and Chief Executive Officer of Hunan Tongxin and its largest shareholder.
The following is a brief discussion of the background of these negotiations, the
Equity Acquisition and related transactions.
THE CANDIDATE IDENTIFICATION PROCESS
AAAC was formed on June 21, 2005 to serve as a vehicle to accomplish a business
combination with an unidentified automotive component business in China, India
or the ASEAN region. AAAC completed an initial public offering on April 19,
2006, in which it raised net proceeds of approximately $38.2 million. Of these
net proceeds, approximately $37.4 million were placed in a trust account. In
accordance with AAAC's Certificate of Incorporation,
the trust account will be released either upon the consummation of a business
combination or upon the liquidation of AAAC. AAAC must liquidate unless a
business combination is consummated by April 19, 2008.
From April, 2006 through October 2006, AAAC selected fourteen companies as
potential candidates for a business combination. Hunan Tongxin was one of the
fourteen potential candidates selected for a business combination.
Mr. Hao Chun, President of China Operation for AAAC first met with Mr. Zhang
Duanxiang, Chairman of Hunan Tongxin, on October 24, 2006 to present the concept
of a Special Purpose Acquisition Corporation ("SPAC") and judge the interest on
the part of Hunan Tongxin to work with AAAC. This was the first direct or
indirect communications between AAAC and Hunan Tongxin. At the request of Mr.
William Herren, Chairman of AAAC, Mr. Hao had a follow up meeting on October 30,
2006 to request additional information including current revenues, future growth
opportunities, customers, ownership and manufacturing processes. Over the next 5
weeks there were numerous telephone calls between the two parties to gather and
understand the information that was requested in the October 30, 2006 meeting.
After receiving the requested information, it was determined that Hunan Tongxin
had the potential to meet AAAC's requirements for a business transaction. We
determined the next step should be a face to face meeting between Mr. Herren and
Mr. Wilson, CEO of AAAC, with Mr. Zhang and Mr. Peng Weiwu, COO of Hunan
Tongxin. After the initial meeting with Mr. Hao, Hunan Tongxin contracted with
Manhattan Capital Group ("MCG") to act as advisors to them for the potential
business transaction. A meeting was held in Changsha, China on December 2, 2006
with all of the above people in attendance. We exchanged background information
of the officers of both organizations, and shared additional financial
information for the 2 companies as well as each of our broad based plans for the
next 5 years. We agreed that AAAC would present Hunan Tongxin with a non-binding
Letter of Intent (LOI) within the next 10 days. On December 9, 2006, AAAC
presented the non-binding LOI to Hunan Tongxin, and after three days of
negotiations from January 5, 2007 to January 7, 2007, both parties signed the
non-binding LOI. At this meeting it was also agreed that AAAC would commence due
diligence reviews in January 2007 and Hunan Tongxin would contract with a
mutually acceptable firm to commence the US GAAP audit. For approximately 3
weeks in January, 2007 and 2 weeks in February, 2007 AAAC had a team in China
performing due diligence.
During all of these discussions, AAAC continued to evaluate other potential
candidates. We had reduced the candidates from the above mentioned 14 down to 5
including Hunan Tongxin. Because of concerns with any Chinese company being able
to pass a US GAAP audit we opted to choose one of the remaining 4 candidates to
run a somewhat parallel process with, including signing a confidentiality
agreement. In June, 2007, we were comfortable enough with the progress of the
audit to drop the other candidate from consideration for the SPAC and put all
of our efforts into concluding the agreement with Hunan Tongxin.
Manhattan Capital Group was included in these the negotiations representing
Hunan Tongxin.
53
There is no present or proposed material agreement, arrangement or understanding
or relationship between AAAC and Manhattan Capital Group. AAAC has not paid nor
will it pay a finders fee to anyone with regard to this transaction.
This LOI signed on January 7, 2007 would serve as the basis for the Equity
Acquisition Agreement and set forth the following:
- - the reorganization of Hunan Tongxin and AAAC which was to take into account
the best tax arrangements for all parties: During the negotiations Hunan
Tongxin felt that any reorganization had to include Mr. Herren and Mr.
Wilson has part of the new company. The principals at Hunan Tongxin were
concerned about the requirements of managing a publicly held company and
they recognized that their rate of growth was demanding changes in the way
they needed to manage the company.
- - the consideration to be paid for Hunan Tongxin, which is reflected in the
Equity Acquisition Agreement. During these negotiations AAAC position was
that we should both use 12 month Trailing data for our discussions, whereas
Hunan Tongxin initially wanted to base the discussions on forward
projections. After much discussion we agreed that 2006 data for revenues,
net income and earnings before interest taxes, depreciation and
amortization or EBITDA (EBITDA is a common metric used throughout the
automobile industry) would be the basis for our discussions. Although our
discussions centered on the 2006 financial results, the AAAC negotiators
felt very comfortable that Hunan Tongxin's projections for 2007 were
attainable and that we would be well into 2007 before we would present the
data to our shareholders. After much negotiations, as well as give and take
on the part of both parties. AAAC and Hunan Tongxin agreed the total value
of Hunan Tongxin to be $65M. We then began negotiations on how and when the
$65M would be paid.
- - at the closing, and pursuant to the EAA, the Hunan Tongxin Shareholders and
their designees will be paid an aggregate of $13,000,000 in cash for all
the outstanding common stock of Hunan Tongxin. The actual discussions
around the amount to be paid in cash was actually a resultant from the
discussions regarding the retention of key members of the Hunan Tongxin
management team and making sure we had a substantial portion of the
purchase price tied to Hunan Tongxin achieving their projected results for
2007.
- - the terms of the additional consideration to be paid subsequent to the
close of the business combination for retention of key management personnel
which is reflected in the Key Employees Employment Agreement. This part
of the negotiations was very important to AAAC, we felt that to protect our
stockholders that we had to negotiate an agreement that would provide
enough incentive to make sure we retained the key members of the management
team. If we offered too much cash we would run the risk of the management
team taking the cash and leaving the company and at the same time had to be
diligent in regards to the impact on the value of our stock with regards to
dilution, After many hours of negotiations both parties agreed that the
management team would receive 4.5m shares of stock in the company after the
close of the business combination. Based on the then selling price of
AAAC's stock of $8.00/share this would amount to $36m or 55% of the total
purchase price. We felt this would certainly be enough of an incentive for
the management team to stay with the company and work towards continuing to
improve the company.
- - the terms of the additional consideration to be paid in 2008 for
performance achieved in 2007 which is reflected in the Performance Earn Out
Agreement. This too was an important part of the negotiations. As mentioned
earlier we used 12 month trailing, or 2006 data as the basis for our
discussions, but we knew we would be well into 2007 before we shared the
metrics of the business combination with our shareholders. Also, we knew
the Board of Directors of AAAC would use current year (2007) data for their
valuation. Because of these two factors, we felt it was important for us to
conclude a deal that would offer enough of an incentive for Hunan Tongxin
to achieve their projected financial results for 2007. In addition, as with
the negotiations to retain key management personnel we had to be cognizant
of the impact on dilution of the stock value.
After much discussion both parties agreed that in 2008, pursuant to the
Performance Earn Out Agreement, Hunan Tongxin Management will be issued 2M
shares of common stock of TI (on an all-or-none basis) if, on a
consolidated basis, TI generates after-tax profits of $9,500,000 for fiscal
year 2007 (excluding one time costs associated with the transaction and
corporate costs).
- - The inclusion of certain Hunan Tongxin equity holders on the board of
directors of the surviving corporation. During these negotiations Hunan
Tongxin initially felt they should nominate the majority of the members of
the Board because they would by far be the largest stockholder in the new
company. However, AAAC believed it was important to end up with the
majority for the first 2 years because AAAC management had presented a
three step plan to our initial investors that (1) we would bring forth a
proposed business combination that would have an attractive purchase price,
(2) using our significant experience in the global automotive industry
introduce the products of the new company into Western Europe and/or the US
markets, and (3) make an add on acquisition for the new company. We felt
that the first two years would be critical in achieving this plan. As
mentioned earlier, there was a strong desire on the part of Hunan Tongxin
to have Mr. Herren remain with the new company as the CEO. Mr. Herren made
it clear during the discussion that he would remain with the company in
this position for the first two years, but only if he was Chairman of the
Board and that AAAC would nominate the majority of the directors of the
BOD. After significant discussions the two parties agreed that for the
first two years following the close of the business transaction the Board
of Directors will be comprised of 9 directors including Mr. Zhang Duanxiang
and Mr. Peng Weiwu, current Hunan Tongxin equity holders, and two
additional directors to be nominated by Hunan Tongxin. The remaining five
positions would be comprised of Mr. Herren and Mr. Wilson current AAAC
officers, and three additional directors to be nominated by AAAC.
54
*
*
During the period between January 8, 2007 and March 26, 2007, AAAC and Tongxin
exchanged emails about various points in the agreements and continued to modify
them and exchanged drafts of documents. Counsel and the accountants for all the
parties conducted legal and financial due diligence and negotiated points in the
agreements. During this period, representatives of AAAC and Hunan Tongxin also
conducted operational due diligence. This included:
- Revenue verification, market analysis and an analysis of each Tongxin
customer account history from 2004 thru 2006 as well as analysis of
projections for 2007. Included in this was an analysis of the costing,
pricing and quoting process.
- A visit to each Hunan Tongxin facility to understand the scope and
capacity of the manufacturing processes in each including stamping,
welding, assembly and paint. Included in the analysis was worker
safety, worker training procedures, worker turnover, scrap handling,
floor space evaluation for capacity expansion, and quality control
procedures. An initial environmental evaluation was conducted to
validate compliance with governmental licensing requirements, issuance
of governmental licenses and permits, appropriate safeguards, ongoing
compliance auditing process, and education and training levels of
persons responsible for managing facilities and processes
- A review of current and future Tongxin products
- An understanding of product design capabilities, customer interface,
technical staffing levels, educational levels of technical personnel,
training programs, and Intellectual Property Management.
- An analysis of Hunan Tongxin's die design and fabrication process
- A review of its raw material process (purchase and stamping of cold
rolled steel) including confirmation of raw material costs through
analysis of individual purchase orders, analysis of the purchasing
process and controls associated with purchasing contract approval, raw
material ordering and lead-time analysis.
- An overview of its logistics capabilities
On March 31, 2007, by and among the chairman and chief executive officer of AAAC
and the chairman and president of Hunan Tongxin, AAAC and Hunan Tongxin executed
a Definitive Agreement of Equity Transfer The material terms of the Definitive
Agreement of Equity Transfer including:
- Cash price consideration of $13 million
- 4.5 million TI common shares to be issued subsequent to close of the
transaction to retain Hunan Tongxin management services
55
- Initial board structure for the first 2 years including 9 directors
and a subsequent board structure beginning in year 3 including 7
directors
- 2 million TI common shares to be issued on a all or none basis if
Tongxin attains $9.5 million in after tax profits in 2007 (excluding
one time transaction and corporate costs)
- The Definitive Agreement was subject to a satisfactory completion of a
USGAAP audit
Since April, 2007, subsequent to the execution of the Definitive Agreement of
Equity Transfer, AAAC and representatives of Hunan Tongxin met regularly in
Changsha, China. AAAC reviewed with them the obligations of being a reporting
company, including compliance with the reporting requirements of the federal
securities laws, accounting procedures and Sarbanes Oxley requirements, press
release disclosure and timing, shareholder communications, website disclosure,
financial public relations, NASDAQ compliance and transfer agent requirements.
AAAC also reviewed with Hunan Tongxin the resources required to begin
identifying market opportunities in the North American and European regions.
Hunan Tongxin asked if AAAC could help the post transaction company in advising
and complying with all the various requirements. AAAC responded that it would
assist at the TI corporate level. Tongxin International will be the post
transaction company. Its wholly owned subsidiary, Hunan Tongxin, will be
responsible for running the day-to-day business in China. At the corporate
level, Tongxin International will be responsible for advising and complying with
various requirements as a publicly traded company. In addition, Tongxin
International will manage marketing and sales activities outside of China and
oversee mergers and acquisitions globally.
On July 18, 2007 Hunan Tongxin completed its reorganization into a limited
liability company pursuant to the terms of the Preliminary Definitive Agreement
of Equity Transfer and was granted a business license. On July 19, 2007, at a
meeting with the Chairman and CEO of AAAC, legal counsel for Hunan Tongxin
informed the officers that the reorganization of Hunan Tongxin has been
completed with the Changsha Ministry of Commerce, permitting the execution of
the Equity Acquisition Agreement. The officers deemed it appropriate to execute
the Equity Acquisition Agreement and make a public announcement by filing Form
8K with the SEC on July 25, 2007.
On August 10, AAAC was informed by legal counsel for Hunan Tongxin that Hunan
Tongxin was granted approval as a wholly foreign owned enterprise by the
Changsha Ministry of Commerce and therefore the proposed transaction with AAAC
was approved. Subsequently AAAC made a public announcement by filing Form 8K
with the SEC on August 13, 2007.
BOARD CONSIDERATION AND APPROVAL OF TRANSACTION
While no single factor determined the final agreed upon consideration in the
Equity Acquisition, AAAC's board of directors reviewed various industry and
financial data, including certain valuation analyses and metrics compiled by
AAAC and presented to the board of directors by Rudy Wilson on July 19, 2007 in
order to determine that the consideration to be paid to the Hunan Tongxin Equity
Holders was reasonable and that the Equity Acquisition was in the best interests
of AAAC's share holders.
INTEREST OF AAAC DIRECTORS AND OFFICERS IN THE EQUITY ACQUISITION
In considering the recommendation of the board of directors of AAAC to vote for
the proposals to approve the Equity Acquisition Agreement and the
Redomestication, you should be aware that certain members of the AAAC board have
agreements or arrangements that provide them with interests in the Equity
Acquisition that differ from, or are in addition to, those of AAAC share holders
generally. In particular:
56
* If the equity acquisition is not approved and AAAC fails to consummate an
alternative transaction within the time allotted pursuant to its
Certificate of Incorporation, AAAC would be required to liquidate. In such
event, the shares of common stock held by AAAC's directors and officers
would be worthless because AAAC's directors and officers are not entitled
to receive any of the liquidation proceeds, and any warrants they hold will
expire worthless.
* AAAC's executives and directors own a total 1,149,000 shares of AAAC common
asset that have a market value of $9,421,800 based on AAAC's share price of
$8.20 as of December 31, 2007. However, as AAAC's directors and executives
are contractually prohibited from selling their shares prior to April 19,
2008 (during which time the value of the shares may increase or decrease),
it is impossible to determine what the financial impact of the equity
acquisition will be on AAAC's directors and executives;
* AAAC's executives and directors own a total 290,000 warrants of AAAC that
have a market value of $812,000 based on AAAC's warrant price of $2.80 as
December 31, 2007. However, as AAAC's directors and executives are
contractually prohibited from selling their warrants prior to the
completion of the consummation of the Business Transaction (during which
time the value of the warrants may increase or decrease), it is impossible
to determine what the financial impact from the equity acquisition will be
on AAAC's directors and executives;
* the transactions contemplated by the Equity Acquisition Agreement provide
that Mr. William R. Herren and Mr. Rudy Wilson will be directors/officers
of TI;
AAAC'S REASONS FOR THE EQUITY ACQUISITION AND RECOMMENDATION OF THE AAAC BOARD
The AAAC board of directors concluded that the Equity Acquisition Agreement with
the Hunan Tongxin Equity Holders is in the best interests of AAAC's share
holders. The AAAC board of directors did not obtain an independent fairness
opinion.
The entire AAAC board of directors is comprised of directors with extensive
experience in analyzing acquisition targets and assessing their future values.
AAAC officers William R. Herren and Rudy Wilson have been involved in
identifying and completing seven investment projects in China with over $250
Million in direct investment while employed at General Motors. David J. Brophy,
leads the University of Michigan's Private Equity and Entrepreneurship Center
and brings considerable independent expertise in this area. Donald L. Runkle
brings experience from numerous global acquisitions during his tenure at Delphi
Automotive.
The AAAC board of directors considered a wide variety of factors in connection
with its evaluation of the equity acquisition. In light of the complexity of
those factors, the AAAC board of directors did not consider it practicable to,
nor did it attempt to, quantify or otherwise assign relative weights to the
specific factors it considered in reaching its decision. In addition, individual
members of the AAAC board may have given different weight to different factors.
In considering the equity acquisition, the AAAC board of directors gave
considerable weight to the factors discussed below.
57
HUNAN TONGXIN'S RECORD OF GROWTH AND EXPANSION AND HIGH POTENTIAL FOR FUTURE
GROWTH
Important criteria to AAAC's board of directors in identifying an acquisition
target were that the company has established business operations, that it was
generating current revenues, and that it had what AAAC believes to be a
potential to experience growth in the future. AAAC's board of directors believes
that Hunan Tongxin has in place the infrastructure for good business operations,
a large and growing customer base, technological capabilities and brand name
recognition. Hunan Tongxin commenced business operations in Changsha, China on
November 27, 1984 and it has experienced an average annual revenue growth of
greater than 20% from 2004 through 2006. The fiscal year 2006 revenues were
approximately $64.3 million.
Although revenue projections are inherently uncertain, AAAC's board of directors
believed, and continues to believe, the projections for Hunan Tongxin's business
are reliable, based in part on AAAC extensive due diligence and utilization of
its proprietary revenue recognition model.
This record of significant growth helped to convince AAAC's board of directors
that a business combination with Hunan Tongxin would be in the best interests of
AAAC's share holders.
AAAC's board of directors believes that Hunan Tongxin has the ability to
continue growth because:
* Hunan Tongxin has established itself as the leader in the Chinese EVBS
market segment in the twenty-three years it has been in operation;
* China's rapid automotive market expansion, which creates demand for Hunan
Tongxin' products, is expected to continue for the foreseeable future;
* Hunan Tongxin has an expanding presence in Southeast Asia markets including
the Vietnam, commercial market, as it continues its economic growth and
shifts toward a consumer economy;
* Hunan Tongxin's rapid development of new products should enable it to
continue to enhance its position relative to its domestic and international
competitors;
* Hunan Tongxin intends to enter the North American and European automotive
markets, which will significantly increase the opportunity for sales of its
products, taking advantage of the continued availability of China's
comparative cost advantages.
Based on its review of Hunan Tongxin's historical financial statements and its
business model and relationships, AAAC's board of directors believes that Hunan
Tongxin's products will continue to be attractive to global OEMs. Hunan Tongxin
bases its products on the latest OEM vehicle exterior designs, helping Hunan
Tongxin to maintain and even to improve its margins.
THE EXPERIENCE OF HUNAN TONGXIN'S MANAGEMENT
58
Another criterion important to AAAC's board of directors in identifying an
acquisition target was that the company has a seasoned management team with
specialized knowledge of the markets within which it operates, the ability to
lead a company in a rapidly changing environment, and the desire to change its
business practices and adapt an integrated and balanced planning process. AAAC's
board of directors believes that Hunan Tongxin's management has demonstrated
that ability, addressing critical issues such as the development of its
products, its emphasis on rapid product development and deployment and its savvy
marketing strategy, which targets its products and services to China's most
rapidly growing segments. By utilizing its growing revenues to expand its market
share and develop additional products, Hunan Tongxin's management has
demonstrated a commitment to a strategy that has given it a significant presence
in the EVBS market in the PRC.
DUE DILIGENCE INFORMATION MATERIALS
AAAC compiled information and analysis on fourteen target companies identified
within China, India and the ASEAN region, and a detailed comparison of each
target company utilizing twelve different investment criteria as indicated in
AAAC's final offering prospectus.
(1) Small and medium size supplier firms with annual revenues from $25
million-$50 million;
(2) financial condition and results of operation;
(3) global growth potential in both the Original Equipment and Service Parts
markets;
(4) experience and skill of management and availability of additional
personnel;
(5) capital requirements;
(6) competitive position versus global competitors;
(7) barriers to entry;
(8) stage of development of automotive products;
(9) degree of current or potential market acceptance of automotive products;
(10) proprietary features and degree of intellectual property or other
protection of the products, processes or services;
(11) regulatory environment of the automotive industry; and
(12) costs associated with effecting a business combination.
The selection of Hunan Tongxin as the target company of choice was derived from
this comparison.
59
The due diligence report included a global Marketing Plan ("MP") covering the
EVBS market. The MP included an internal and external situation analysis, a
global competitive assessment including both Chinese domestic and international
competitors, and an opportunity analysis of customer programs for both the
original equipment manufacturers ("OEM") and aftermarket .
The external situation analysis refers to the company's review of all known
activities external to the target firm which affects the market for EVBS
globally. This includes a review and analysis of trends in design, manufacturing
processing, and changes in developments of raw materials. The internal analysis
includes a comparative review of the strengths and weaknesses of Tongxin
compared to its competitors. The opportunity analysis is a result of an indepth
look at the internal and external analyses, coupled with known market place
factors. The term "known" refers to information and data obtained through
discussions with customers, data published by customers, and data published by
professional firms engaged in the business of collecting and disseminating
industry information.
The report then examined Hunan Tongxin's business operations, including its
business model, revenues, customers, cost of goods sold, selling, general and
administrative expenses, customer geographic locations, product development,
manufacturing capability, pricing policy, material procurement control and
supply, quality control and project management. The report provided additional
information regarding Hunan Tongxin's financial performance from 2004 to 2006 by
analyzing the financial statements for those years. The report also discussed
projected operating results for fiscal year 2007 provided by Hunan Tongxin.
The report noted that Hunan Tongxin Stockholders had warranted to AAAC that
Hunan Tongxin is not involved in or threatened with any legal proceedings. The
report provided information on the intellectual property owned by Hunan Tongxin,
including four licenses and trade certificates, nine patents, and two
trademarks. The report also provided information on the real property owned by
Hunan Tongxin.
Mr. Rudy Wilson, a director and officer of AAAC, prepared for the board of
directors an analysis of the post-transaction value of Hunan Tongxin. He
analyzed comparable companies in the global automotive component supply market
(See chart under SATISFACTION OF 80% TEST), taking into account their relative
market presences and maturity. He prepared a list of comparative price/earnings
ratios of these companies and compared them to the price/earnings of Hunan
Tongxin and its anticipated price/earnings. The valuation of Hunan Tongxin was
based on three assumptions, including sales growth, manufacturing capacity and
net income margin. AAAC believes the individual assumptions are valid for the
following reasons:
- Sales Growth: The board assumed that the 25% to 30% annual growth that
has occurred in the. Chinese commercial vehicle market for the last 3
years would continue for the next 10 years based on the Chinese
government's announcement in November, 2005 that it will spend
approximately $250 billion through 2020 to improve the roads and
bridges in China. This program is referred to as the 7-9-18 plan and
includes 7 expressways from Beijing, 9 expressways North/South and 18
expressways East/West. Not only will it take additional commercial
vehicles to build this added infrastructure, but once the expressways
are completed it will enable China to expand its economic growth to
areas that are difficult to reach by truck today, again increasing the
demand for commercial vehicles. In view of this the board felt the
growth rate was attainable.
- Hunan Tongxin's Manufacturing Capacity: The board, based on its
operational due diligence, assumed that there would be minor capital
expenditures to achieve this sales growth for the next 3 years. The
actual manufacturing capacity is proprietary, however, the board was
convinced the existing capacity will handle the growth for the next 3
years.
- Net Income Margin: The board also examined whether there would be any
margin compression from the net income margin of 12.3% achieved in
the 1st 9 months of 2007, Based on the history of cost control
exhibited by Hunan Tongxin from 2004 through the 1st 9 months of 2007,
and coupled with the above discussion on capacity, the board came to
the conclusion that there would be little or no margin compression.
Capital resources were taken into account, based on the capital of the company
before and after the acquisition.. Based on this analysis, Mr. Wilson concluded
that, comparatively speaking, the enterprise value of Hunan Tongxin, immediately
after the acquisition was favorable. Enterprise value is defined as market
capitalization, plus long term debt, plus preferred equity, minus cash and cash
equivalents. On
60
the basis of the analysis, he concluded on July 19, 2007 that the board of
directors, from an economic point of view, should consider the acquisition of
Hunan Tongxin.
AAAC's directors also considered the method of affecting a business combination
with Hunan Tongxin. In structuring the transaction and in preparing the
documentation, AAAC consulted with its legal counsel, which has offices in the
PRC, for advice on the acquisition. The Equity Acuisition Agreement includes the
opinions of PRC counsel on the validity and enforceability of all the agreements
with Hunan Tongxin. On the basis of its discussions with Chinese counsel, the
AAAC board of directors believed that the use of an Equity Acquisition Agreement
was the preferred business strategy for completing an acquisition of Hunan
Tongxin.
SATISFACTION OF 80% TEST
It is a requirement that any business acquired by AAAC have a fair market value
equal to at least 80% of its net assets at the time of acquisition, which assets
shall include the amount in the trust account. Based on the financial analysis
of Hunan Tongxin used to approve the transaction, the AAAC board of directors
determined that this requirement was met and exceeded.
Overall the Company examined 65 automotive supplier firms traded on United
States stock exchanges. Subsequently 11 companies were selected including eight
firms based on their single or dual focus technical competency which is similar
to that of Hunan Tongxin, and three Chinese automotive supply firms because they
are similar to Hunan Tongxin in that they operate in the same market as Hunan
Tongxin. Additionally, we analyzed gross and net income margins and revenue
growth rates. The board then examined the forward price earnings ratios of these
companies. The median and mean forward price earnings ratios for the 11
companies were 14.8 and 19.7, respectively. The board used this range of price
earnings ratios as the most representative.
61
The companies used for this analysis were as follows as of October 29, 2007:
($ in millions, except per share data)
Comparable Companies-Global Automotive Component Supply Market
NET
FORWARD MARKET STOCK TEV/LTM LTM LTM EBITDA INCOME
COMPANY NAME LTM PE PE CAP PRICE EBITDA REVENUE EBITDA MARGIN MARGIN
- ------------ ------ ------- ------- ------- ------- ------- ------ ------ ------
Wonder Auto Technology, Inc. (WATG) 16.5x 11.7x $ 207 $ 8.65 12.7x $ 92 $ 18 19.4% 13.8%
SORL Auto Parts, Inc. (Nasdaq NM:SORL) 12.3x 11.2x $ 137 $ 7.50 11.3x $ 99 $ 13 13.5% 10.0%
China Automotive Systems Inc.
(NasdaqSC:CAAS) 25.1x 46.7x $ 179 $ 7.47 7.5x $ 115 $ 25 21.6% 6.2%
Eaton Corp. (NYSE:ETN) 13.9x 11.8x $13,170 $ 90.30 9.3x $12,870 $1,650 12.8% 7.6%
62
CLARCOR Inc. (NYSE:CLC) 21.0x 19.4x $ 1,850 $ 37.16 12.1x $ 916 $ 153 16.7% 9.9%
Gentex Corp. (NasdaqNM:GNTX) 22.5x 20.0x $ 2,740 $ 18.99 13.6x $ 633 $ 174 27.5% 19.1%
Standard Motor Products Inc.
(NYSE:SMP) 16.7x 8.3x $ 149 $ 7.88 7.2x $ 792 $ 54 6.8% 1.1%
Amerigon Inc. (NasdaqNM:ARGN) 58.6x 43.2x $ 376 $ 17.28 43.5x $ 62 $ 8 12.8% 10.7%
Aftermarket Technology Corp.
(NasdaqNM:ATAC) 17.2x 14.8x $ 683 $ 30.90 8.4x $ 524 $ 78 15.0% 7.6%
SPX Corp. (NYSE:SPW) 22.2x 17.5x $ 5,570 $105.10 13.2x $ 4,870 $ 488 10.0% 5.6%
Stoneridge Inc. (NYSE:SRI) 18.8x 12.0x $ 227 $ 9.38 6.6x $ 713 $ 54 7.6% 1.6%
MEDIAN 18.8X 14.8X $ 376 $ 17.28 11.3X $ 633 $ 54 14% 7.6%
AVERAGE 22.2X 19.7X $ 2,299 $ 30.96 13.2X $ 1,971 $ 247 15% 8.5%
The board made the above noted assumptions in deriving statistics about Hunan
Tongxin that was used solely for the purpose of management's determining a value
of Hunan Tongxin. Investors should not rely upon these projections for any other
purpose than determining valuation, and that these assumptions should not be
considered projected earnings
- -
- -
- -
- -
- The Company used the enterprise value method, which is considered a
theoretical takeover price, as the method of determining the valuation
of the transaction. It subsequently calculated a per share value using
the implied market capitalization based upon the common shares
currently outstanding.
- -
- The Company assumed that Hunan Tongxin would achieve a $9.5 million
net income in 2007. The projected net income for 2007 was determined
to be reasonable in light of the net income for 2006 of approximately
$5.7 million and the number of existing and new contracts at the time
the assessment was made. The number of contracts has increased
approximately 25% from 2006 to 2007.
- -
- The Company examined the forward price earnings ratios of these
companies. Using the median forward price earnings ratios for the
eight companies which were 17.7, the Company calculated an actual
valuation of $168,000,000 as the most representative. This was derived
by taking the fair market comparable capitalization using an implied
market capitalization equal to a comparable price earnings ratio of
17.7 multiplied by the assumed earnings of Hunan Tongxin for 2007 of
9.5 million.
63
The AAAC board of directors believes because of the financial skills and
automotive background of all of its directors, it was qualified to make this
analysis itself and conclude that the acquisition of Hunan Tongxin met this 80%
test requirement without recourse to an independent source. The entire AAAC
board of directors is comprised of directors with extensive experience in
analyzing acquisition targets and assessing their future values.
By conducting this analysis internally (as opposed to obtaining a third party
determination of the satisfaction of the 80% test and the fairness of the
transaction to the AAAC stockholders), the AAAC board may have assumed
additional potential liability in the event of a challenge to the board's
actions. Under Delaware law, a director is fully protected in relying in good
faith upon the opinions, reports or statements presented by a person as to
matters the director reasonably believes are within such person's professional
or expert competence and who has been selected by reasonable care. Without that
protection afforded by a third party determination, directors could have
additional liability (and AAAC could be required to provide indemnification to
the directors) if the decision to acquire Hunan Tongxin was determined to be in
violation of the board's fiduciary duties and not covered by the limitations on
director liability contained in AAAC's certificate of incorporation.
CONCLUSION OF THE BOARD OF DIRECTORS
After careful consideration, AAAC's board of directors determined unanimously
that each of the Equity Acquisition proposal and the Redomestication proposal is
fair to and in the best interests of AAAC and its stockholders. AAAC's board of
directors has approved and declared advisable the Equity Acquisition proposal,
the Redomestication proposal and unanimously recommends that you vote or give
instructions to vote "FOR" each of the proposals to adopt the Equity Acquisition
Proposal and the Redomestication proposal.
The foregoing discussion of the information and factors considered by the AAAC
board of directors is not meant to be exhaustive, but includes the material
information and factors considered by the AAAC board of directors.
64
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS OF THE
REDOMESTICATION
The following discussion summarizes the material United States federal
income tax considerations of the redomestication to AAAC and the AAAC
shareholders who are "United States persons" as defined by the federal Internal
Revenue Service regulations. This discussion assumes that the AAAC shareholders
hold their AAAC units, common stock and/or warrants as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended
(the"Code"). Thus, this section does not discuss all the United States federal
income tax considerations that may be relevant to a particular AAAC security
holder if such security holder is subject to special treatment, including but
not limited to brokers or dealers, stockholders who are tax-exempt
organizations, who are not United States persons, who are expatriates or subject
to the alternative minimum tax, or who hold their AAAC securities as part of
some larger integrated investment plan or conversion transaction. Each AAAC
security holder is urged to consult his or her own tax advisor as to his or her
own tax situation, including the effect of state or local tax laws or
regulations.
This discussion of United States federal tax law and regulations is the
opinion of Strobl & Sharp, P.C., whose opinion is included as an Annex to this
Prospectus/Proxy Statement. Reference is made to the opinion. This section
describes the material federal income tax consequences of the redomestication
merger to the holders of AAAC's securities, assuming such holders are
individuals who are citizens or residents of the United States, corporations or
partnerships created or organized in the United States or are trusts
administered within the United States and whose trustees include one or more
United States persons who have authority to control all substantial decisions of
the trust.
No ruling has been or will be sought from the Internal Revenue Service. The
discussion in this section is not binding on the Internal Revenue Service. This
discussion is based on the Code, regulations and rulings and decisions in effect
as of the date of this Prospectus/Proxy Statement, all of which are subject to
change. This discussion does not address state or local tax laws or regulations.
Subject to the limitations and qualifications described in this section,
and assuming that the redomestication merger will be completed as described in
the merger agreement and this Prospectus/Proxy Statement, the redomestication
merger will constitute a reorganization with the meaning of Code Section 368(a)
and the following United States federal income tax consequences will result:
(A) AAAC shareholders will not recognize any gain or loss upon the receipt
of TI common stock in exchange for AAAC common stock; and
(B) AAAC warrant holders will not recognize any gain or loss upon the
receipt of TI warrants in exchange for AAAC warrants; and
(C) The aggregate basis of the TI common stock received by an AAAC
shareholder will be the same as the aggregate tax basis of the AAAC
common stock surrendered in exchange for the TI common stock; and
65
(D) The holding period of the TI common stock received by the AAAC
shareholder in connection with the redomestication merger will include
the period the AAAC shareholder owned the AAAC shares; and
(E) AAAC will recognize gain, but not loss, as a result of the
redomestication merger equal to the difference, if any, between the
adjusted tax basis in AAAC's assets and the assets' fair market value
at the effective date of the redomestication.
The foregoing United States federal income tax consequences are not 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, under Section 7874 of the Code,
generally apply to the direct or indirect acquisition of substantially all of
the properties of a domestic enterprise by a foreign corporation if there is at
least 60% or 80% of continuing share ownership in the successor foreign entity
by the former United States corporation's stockholders and substantial business
activities are not conducted in the jurisdiction in which such successor is
created or organized. Under the AAAC Redomestication and the Equity Acquisition
Agreement, following the Redomestication into TI, more than 41% of stock of TI
(by vote and by value) will be held by persons who were not holders of AAAC
common stock, and accordingly Section 7874 should not apply to TI.
BECAUSE OF THE COMPLEXITY OF THE TAX LAWS, AND BECAUSE THE TAX CONSEQUENCES TO
ANY PARTICULAR STOCKHOLDER MAY BE AFFECTED BY MATTERS NOT DISCUSSED ABOVE, EACH
STOCKHOLDER IS URGED TO CONSULT A TAX ADVISOR
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WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED
BY THE REDOMESTICATION AND THE EQUITY ACQUISITION INCLUDING THE APPLICABILITY
AND EFFECT OF STATE, LOCAL AND NON-UNITED STATES TAX LAWS, AS WELL AS UNITED
STATES FEDERAL TAX LAWS.
ANTICIPATED ACCOUNTING TREATMENT
The acquisition will be accounted for using the purchase method of accounting
with AAAC treated as the acquirer. Under this method of accounting, Hunan
Tongxin's assets and liabilities will be recorded by AAAC at their respective
fair values as of the closing date of the acquisition (including any
identifiable intangible assets). Any excess of purchase price over the net fair
values of Hunan Tongxin's assets and liabilities will be recorded as goodwill.
Financial statements of AAAC after the acquisition will reflect these values.
The results of operations of Hunan Tongxin will be included in the results of
operations of AAAC beginning on the effective date of the acquisition.
REGULATORY MATTERS
The Equity Acquisition and the transactions contemplated by the Equity
Acquisition Agreement are not subject to any United States federal or state
regulatory requirement or approval, except for filings necessary to effectuate
the transactions contemplated by the Equity Acquisition proposal with the State
of Delaware.
On August 10, 2007, AAAC was informed by counsel for Hunan Tongxin that it
received approval of the Changsha Ministry of Commerce to complete the
transaction and no further Chinese government or regulatory approvals are
required.
Your percentage ownership of AAAC will not be affected by the redomestication.
As part of Key Employees Employment Agreement, however, there will be the
issuance of additional shares of common stock, subsequent to the close of the
transaction, to retain the Hunan Tongxin management team. As part of the
reincorporation, TI will assume the outstanding warrants of AAAC on the same
terms as currently issued. In addition, TI will assume all other outstanding
obligations of AAAC and succeed to those benefits enjoyed by AAAC. The business
of AAAC, upon the redomestication and the acquisition of the Hunan Tongxin will
become that of TI.
AAAC REDOMESTICATION
GENERAL
AAAC will redomesticate in the BVI and in that process change its name and
corporate documents and establish a new board of directors.
We believe that the redomestication in the BVI will give the continuing company
more flexibility and simplicity in various corporate transactions. We also
believe that being reincorporated in the BVI will facilitate and reduce the
costs of any further reorganization of Hunan Tongxin and permit the creation and
acquisition of additional companies in Asia as the business of Hunan Tongxin
expands.
67
We believe that after the redomestication there will be reduced taxes and other
costs of doing business by TI in the future because its operations will be in
China after the acquisition. The BVI have adopted an International Business
Companies Act that allows for flexible and creative corporate structures for
international businesses. Further, BVI international business companies are
wholly exempt from BVI tax on their income. As part of the redomestication ,
AAAC's corporate name will become that of the surviving company, Tongxin
International.
The full texts of the Plan of Redomestication and the Memorandum and Articles of
Association of TI are set forth in annexes to this proxy statement. The
discussion of these documents and the comparison of rights set forth below are
qualified in their entirety by reference to those annexes.
ADOPTION OF THE REDOMESTICATION
The AAAC board of directors has unanimously approved the reincorporation plan
and Redomestication and recommends that the stockholders of AAAC approve it.
The affirmative vote of the holders of a majority of the shares outstanding of
AAAC is required for approval of the reincorporation plan and Redomestication.
Abstentions and broker non-votes will have the effect of a vote against the
proposal.
The reincorporation plan will not be implemented if the Equity Acquisition
Agreement is not approved. The Equity Acquisition Agreement will not be
consummated if AAAC does not reincorporate in the BVI.
The board of directors unanimously recommends a vote "FOR" the approval of the
reincorporation plan and Redomestication.
PLAN OF REDOMESTICATION
The reincorporation will be achieved by the merger of AAAC, a Delaware company,
with and into TI, a BVI corporation, with TI being the surviving entity. The
Memorandum of Association and the Articles of Association, the equivalent of a
certificate of incorporation and bylaws of a United States company, of the
surviving company will be those of TI, written in compliance with BVI law. The
effectiveness of the reincorporation and the merger is conditioned upon the
filing by both AAAC and TI of a certificate of merger with the State of Delaware
and articles of merger with the BVI. Upon the filing of these documents, AAAC
will cease its corporate existence in the State of Delaware.
At the time of the redomestication, one new share of TI will be issued for each
outstanding share of common stock of AAAC held by our stockholders on the
effective date of the reincorporation. Each share of AAAC that is owned by AAAC
shareholders will be canceled and assume the status of TI common stock. The AAAC
shares no longer will be eligible to trade on the over-the-counter bulletin
board ("OTCBB") market. The shares of TI will be eligible to trade in their
place beginning on or about the effective date of the reincorporation under a
new CUSIP number and trading symbol. The symbol will be assigned if the market
will be the OTCBB or will be as determined with the approval of NASDAQ Global
Market if that is where the shares will trade upon consummation of the equity
acquisition.
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STOCK CERTIFICATE DELIVERY REQUIREMENTS
You do not need to replace the current stock certificate of AAAC after the
Redomestication. DO NOT DESTROY YOUR CURRENT STOCK CERTIFICATES ISSUED BY AAAC.
The issued and outstanding stock certificates of AAAC will represent the rights
that our stockholders will have in TI. Stockholders, however, may submit their
stock certificates to our transfer agent, Continental Stock Transfer and Trust
Company, 17 Battery Place, New York, New York 10004 (212-509-4000) for new
certificates, subject to normal requirements as to proper endorsement, signature
guarantee, if required, and payment of applicable taxes.
If you have lost your certificate, you can contact our transfer agent to have a
new certificate issued. You may be requested to post a bond or other security to
reimburse us for any damages or costs if the lost certificate is later delivered
for sale or transfer.
APPRAISAL RIGHTS
If the Redomestication occurs, the AAAC stockholders who do not vote in favor of
the Redomestication have the right to demand in cash the fair value of their
AAAC shares (exclusive of any element of value arising from the accomplishment
or expectation of the merger) instead of taking the surviving corporation's
common stock. Holders of options or warrants to purchase AAAC common stock do
not have any appraisal rights.
AAAC common stock will not be converted into surviving corporation common stock
if the holder of the shares validly exercises and perfects statutory appraisal
rights with respect to the shares. When and if the holder of those shares
withdraws the demand for appraisal or otherwise becomes ineligible to exercise
appraisal rights, the shares will automatically convert into shares of the
surviving corporation common stock on the same basis as the other shares that
convert in the Redomestication.
To perfect the appraisal right, stockholders must not vote in favor of the
Redomestication and must then mail or deliver a written demand for appraisal,
before the taking of the vote on the merger at the special meeting of AAAC
stockholders. This written demand must be separate from any written consent or
vote against approval of the Redomestication merger. Voting against approval of
the Redomestication or failing to vote on the proposal will not constitute a
demand for appraisal within the meaning of Section 262 of the Delaware General
Corporations Law. The written demand should be delivered to:
Asia Automotive Acquisition Corporation
199 Pierce Street, Suite 202
Birmingham, MI 48009
Attention: David J. Brophy
A written demand for appraisal of the AAAC shares is only effective if it
reasonably informs AAAC of the identity of the stockholder and that the
stockholder demands appraisal of his, her or its shares. Accordingly, the
written demand for appraisal should specify the stockholder's name and mailing
69
address, the number of shares of AAAC stock owned and that the stockholder is
thereby demanding appraisal.
A dissenting stockholder who is the record owner, such as a broker, of AAAC
stock as a nominee for others, may exercise a right of appraisal with respect to
the common stock held for one or more beneficial owners, while not exercising
such right for other beneficial owners. In that case, the record stockholder
should specify in the written demand the number of shares as to which the
stockholder wishes to demand appraisal. If the written demand does not expressly
specify the number of shares, AAAC will assume that the written demand covers
all the shares of AAAC common stock that are in the nominee's name.
It is important that AAAC receive all written demands promptly as provided
above. Failure to comply with any of these conditions will result in the
stockholder only being entitled to receiving the shares of TI in the
Redomestication.
Dissenting stockholders must either vote not to approve the Redomestication or
abstain. If a dissenting stockholder votes in favor of the merger, the
stockholder's right to appraisal will terminate, even if the stockholder
previously filed a written demand for appraisal. A vote against approval of the
Redomestication is not required in order to exercise appraisal rights.
Dissenters must continuously hold their shares of AAAC common stock from the
date they make the demand for appraisal through the closing of the
Redomestication. Record holders of AAAC common stock who make the appraisal
demand, but subsequently sell their shares of common stock prior to the merger
will lose any right to appraisal in respect of the sold shares.
Within 120 days after the effective date of the merger, either the surviving
corporation or any stockholder who has complied with the conditions of Section
262 may file a petition in the Delaware Court of Chancery demanding that the
Chancery Court determine the fair value of the shares of stock held by all the
stockholders who are entitled to appraisal rights. Neither AAAC nor the
surviving corporation has any intention at this time of filing this petition.
Because the surviving corporation has no obligation to file this petition, if no
dissenting stockholder files this petition within 120 days after the closing,
the dissenting stockholder may lose its rights of appraisal.
A dissenting stockholder who no longer wishes to exercise appraisal rights must
withdraw the holder's demand for appraisal rights within 60 days after the
effective date of the Redomestication. A stockholder also may withdraw a demand
for appraisal after 60 days after the effective date of the merger, but only
with the written consent of the surviving corporation. If a stockholder
effectively withdraws a demand for appraisal rights, the stockholder will
receive the merger consideration provided in the Redomestication.
If the stockholder is in compliance with the demand requirements, the
stockholder is entitled to receive from the surviving corporation a statement
setting forth the aggregate number of shares for which appraisal has been
demanded and the aggregate number of stockholders making the demand. To obtain
this statement, the stockholder must make a written demand to the surviving
corporation within 120 days after the effective date of the Redomestication. The
surviving corporation must make
70
the statement before the later of (i) the 10th day after receiving such request
or (ii) the 10th day after the expiration of the period within which demand for
appraisal rights must be made.
If a Chancery Court proceeding is commenced by a dissenting stockholder, the
surviving corporation has 20 days to provide the court with the names of
dissenting stockholders with which it has not settled a claim for appraisal. The
court may then send notice of a hearing to all the stockholders demanding
appraisal rights, and then conduct a hearing to determine whether the
stockholders have fully complied with Section 262 and their entitlement to the
appraisal rights under that section. The court may require deposit of the stock
certificates of dissenting stockholders with the court. A dissenting stockholder
who does not follow this requirement may be dismissed from the proceeding.
The Chancery Court will determine the value of the shares. To determine the fair
value, the court will consider all relevant factors, and will exclude any
appreciation or depreciation due to the anticipation or accomplishment of the
Redomestication. Whether or not an investment banking firm has determined that
the merger is fair is not an opinion that the merger consideration is fair value
under Section 262. Upon determination of the value, the surviving corporation
will be ordered to pay that value, together with simple or compound interest as
the court directs. To receive payment, the dissenting stockholders must
surrender their stock certificates to the surviving corporation.
The costs of the appraisal proceeding may be assessed against the surviving
corporation and the stockholders as the court determines.
DIFFERENCES OF STOCKHOLDER RIGHTS
The corporate statutes of Delaware and the BVI are similar, however certain
differences exist. The most significant differences, in the judgment of the
management of AAAC are summarized below. Stockholders should refer to the
Annexes of the Memorandum and Articles of Association and to the Delaware
corporate law and corporate law of the BVI, including the Business Companies Act
("BCA") to understand how these laws apply to AAAC and TI and may affect you.
Neither BVI law nor the memorandum and articles of association of TI impose any
limitations on the right of nonresident or foreign owners to hold or vote
securities. Under the BVI law, holders of a company's stock are referred to as
members, as opposed to stockholders, which reference is carried through in the
table.
PROVISION AAAC TI
- ------------------------ ------------------------------------------- --------------------------------
Number of Authorized 40 million shares of which 39 million are Same as AAAC
Shares shares of common stock, $.001 par value
per share and 1 million are shares of
preferred stock, par value $.001 per share
Par Value Stated in United States dollars. No par value
Changes in capital generally require Changes in capital may be made
stockholder approval upon resolution of members or
directors.
Preferred (Preference) Directors may fix the designations, Same as AAAC, but subject to
Shares powers, preferences, rights, the memorandum.
qualifications, limitations and
restrictions by resolution.
71
Registered Shares Shares of capital stock of AAAC to be Same as AAAC
registered shares.
Purpose of Corporation To engage in any lawful act not prohibited Same as AAAC subject to the
by law. prohibition of conducting
certain business activities in
the BVI ( i.e., banking,
insurance and local BVI
businesses).
Amendment of Requires stockholder vote and, except in Requires vote of the members,
Certificate of limited circumstances, by the board of being a person that holds
Incorporation directors. shares, or as permitted by the
BCA by the board of directors
and articles.
Registered Office 199 Pierce Street, Suite 202 P.O. Box 173
Birmingham, Michigan Kingston Chambers
Road Town,
Tortilla, BVI
Transfer Agent Continental Stock Transfer & Trust Company Same as AAAC
PROVISION AAAC TI
- ------------------------ ------------------------------------------- --------------------------------
Voting Rights Common stock: one share, one vote on all Same as AAAC
matters before the holders of the common
stock. Directors elected by plurality
as provided in memorandum and
Other classes of equity may have voting articles; all other matters by
rights as assigned to them by the board of a majority of those shares
directors or as approved by stockholders. present and entitled to vote.
Directors elected by plurality, all other
matters either by majority of issued and
outstanding or majority of those present
and entitled to vote as specified by law.
Redemption of Equity Shares may be repurchased or otherwise Same as AAAC
acquired, provided the capital of the
company will not be impaired by the
acquisition.
Company may hold or sell treasury shares.
PROVISION AAAC TI
- ------------------------ ------------------------------------------- --------------------------------
Stockholder/Member Permitted as required for a vote at a Same as AAAC
consent meeting
Notice Requirements for In general, to bring a matter before an To bring a matter before an
Stockholder/Member annual meeting or to nominate a candidate annual meeting or to nominate a
Nominations and Other for director, a stockholder must give candidate for director, a
Proposals notice of the proposed matter or member must give notice to the
nomination not less than 60 days and not company of not less than 30
more than 90 days prior to public days nor more than 60 days.
disclosure of the date of annual meeting.
If the member is making a
In the event that less than 70 days notice proposal on a matter or
or prior public disclosure of the date of nominating a candidate for
the meeting is given or made to director and there is less than
stockholder, to be timely, the notice must 40 days notice or prior public
be received by the company no later than disclosure of the date is given
the close of business on the 10th day or made to members, to be
following the day on which such notice of timely, must be received no
the date of the meeting was mailed or later than the close of
public disclosure was made, whichever business on the 10th day
first occurs. following the day on which such
notice of the date of the
meeting was
72
mailed or such public disclosure
was made.
Meetings of In person or by proxy or other appropriate In person or by proxy or by any
Stockholders/ electronic means. teleconference means where
Members - Presence persons can hear one another.
PROVISION AAAC TI
- ------------------------ ------------------------------------------- --------------------------------
Meeting of Not less than 10 days or more than 60 days. Not less than seven days; no
Stockholder/Member - maximum limit.
Notice
Meeting of Regular and annual meetings shall be Meetings may be called by the
Stockholders/Members - called by the directors. Special meetings directors or by members holding
Call of Meeting may be called only by majority of board of 30 percent of the outstanding
directors, chief executive officer or by a votes. The articles require an
majority of the issued and outstanding annual meeting of the members
capital stock entitled to vote. for the election of directors
to be called by the directors.
Meetings on short notice may be
called upon waiver or presence
of all the members holding
shares entitled to vote or 90%
of the total number of shares
entitled to vote agree to short
notice.
Meeting of Stockholders Within or without Delaware Within or outside the BVI as
/Members- Place the directors consider
necessary or desirable.
Meeting of Majority of the capital stock issued and One-half of the votes of the
Stockholders/Members - outstanding and entitled to vote at shares of each class or series
Quorum meeting. Meeting may be adjourned for up entitled to vote. Adjournment
to 30 days without additional notice to for such time as directors
stockholders. determine.
Meeting of As fixed by the directors, no more than 60 As fixed by the directors
Stockholders/Members - days and no less than 10 days before the
Record Date meeting. If not fixed, the day before
notice of meeting is given.
Directors - Election By the stockholders as entitled by their By the members as entitled by
terms, including the holders of common their terms, including the
stock. holders of common stock
73
Directors - Term Staggered board of three classes; for Annual term
terms of three years
Directors - Removal By the stockholders for cause. By resolution of the members
for cause or without cause on a
vote of the members
representing 66-2/3 of the
shares entitled to vote or the
directors for any reason on a
resolution signed by all the
other directors absent from
meetings for six months without
leave of the board, death or
incapacity.
Directors - Vacancy May be filled by majority of remaining May be filled by members or the
directors (unless they are the result of board of directors.
the action of stockholders) and newly
created vacancies may be filled by
majority of remaining directors.
Directors - Number Unless established by certificate of Same as AAAC.
incorporation, as determined by board of
directors, but not less than one.
PROVISION AAAC TI
- ------------------------ ------------------------------------------- --------------------------------
Directors - Quorum and A majority of the entire board. The One-half of the total number of
Vote Requirements affirmative vote of a majority of directors, present in person or
directors present at a meeting at which by alternate, except if there
there is a quorum constitutes action by are only two or less directors
the board of directors. then a quorum will be all the
directors.
Directors - Managing Not applicable Provision for the board to
Director select one or more directors to
be managing directors, provide
for special remuneration and
assign such powers as the board
determines so long as it is not
a power that requires board
approval.
Directors - Powers All powers to govern the corporation not Same as AAAC
reserved to the stockholders.
PROVISION AAAC TI
- ------------------------ ------------------------------------------- --------------------------------
Directors - Committees Directors may establish one or more Same as AAAC
committees with the authority that the
board determines.
Directors - Consent Directors may take action by written By written consent in same
Action consent of all directors, in addition to manner as if at a meeting in
action by meeting. persons, by directors or by
alternate.
Director - Alternates Not permitted Directors may, by written
instrument, appoint an
alternate who need not be a
director, who may attend
meetings in
74
the absence of the director and
vote and consent in the place of
the directors.
Directors - Appoint Directors appoint the officers of the Same as AAAC, subject to the
Officers corporation, subject to the by-laws, with articles of association
such powers as they determine.
Director - Limitation Directors liability is limited, except for Duty to act honestly and in
of Liability (i) breach of loyalty, (ii) act not in good faith with a view to the
good faith or which involves international best interests of the company
misconduct or a knowing violation of law, and exercise care, diligence
(iii) willful violation of law in respect and skill of a reasonably
of payment of dividend or redeeming prudent person acting in
shares, or (iv) actions in which director comparable circumstances. No
receives improper benefit. provisions in the memorandum,
articles or agreement may
relieve a director, officer, or
agent from the duty to act in
accordance with the memorandum
or articles or from personal
liability arising from the
management of the business or
affairs of the company.
PROVISION AAAC TI
- ------------------------ ------------------------------------------- --------------------------------
Director - Company may purchase insurance in relation Same as AAAC, extends to a
Indemnification to any person who is or was a director or liquidator of the company.
Insurance officer of the company.
Amendments to Amendments must be approved by the board Amendments to the memorandum
Organizational Documents of directors and by a majority of the and articles may be made by
outstanding stock entitled to vote on the resolution of the members or by
amendment, and if applicable, by a the directors.
majority of the outstanding stock of each
class or series entitled to vote on the
amendment as a class or series. By-laws
may be amended by the stockholders
entitled to vote at any meeting or, if so
provided by the certificate of
incorporation, by the board of directors.
PROVISION AAAC TI
- ------------------------ ------------------------------------------- --------------------------------
Sale of Assets The sale of all or substantially all the Subject to the Memorandum and
assets of the company requires stockholder Articles of Association, the
approval. sale of more than 50% of the
assets of the company requires
member approval.
Dissenters Rights Provision is made under Delaware corporate Provision is made under the BCA
law to dissent and obtain fair value of to dissent and obtain fair value
shares in connection with certain of shares in connection with
corporate actions that require stockholder certain corporate actions that
approval or consent. require member approval or
consent.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
75
As indicated in the comparison of charter provisions, a director, officer or
agent of a company formed under the laws of the BVI is obligated to act honestly
and in good faith and exercise care, diligence and skill of a reasonably prudent
person acting in comparable circumstances. The Memorandum and Articles of TI do
not relieve directors, officers or agents from personal liability arising from
the management of the business of the company. Notwithstanding the foregoing,
Section 14 (A) of the Business Companies Act of the BVI may indemnify directors,
officers and agents against all expenses, including legal fees and judgments,
fines and settlements, in respect of actions related to their employment. The
Equity Acquisition Agreement provides indemnification in respect of the
representations, warranties and covenants of the parties, some of which may
relate to the securities laws of the United States. There are no agreements that
relieve directors, officer or agents from personal liability. TI is permitted
and intends to obtain director and officer insurance.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be permitted to directors, officers or persons controlling
the registrant pursuant to the foregoing provisions, TI and AAAC have been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy, as expressed in the Securities Act of
1933, as amended, and is, therefore, unenforceable.
DEFENSES AGAINST HOSTILE TAKEOVERS
While the following discussion summarizes the reasons for, and the operation and
effects of, the principal provisions of TI's Memorandum and Articles of
Association that management has identified as potentially having an
anti-takeover effect, it is not intended to be a complete description of all
potential anti-takeover effects, and it is qualified in its entirety by
reference to the full texts of TI's Memorandum and Articles of Association.
In general, the anti-takeover provisions of TI's Memorandum and Articles of
Association are designed to minimize susceptibility to sudden acquisitions of
control that have not been negotiated with and approved by TI's board of
directors. As a result, these provisions may tend to make it more difficult to
remove the incumbent members of the board of directors. The provisions would not
prohibit an acquisition of control of TI or a tender offer for all of TI's
capital stock. The provisions are designed to discourage any tender offer or
other attempt to gain control of TI in a transaction that is not approved by the
board of directors, by making it more difficult for a person or group to obtain
control of TI in a short time and then impose its will on the remaining
stockholders. However, to the extent these provisions successfully discourage
the acquisition of control of TI or tender offers for all or part of TI's
capital stock without approval of the board of directors, they may have the
effect of preventing an acquisition or tender offer which might be viewed by
stockholders to be in their best interests.
Tender offers or other non-open market acquisitions of stock will generally be
made at prices above the prevailing market price of TI's stock. In addition,
acquisitions of stock by persons attempting to acquire control through market
purchases may cause the market price of the stock to reach levels that are
higher than would otherwise be the case. Anti-takeover provisions may discourage
such purchases, particularly those of less than all of TI's stock, and may
thereby deprive stockholders of an opportunity to sell their stock at a
temporarily higher price. These provisions may therefore decrease the likelihood
that a tender offer will be made, and, if made, will be successful. As a result,
the provisions may adversely affect
76
those stockholders who would desire to participate in a tender offer. These
provisions may also serve to insulate incumbent management from change and to
discourage not only sudden or hostile takeover attempts, but also any attempts
to acquire control that are not approved by the board of directors, whether or
not stockholders deem such transactions to be in their best interest.
Stockholder Meetings. BVI law provides that stockholder meetings shall be
convened by the board of directors at any time or upon the written request of
stockholders holding more than 30% of the votes of the outstanding voting shares
of the company. TI's Articles of Association provide that annual stockholder
meetings for the election of directors may be called only by the directors.
Number of Directors and Filling Vacancies on the Board of Directors. BVI law
requires that the board of directors of a company consist of one or more members
and that the number of directors shall be set by the corporation's Articles of
Association, with a minimum of one director. TI's Articles of Association
provide that the number of directors shall be not less than one, subject to any
subsequent amendment to change the number of directors. The power to determine
the number of directors is vested in the board of directors. The power to fill
vacancies, whether occurring by reason of an increase in the number of directors
or by resignation, is vested primarily in the board of directors. Directors may
be removed by the members only for cause or without cause on a vote of the
members representing 66-2/3 of the shares entitled to vote.
Election of Directors. Under British Virgin Island law, there is no cumulative
voting by stockholders for the election of the directors. The absence of
cumulative voting rights effectively means that the holders of a majority of the
stock voted at a stockholders meeting may, if they so choose, elect all
directors of TI, thus precluding a small group of stockholders from controlling
the election of one or more representatives to the board of directors.
Advance Notice Requirements for Nomination of Directors and Presentation of New
Business at Meetings of Stockholders; Action by Written Consent. The TI Articles
of Association will provide for advance notice requirements for stockholder
proposals and nominations for director. Generally, to be timely, notice must be
delivered to the secretary of TI at its principal executive offices not fewer
than 30 days nor more than 60 days prior to the first anniversary date of the
annual meeting for the preceding year. Special meetings may be called by TI's
board of directors or by stockholders comprising 50% of the combined voting
power of the holders of the then outstanding shares entitled to vote. These
provisions make it more procedurally difficult for a stockholder to place a
proposal or nomination on the meeting agenda or to take action without a
meeting, and therefore may reduce the likelihood that a stockholder will seek to
take independent action to replace directors or seek a stockholder vote with
respect to other matters that are not supported by management.
RIGHTS OF MINORITY SHAREHOLDERS
Under the law of the BVI there is little statutory law for the protection of
minority shareholders. The principal protection under statutory law is that
shareholders may bring an action to enforce the constituent documents of the
corporation, the Articles and the Memorandum of Association. Shareholders are
entitled to have the affairs of the company conducted in accordance with the
general law and the articles and memorandum. The company is obliged to hold an
annual general meeting and
77
provide for the election of directors. Companies are obligated to appoint an
independent auditor and shareholders are entitled to receive the audited
financial statements of the company.
There are common law rights for the protection of shareholders that may be
invoked, largely dependent on English company law, since the common law of the
BVI for business companies is limited. Under the general rule pursuant to
English company law known as the rule in Foss v. Throttle, a court will
generally refuse to interfere with the management of a company at the insistence
of a minority of its shareholders who express dissatisfaction with the conduct
of the company's affairs by the majority or the board of directors. However,
every shareholder is entitled to have the affairs of the company conducted
properly according to law and the constituent documents of the corporation. As
such, if those who control the company have persistently disregarded the
requirements of company law or the provisions of the company's memorandum of
association or articles, then the courts will grant relief. Generally, the areas
in which the courts will intervene are the following:
(i) an act complained of which is outside the scope of the authorized business
or is illegal or not capable of ratification by the majority, (ii) acts that
constitute fraud on the minority where the wrongdoers control the company, (iii)
acts that infringe on the personal rights of the shareholders, such as the right
to vote, and (iv) where the company has not complied with provisions requiring
approval of a special or extraordinary majority of shareholders.
Under the law of Delaware, the rights of minority shareholders are similar to
that which will be applicable to the shareholders of TI. The principal
difference, as discussed elsewhere will be the methodology and the forum for
bringing such an action. It is also generally the case that the Delaware courts
can exercise wide latitude in interpretation and wide discretion in fashioning
remedies as they think fits the circumstances for the regulation of the company.
Under English precepts of the law of minority shareholders, there is generally a
more restricted approach to the enforcement of the rights through the
interpretation of the law, articles and memorandum.
FEDERAL INCOME TAX CONSEQUENCES OF THE REDOMESTICATION
The Redomestication will be structured to qualify as a redomestication merger
under section 368(a) of the Code for federal income tax purposes. For United
States federal income tax purposes, no gain or loss will be recognized by the
stockholders of AAAC who receive TI common stock for their AAAC common stock in
connection with the Redomestication merger. The aggregate tax basis of the TI
common stock received by an AAAC stockholder in connection with the
domestication will be the same as the aggregate tax basis of the AAAC common
stock surrendered in exchange for TI common stock. A stockholder who holds AAAC
common stock will include in his holding period for the TI common stock that he
receives his holding period for the AAAC common stock. AAAC, however, will
recognize gain, but not loss, as a result of the Redomestication equal to the
difference, if any, between the adjusted tax basis of any AAAC assets and such
asset's fair market value at the effective time of the Redomestication. There is
no reciprocal tax treaty between the BVI and the United States regarding
withholding.
State, local or foreign income tax consequences to stockholders may vary from
the federal income tax consequences described above, and STOCKHOLDERS ARE URGED
TO CONSULT THEIR OWN
78
TAX ADVISOR AS TO THE CONSEQUENCES TO THEM OF THE REDOMESTICATION UNDER ALL
APPLICABLE TAX LAWS.
INFORMATION ABOUT HUNAN TONGXIN ENTERPRISE CO., LTD.
BACKGROUND
Hunan Tongxin is the largest independent Chinese supplier of EVBS capable of
providing products for both light and commercial vehicles in addition to
designing, fabricating and testing dies used to stamp automotive body panels.
EVBS consists of exterior body panels including doors, floor pans, hoods, side
panels, fenders. Hunan Tongxin also manufactures complete cab structures for
commercial vehicles. Hunan Tongxin's components must meet exacting dimensions
for fit and finish before they are assembled and finally painted. These
capabilities enable it to participate effectively in all sectors of the Chinese
automotive market including light and commercial vehicles. Hunan Tongxin was
established in 1984 as a private enterprise as opposed to most companies in the
automotive sector that were originally established as state owned enterprises
that migrated to private enterprises. This is important because companies that
were originally state owned enterprises have encountered difficulties in
adjusting to the demands of a market not controlled by the government where as
Hunan Tongxin has operated in this non controlled environment for more than 23
years.
MARKET OVERVIEW
- - Market Overview:- Hunan Tongxin operates within the automotive sector of
the Chinese economy and like this sector throughout the world there is some
seasonality to the market. In the automobile industry in China new models
are introduced in the 3rd quarter of the calendar year. Due to retooling
and start up inefficiencies associated with these new models, the 3rd
quarter is the weakest quarter from a revenue standpoint. These new models
will increase in volume throughout the 3rd quarter and by the
beginning of the 4th quarter the companies will be operating at the same
levels as they were prior to retooling for the new models, but with a
higher demand from the market due to the new models. This results in the
4th quarter being the highest in revenue for the year. The 1st and 2nd
quarters are basically the same.
- - In 2006, over 7.2 million automotive vehicles were produced in China
surpassing Japan as the second largest vehicle market in terms of
sales. The market is anticipated to grow by over 80% surpassing 13
million vehicles by 2011 (China Trends: Michael Tchong; February 2, 2007)
- - The market is segmented into light vehicles (including car, multi purpose
vehicles, sport utility vehicles and minivans) and the commercial vehicles
(including light, medium and heavy duty buses, trucks, chassis and semi
tractors). Exports accounted for 185,000 units in 2006 and are anticipated
to grow to 650,000 by 2011.(China Commercial Vehicle Market; February
2006).
STRATEGY
Hunan Tongxin captured approximately 8% of the EVBS market in 2006 an increase
from 7% in 2005 and plans to increase its share to 12-15% by 2010. In order to
achieve its goal to increase its share of the EVBS market Hunan Tongxin is
designing new cab structures, expanding its die design and fabrication
capabilities, expanding its product design engineering capabilities, and has
established new EVBS assembly facilities in close proximity to regional
customers.
79
Hunan Tongxin intends to enter the North American and European collision-parts
after-markets ("After-Market"), which will significantly increase the
opportunity for sales of its products, taking advantage of the continued
availability of its comparative cost advantage versus global suppliers. European
and North American Original Equipment Manufacturers ("OEMs") prefer to
manufacture EVBS components and structures in their own facilities until such
time as there is a significant model change or "facelift" (change to exterior
appearance of a vehicle). At the time of such model change or "facelift", the
OEM prefers to outsource EVBS components and structures to independent
suppliers, such as Hunan Tongxin, to reduce costs and maintain a new product
focus in its assembly plants. The After-Market for these components and
structures is created by vehicle accidents that result in the replacement of
damaged components and represented approximately $3.5 billion in sales for 2006
(Frost & Sullivan, March 2005) . It is the intent of Hunan Tongxin to work with
the OEMs to supply high quality components and structures through the OEM's
distribution network, in these markets.
There is no government approval or significant regulations required to enter
these markets.
Hunan Tongxin's goal is to become one of the world's premier EVBS companies.
The principal elements of its core business strategies are as follows:
* Maintaining its leadership position in China's EVBS
* Enhancing the leadership position in die design and fabrication.
* Increasing value added content for cab assembly.
* Focusing on high-value EVBS design services
Since 2004 Hunan Tongxin had successfully expanded to the following Southeast
Asia exports markets:
* Vietnam EVBS market
* Expand into non-Chinese markets
PRODUCTS AND SERVICES
As the largest independent supplier in the Chinese automotive EVBS market, Hunan
Tongxin offers a wide variety of exterior body panels and cabs for passenger and
commercial vehicles. It provides more than 22 different cab structures including
those outfitted with complete interiors. The company has the capability to
design, fabricate and test progressive stamping dies and moulds for its own use
and for sales to other companies. It is involved with its customers early on in
the vehicle design process as the exterior vehicle structure is being designed.
Hunan Tongxin is linked with its customers through its computer aided design
("CAD") systems allowing for instantaneous transfer of engineering drawings and
specifications.
PRODUCT ENGINEERING & TECHNOLOGY
80
Hunan Tongxin's business and long-term development rely on its ability to
provide state of the art die design and fabrication and a full range of EVBS
products. The technical staff totals 110 employees or 28% of its management
staff. Its technical equipment capability includes:
* Flexible 3D Laser Scan System
* 3D Laser cutting
* CAD workstations
* 3D coordinating measuring machine
* Die Try-out
* Press capabilities from 400 ton to 2,400 ton
Hunan Tongxin maintains a close working relationship with the local provincial
automotive body research center with Hunan University and has cooperative
technical relationships with key customers including Foton Beiqi, Changan,
Dongfeng and First Auto Works.
INTELLECTUAL PROPERTY RIGHTS
Hunan Tongxin relies on a combination of copyright, patent, trademark and other
intellectual property laws, nondisclosure agreements and other protective
measures to protect its proprietary rights. It has nine design and utility
patents registered in China. Hunan Tongxin also utilizes unpatented proprietary
know-how and trade secrets and employs various methods to protect its trade
secrets and know-how.
Hunan Tongxin markets its EVBS products solely under the brand "Hunan Tongxin
Enterprise Co. Ltd." The brand name has been well-established over the years and
is recognized by industry participants to be associated with high quality and
reliable products. Hunan Tongxin has obtained both brand name and trademark
protection in the PRC.
MARKETING, SALES AND CUSTOMER SUPPORT
Hunan Tongxin conducts its marketing, sales and customer support through a team
of eleven sales personnel located across five sales locations in China:
* Southwest area;
* Middle south area;
* East area;
* Shandong area (provinces of Jiangxi, Shandong); and
* Exports.
Through these sales regions Hunan Tongxin is capable of servicing over 130
customers in 26 different cities.
Hunan Tongxin provides training for its sales personnel twice a year and
includes updates of the latest product technology and sales administration
including accounts receivable, customer liaison, and price negotiations.
81
MANUFACTURING
Hunan Tongxin designs specific stamping manufacturing and assembly processes.
Its products are processed from sheet steel. This sheet steel is cold carbon
rolled steel and accounts for approximately 70% of cost of goods sold and about
98% of Hunan Tongxin's total cost of raw material. Due to increasing worldwide
demand for all steel the cost for sheet steel has been increasing for the last
five years. Because of these increases Hunan Tongxin has successfully negotiated
a materials escalation clause with all of its customers. This escalation clause
allows for Hunan Tongxin to pass on to its customers any cost increases the
company incurs due to rising steel costs. The dies utilized in its stamping
process are developed and fabricated in-house by Hunan Tongxin. Its processing
capabilities include:
* Steel shearing
* Progressive stamping
* Welding and joining
* Atmospheric furnaces
* Cathodic painting systems
Hunan Tongxin obtained ISO 9001-2000 international quality management system
certification in 2002.
COMPETITION
Hunan Tongxin's competitors include the Chinese original equipment manufacturers
of commercial trucks possessing the capability to manufacture some portion of
their requirements for EVBS and EVBS components. This includes but is not
limited to First Auto Works, Second Auto Works, Beiqi Foton, and independent
domestic Chinese suppliers including Shiyan Jianan Vehicle Body Co., Ltd. and
Sichuan Chongzhou Tingjiang Vehicle Body Plant.
For 2006 Hunan Tongxin captured 7% of the total China market for cabs in the
commercial vehicle market resulting in 87% of total revenue. Other independent
suppliers such as(Shiyan Jianan Vehicle Body Company and Sichuan Chongzhou
Tingjiang Vehicle Body Plant) combined captured approximately 1% of the market
for cabs. The remaining 82% of the market share was held by the truck OEMs. In
analyzing the competitive landscape, Hunan Tongxin must continue to supply their
products to the OEMs at comparable levels for quality, delivery, technology and
price as the OEMs are able to deliver in their plants. Quality in this
environment is a given in that the customers expect and even demand defect free
products from all suppliers. From a delivery standpoint, Hunan Tongxin is able
to meet just in time requirements from their customers with plants strategically
located in Changsha, Qingdao and Chengdu. It has a technology advantage over
their competition (including their customers) in that Hunan Tongxin designs and
manufactures its requirement for dies and moulds. Dies and moulds are the high
technology part of any stamping operation. Price is the area in which Hunan
Tongxin must continue to offer their customers an advantage when comparing the
OEMs in house cost to the price charged by it. The workforce at Hunan Tongxin is
paid on a piece part basis. The employees are paid only for the number of parts
they actually produce. This results in a competitive wage advantage. In addition
to this labor cost advantage, it provides the customers with the ability to
better deploy their capital. The competitive differentiators in the truck market
are vehicle attributes such as brake and torque horsepower from the power train
and load capability from the chassis. The cab is not a competitive
differentiator and the truck OEM would prefer to deploy their capital in an area
that will differentiate their product from the competitors and outsource those
parts that are not considered to be competitive differentiators.
Hunan Tongxin has die design and fabrication capability and a wide variety of
products including semi-finished and finished cabs and related body panels which
provide competitive advantages over domestic Chinese competitors. Compared to
its competitors, Hunan Tongxin's competitive advantages include the following
elements:
82
* Utilizing a large, low cost die design and fabrication facility and
technical staff that permits Hunan Tongxin to provide a custom solution to
its customers at a lower price and quicker delivery than its competition
can supply;
* Providing a one stop solution for customers consisting of 80 different
types of EVBS products;
* Servicing over 130 customers providing access to all major OEM regional
vehicle assembly sites in China.
* Locating sales personnel in various customer regions to help match Hunan
Tongxin's product capabilities to customer needs and provide the assurance
that Hunan Tongxin can meet those needs;
* An in-depth understanding of the local Chinese commercial vehicle market
that enables Hunan Tongxin to design a custom fit for a particular vehicle
size, type and level of styling;
* Close technical cooperative relationships with its customers including
Foton Beiqi, Changan, Dongfeng and First Auto Works.
EMPLOYEES
Hunan Tongxin employs approximately 2,100 people of which 28% or 588 are
considered manufacturing support personnel, a concentration of engineering and
technical talent that Hunan Tongxin does not believe is matched by any of its
competitors. Hunan Tongxin's strong reputation allows it to attract and retain
the engineering talent it needs to execute its business strategy. As the
prevailing wage for engineers in China is considerably less than the equivalent
rates in Western economies, Hunan Tongxin sees this as a significant competitive
advantage.
PROPERTIES
Hunan Tongxin main administrative office and manufacturing facilities are
located in Changsha, China. Other manufacturing sites are located in Chengdu and
Qingdao China. All properties, except for a leased site in Qingdao, are owned by
Hunan Tongxin and it believes its facilities are adequate for its current needs.
LEGAL PROCEEDINGS
Hunan Tongxin is not involved in any legal proceedings nor is AAAC aware of any
proceedings that are pending or threatened which may have a significant effect
on Hunan Tongxin's business, financial position, and results of operations or
liquidity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
83
BUSINESS OVERVIEW
Hunan Tongxin's current products include body structures for passenger vehicles
and commercial vehicles (light, medium and heavy duty trucks). In addition the
company fabricates individual components (fenders, doors, floor pans, side
panels and roofs). For fiscal year 2006, individual components accounted for 9%
of total revenue, unpainted cabs and bodies for 50% of total revenue, painted
cabs accounted for 20% and finished cabs (cabs with complete interiors)
accounted for 20%. In addition it sells dies and moulds to other fabricators,
these sales accounted for the remaining 1% of revenue.
The total revenue from these sales in 2006 accounted for $66.6 million. As
depicted on the following table, 2006 revenue was 47% higher than 2004 revenue.
In 2005 the Chinese government implemented austerity measures to dampen the
economic growth rate. These measures included limitations on fixed asset
expenditures resulting in the overall truck market being flat when comparing
2005 to 2004. However, during this period from 2004 to 2005 Hunan Tongxin was
able to increase revenue from $45.1 million to $58.8 million. This was
accomplished because it had excess capacity and the company manufactures its own
requirements for dies and moulds, resulting in significantly less fixed asset
expenditures. During this period of government restraints the truck original
equipment manufacturers ("OEMs") continued to introduce and plan for new models.
These new models forced the OEMs to go to Hunan Tongxin as their proven supplier
of cabs to provide the necessary capacity. Also, as shown on the table, sales
revenue for Hunan Tongxin has continued to grow between 25% and 30%, year over
year from
84
2004 through the first half of 2007. It has continued to increase market share
during this period. Since 2004 the Chinese production of trucks has increased,
year over year through the first nine months of 2007 by more than 25%.
(PERFORMANCE GRAPH)
REVENUE ANALYSIS
(NET OF VALUE ADDED TAX)
2004 $45.1
2005 $58.8
2006 $66.6
9Mon-06 $47.2
9Mon-07 $63.0
In addition to this growth from 2004 through the first nine months of 2007, we
believe the production of trucks in the Chinese market will continue to increase
by 15% to 25% a year through 2020. In 2006 the Chinese government announced a
Unified National Transport Network Plan referred to as the "7-9-18" plan. This
plan calls for $250 billion to be invested in roads by 2020. The Chinese will
construct seven expressways from Beijing, nine expressways North/South and
eighteen expressways East/West. It will require trucks for this construction. In
addition, the Chinese government is encouraging companies to locate in western
China. This area has a significant percentage of the Chinese population but to
date has not seen the economic growth that has occurred in the eastern part of
China. This lack of manufacturing in western China is due to the lack of roads
to get product from this region to the ports. The "7-9-18" plan will alleviate
this problem and result in a greater demand for trucks.
In the future, planned for 2008, Hunan Tongxin will add new stampings for the
aftermarket. In addition, today the company purchases the interior plastic trim
products and the instrumentation/wiring harnesses for the finished cabs.
85
The Company believes that presenting an executive overview of key financial
information for Hunan Tongxin is appropriate in providing further disclosure of
Hunan Tongxin. Correspondingly, the Company is using Net Income as a financial
measure calculated in accordance with generally accepted accounting principles.
(PERFORMANCE GRAPH)
NET INCOME MARGIN
(NET INCOME-% NET REVENUES)
2005 $1.3%
2006 8.9%
9Mon-06 8.1%
9Mon-07 12.3%
From the beginning of 2004 through the first nine months of 2007 Hunan Tongxin
has averaged spending $6.3 million per year in capital expenditures and as of
September 30, 2007 the company had $4.4 million in long term debt and cash on
hand of $7.6 million. The company is generating sufficient cash to maintain its
current manufacturing capacity through 2010. At the current level of growth and
factoring in the expected continued growth of 25% to 30% per year the company
will have to increase its capital outlays in 2010 and 2011. With the merger
between the Company and Hunan Tongxin, TI will have sufficient cash to meet this
requirement.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of Tongxin's financial condition presented in this
section are based upon Tongxin's consolidated financial statements, which have
been prepared in accordance with the generally accepted accounting principles in
the United States. During the preparation of the consolidated financial
statements, Tongxin was required to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, Tongxin
evaluates its estimates and judgments, including those related
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to sales, returns, pricing, bad debts, inventories, investments, fixed assets,
intangible assets, income taxes and other contingencies. Tongxin bases its
estimates on historical experience and on various other assumptions that it
believes are reasonable under current conditions. Actual results may differ from
these estimates under different assumptions or conditions.
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure about Critical Accounting Policy," Tongxin has identified the most
critical accounting policies upon which its financial status depends. It
determined that those critical accounting policies are related to revenue,
accounts receivable, inventories and fixed assets and use of estimates. These
accounting policies are discussed in the relevant sections in this management's
discussion and analysis, including the Recently Issued Accounting Pronouncements
discussed below.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
These consolidated financial statements have been prepared in accordance with
the accounting principles generally accepted in the United States of America
("U.S. GAAP").
The consolidated financial statements include the financial statements of
Tongxin, its subsidiaries and those entities that Tongxin has determined it has
a direct or indirect controlling financial interests. All significant
inter-company balances and transactions have been eliminated in consolidation.
Investments in unconsolidated subsidiaries representing ownership of at least
20%, but less than 50%, are accounted for under the equity method. Nonmarketable
investments in which Tongxin has less than 20% ownership and in which it does
not have the ability to exercise significant influence over the investee are
initially recorded at cost and periodically reviewed for impairment.
Tongxin evaluates its relationships with other entities to identify whether they
are variable interest entities as defined by the Financial Accounting Standard
Board Interpretation No. 46(R), "Consolidation of Variable Interest Entities"
and to assess whether it is the primary beneficiary of such entities. If the
determination is made that Tongxin is the primary beneficiary, then that entity
is included in the consolidated financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
For purposes of the consolidated statements of cash flows, Tongxin considered
all highly liquid debt instruments with original maturities of three months or
less to be cash equivalents. None of Tongxin 's cash is restricted as to
withdrawal. Cash deposits with banks are held in financial institutions in
China, which has no federally insured deposit protection. Accordingly, Tongxin
has a concentration of credit risk related to these uninsured deposits.
FOREIGN CURRENCY TRANSLATIONS AND TRANSACTIONS
The Renminbi ("RMB"), the national currency of China, is the primary currency of
the economic environment in which the operations of Tongxin are conducted.
Tongxin uses the United States dollar for financial reporting purposes. Tongxin
translates assets and liabilities into U.S. dollars using the rate of exchange
prevailing at the balance sheet date, and the consolidated statement of
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income is translated at average rates during the reporting period. Adjustments
resulting from the translation of financial statements from RMB into U.S.
dollars are recorded in shareholders' equity as part of accumulated
comprehensive income/(loss). Gains or losses resulting from transactions in
currencies other than RMB are reflected in income for the reporting period.
REVENUE RECOGNITION
Tongxin recognizes revenue when persuasive evidence of an arrangement exists,
services have been rendered, the sales price is fixed or determinable, and
collectibility is reasonably assured. This typically occurs when the product is
shipped.
Revenue from sale of goods represents the invoiced value of goods, net of
value-added tax, sales returns and trade discounts.
TRADE ACCOUNTS RECEIVABLE AND THE ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is Tongxin's best estimate of the amount of
probable credit losses in its existing accounts receivable. Tongxin's estimate
is based on historical collection experience and a review of the current status
of trade accounts receivable.
INVENTORIES
Inventories consist of raw materials, work-in-progress and finished goods.
Inventories are stated at the lower of cost or market value. Costs are
calculated on the weighted average basis and are comprised of direct materials,
direct labor and a relevant portion of all production overhead expenditures.
Slow-moving inventories are periodically reviewed for impairment in value.
USE OF ESTIMATES
Hunan Tongxin's accounting estimates or assumptions bear the risk of change due
to the uncertainty attached to those estimates and assumptions as a result of
the emerging Chinese automotive market. The preparation of the consolidated
financial statements in accordance with USGAAP requires management of Hunan
Tongxin to make a number of estimates and assumptions relating to the reported
amount of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of consolidation financial statements and the reported
amounts of revenue and the expenses during the reporting period.
Significant items subject to such estimates and assumptions include revenue
recognition, recoverability of accounts receivable and realization of deferred
tax assets.
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For revenue recognition, Hunan Tongxin has adopted an accounting policy of
recognizing the revenue when persuasive evidence of an arrangement exists,
services have been rendered, the sales price is fixed or determinable, and
collectibility is reasonably assured. This means it recognizes revenue when the
goods are shipped and the risks and rewards of the ownership of the goods are
transferred to the customers.
In this respect, Hunan Tongxin believes that its revenue recognition is not
affected by any significant estimate or assumption because for all sales of
goods there are orders from customers, prices are agreed beforehand and once the
goods are shipped and accepted by customers, the earning process is considered
as completed and revenue is recognized accordingly.
It reviews the existing accounts receivable for any potential
recoverability issue on regular basis. In carrying out such assessment, Hunan
Tongxin would review the historical collection experience and the current status
of trade accounts receivable concerned.
With regard to the realization of deferred income tax assets, it believes that
it is more likely than not, the temporary differences in deferred income tax
assets will be realized in the future, thus no valuation
allowance is recognized as of the balance sheet dates.
Hunan Tongxin has stated that those estimates and assumptions used in its
assessments are subject to changes and accordingly, the actual results could
differ from those estimates.
PROPERTY AND EQUIPMENT
Property, plant and equipment are recorded at cost and are stated net of
accumulated depreciation. Depreciation expense is calculated using the
straight-line method over the estimated useful lives of the assets, taking into
account the estimated residual value. The estimated useful lives are as follows:
Asset Useful Lives
- ----- ------------
Buildings 20 years
Machinery 10 years
Motor vehicles 5 years
Office and computer equipment 5 years
Maintenance and repairs are charged directly to expense as incurred, whereas
betterment and renewals are generally capitalized in their respective property
accounts. When an item is retired or otherwise disposed of, the cost and
applicable accumulated depreciation are removed and the resulting gain or loss
is recognized and reflected as an item before operating income (loss).
VALUE ADDED TAX
Hunan Tongxin is subject to value added tax ("VAT") imposed by the Chinese
government on its domestic product sales. The output VAT is charged to customers
who purchase goods from Hunan Tongxin and the input VAT is paid when it
purchases goods from its vendors. VAT rate is 17%, in general, depending on the
types of product purchased and sold. The input VAT can be offset against the
output
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VAT. VAT payable or receivable balance represents either the input VAT less than
or larger than the output VAT. The debit balance represents a credit against
future collection of output VAT instead of a receivable.
Pursuant to EITF 06-3 "How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement", Tongxin
has elected to present revenue on net basis (net of VAT) within the statements
of operations.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2007 and 2006
OPERATING REVENUES
Tongxin's operating revenues are derived from the following three categories.
* approximately 90% derived from the manufacture and sales of EVBS;
* approximately 9% from exterior body panels for commercial vehicles
enclosures, and
* approximately 1% from the design, fabrication and sales of stamping dies.
For the period ended September 30, 2007, total revenues amounted to
approximately $63 million, an increase by $16 million compared to $47 million
for the same period the prior year representing a 34% increase. The favorable
variance was due to increased shipments of complete cabs to both existing and
new customers resulting in increased market share and the introduction of new
products with added content.
COST OF GOODS SOLD
Cost of Goods Sold ("COGS") can be divided into cost of raw material including
primarily carbon sheet rolled steel and the cost of labor, which is paid based
entirely on a piece work system, and other production related expenses including
utilities, indirect labor, inbound freight and non-product material.
For the period ended September 30, 2007, the COGS amounted to approximately $43
million, an increase by $10 million compared to $33 million for the same period
the prior year representing a 30% increase. The increase was primarily due to
increased usage of steel and interior components for finished cabs.
GROSS MARGIN
As a percentage of total revenues, the overall gross margin increased to 32% for
the period ended September 30, 2007 compared to 28% for the same period the
prior year, primarily because of increased productive labor operating
efficiency, net improvement in steel usage resulting from reduced scrap and
design improvements, and other cost-saving measures.
OPERATING EXPENSES
SELLING EXPENSES
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Selling expenses consist mainly of compensation for sales personnel, travel
related costs and product order shipment. Product order shipment is shipping
expenses carrying finish products from the Company warehouse to customers'
premise. Product order shipment represents roughly 75% of total selling
expenses. Sales personnel are paid upon receipt by the Company of cash payment
from their customers. Selling expenses were approximately $4.6 million for the
period ended September 30, 2007, an increase of 12% or roughly $500,000 compared
to approximately $4.1 miilion for the same period of the prior year. Increased
product order shipments costs inline with increased unit shipments of cabs and
components to customers accounted for most of the variance. Selling expenses
accounted for approximately 7% and 8% for the period ended September 30, 2007
and 2006 respectively.
Hunan Tongxin is reporting revenue on a gross basis, including the cost of
shipping finished product. The cost of this shipping is included in SGA as an
expense. This is in accordance with the guidance in ETIF 00-10. The Company has
evaluated the significance of outbound freight expense versus the total cost of
SGA as well as the impact on gross profit and has concluded that the importance
of capturing this expense in sales expense, where one manager has the
responsibility for total sales expense (including the cost of outbound freight)
far out weighs any argument to include this item on a different line of the
income statement.
R&D AND PRODUCT ENGINEERING EXPENSES
Product engineering, including R&D was $2.8 million for the 9 months ending
September 30, 2007 compared to $2.6 million for the same period of 2008. As a
percentage revenue, product engineering and R&D was 4% and 6% for the same two
periods. Product engineering is comprised of wages and salaries for technical
employees, cost associated with tooling and die tryout and the cost of steel
included in these tryouys. For the 9 months ending September 30, 2007, steel
consumption accounted for 73% of all product engineering expense, salaries and
wages accounted for 15% and the remaining 12% was for other perishable
materials.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, including salaries, bonuses, and
maintenance and upkeep for the workers' dormitories, amounted to approximately
$2.7 million for the period ended September 30, 2007, an increase of
roughly $100,000 for the same period the prior year, representing an increase of
approximately 4%.period ended September 30, 2007, One-time expenses of $230,000
associated with the proposed business transaction to date, including fees
charged by lawyers, advisors, accountants and auditors, are included in the
total $2.7 million general and administrative expenses ended september 30, 2007.
If one-time expenses were excluded, the total expenses would be $2.5 million, a
decrease of 4% compared to the same period of the prior year.
This decrease in net general and administrative expenses was the result of
several factors: 1) a decrease in workers' dormitory related expenses, and 2) a
decrease of travel expenses;
INCOME FROM OPERATIONS
Income from operations increased by approximately $5.8 million, or 86%, to $12.5
million for the period ended september 30, 2007, from $6.7 million for the same
period the previous year, as a result of increased revenues and operating
income.
INTEREST EXPENSES, NET
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For the period ended September 30, 2007, interest expenses increased by
approximately $250,000 or 20% to $1.52 million from $1.27 million for the same
period of the prior year. The increase in interest expense was mainly due to the
Company's additional commercial loan financing for the period.
OTHER INCOME (EXPENSES), NET
Other income (expenses) consist primarily of interest income, tax rebate, and
non-operational income (expenses). For the period ended September 30, 2007, The
other income (net) is $73,000, compared to $299,000 for the same period the
prior year.
INCOME TAX PROVISION
For the period ended September 30, 2007, Tongxin's tax provision was $3.6
million for financial reporting purposes, whereas there was an income tax
provision of $1.9 million for the same period the previous year. This increase
was due mainly to the increase in taxable income of Hunan Tongxin and an
increase in the effective tax rate of 32.7% compared to 30.4% for the same
period the prior year.
NET INCOME
For the period ended September 30, 2007, Hunan Tongxin's net income amounted to
$7.5 million, an increase of $3.7 million compared to $3.8 million for the same
period of the prior year. This increase was due mainly to the increase in
revenues and gross margin.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2006 AND 2005
OPERATING REVENUES
For the months ended December 31, 2006, total revenues amounted to $66.6
million, an increase by $7.8 million compared to $58.8 million for the same
period of the prior year, representing a 13% increase. The increase was
influenced by the Tongxin's market share increase during the period reflecting
increased unit shipments of finished cabs and components to new customers.
COST OF GOODS SOLD
In fiscal year 2006, the COGS amounted to $47.7 million, a decrease of $1.5
million, compared to $49.2 million for the same period of the prior year, a 3%
decrease. The decrease was due to reduction in price of cold rolled steel sheet.
The steel cost was 70% to net revenue in 2005, but 59% in 2006, while labor and
other production related costs roughly remained the same for the period.
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GROSS MARGIN
As a percentage of total revenues, the overall gross margin was 28% for the year
ended December 31, 2006 compared to 16% for the same period in the prior year. A
decrease in material cost contributed mostly the margin improvement.
OPERATING EXPENSES
SELLING EXPENSES
Selling expenses were approximately $5.4 million for the year ended December 31,
2006, of which 75% was for order shipment, delivering finish products from the
Company warehouse to customers' premise. The selling expenses had a decrease of
5%, or roughly $300,000 compared to approximately $5.6 million for the same
period of the prior year. As a percentage of total revenues, selling expenses
have witnessed a reduction for the years ended December 31, 2004, 2005, 2006.
(in $thousands)
2004 2005 2006
------ ------ ------
Selling expenses $5,816 $5,637 $5,357
Percentage to revenue 12.5% 9.6% 8.1%
R&D AND PRODUCT ENGINEERING EXPENSES
R&D and product engineering expense increased to $3.15 million from $2.56
million for the year ended December 31, 2006 and 2005, respectively. The
expenses were used to pay salaries and bonus to R&D staff and engineers,
material consumption, including steel consumption, during product engineering
and testing. The steel material consumption represents 73% of the total
expenses, while salary and bonus represents 15% of the total, and the remaining
12% is for all other perishable material use.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, including salaries, bonuses, and
maintenance and upkeep for the workers' dormitories, amounted to approximately
$3.1 million for the year ended December 31, 2006, an increase of $1.5 million
compared to $1.6 million for the same period of the prior year. The increase in
general and administrative expenses was primarily due to increases of (1)
$100,000 paid to pension fund for the Company senior management; (2) $360,000
social welfare pay-out for ordinary employees in accordance to China latest
labor law; (3) $630,000 realized bad debt provision and (4) $100,000 one time
charge legal service fee involving the Company legal dispute for the period of
2006. As a result of the above increases, general and administrative expense
accounted for 4.8% and 2.8% of total revenues for the year ended December 31,
2006 and 2005, respectively.
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(in $thousands)
2004 2005 2006
------ ------ ------
General and admin expenses $1,908 $1,616 $3,158
INCOME FROM OPERATIONS
Income from operations increased to $10.35 million, an increase of $7.99
million, or roughly 340% for the year ended December 31, 2006 from $2.36 million
for the year ended December 31, 2005, as a result of the following : an increase
of $7.8 million in total revenues, decrease of $1.3 million in cost of revenues,
and an increase of $1.3 million in selling and general and administrative
expenses. As a percentage of total revenue, the operating income for the year
ended December 31, 2006 was 15.5% compared to 4% for the same period the prior
year. The increase as a percentage of total revenues was mainly due to a
decrease of COGS resulting in improved gross margins, from 16% to28% for the
year ended December 31, 2005 and 2006, respectively.
INTEREST EXPENSES, NET
For the year ended December 31, 2006, net interest expenses increased by
approximately $625,000, or 57%, to $1.7 million 2006 from $1.08 million the same
period of the prior year. The increase in net interest expenses was mainly due
to its outstanding bank loans in the year ended December 31, 2006 were higher
than the outstanding bank loans during the same period of the prior year, which
increased from $17.7 million to $24 million for the year ended December 31, 2005
and 2006, respectively. As a percentage of total revenues, the interest expense
for the year ended December 31, 2006 was 2.6% compared to 1.8% for the same
period of the prior year.
INCOME TAX PROVISION
For the year ended December 31, 2006, Hunan Tongxin's income tax provision was
$2.9 million for financial reporting purposes, whereas there was an income tax
provision of $527,000 for the same period of the prior year. This change was due
mainly to the increase in taxable income of Hunan Tongxin. It had income before
income taxes of approximately $8.6 million for the year ended December 31, 2006
compared to $1.3 million for the same period of the prior fiscal year. Its
effective tax rate was 34% for the financial year 2006 compared to 40% for the
same period of the prior fiscal year.
NET INCOME
For the year ended December 31, 2006, Hunan Tongxin's net income amounted to
$5.7, an increase by $5 million compared to $0.7 million for the same period of
the prior year, or 715%. This increase was attributable primarily to the
increase in revenues and gross margin. Resulting primarily from a decrease in
steel costs.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2005 AND 2004
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OPERATING REVENUES
For the months ended December 31, 2005, total revenues amounted to $58.6
million, an increase by $12.3 million compared to $46.3 million for the same
period of the prior year, representing a 27% increase. The increase was due
primarily by new orders for unpainted cabs, and increased shipments of finished
cabs resulting in increased market share.
COST OF GOODS SOLD
In fiscal year 2005, the COGS amounted to $49.2 million, an increase of $11.1
million, compared to $38.1 million for the same period of the prior year, a
29.13% increase.
GROSS MARGIN
As a percentage of total revenues, the overall gross margin was 16.04% for the
year ended December 31, 2005 compared to 17.71% for the same period in the prior
year. An increase in non-steel material cost contributed to the decrease in
gross margin.
OPERATING EXPENSES
SELLING EXPENSES
Selling expenses were approximately $5.6 million for the year ended December 31,
2005 resulting in a decrease of 3.45%, or roughly $0.2 million compared to
approximately $5.8 million for the same period of the prior year. As a
percentage of total revenues, selling expenses have witnessed a reduction for
the years ended December 31, 2004, 2005, 2006. A reduction in shipping costs
contributed to the overall reduction in selling expenses.
R&D AND PRODUCT ENGINEERING EXPENSES
R&D and product engineering expense increased to $2.56 million from $ 2.10
million for the year ended December 31, 2005 and 2004, respectively. The
expenses were used to pay salaries and bonus to R&D staff and engineers,
material consumption, including steel consumption, The increase was due to
increased operations of die design and fabrication and customer engineering
support.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, including salaries, bonuses, and
maintenance and upkeep for the workers' dormitories, amounted to approximately
$1.6 million for the year ended December 31, 2006, a decrease of $0.3million
compared to $1.9 million for the same period of the prior year. The decrease in
general and administrative expenses was primarily due to increases of (1)
$100,000 paid to pension fund for the Company senior management; (2) $360,000
social welfare pay-out for ordinary employees in accordance to China latest
labor law; (3) $630,000 realized bad debt provision and (4) $100,000 one time
charge legal service fee involving the Company legal dispute for the period of
2006. As a result of the above decreases, general and administrative expense
accounted for 2.7% and 4.1% of total revenues for the year ended December 31,
2005 and 2004, respectively.
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INCOME FROM OPERATIONS
Income from operations increased to $2.14 million, an increase of $1.64 million,
or roughly 462% for the year ended December 31, 2005 from $463,000 for the year
ended December 31, 2004, as a result of the following: 1) a decrease of
$472,000 of SGA expenses due to maintaining salary compensation level year over
year; 2) an increase in gross profit due to a reduction in material costs
million in total revenues, increase of $11.1 million in cost of revenues, and an
decrease of $0.5 million in selling and general and administrative expenses. As
a percentage of total revenue, income from operations for the year ended
December 31, 2005 was 3.65% compared to 1.08% for the same period the prior
year.
INTEREST EXPENSES, NET
For the year ended December 31, 2005, net interest expenses is $1.08 million,
which was approximately the same level as the year ended December 31, 2004. As a
percentage of total revenues, the interest expense for the year ended December
31, 2005 was 1.8% compared to 2.3% for the same period of the prior year.
INCOME TAX PROVISION
For the year ended December 31, 2005, Tongxin's income tax provision was $0.528
million for financial reporting purposes, whereas there was an income tax
provision of $0.424 million for the same period of the prior year. This change
was due mainly to the increase in taxable income of Tongxin. Tongxin's
effective tax rate was 40% for the fiscal year ended 2005 compared to 82%for the
same period of the prior fiscal year.
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LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2007 and 2006
As of September 30, 2007, Hunan Tongxin had total assets of $90.5 million, of
which cash was $7.6 million, accounts receivable were $16.9 million, accounts
receivable from related parties were $10.1 million and inventories were $15.4
million. Working capital was a negative $3.7 million, and shareholders equity
was $22.4 million.
Cash provided by operating activities was $9.3 million. This was a net increase
of $5.8 million from the $3.5 million in the prior year. This increase resulted
primarily from an increase in net income of $3.7 million and an increase in
depreciation expense of $.8 million
Capital expenditures were $6.7 million for the period ended September 30, 2007.
These capital expenditures were primarily for the purchases of property, plant
and equipment at the new manufacturing facility at Qingdao.
Cash provided by financing activities were $.5 million. This was a net decrease
of $.4 million compared to cash flow of $.9 million for the prior period ended
September 30 2006. These financing activities consisted of loans of $22.4
million,.
WORKING CAPITAL
For the period ended December 31, 2006 Hunan Tongxin's working capital was a
negative $3.7 million. This compares to a negative $.8 million for the period
ended September 30, 200.6 This increase was due primarily to an increase in
accounts receivable and other receivables that resulted from an increase in
revenues.
Total current assets for the period ended September 30, 2007 were $59.4 million.
This is an increase of $10.4 million compared to $49.0 million for the period
ended September 30, 2006. The increases resulted mainly due to increases in
accounts receivable and other receivables, all of which resulted from increased
revenues.
Total current liabilities for the period ended September 30, 2007 were $63.1
million. This is an increase of $14.1 million compared to $49 million for the
period ended September 30, 2006. The increases resulted mainly to larger amounts
of accounts payable, taxes payable, dividends payable and short-term loans. The
increase in accounts payable resulted from the increase in revenues. The
increases in taxes payable and dividends payable were due to the increase in net
income. The increase in short term loans were a result of additional working
capital needs.
97
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2006 AND 2005
As of December 31, 2006, Hunan Tongxin had total assets of $65.5 million, of
which cash was $3.6 million, accounts receivable were $16.6 million, accounts
receivable from related parties were $8.9 million and inventories were $8.8
million. Working capital was a negative $5.5 million, and shareholders equity
was $13.3 million.
Cash provided by operating activities was $4.1 million. This was a net increase
of $6.0 million from the negative $1.9 million in the prior year. This increase
resulted primarily from an increase in net income of $5.0 million.
Capital expenditures were $5.3 million for the period ended December 31, 2006.
These capital expenditures were primarily for the purchases of property, plant
and equipment at the new manufacturing facility at Ziyang.
Cash provided by financing activities were $2.3 million. This was a net increase
of $0.7 million compared to cash flow of $1.6 million for the prior period ended
December 31, 2005. These financing activities consisted of loans of $28.2
million, dividends paid of ($3.6 million) and repayments of amounts borrowed of
($22.3 million).
WORKING CAPITAL
For the period ended December 31, 2006 Hunan Tongxin's working capital was a
negative $5.5 million. This compares to a negative $4 million for the period
ended December 31, 2005. This increase was due primarily to an increase in
accounts receivable and other receivables that resulted from an increase in
revenues.
Total current assets for the period ended December 31, 2006 were $42.6 million.
This is an increase of $12.1 million compared to $30.5 million for the period
ending December 31, 2005. The increases resulted mainly due to increases in
accounts receivable and other receivables, all of which resulted from increased
revenues.
Total Current liabilities for the period ended December 31, 2006 were $48
million. This is an increase of $14 million compared to $34 million for the
period ended December 31, 2005. The increases resulted mainly to larger amounts
of accounts payable, taxes payable, dividends payable and short-term loans. The
increase in accounts payable resulted from the increase in revenues. The
increases in taxes payable and dividends payable were due to the increase in net
income. The increase in short term loans were a result of additional working
capital needs.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2005 AND 2004
As of December 31, 2005, Hunan Tongxin had total assets of $50.2 million, of
which cash was $1.2 million, accounts receivable were $10.8 million, accounts
receivable from related parties were $5.3 million and inventories were $7.5
million. Working capital was a negative $4.0 million, and shareholders equity
was $13.3 million.
Cash provided by operating activities was a negative $1.9 million. This was a
net decrease of $4.0 million from the $2.1 million in the prior year. This
decrease resulted primarily from an increase in prepaid expenses of $1.5 million
and an increase in inventories of $3.2. million.
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Capital expenditures were $4.6 million for the period ended December 31, 2005.
These capital expenditures were primarily for the purchases of property, plant
and equipment at the new manufacturing facility at Ziyang.
Cash provided by financing activities were $1.6 million. This was a net decrease
of $6.9 million compared to cash flow of $8.5 million for the prior period ended
December 31, 2004. These financing activities consisted of loans of $23.6
million, dividends paid of ($1.8 million) and repayments of amounts borrowed of
($23.8 million).
WORKING CAPITAL
For the period ended December 31, 2005 Hunan Tongxin's working capital was a
negative $4.0 million. This compares to a negative $2.9 million for the period
ended December 31, 2004. This increase was due primarily to an increase in
accounts receivable and other receivables that resulted from an increase in
revenues.
Total current assets for the period ended December 31, 2005 were $30.5 million.
This is an increase of $8.6 million compared to $21.9 million for the period
ended December 31, 2004. The increases resulted mainly due to increases in
accounts receivable and other receivables, all of which resulted from increased
revenues.
Total current liabilities for the period ended December 31, 2005 were $34.5
million. This is an increase of $9.7 million compared to $24.8 million for the
period ended December 31, 2004. The increases resulted mainly to larger amounts
of accounts payable, taxes payable, dividends payable and short-term loans. The
increase in accounts payable resulted from the increase in revenues. The
increases in taxes payable and dividends payable were due to the increase in net
income. The increase in short term loans were a result of additional working
capital needs.
99
The following table sets forth the Tongxin's contractual obligations, including
long-term and short-term loans as of September 30, 2007.
Short Term and Long Term Loans as of September 30, 2006
Less More
than 1-2 2-3 Than
Item 1 Year Years Years 3 Years Total
- ---- -------- ------- ------- ------- -------
Long-term Bank Loans -- $1.6M $2.8M -- $ 4.4M
Short-term Bank Loans $15.9M -- -- -- $15.9M
Total loans $15.9M $1.6M $2.8M -- $20.3M
Other than commercial loan set forth above, Hunan Tongxin has short-term
loans payable to individuals as well as to shareholders of the Company,
amounting to $7.0 million. These loans bear an interest of 5.4% and has no
maturity date.
Other than the commercial commitments set forth above, Tongxin does not have any
other short-term and long-term debt obligations, operating lease obligations,
purchase obligations or other long-term liabilities.
OFF-BALANCE SHEET ARRANGEMENTS
Hunan Tongxin has not entered into any financial guarantees or other commitments
to guarantee the payment obligations of any third parties as of December 31,
2006. It has not entered into any foreign currency forward contract. It does not
have any other off-balance sheet arrangements except for the contractual
obligations and commitments mentioned above as of December 31, 2006. Tongxin
believes that there are no off-balance sheet arrangements that have or are
reasonably likely to have a material effect on its financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
EMPLOYEES AND THEIR BENEFITS
At December 31, 2006, Hunan Tongxin had a total of approximately 2,100 employees
including 1,893 hourly and 207 salary personnel. The remuneration package of its
hourly employees is based upon a piecework system whereby each production worker
is paid by the unit of product produced by each.
100
Tongxin remunerates its sales personnel on a commissions based system. All
employees receive company paid meals and some welfare benefits including
workers' insurance and medical care. Additionally, Tongxin currently provides
housing subsidies for approximately 300 people.
Tongxin believes that its success in attracting and retaining highly skilled
technical employees and sales and marketing personnel is largely a product of
its commitment to providing a motivating and interactive work environment that
features continuous and extensive professional development opportunities, as
well as frequent and open communications at all levels of the organization.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". This Statement permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No.159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of SFAS No.159 on its financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans." This Statement requires
an employer to recognize the over funded or under funded status of a defined
benefit post retirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position, and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income. SFAS No. 158 is effective for fiscal years ending after December 15,
2006. The Company does not expect that the implementation of SFAS No.158 will
have any material impact on its financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures". This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), expands disclosures about
fair value measurements, and applies under other accounting pronouncements that
require or permit fair value measurements. SFAS No. 157 does not require any new
fair value measurements. However, the FASB anticipates that for some entities,
the application of SFAS No. 157 will change current practice. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, which for the Company would be the fiscal year beginning
January 1, 2008. The Company is currently evaluating the impact of SFAS No. 157
but does not expect that it will have a material impact on its financial
statements.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No.108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB No. 108 addresses how
the effects of prior year uncorrected misstatements should be considered when
quantifying misstatements in current year financial statements. SAB No. 108
requires companies to quantify misstatements using a balance sheet and income
statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. SAB No. 108 is effective for periods ending after November
15, 2006. Effective December 31, 2006, the Company adopted SAB No. 108 which did
not have a material effect on its consolidated financial statements.
101
In July 2006, the FASB issued Interpretation ("FIN") No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of SFAS No. 109". FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in an
entity's financial statements in accordance with SFAS No. 109 and prescribes a
recognition threshold and measurement attribute for financial statement
disclosure of tax positions taken or expected to be taken on a tax return.
Additionally, FIN No. 48 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN No. 48 is effective for fiscal years beginning after December
15, 2006, with early adoption permitted. The Company will adopt FIN No. 48
January 1, 2007 and is currently evaluating the impact, if any, that FIN No. 48
will have on its financial statements.
QUANTITATIVE AND QUALITATIVE MARKET RISKS
AUTOMOTIVE INDUSTRY POLICIES
Hunan Tongxin is highly sensitive to automotive industry policy changes within
China. These are crucial to the development of Hunan Tongxin products,
especially for commercial vehicles. At present, state policies are favorable to
its development. If the government ceases supporting the automotive
transportation industries, however, it would bring about a negative impact on
operating results in the next few years.
Hunan Tongxin relies on close customer support and product engineering
development to ensure that it delivers attractive, high-quality products and
services to its customers as a way to protect against risks connected with a
change in the competitive environment.
CURRENCY RISK
All of Hunan Tongxin's business is currently conducted using the Renminbi. As a
result, changes in the exchange rate between it and other currencies should not
have a material adverse effect on Hunan Tongxin's current business. In fact, to
the extent that the Renminbi appreciates against the dollar over time, which is
widely anticipated, the result will be to increase Hunan Tongxin's earnings when
stated in dollar terms.
INFORMATION ABOUT AAAC
BUSINESS OF AAAC
GENERAL
AAAC was formed on June 20, 2005, to serve as a vehicle to affect an equity
acquisition, capital stock exchange, or other similar business combination with
an unidentified automotive component operating business that has its primary
operating facilities located in Asia. Prior to executing the Equity Acquisition
Agreement with the Hunan Tongxin Stockholders, AAAC's efforts were limited to
organizational activities, completion of its initial public offering and the
evaluation of possible business combinations.
OFFERING PROCEEDS HELD IN TRUST
102
AAAC consummated its initial public offering on April 19, 2006. The net proceeds
of the offering, after payment of underwriting discounts and expenses, were
approximately $ 38.5 million. Of that amount, approximately $37.8 million was
placed in the trust account and invested in government securities. The remaining
proceeds have been or are being used by AAAC in its pursuit of a business
combination. The trust account will not be released until the earlier of the
consummation of a business combination or the liquidation of AAAC. The trust
account contained approximately $39.1 million as of September 30, , 2007. If the
Equity Acquisition with the Hunan Tongxin Stockholders is consummated, the trust
account will be released to AAAC, less:
* amounts paid to stockholders of AAAC who do not approve the stock purchase
and elect to convert their shares of common stock into their pro-rata share
of the trust account;
* payment of the accrued expenses of AAAC as of the date of the closing of
the transaction; and
* the cash payment being paid to the Hunan Tongxin Stockholders in the Equity
Acquisition.
FAIR MARKET VALUE OF TARGET BUSINESS
Pursuant to AAAC's Articles of Incorporation, the initial target business that
AAAC acquires must have a fair market value equal to at least 80% of AAAC's net
assets at the time of such acquisition. AAAC's board of directors determined
that this 80% test was clearly met in connection with its equity acquisition of
Hunan Tongxin.
STOCKHOLDER VOTE ON THE BUSINESS COMBINATION
AAAC will proceed with the acquisition of Hunan Tongxin only if a majority of
all of the outstanding shares of AAAC is voted in favor of the Equity
Acquisition and Redomestication Proposals. The stockholders existing prior to
the initial public offering have agreed to vote their common stock on these
proposals in accordance with the vote of the majority offering. If the holders
of 20.0% or more of AAAC's common stock vote against the Equity Acquisition
Agreement and demand that AAAC convert their shares into their pro rata share of
the trust account, then AAAC will not consummate the Equity Acquisition.
LIQUIDATION IF NO BUSINESS COMBINATION
If AAAC does not complete a business combination by April 19, 2008, AAAC will
be dissolved and will distribute to all of its public stockholders, in
proportion to their respective equity interests, an aggregate sum equal to the
amount in the trust account, inclusive of any interest, plus any remaining net
assets. AAAC's existing stockholders have waived their rights to participate in
any liquidation distribution with respect to shares of common stock owned by
them immediately prior to the initial public offering. There will be no
distribution from the trust account with respect to AAAC's warrants.
If AAAC were to expend all of the net proceeds of the initial public offering,
other than the proceeds deposited in the trust account, the per-share
liquidation price as of September 30, 2007
103
would be approximately $7.79, or $0.21 less than the per-unit offering price of
$8.00 in AAAC's initial public offering. The proceeds deposited in the trust
account could, however, become subject to the claims of AAAC's creditors and
there is no assurance that the actual per-share liquidation price will not be
less than $7, due to those claims.
The stockholders holding shares of AAAC common stock issued in the initial
public offering will be entitled to receive funds from the trust account only in
the event of AAAC's liquidation or if the stockholders seek to convert their
respective shares into cash and the Equity Acquisition is actually completed. In
no other circumstances shall a stockholder have any right or interest of any
kind to or in the trust account.
If AAAC is unable to complete a business combination by April 19, 2008 upon
notice from AAAC, the trustee of the trust account will commence liquidating the
investments constituting the trust account and will turn over the proceeds to
the transfer agent for distribution to the stockholders holding shares acquired
through the initial public offering. Given the time required to consummate a
transaction and obtain requisite stockholder approval, AAAC would probably be
dissolved if the stockholders do not approve the stock purchase agreement.
The stockholders holding shares of AAAC common stock issued in the initial
public offering will be entitled to receive funds from the trust account only in
the event of AAAC's liquidation or if the stockholders seek to convert their
respective shares into cash and the stock purchase is actually completed. In no
other circumstances shall a stockholder have any right or interest of any kind
to or in the trust account.
Under Delaware corporate law, holders of a majority of AAAC's outstanding stock
must approve its dissolution. If AAAC were required to dissolve, following the
approval by AAAC's stockholders of a plan of dissolution and distribution, AAAC
would liquidate the trust account to the holders of shares purchased in AAAC's
initial public offering (subject to any provision for unpaid claims against AAAC
which it is advised must or should be withheld).
Under Delaware corporate law, AAAC stockholders may be held liable for claims by
third parties against a corporation to the extent of distributions received by
those stockholders in a dissolution. Delaware corporate law provides for
limitations on the potential liability of stockholders if AAAC were to wind up
its affairs in compliance with either Section 280 or Section 281(b) of the
Delaware corporate law. If AAAC complies with either procedure, Delaware
corporate law (i) limits the potential liability of each stockholder for claims
against AAAC to the lesser of the stockholder's pro-rata share of the claim or
the amount distributed to the stockholder in liquidation and (ii) limits the
aggregate liability of any
104
stockholder for all claims against AAAC to the amount distributed to the
stockholder in dissolution. If AAAC were to comply with Section 280 instead of
Section 281(b), Delaware corporate law also would operate to extinguish the
potential liability of its stockholders for any claims against AAAC unless
litigation with respect to such claim has been commenced prior to the expiration
of the statutory winding-up period under Delaware law (generally three years).
In addition, compliance with Section 280 could potentially operate to bar
certain claims if the claimant does not take specified actions within certain
time frames specified in the statute.
Even though compliance with Section 280 of Delaware corporate law would provide
additional protections to both AAAC's directors and stockholders from potential
liability for third party claims against AAAC, it is AAAC's current intention
that it would make liquidating distributions to its stockholders as soon as
reasonably possible following any dissolution and, therefore, it does not expect
that its Board of Directors would elect to comply with the more complex
procedures in Section 280. Because AAAC would most likely not be complying with
Section 280, it would seek stockholder approval to comply with Section 281(b) of
Delaware corporate law, requiring it to adopt a plan of dissolution that will
provide for payment, based on facts known to AAAC at such time, of (i) all
existing claims, (ii) all pending claims and (iii) all claims that may be
potentially brought against AAAC within the subsequent 10 years. As such, AAAC's
stockholders could potentially be liable for any claims to the extent of
distributions received by them in a dissolution and any such liability of AAAC's
stockholders would likely extend beyond the third anniversary of such
dissolution. However, because AAAC 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 its vendors (such as accountants, lawyers, investment bankers and
consultants). AAAC would attempt to enter into arrangements with most, if not
all significant creditors whereby they agree to waive any interest or claim of
any kind in or to any monies held in the trust account. As a result of this,
AAAC believes that the claims that could be made against AAAC would be
significantly limited. However, AAAC cannot guarantee that its creditors will
agree to such arrangements, or even if they do that they would be prevented from
bringing claims against the trust account.
AAAC expects that all costs associated with the implementation and completion of
its plan of dissolution and liquidation, which it currently estimates to be less
than $100,000, will be funded by any funds not held in the trust account. There
currently are not, and may not at that time, be sufficient funds for such
purpose, in which event AAAC would have to seek funding or other accommodation
to complete the dissolution and liquidation.
AAAC currently believes that any plan of dissolution and distribution would
proceed in the following manner:
- its board of directors would, consistent with its obligations to
liquidate and dissolve (as contained in its charter), adopt (and
recommend to its stockholders) a specific plan of dissolution and
distribution and the board would also cause to be prepared a
preliminary proxy statement setting out such plan of dissolution and
distribution and the board's recommendation of such plan;
- AAAC would file the preliminary proxy statement with the SEC; and
105
- following any SEC review of the preliminary proxy statement and
resolution of any staff comments, AAAC would mail the proxy statement
to its stockholders, and approximately 30 days later would convene a
meeting of its stockholders for them to either approve or reject the
plan of dissolution and distribution.
In the event AAAC seeks stockholder approval for a plan of dissolution and
distribution and does not obtain such approval, it will nonetheless continue to
pursue stockholder approval for its dissolution. Following Board adoption of a
plan of dissolution and distribution, AAAC's powers will be limited to acts and
activities relating to dissolving and winding up its affairs, including
liquidation. The funds held in the trust account may not be distributed except
upon AAAC's dissolution (subject to third party claims as discussed above) and,
unless and until such approval is obtained from its stockholders, the funds held
in its trust account will not be released (subject to such claims).
Consequently, holders of a majority of AAAC's outstanding stock would have to
approve its dissolution in order to receive the funds held in the trust account
and the funds will not be available for any other corporate purpose (although
they may be subject to creditors' claims).
FACILITIES
AAAC maintains executive offices at 199 Pierce Street, Suite 202, Birmingham,
Michigan 48009. The cost for this space is included in a $7,500 per-month fee
that ADC charges AAAC for general and administrative services. AAAC believes,
based on rents and fees for similar services in the Michigan area, that the fees
charged by ADC are at least as favorable as AAAC could have obtained from an
unaffiliated person. AAAC considers its current office space adequate for
current operations.
EMPLOYEES
AAAC has four directors, three of which serve as officers. These individuals are
not obligated to contribute any specific number of hours to AAAC's business.
AAAC has no paid employees
PERIODIC REPORTING AND AUDITED FINANCIAL STATEMENTS
AAAC has registered its securities under the Securities Exchange Act of 1934 and
has reporting obligations, including the requirement to file annual and
quarterly reports with the SEC. In accordance with the requirements of the
Securities Exchange Act of 1934, AAAC's annual reports will contain financial
statements audited and reported on by AAAC's independent accountants. AAAC has
filed with the Securities and Exchange Commission a Form 10-QSB covering the
fiscal quarter ended September 30, 2007.
LEGAL PROCEEDINGS
There are no legal proceedings pending against AAAC.
PLAN OF OPERATIONS
106
The following discussion should be read in conjunction with AAAC's Financial
Statements and related notes thereto included elsewhere in this proxy
statement/prospectus.
AAAC was formed on June 20, 2005 to serve as a vehicle to affect an equity
acquisition, capital stock exchange, asset acquisition or other similar business
combination with an unidentified business that has its primary operating
facilities located in Asia. AAAC closed its initial public offering on April 19,
2006. All activity from June 20, 2005 through April 19, 2006 relates to its
formation and initial public offering.
Approximately $37.4 million of the net proceeds of the initial public offering
are in trust, with the remaining net proceeds of approximately $780,000
available to pay for business, legal and accounting due diligence on prospective
acquisitions and continuing general and administrative expenses. The use of the
remaining net proceeds through June 30, 2007 included:$110,000 for
directors/officers liability insurance, legal expenses of 75,000,
tax/accounting/audit of approximately 110,000 and due diligence on the
prospective acquisitions of $270,0000 and general and administrative expenses of
$95,000. As of June 30 amounts owed and accrued included legal of $15,000, due
diligence $25,000 and general and administrative $43,000. AAAC will use
substantially all of the net proceeds of its initial public offering not held in
trust to consummate the business combination. AAAC intends to utilize its cash,
including the funds held in the trust fund, capital stock, debt or a combination
of the foregoing to effect a business combination. To the extent that its
capital stock or debt securities are used in whole or in part as consideration
to effect a business combination, the proceeds held in the trust fund as well as
any other available cash to finance the operations of the target business.
AAAC intends to utilize its cash, including the funds held in the trust account,
capital stock, debt or a combination of the foregoing to effect a business
combination. Under the agreement governing the proposed transaction, $13,000,000
will be paid at the closing to the Hunan Tongxin Stockholders to acquire their
shares. The remaining funds in the trust account will be used to finance the
operations of TI. Uses of those proceeds will include, among other things, the
following:
* Payment of the AAAC accrued expenses as of September 30, 2007 amounted to
$383,040 (Reference is made to AAAC's 10-QSB for the period ended September
30, 2007. The Company has verbal agreements with the following entities to
make payments at the close of the transaction for the following amounts.
Entity Amount Owed
- ------ -----------
1. Legal $ 76,300
- Strobl & Sharp $ 56,300
- Norton & Norton $ 20,000
2. Filings with SEC/PR $ 47,240
- Dallas Print $ 43,000
- PRNewswire $ 4,240
3. Asia Development Capital $ 37,500
4. Automotive Advisory Partners $203,500
5. Travel $ 18,500
- American Express $ 18,500
Total $383,040
* To support internal expansion of TI' s operations, including increased
hiring, expansion of existing facilities or the acquisition or construction
of new facilities, expenditures to increase the geographic markets within
China in which Hunan Tongxin operates and expansion of the production and
distribution networks needed to accomplish that geographic market
extension; and
* To increase inorganic growth opportunities through an add-on acquisition.
Inorganic growth opportunities" are an increase in revenue from a merger,
acquisition, or joint venture resulting in the consolidation of revenue
from the acquired company on the income statement of the acquiring
company.
* To increase opportunities in the collision repair parts aftermarkets in
North America and Europe.
AAAC became obligated, commencing April 19, 2006 to pay to ADC LLC, an affiliate
of William Herren, AAAC's chairman of the board, Rudy Wilson, a director and
chef executive officer,
107
and Chun Hao, president of China operations, a monthly fee of $7,500 for
general and administrative services.
In connection with its initial public offering, AAAC issued an option for $100
to the representative of the underwriters to purchase 350,000 units at an
exercise price of $10.00 per unit. AAAC has accounted for the fair value of the
option, inclusive of the receipt of the $100 cash payment, as an expense of the
public offering resulting in a charge directly to stockholders' equity. AAAC
estimates that the fair value of this option is approximately $1,086,001 ($3.10
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: (i) expected volatility of 45.47%, (ii) risk-free
interest rate of 4.39% and (iii) expected life of five years. The option may be
exercised for cash or on a "cashless" basis at the holder's option 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 $10.00 per share.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has outstanding warrants, which provides for the Company to register
the shares underlying the warrants and is silent as to the penalty to be
incurred in the absence of the Company's ability to deliver registered shares to
the warrant holders upon warrant exercise. These warrants do not meet the scope
exception in paragraph 11(a) of SFAS 133, and have been accounted for as
liabilities under EITF 00-19. Under EITF No. 00-19 "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" ("EITF No. 00-19"), registration of the common stock underlying the
Company's warrants is not within the Company's control. As a result, the company
must assume that it could be required to settle the warrants on a net-cash
basis, thereby necessitating the treatment of the potential settlement
obligation as a liability. Further EITF No. 00-19, requires the Company to
record the potential settlement liability at each reporting date using the
current estimated fair value of the warrants, with any changes being recorded
through the Company's statement of operations. The potential settlement
obligation related to the warrants will continue to be reported as a liability
until such time that the warrants are exercised, expire, or the Company is
otherwise able to modify the registration requirements in the warrant agreement
to remove the provisions which require this treatment. The fair value of the
warrant liability is determined using the trading value of the warrants. The
Company intends to enter into a clarification agreement with the holders of the
representative units purchase option to clarify that the units (or underlying
warrants) were never intended to be settled with cash and if the Company cannot
provide registered shares, the holder of the option will accept unregistered
shares. Therefore the representatives unit option is treated as a portion of
permanent equity.
Warrants and representative's unit purchase option issued in conjunction
with our initial public offering are equity linked derivatives and accordingly
represent off balance sheet arrangements. In addition, the conversion feature of
the representative's unit purchase option constitutes an embedded derivative.
The warrants, unit purchase option and conversion feature meet the scope
exception in paragraph 11(a) of FAS 133 and are accordingly not accounted for as
derivatives for purposes of FAS
108
133, but instead are accounted for as equity. See Footnote 5 to the financial
statements for more information.
PRO FORMA
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect to
the Equity Acquisition Agreement and Key Employees Employment Agreement dated
July 24, 2007 (the "Transaction") based on the assumptions and adjustments set
forth in the accompanying notes, which management believes are reasonable.
The unaudited combined financial statements combine (i) the financial position
of Hunan Tongxin and AAAC as of September 30, 2007, giving pro forma effect to
the Transaction as if it occurred on September 30, 2007, and (ii) the financial
position of AAAC for the period June 20, 2005 (inception) to December 31, 2006
and Hunan Tongxin for the year ended December 31, 2006 giving pro forma effect
to the Transaction as if it occurred January 1, 2006.
The pro forma adjustments are preliminary, and the unaudited pro forma condensed
combined financial statements are not necessarily indicative of the financial
position or results of operations that may have actually occurred had the merger
taken place on the dates noted, or the future financial position or operating
results of AAAC or Hunan Tongxin. The pro forma adjustments are based upon
available information and assumptions that we believe are reasonable. Under the
purchase method of accounting, the total purchase price will be allocated to the
net tangible and intangible assets acquired and liabilities assumed, based on
various estimates of their respective fair values. Hunan Tongxin has determined
the estimated fair values of certain assets and liabilities. The purchase price
allocations set forth in the following unaudited pro forma condensed combined
financial statements are based on preliminary valuation estimates of Hunan
Tongxin's intangible assets. Hunan Tongxin's tangible assets approximate fair
value. The final valuations, and any interim updated preliminary valuation
estimates, may differ materially from these preliminary valuation estimates and,
as a result, the final allocation of the purchase price may result in
reclassifications of the allocated amounts that are materially different from
the purchase price allocations reflected below. Any material change in the
valuation estimates and related allocation of the purchase price would
materially impact Hunan Tongxin's depreciation and amortization expenses, the
unaudited pro forma condensed combined financial statements and AAAC's results
of operations after the merger.
The following unaudited pro forma combined financial statements have been
prepared using two different levels of approval of the Transaction by the AAAC
stockholders, as follows:
* Assuming Maximum Approval: This presentation assumes that 100% of AAAC
stockholders approve the Transaction; and
* Assuming Minimal Approval: This presentation assumes that only 80.01% of
AAAC stockholders approve the Transaction and the remaining 19.99% all vote
against the acquisition and elect to exercise their conversion rights.
109
We are providing this information to aid you in your analysis of the financial
aspects of the Transaction. The unaudited pro forma condensed consolidated
financial statements described above should be read in conjunction with the
historical financial statements of Hunan Tongxin and AAAC and the related notes
thereto.
110
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Unaudited Pro Forma Condensed Combined Statement of Income
(Maximum Approval Assumption)
At December 31, 2006
(in US dollars, in thousand)
PRO-FORMA COMBINED
ADJUSTMENTS PRO-FORMA
(ASSUMING (ASSUMING
MAXIMUM MAXIMUM
TONGXIN AAAC APPROVAL) APPROVAL)
----------- ---------- ------------ ----------
Revenue
Revenues (Net) $ 66,205 $ -- $ -- $ 66,205
COST OF REVENUE
Cost of good sold 47,741 47,741
----------- ---------- ------- ----------
Gross profit 18,464 -- 18,464
OPERATING EXPENSES
--
Selling, general and administrative 8,492 7,818(G) 16,310
----------- ---------- ------- ----------
--
----------- ---------- ------- ----------
OPERATING INCOME 9,972 -- (7,818) 2,154
Interest income -- 1,308 432(H) 876
Interest expense (1,707) -- (1,707)
Other income, net 400 400
Unrealized loss on warrant liability -- (3,783) (3,783)
Formation and operating costs -- (637) (637)
----------- ---------- ------- ----------
TOTAL OTHER INCOME (EXPENSE) (1,307) (3,112) (432) (4,581)
NET INCOME (LOSS) BEFORE TAXES 8,665 (3,112) 8,250 (2,697)
Income tax provision (2,946) (458) 173(H) (3,231)
----------- ---------- ------- ----------
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NET INCOME (LOSS) $ 5,719 $ (3,570) $(8,077) $ (5,928)
=========== ========== ======= ===========
Weighted average common shares outstanding
Basic 72,521,705 4,901,284 10,880,250
Diluted 72,521,705 4,901,284 10,880,250
=========== ========== ===========
Income (loss) per share:
Basic $ 0.0786 $ (0.7283) $ (0.5449)
Diluted $ 0.0786 $ (0.7283) $ (0.5449)
=========== ========== ===========
Unaudited Pro Forma Condensed Combined Statement of Income
(Minimum Approval Assumption)
At December 31, 2006
(in US dollars, in thousand)
PRO FORMA COMBINED
ADJUSTMENTS PRO FORMA
(ASSUMING (ASSUMING
HUNAN MINIMUM MINIMUM
TONGXIN AAAC APPROVAL) APPROVAL)
----------- ---------- ----------- ----------
Total revenue (net) $ 66,205 $ 0 $ 0 $ 66,205
----------
COST OF REVENUE
Cost of good sold $ 47,741 $ 0 $ 0 $ 47,741
----------- ---------- ------ ----------
Gross profit $ 18,464 $ 0 $ 0 $ 18,464
OPERATING EXPENSES
Selling, general and administrative $ 8,492 $ 0 $7,818(G) $ 16,310
----------- ---------- ------ ----------
--
----------- ---------- ------ ----------
OPERATING INCOME $ 9,972 $ 0 $(7,818) $ 2,154
Interest income $ 1,707 $1,308 (602)(H) 706
Interest expense $ (1,707) $ 0 $ 0 $ (1,707)
Other Income 400 400
Unrealized loss on warrant liability $ 0 $ (3,783) $ 0 $ (3,783)
112
Formation and operating costs $ 0 $ (637) $ 0 $ (637)
----------- ---------- ------ ----------
TOTAL OTHER INCOME (EXPENSE) $ (1,307) $ (3,112) ($170) $ (5,021)
Net income(loss) before taxes $ 8,665 ($3,112) ($170) (2,867)
Income tax provision ($2,946) ($458) ($68)(H) ($3,163)
----------- ---------- ------ ----------
Net income(loss) $ 5,719 ($3,570) (102) (6,030)
Basic 72,521,705 4,901,284 9,874,504
Diluted 72,521,705 4,901,284 9,874,504
----------- ---------- ----------
Income(loss) per share
Basic $ 0.0786 ($0.7283) (0.6107)
Diluted $ 0.0786 ($0.7283) (0.6107)
Unaudited Pro Forma Condensed Combined Balance Sheet
(Maximum Approval Assumption)
At September 30, 2007,
(US dollars, in thousand)
PRO-FORMA COMBINED
ADJUSTMENTS PRO-FORMA
(ASSUMING (ASSUMING
MAXIMUM MAXIMUM
TONGXIN AAAC APPROVAL) APPROVAL)
------- ------- -------------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 7,646 $ 60 $ 39,912 (A) $ 28,591
(13,000)(B)
(4,100)(B)
(1,207)(E)
Accounts receivable, net 16,902 -- -- 16,902
Inventories 15,403 -- 15,403
Investments held in trust -- 39,192 (39,192)(A) --
Other receivables 4,309 -- 4,309
113
Other receivables due related party 10,056 -- -- 10,056
Deferred tax assets 1,710 358 -- 2,068
Prepaid expenses and other current assets 1,635 -- -- 1,635
Advanced suppliers 1,760 -- 1,760
------- ------- -------- --------
Total current assets 59,421 39,610 (18,307) 80,724
Property and equipment, net 24,002 -- -- 24,002
Land occupancy rights 1,876 -- (1,876)(B) --
Investments in operating businesses 5,225 -- -- 5,225
New goodwill 11,192 (B) 11,192
New intangible assets 21,083 (B) 21,083
-- --
------- ------- -------- --------
Total assets $90,524 $39,610 $ 12,092 $142,226
======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $16,215 $ $ -- $ 16,215
Short-term bank loans 15,871 -- 15,871
Short-term bank loans from related parties 6,974 -- 6,974
Accrued expenses 4,894 383 5,277
Accrued income tax payable 11,068 -- 11,068
Warrant liability -- 9,599 9,599
Dividend payable 5,279 -- 5,279
Advances to customers 2,813 -- 2,813
Deferred underwriters fee -- 966 (966)(E) --
--
------- ------- -------- --------
Total current liabilities 63,114 10,948 (966) 73,096
114
Long-term debt, net of current maturities 4,394 -- 4,394
Long-term payables 630 -- 630
--
------- ------- -------- --------
Total Liabilities 68,138 10,948 (966) 78,120
------- ------- -------- --------
Common stock, subject to possible
redemption, 1,005,746 shares at
redemption value -- 7,829 (7,829)(C) --
Stockholders' equity (deficit)
Preferred stock -- -- -- --
Common stock -- 6 34 (B) 40
Additional paid-in-capital 8,762 22,327 34,477 (B,C) 65,566
Deficit accumulated during the development
stage --
Reserve funds 1,994 -- (1,994)(B) --
Other Comprehensive Income 2,421 -- (2,421)(B) --
Appropriated earnings -- --
Accumulated other comprehensive income
Retained earnings (accumulated deficit) 9,209 (1,500) (9,209)(B,F) (1,500)
------- ------- -------- --------
Total stockholders' equity (deficit) 22,386 20,833 20,887 64,106
------- ------- -------- --------
Total liabilities and stockholders'
equity (deficit) $90,524 $39,610 $ 12,092 $142,226
======= ======= ======== ========
-- -- --
Unaudited Pro Forma Condensed Combined Balance Sheet
(Minimum Approval Assumption)
At September 30, 2007,
(US dollars, in thousand)
PRO-FORMA COMBINED
ADJUSTMENTS PRO-FORMA
(ASSUMING (ASSUMING
MINIMUM MINIMUM
TONGXIN AAAC APPROVAL) APPROVAL)
------- ------- ----------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 7,646 $ 60 $ 31,363 (A,D) $ 21,003
(12,759)(B,E)
(4,100)(B)
(1,207)(E)
Accounts receivable, net 16,902 -- 16,902 16,902
115
Inventories 15,403 -- -- 15,403
Investments held in trust -- (39,192) (39,192) --
Other receivables 4,309 -- -- 4,309
Other receivables due related party 10,056 -- -- 10,056
Deferred tax assets 1,710 358 -- 2,068
Prepaid expenses and other current assets 1,635 -- -- 1,635
Advanced suppliers 1,760 -- 1,760
------- ------- ----------- --------
Total current assets 59,421 39,610 (25,895) 73,136
Property and equipment, net 24,002 -- 24,002
Land occupancy rights 1,876 -- 1,876 (B) --
Investments in operating businesses 5,225 -- 5,225
New goodwill 11,192 (B) 11,192
New intangible assets 21,083 (B) 21,083
--
------- ------- ----------- --------
Total assets $90,524 $39,610 $ 4,504 $134,638
======= ======= =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $16,215 $ $ $ 16,215
Short-term bank loans 15,871 -- 15,871
Short-term bank loans from related parties 6,974 -- 6,974
Accrued expenses 4,894 383 5,277
Accrued income tax payable 11,068 -- 11,068
Warrant liability -- 9,599 9,599
Dividend payable 5,279 -- 5,279
Advances to customers 2,813 -- 2,813
116
Deferred underwriters fee -- 966 (966)(E) --
--
------- ------- ----------- --------
Total current liabilities 63,114 10,948 (966) 73,096
Long-term debt, net of current maturities 4,394 -- 4,394
Long-term payables 630 -- 630
--
------- ------- ----------- --------
Total Liabilities 68,138 10,948 (966) 78,120
------- ------- ----------- --------
Common stock, subject to possible
redemption, 1,005,746 shares at
redemption value -- 7,829 --
Stockholders' equity (deficit)
Preferred stock -- -- -- --
Common stock -- 6 (7)(D) 33
Additional paid-in-capital 8,762 22,327 26,896 (D,E) 57,985
Deficit accumulated during the development
stage --
Reserve funds 1,994 -- (1,994) (B)
Other Comprehensive Income 2,421 -- (2,421) (B)
Appropriated earnings -- --
Accumulated other comprehensive income --
Retained earnings (accumulated deficit) 9,209 (1,500) (9,209) (B,F) (1,500)
------- ------- ----------- --------
Total stockholders' equity (deficit) 22,386 20,833 13,299 56,518
------- ------- ----------- --------
Total liabilities and stockholders'
equity (deficit) $90,524 $39,610 $ 4,504 $134,638
======= ======= =========== ========
Unaudited Pro Forma Condensed Combined Statement of Income
(Maximum Approval Assumption)
At September 30, 2007
(in US dollars, in thousand)
PRO-FORMA COMBINED
ADJUSTMENTS PRO-FORMA
(ASSUMING (ASSUMING
MAXIMUM MAXIMUM
TONGXIN AAAC APPROVAL) APPROVAL)
---------- ---------- ----------- ----------
Revenue
Revenues (Net) $ 62,922 $ -- $ -- $ 62,922
117
COST OF REVENUE
Cost of good sold 43,066 43,066
---------- ---------- -----------
Gross profit 19,856 -- 19,856
OPERATING EXPENSES
--
Selling, general and administrative 7,270 539 (G) 7,809
--
---------- ---------- ------ -----------
OPERATING INCOME 12,586 -- (539) 12,047
Other income, net 73 288 (H) 73
Interest income -- 1,377 288 (H) 1,089
Interest expense (1,520) -- (1,520)
Unrealized loss on warrant liability -- 1,567 1,567
Equity in earnings(loss)of associated company 7 7
Formation and operating costs -- (590) 1 (590)
---------- ---------- -----------
TOTAL OTHER INCOME (EXPENSE) (1,440) 2,354 (288) 626
NET INCOME (LOSS) BEFORE TAXES 11,146 2,354 (827) 12,673
Income tax provision (3,625) (100) (115)(H) (3,840)
---------- ---------- ------ -----------
NET INCOME (LOSS) $ 7,521 $ 2,254 $ (942) $ 8,833
========== ========== ====== ===========
Weighted average common shares outstanding
Basic 72,521,705 6,380,250 $10,880,250
Diluted 72,521,705 8,110,518 12,610,518
========== ========== ===========
Income (loss) per share:
Basic $ 0.1037 $ 0.3533 $ 0.8118
Diluted $ 0.1037 $ 0.2779 $ 0.7004
========== ========== ===========
Unaudited Pro Forma Condensed Combined Statement of Income
(Minimum Approval Assumption)
At September 30, 2007
(in US dollars, in thousand)
118
PRO-FORMA COMBINED
ADJUSTMENTS PRO-FORMA
(ASSUMING (ASSUMING
MINIMUM MINIMUM
TONGXIN AAAC APPROVAL) APPROVAL)
---------- ---------- ----------- ----------
Revenue
Revenues (Net) $ 62,922 $ -- $ $ 62,922
COST OF REVENUE
Cost of good sold 43,066 43,066
---------- ---------- ----------
Gross profit 19,856 -- 19,856
OPERATING EXPENSES
--
Selling, general and administrative 7,270 539 (G) 7,809
--
---------- ---------- ------ ----------
OPERATING INCOME 12,586 -- (539) 12,047
Other income, net 73 73
Interest income -- 1,377 (637) (H) 740
Interest expense (1,520) -- (1,520)
Unrealized loss on warrant liability -- 1,567 1,567
Equity in earnings(loss)of associated company 7 7
Formation and operating costs -- (590) (590)
---------- ---------- ------ ----------
TOTAL OTHER INCOME (EXPENSE) (1,440) 2,354 (637) 277
NET INCOME (LOSS) BEFORE TAXES 11,146 2,354 (1,176) 12,324
Income tax provision (3,625) (100) 25 (H) (3,701)
---------- ---------- ------ ----------
NET INCOME (LOSS) $ 7,521 $ 2,254 $ (209) $ 8,623
========== ========== ====== ==========
Weighted average common shares outstanding
Basic 72,521,705 6,380,250 9,874,504
Diluted 72,521,705 8,110,518 11,604,772
========== ========== ==========
Income (loss) per share:
Basic $ 0.1037 $ 0.3533 $ 0.8733
Diluted $ 0.1037 $ 0.2779 $ 0.7431
========== ========== ==========
1. DESCRIPTION OF TRANSACTION AND BASIS OF PRESENTATION
119
On July 25, 2007 AAAC announced that it signed an Equity Acquisition Agreement
("EAA") and Key Employees Employment Agreement ("KEOA") with Hunan Tongxin
Enterprise Co., Ltd., ("Hunan Tongxin") pursuant to which AAAC will acquire 100%
of the shares of Hunan Tongxin. The purchase price for the shares of Hunan
Tongxin is equal to the sum of $13 million in cash, plus 4,500,000 common shares
of AAAC valued at $ $35.7 million based upon an average closing price of $7.93
from July 24, 2007 through July 31, 2007.
2. PRO FORMA ADJUSTMENTS
DESCRIPTIONS OF THE ADJUSTMENTS INCLUDED IN THE UNAUDITED PRO FORMA BALANCE
SHEET AND STATEMENTS OF OPERATIONS ARE AS FOLLOWS:
(A) To record the reclassification of funds held in trust by AAAC which are to
be released upon the earlier of completion of an acquisition or liquidation of
AAAC. As of September 30, 2007 the balance of the trust account was $39.192
million.
(B) To record the payment of $48.7 million purchase price ($13.0 million cash
and $35.655 million stock) for the purchase of TX, the recording of $ 4.1
million of costs related to the transaction, and the allocation of the purchase
price of the assets acquired and liabilities assumed as follows (in thousands):
(in thousands)
Calculation of Allocable Purchase Price:
Cash to be paid $ 13,000
Common stock (4,500,000 million shares valued) an average closing
price of $7.93 from July 24, 2007 through July 31, 2007 35,685
--------
AAAC additional transactions costs 4,100
--------
Total allocable purchase price 52,785
--------
Estimated Allocation of Purchase Price at September 30, 2007
Cash 7,646
Accounts receivable, net 16,902
120
Inventories 15,403
Other current assets 17,760
P&E 24,002
Other assets 5,225
Goodwill 11,192
Intangible assets 21,083
Deferred tax asset 1,710
Accounts payable (19,028)
Notes Payable (27,869)
Accrued expenses and other (21,241)
--------
Hunan Tongxin Net Asset Acquired 52,785
--------
* The purchase price allocation has not been finalized and is subject to
change upon recording of actual transaction costs and completion of
appraisals of intangible assets.
(C) Assuming maximum approval, reclassify common stock subject to redemption to
permanent equity. This amount, which immediately prior to this transaction was
being held in the trust account, represents the value 1,005,746 shares of common
stock which may be converted into cash by AAAC shareholders.
(D) Assuming minimum approval and the election by shareholders to convert their
shares into cash. This amount, which immediately prior to this transaction was
being held in the trust account, represents the value of 1,005,746 shares of
common stock which may be converted into cash by AAAC shareholders.
(E) To record payment to the underwriters for the non-accountable expenses
deposited in trust account which becomes due upon the consummation of the
Acquisition.
In the event of minimum approval, the underwriters have agreed to forfeit, on a
pro rata basis, the underwriter fee due to them.
(F) Adjustment to eliminate TX's historical equity.
(G) Record amortization of intangibles identified in the acquisition as
described in Note 3.
(H) Reduction of interest income earned on trust account described in Note 2
(Approximately 33%).
121
(i) pro forma net income per share was calculated by dividing pro forma net
income by the weighted average number of shares outstanding as follows:
Year Ended
December 31, 2006
---------------------
Maximum Minimum
Approval Approval
(100%) (80.01%)
---------- ---------
Shares to be issued to Hunan Tongxin management
after close of Transaction 4,500,000 4,500,000
Weighted average shares outstanding in AAAC 6,380,250 5,374,504
---------- ---------
Weighted average basic shares, assuming a
January 1, 2006 transaction date 10,880,250 9,874,504
Nine Months Ended
September 30, 2007
---------------------
Maximum Minimum
Approval Approval
(100%) (80.01%)
--------- ----------
Shares to be issued to Hunan Tongxin management
after close of Transaction 4,500,000 4,500,000
Weighted average shares outstanding in AAAC 6,380,250 5,374,504
--------- ----------
Weighted average basic shares, assuming a
January 1, 2006 transaction date 10,880,250 9,874,504
Net dilution of warrants and options,
utilizing the treasury stock method 1,730,268 1,730,268
Weighted average diluted shares, assuming a
January 1, 2006 transaction date 12,610,518 11,604,772
THE SHARES UNDERLYING THE UNDERWRITER'S PURCHASE OPTION HAVE NOT BEEN CONSIDERED
SINCE THE RELATED EXERCISE PRICE IS IN EXCESS OF THE AVERAGE MARKET PRICE DURING
THE PERIOD. THERE ARE NO OTHER DILUTED INSTRUMENTS IN AAAC.
3. PURCHASE ACCOUNTING ADJUSTMENT
Under the purchase method of accounting, the total preliminary purchase price
has been allocated to the net tangible and intangible assets acquired and
liabilities assumed, based on various preliminary estimates of their fair
values. Tongxin had engaged a third party appraiser to assist it to perform a
valuation of the acquired intangible assets in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 141, Business Combinations. Some of
the work commenced shortly after the consummation of the definitive agreement
and the valuation will be finalized after the completion of the acquisition.
Management estimates that the majority of the purchase price in excess of
current recorded values will be allocated to non-amortizable intangible assets.
The preliminary work performed by management and the third party valuation
specialists has been considered in management's estimates of the fair values
reflected in these unaudited pro forma condensed combined financial statements.
Management's estimates and assumptions are subject to change upon the
finalization of the valuation and may be adjusted in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. The
purchase price allocation is not finalized. Management has assumed that carrying
value approximates fair value for the tangible assets and liabilities of Hunan
Tongxin. The intangible assets acquired will include:
* the Hunan Tongxin trademark and trade name,
* customer relationships,
* Employee retention agreements,
* customer order backlog,
* land use rights in China, and
* goodwill
Some of these assets, such as goodwill and the Hunan Tongxin trademark and trade
name will be non-amortizable; other assets will be amortized over their useful
lives ranging from one to ten years except for land use rights, which in China
are provided for 99 years. Since Hunan Tongxin has been in operation for 23
years, 76 years will be used to amortize land use rights.
Under the purchase method of accounting, the total estimated purchase price of
$52.785 million was allocated to Hunan Tongxin's net tangible and intangible
assets based on their estimated fair values as of September 30, 2007. Intangible
assets are amortized utilizing the estimated pattern of the consumption of the
economic benefit over their estimated lives, ranging from one to ten weighted
average years of economic benefit except for land use rights where the economic
benefit extends over 76 years. Based on the preliminary third party valuation
and other factors as described above, the preliminary estimated purchase price
and amortization was estimated as follows (in thousands):
123
Preliminary
Purchase Price
Allocation Asset Life
------------- ----------
Tangible assets: $ 88,648 various
Less liabilities assumed 68,138
--------
Net tangible assets acquired 20,510
Amortizable intangible assets: 18,416
Employee Retention Agreements 636 2 years
Customer Relationships 1,230 10 years
Customer Backlog 7,100 6 months
Land Use Rights 7,700 76 years
Patented/Trade Secrets 1,750 10 years
Trademark and trade name 2,667 Indefinite
Goodwill 11,192 Indefinite
--------
Total preliminary purchase price allocation and
estimated direct transaction costs 52,785
--------
* Land use rights' estimated value is based on a fair market valuation from
an independent appraiser less the land grant fee paid by Tongxin in 1984.
The original grant was for a period of 100 years; there are 76 years
remaining under the grant.
* Tongxin has three registered trademarks in the PRC that are registered
through 2012-2016. AAAC was provided a fair market value of $2,667,000 for
these assets by an independent appraiser.
* The estimated fair market value for the 4 patents registered by Tongxin was
derived by what the company believes is the competitive piece cost the
company enjoys multiplied times the number of pieces produced and sold for
the entire 2007 calendar year. The $1,750,000 is the result of this
calculation. The remaining time of patent protection as well as the useful
life of the competitive advantage varies by patent.
* Customer relationships are valued on the excellent relationship that Mr.
Zhang, CEO of Tongxin, has with his customers. We believe that without his
personal involvement Tongxin's revenue would decrease by 10%. We applied
this 10% to 2007 projected revenues of $100 million and then applied
the Anticipated Net Income margin of 12.3% to arrive at the estimated value
of $1,230,000.
* Customer backlog is estimated based upon the backlog of unsigned customer
contracts for the remainder of 2007 calendar (new custom contracts are
signed each year in January/February timeframe) Customer order backlog is
based on firm orders in the system as of June 30, 2007. We priced these
orders based on current sale's price and arrived at estimated revenue of
$57.7 million for the remainder of 2007. Although additional orders will be
put into the order system as we get closer to the end of the year it is not
anticipated this number will change due to the contractual agreements that
Tongxin has with its customers. These contracts run from January 1 through
December 31 each year even though Tongxin is released as the supplier
of choice for a longer period, prices and terms must be renegotiated at the
beginning of each year. We believe the fair value of these orders can only
be applied for the remainder of the contact period. We applied the
estimated Net Income margin to the $57.7 million in revenue to arrive at
the estimated value of $7,100,000.
* Management Retention Agreements are estimated based upon retaining
53 management employees, with an average yearly compensation, including
salary and bonus, of approximately $6,000, over a two year period.
124
Amortization expense for the year ended December 31, 2006 was calculated to
be approximately $7,500 and $539,000 for the nine months ended of September 30,
2007.
Amortization expense for the five years subsequent to December 31, 2006, are
approximately as follows:
2007 718
2008 400
2009 400
2010 400
2011 400
Thereafter 8,280
-------
$10,598
DIRECTORS AND MANAGEMENT
Directors and Management following the consummation of the Business Transaction.
At the effective time of the consummation of the Business Transaction the
compensation agreements of the officers of Tongxin International will be
unknown. Reference to Risk Factor under "RISKS RELATED TO OWNERSHIP OF OUR
STOCK". The board of directors and officers of TI and the executive management
of Hunan Tongxin will be as follows:
Name Age Position
- ---- --- ----------------------------------------
William R. Herren 60 Director, Chairperson of the Board, CEO
Rudy Wilson 58 Director, COO
David J. Brophy 70 Director
Pilar Albiac-Murillo 51 Director
William Zielke 62 Director
Duanxiang Zhang 57 Director, Vice Chairperson of the Board
Weiwu Peng 55 Director
Ai Xing 36 Director
Xiao Tangbing 55 Director
DIRECTORS
William R. Herren, Director, has served as chairman of the board of AAAC since
its inception. Mr. Herren was employed with General Motors and its subsidiary
Delphi, the largest global automotive vehicle/component manufacturer. From July
1999 to June 2002, he was executive director of marketing, sales, planning and
M&A for Delphi Energy and Chassis Systems. From 1996 to 1999, in addition to his
125
responsibility as executive director, Mr. Herren also managed Delphi's Exhaust
business unit. From 1993 to 1996 he served as executive director of Delphi
Saginaw's marketing, sales, planning and M&A. From 1986 through 1993 he directed
several Saginaw business units including Final Drive, Engine Drive and Steering
Systems
Rudy Wilson, Director, has served as the chief executive officer of AAAC and a
member of the AAAC board of directors since its inception. From January 1997 to
December 2003, he was responsible for various foreign funded investments in Asia
for several Delphi Energy and Chassis Systems business lines. Mr. Wilson was
assigned to Beijing, China from May 1993 through 1997 directing the development
of Delphi Saginaw's initial investment projects in China, India and ASEAN.
During the assignment in China he served on the board of directors of Delphi
Lingyun Driveshaft, Delphi Xiaoshan Steering and Delphi Malaysia. From 1976
through 1993 Mr. Wilson held a variety of assignments with General Motors
component operations and advanced manufacturing engineering staff.
David J. Brophy, Director, has served as the chief financial officer and a
member of the AAAC board of directors since its inception. As a member of the
Finance Faculty at The University of Michigan School of Business Administration
from 1968 to the present, and Director of its Center for Venture Capital and
Private Equity Finance since 1992, he assists emerging and mid-sized companies.
Dr. Brophy is a founding member of the editorial board of the Journal of Private
Equity and the International Journal of Venture Capital. His advisory and
consultant activities in the public and private sector include such funds as
Compass Technology Partners, Plymouth Ventures, and Bio-Star Ventures and
various government agencies in the United States, Australia and France.
Pilar Albiac-Murillo, Director, is Director of Remy International's Mexican
manufacturing operations. Ms. Albiac brings over 25 years automotive experience
from General Motors and Delphi including assignments in Europe and North
America.
William Zielke, Director, has over 30 years automotive experience including an
expatriate assignment in Europe. Bill has been involved in the China automotive
market For 14 years. He has served on various boards of directors with supplier
firms in China, Saudi Arabia. Mexico, Belgium and Korea. As part of his role on
the various boards, he has served on various committees including the audit
committee. Bill has authored board training modules and conducted board
training. Outside the automotive arena Bill is currently the Treasurer of a
Brazilian/USA Joint Venture located in the USA. He has served as both President
and Treasurer of civic organizations as well.
Ai Xing, Director, brings a background in mechanical engineering and 15 years
electronics software experience in both the US and China. Mr., Ai is currently
employed with IBM (Canada).
Xiao Tangbing, Director, brings a background in business administration and over
30 years experience in China's machinery and electronics controls industry. He
is currently chairman and general manager of Changsha Machinery and Electronic
Equipment, Inc.
126
MANAGEMENT OF HUNAN TONGXIN
Zhang Duanxiang, Director of TI and Chief Executive Officer of Hunan Tongxin, is
currently president of Hunan Tongxin Enterprise Co., Ltd. He has over 20 years
of management experience in the Chinese automotive industry and under his
leadership, the company has become one of the top 50 companies in Hunan
Province. His work lead to successful establishment of the "Hunan Tongxin" brand
within the China vehicle body industry segment. During the past five years Mr.
Zhang also has been recognized as one of the top 10 outstanding economic
business executives and recognized twice as an excellent private entrepreneur in
Hunan province. In addition Mr. Zhang is also a committee member of China
Private Entrepreneur Association, premier vice president of Hunan Private
Entrepreneur Association, vice president of Hunan Mechanical Industry
Association, and vice president of Changsha Commercial Association.
Peng Weiwu, Director of TI and Chief Operating Officer of Hunan Tongxin is
currently general manager of Hunan Tongxin Enterprise Co., Ltd. Mr. Peng's
experience spans over 20 years within the Chinese automotive industry primarily
in the sales area. As an executive with the Company Mr. Peng has been
instrumental in increasing the company's business revenues and profits. His
understanding of the vehicle body segment has enabled the Company to take
advantage of the growth in the commercial vehicle segment. Through his
leadership Mr. Peng was responsible for improving the firm's production process
and enhancing product development resulting in the development of 128 brand
products and 9 product series in the past 22 years. In 2003, the Company's "Thin
Stamping Process and Design Theory in Vehicle Manufacturing Application" was
awarded the first prize by the China Institute of Technology.
There are no material arrangements or agreements relating to compensation of Mr.
Herren to serve as CEO, Mr. Wilson to serve as COO and Mr. Brophy to serve a CFO
for TI The compensation committee of the new board of directors of TI will be
responsible for reviewing and approving all compensation agreements.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS OF AAAC
During the fiscal year ended December 31, 2006, AAAC's board of directors did
not hold any meetings. Although AAAC does not have any formal policy regarding
director attendance at annual stockholder meetings, AAAC attempts to schedule
its annual meetings so that all of its directors can attend. In addition, AAAC
expects its directors to attend all board and committee meetings and to spend
the time needed and meet as frequently as necessary to properly discharge their
responsibilities.
INDEPENDENCE OF DIRECTORS
In anticipation of being listed on the NASDAQ Global Market, TI will elect to
follow the rules of NASDAQ Global Market in determining whether a director is
independent. The board of directors of TI also will consult with the Company's
legal 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. Consistent with these laws and regulations the
board of directors of Tongxin International will include nine directors five of
which will be independent directors.
127
AAAC currently does not have an independent board of directors and is not
required to have one.
AUDIT COMMITTEE
In anticipation of being listed on the NASDAQ Global Market, TI will establish
an audit committee to be effective at the consummation of the stock acquisition.
As required by NASDAQ Global Market listing standards, the audit committee will
be comprised of at least three independent directors who are also "financially
literate." The 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. Each audit committee
member will have an understanding of generally accepted accounting principles
and financial statements, the ability to assess the general application of such
principles in connection with the company's financial statements, including
estimates, accruals and reserves, experience in analyzing or evaluating
financial statements of similar breadth and complexity as the company's
financial statements, an understanding of internal controls and procedures for
financial reporting and an understanding of audit committee functions.
AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors will identify a director of Tongxin International who
will qualify as an "audit committee financial expert" within the meaning of all
applicable rules.
CURRENT AAAC BOARD OF DIRECTORS
The entire Board of Directors of AAAC has acted as the Audit Committee.
INDEPENDENT AUDITORS' FEES
Rothstein & Kass LLP acts as AAAC's principal auditor.
AUDIT FEES
During the fiscal year ended December 31, 2006, AAAC paid, AAAC's principal
accountant $ 62,450 for the services they performed in connection with the
initial public offering, including the financial statements included in the
Current Report on Form 8-K filed with the Securities and Exchange Commission on
August 31, 2006, $24, 900 in connection with the review of the Quarterly Report
on Form 10-QSB, and approximately $ 24,800 in connection with the December 31,
2006 audit and Form 10-QSB.
AUDIT-RELATED FEES
During 2006, AAAC's principal accountant did not render assurance and related
services reasonably related to the performance of the audit or review of
financial statements.
TAX FEES
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During 2006, AAAC did not make any payments for tax services.
ALL OTHER FEES
During 2006, there were no fees billed for products and services provided by the
principal accountant to AAAC other than those set forth above.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
In accordance with Section 10A(i) of the Securities Exchange Act of 1934, before
the company engages its independent accountant to render audit or permitted
non-audit services, the engagement will be approved by the audit committee.
CODE OF CONDUCT
In anticipation of the equity acquisition, the board of directors of TI will
adopt a Code of Conduct that applies to TI's directors, officers and employees.
A copy of the form of TI's Code of Ethics has been filed as Annex G to this
proxy statement. Requests for copies of TI's Code of Conduct should be sent in
writing to Asia Automotive Acquisition Corporation, 199 Pierce Street, Suite
202,Birmingham, MI 48009 Attention: David J. Brophy
AAAC has not yet adopted a formal code of ethics statement because the board of
directors evaluated the business of the company and the number of employees and
determined that since the business is largely limited to maintaining its cash
investments while its searches for a target company and consummates an
acquisition and the only persons acting for AAAC are the four directors there of
which are officers, general rules of fiduciary duty and federal and state
securities laws are adequate ethical guidelines.
COMPENSATION COMMITTEE INFORMATION
In anticipation of being listed on the NASDAQ Global Market TI will establish a
compensation committee. The purpose of the compensation committee will be to
administer the company's equity plans, including authority to make and modify
awards under such plans.
NOMINATING COMMITTEE INFORMATION
In anticipation of being listed on the NASDAQ Global Market, TI will form a
nominating committee. The nominating committee will be responsible for
overseeing the selection of persons to be nominated to serve on TI's board of
directors. The nominating committee will consider persons identified by its
members, management, stockholders, investment bankers and others. A copy of the
form of nominating committee charter is attached as an annex to this proxy
statement.
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AAAC does not have any restrictions on stockholder nominations under its
certificate of incorporation or by-laws. The only restrictions are those
applicable generally under Delaware corporate law and the federal proxy rules.
Prior to the consummation of the Equity Acquisition Agreement, AAAC has not had
a nominating committee or a formal means by which stockholders can nominate a
director for election. Currently the entire board of directors decides on
nominees, on the recommendation of one or more members of the board. None of the
members of the board of directors are "independent." Currently, the board of
directors will consider suggestions from individual stockholders, subject to
evaluation of the person's merits. Stockholders may communicate nominee
suggestions directly to any of the board members, accompanied by biographical
details and a statement of support for the nominees. The suggested nominee must
also provide a statement of consent to being considered for nomination. Although
there are no formal criteria for nominees, the board of directors believes that
persons should be actively engaged in business endeavors, have a financial
background, and be familiar with acquisition strategies and money management.
Because the management and directors of AAAC are the same persons, the board of
directors has determined not to adopt a formal methodology for communications
from stockholders on the belief that any communication would be brought to the
boards' attention by virtue of the co-extensive employment.
DIRECTOR COMPENSATION
TI intends to pay its non-employee directors a yearly retainer of $24,000 and
$3,000 for each board meeting, and $1,000 for each committee meeting that they
attend, as well as reimburse their expenses incurred in attending meetings.
AAAC's directors do not currently receive any cash compensation for their
service as members of the board of directors.
EXECUTIVE COMPENSATION HUNAN TONGXIN EXECUTIVE OFFICERS The following sets forth
summary information concerning the annual compensation paid by the Hunan Tongxin
to Mr. Zhang and Mr. Peng during the last two fiscal years.
Name Year Salary Bonus
- ---- ---- ------ ------
Zhang Duyanxiang 2006 $6,153 $4,492
2005 $6,153 $4,369
Peng Weiwu 2006 $5,128 $3,333
2005 $5,128 $3,379
Not included in the above table were dividends declared by Hunan Tongxin and
paid to Mr. Zhang and Mr. Peng in each of the fiscal years 2005 and 2006. Since
its formation, Hunan Tongxin has granted no stock options or stock appreciation
rights, any awards under long-term incentive plans, or any other non-cash
compensation.
EXECUTIVE COMPENSATION DETERMINATION
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Mr. Zhang Duanxiang and Mr. Peng Weiwu will each enter into a Key Employee
Employment Agreements with TI, effective as of the effective time of the
Redomestication.
Mr. Zhang will be employed as the Chief Executive Officer of Hunan Tongxin and
Vice Chair of Tongxin International and Mr. Peng will be employed as Chief
Operating Officer of Hunan Tongxin.
Both will be members of the board of directors of Tongxin International. The
Agreements will provide for an annual salary and a discretionary cash bonus
based on performance of Hunan Tongxin and other criteria, as the compensation
committee determines. The executives will be entitled to other benefits
currently in place between executive management and Hunan Tongxin. The
Agreements will be terminable by Tongxin International for death, disability and
cause. The Agreements contain provisions for the protection of confidential
information and a three-year-after employment non-competition period within
China.
AAAC EXECUTIVE OFFICERS
No executive officer of AAAC has received any cash or non-cash compensation for
services rendered to AAAC. Each executive officer has agreed not to take any
compensation prior to the consummation of a business combination.
Commencing April 19, 2006 and ending upon the acquisition of a target business,
AAAC has paid and will continue to pay an administrative services fee totaling
$7,500 per month to ADC for providing AAAC with office space and certain office
and secretarial services. Other than this $7,500 per month in fees, no
compensation of any kind, including finders and consulting fees, has been or
will be paid to any of the AAAC stockholders existing prior to its initial
public offering, or any of their respective affiliates, for services rendered
prior to or in connection with a business combination. However, AAAC
stockholders existing prior to its initial public offering have been and will
continue to be reimbursed for any out-of-pocket expenses incurred in connection
with activities on our behalf, such as identifying potential target businesses
and performing due diligence on suitable business combinations.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AAAC
The Company presently occupies office space provided by Asia Development
Capital, an affiliate and stockholder of the Company. ADC 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 for
a fee of $7,500 per month.
The Company has engaged Rodman & Renshaw, (the representative of the
underwriters), on a non-exclusive basis, as the Company's agent for the
solicitation of the exercise of the warrants. To this extent, consistent with
the guidelines of the NASD and the rules and regulations of the SEC, the Company
has agreed to pay the representative for bona fide services rendered a
commission equal to 2.5% of the exercise price for each warrant exercised more
than one year after the date of the proxy statement/prospectus if the exercise
was solicited by the underwriters. In addition to soliciting, either orally or
in writing, the exercise of the warrants, the representative's services may also
include disseminating
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information, either orally or in writing, to warrant holders about the Company
or the market for our securities, and assisting in the processing of the
exercise of the warrants. No compensation will be paid to the representative
upon the exercise of the warrants if:
* The market price of the underlying shares of common stock is lower than the
exercise price;
* The holder of the warrants has not confirmed in writing that the
underwriters solicited the exercise;
* The warrants are held in a discretionary account;
* The warrants are exercised in an unsolicited transaction; or
* The arrangement to pay the commission is not disclosed in the prospectus
provided to warrant holders at the time of exercise.
The Company has sold to Rodman & Renshaw, LLC (the" representative" of the
underwriters), for $100, as additional compensation, an option to purchase up to
a total of 350,000 units at a per-unit price of $10.00. The units issuable upon
exercise of this option are identical to those offered except that the warrants
included in this option have an exercise price of $6.65 (133% of the exercise
price of the warrants included in the units sold in the initial offering).
The sale of the option will be accounted for as an equity transaction.
Accordingly, the only impact on the Company's operating results will be the
recording of the $100 proceeds from the sale. The Company has determined, based
upon the Black-Scholes model, that the fair value of the option on the date of
sale was approximately $3.10 per unit, for a $1,086,001 total, using an expected
life of five years, volatility of 45.47% and a risk-free interest rate of 4.39%.
The volatility calculation of 45.47% is based on the 365-day average volatility
of a representative sample of ten (10) companies with market capitalizations
under $500 million that management believes to be engaged in the business of
auto component parts (the "Sample Companies"). Because the Company does not have
a trading history, the Company needed to estimate the potential volatility of
its common stock price, which will depend on a number of factors, which cannot
be ascertained at this time. The Company referred to the 365-day average
volatility of the Sample Companies because management believes that the average
volatility of such companies is a reasonable benchmark to use in estimating the
expected volatility of the Company's common stock post-business combination.
Although an expected life of five years was taken into account for purposes of
assigning a fair value to the option, if the Company does not consummate a
business combination within the prescribed time period and liquidates, the
option would become worthless.
In addition to this option the Company will pay the underwriters (as listed in
the Offering) an underwriting discount of 6% of the gross proceeds of which 2%
of the gross proceeds is deferred until the consummation of a business
combination.
Pursuant to the agreements 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.
Certain of the Company's officers, directors, or their designees have agreed
with the Representative that upon consummation of the Offering and during the 45
trading day period commencing on the later of the date that the securities
comprising the units begin separate trading or sixty days following the
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consummation of the Offering, that they will purchase up to 320,000 warrants in
the public marketplace at prices not to exceed $1.40 per Warrant. As of October
19,2007 , William R Herren, Rudy Wilson, and Chun Hao as officers and directors
of the Company held 290,000 warrants to purchase the Company's securities.
The Initial Stockholders will be entitled to registration rights with respect to
their founding shares pursuant to an agreement to be signed on the effective
date of the Offering. The holders of the majority of these shares are entitled
to make up to two demands that the Company register these shares at any time
commencing three months prior to the second anniversary of the effective date of
the Offering. In addition, the Initial Stockholders have certain "piggy-back"
registration rights on registration statements filed subsequent to the second
anniversary of the effective date of the Offering.
On February 8, 2006, five stockholders agreed with the representatives of the
underwriters pursuant to which they agreed to purchase in aggregate up to
$2,000,000 in warrants at prices not to exceed $1.40 per warrant during the 45
day trading period commencing on June 12, 2006. These entities have agreed that
any warrants purchased by them pursuant to this agreement will not be sold or
transferred until after a completed business combination. As of December 13,
2006 these five stockholders held 20,000 warrants to purchase the Company's
securities.
TONGXIN INTERNATIONAL
As a public company, TI, neither directly nor indirectly nor through any
subsidiary, will make loans, extend credit, maintain credit or arrange for the
extension of credit or renew an extension of credit in the form of a personal
loan to or for any director or executive officer of the company. This
prohibition is in compliance with the provisions of the Sarbanes-Oxley Act of
2002. Moreover, AAAC and TI have adopted an audit committee charter that
requires the audit committee to review and approve all related party
transactions, assure compliance with the company's code of ethics, and monitor
and discuss with the auditors and outside counsel policies and compliance with
applicable accounting and legal standards and requirements.
HUNAN TONGXIN
Hunan Tongxin does not have a specific review, approval or ratification
process, governing transactions with related persons, currently in place. TI
will utilize the governance committee of the TI Board of Directors to review
and approve all transactions with related persons in compliance with Item 404
of Regulation 5-K.
Hunan Tongxin did not have a promoter and/or certain control persons during the
last five fiscal years.
BENEFICIAL OWNERSHIP OF SECURITIES
BENEFICIAL OWNERS OF MORE THAN 5% OF AAAC COMMON STOCK
Based upon filings made with the Securities and Exchange Commission under
Section 13(d) or Section 16(a) of the Exchange Act as of December 7, 2007, AAAC
is aware of the following beneficial owners of more than 5% of any class of its
voting securities who are listed in the table below:
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SHARES OF
AAAC COMMON APPROXIMATE PERCENTAGE OF APPROXIMATE PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) STOCK OUTSTANDING COMMON STOCK (2) OUTSTANDING COMMON STOCK (3)
- ---------------------------------------- ----------- ---------------------------- ----------------------------
Jeffrey L. Feinberg (4) 1,276,100 20.00% 9.97%
Baupost Group LLC (5) 493,590 7.74% 4.53%
Balyasny Asset Management (6) 355,500 5.57% 3.36%
Global Capital LLC (7) 312,000 4.90% 3.63%
DB Zwirn (8) 329,000 5.16% 3.02%
Cresendo (9) 320,000 5.02% 2.94%
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934. Unless otherwise noted, we
believe that all persons named in the table has sole voting and investment
power with respect to all shares of our common stock beneficially owned by
them.
(2) These amounts based upon pre-business combination aggregate of 6,380,250
shares outstanding including 1,349,000 insider shares and 5, 031,250 shares
publicly held. Excludes shares issuable upon exercise of warrants.
(3) These amounts based upon post-business combination aggregate of
10,880,250 shares outstanding including 1, 349,000 insider shares,
5,031,250 shares publicly held and 4,500,000 shares for Hunan Tongxin
Management. Also include shares issuable upon exercise of warrants.
(4) Mr. Feinberg's shares of AAAC Common Stock include 1,084,900 shares
issuable upon exercise of warrants. The securities reported as held by Mr.
Feinberg represent shares of Common Stock held by Mr. Feinberg in his
personal account; JLF Partners I, L.P., JLF Partners II, L.P. and JLF Off
Shore Fund, Ltd. to which JLF Asset Management LLC serves as the management
company and/or investment manager. Mr. Feinberg is the managing member of
JLF Asset Management, LLC. The business address of Mr. Feinberg and these
entities is 2775 Via de la Valle, Suite 204, Del Mar, California 92014.
This information is derived from a Form 3 filed by the above persons with
the SEC on July 3, 2007, a Form 4 field by the above persons with the SEC
on October 12, 2007 and a Schedule 13 G/A filed by the above persons with
the SEC on December 7, 2007.
(5) The control person of the shares owned by The Baupost Group is Seth A.
Klarman. The business address of The Baupost Group, LLC is: 10 St. James
Avenue, Suite 2000 Boston, Massachusetts 02116. The foregoing information
is derived from a Schedule 13G /A filed with the SEC on February 13, 2007.
(6) The control person of the shares owned by Atlas Global is Mr. Dmitry
Balyasny. The business address of Atlas Global, LLC; Balyasny Asset
Management L.P. and Mr. Dmitry Balyasny is: 181 West Madison, Suite 3600,
Chicago, IL 60602.
The foregoing information is derived from a Schedule 13G /A filed with the
SEC on August 31, 2006.
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(7) The control person of the shares owned by Globis Capital Management is Mr.
Paul Packer. The business address of Mr. Paul Packer; Globis Capital
Management, L.P. and Globis Capital LLC is: 60 Broad Street, 38th Floor,
New York, New York 10004. The foregoing information is derived from a
Schedule 13G /A filed with the SEC on May 17, 2006.
(8) The control person of the shares owned by Zwirn Holdings is Mr. Daniel B.
Zwirn. The business address of Mr. Daniel B. Zwirn; Zwirn Holdings, LLC;
DBZ GP, LLC; D.B. Zwirn & co., L.P. is 745 Fifth Avenue, 18th Floor New
York, NY 10151. The foregoing information is derived from a Schedule 13G /A
filed with the SEC on September 24, 2007.
(9) The control person of the shares owned by Crescendo Investments is Mr. Eric
Rosenfeld. The business address of Mr. Eric Rosenfeld; Crescendo
Investments III, LLC; and Crescendo Partners III, L.P. is 10 East 53rd
Street, 35th Floor, New York, New York 10022. The foregoing information is
derived from a Schedule 13G /A filed with the SEC on October 5, 2007.
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None of the above stockholders has any voting rights that are different from the
voting rights of any other stockholders.
SECURITY OWNERSHIP OF OFFICERS AND DIRECTORS OF AAAC
The following table sets forth information with respect to the beneficial
ownership of AAAC common shares, as of October 19, 2007 by:
- Each director and officer; and
- All directors and officers as a group
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SHARES OF APPROXIMATE APPROXIMATE
AAAC PERCENTAGE OF PERCENTAGE OF
NAME AND ADDRESS OF COMMON OUTSTANDING OUTSTANDING
BENEFICIAL OWNER (1)(2) STOCK COMMON STOCK (3) COMMON STOCK (4)
- ----------------------- --------- ---------------- ----------------
William R. Herren (5) 538,400 8.1% 3.3%
Rudy Wilson (5) (6) 538,400 8.1% 3.3%
Chun Y. Hao (7) 282,200 4.2% 1.8%
David J. Brophy 60,000 0.9% 0.3%
Donald L. Runkle 20,000 0.3% 0.001%
Officers and directors as a 1,439,000 21.5% 9.0%
group (5 persons)
(1) Unless otherwise indicated, the business address of each of the
individuals is c/o AAAC, 199 Pierce Street, Suite 202, Birmingham,
Michigan, 48009.
(2) Beneficial ownership and percentage has been determined in accordance
with Rule 13d-3 under the Securities Exchange Act of 1934.
(3) These amounts based upon pre-business combination aggregate of
6,670,000 shares outstanding including 1,349,000 insider shares and 5,
031,250 shares publicly held and 290,000 shares issuable upon exercise
of warrants.
(4) These amounts based upon at post-business combination aggregate of
15,911,500 shares outstanding including 1,349,000 insider shares,
5,031,250 shares publicly held, 4,500, 000 shares for Hunan Tongxin
Management and 5, 031,250 shares issuable upon exercise of warrants.
(5) William R. Herren shares of Common Stock include 90,400 shares
issuable upon exercise of warrants.
(6) Rudy Wilson shares of Common Stock include 90,400 shares issuable upon
exercise of warrants
(7) Chun Y. Hao shares of Common Stock include 89,200 shares issuable upon
exercise of warrants.
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PRICE RANGE OF SECURITIES
AAAC
The shares of AAAC common stock, warrants and units are currently traded on the
Over-the-Counter Bulletin Board under the symbols "AAAC," "AAACW" and "AAACU,"
respectively. The closing price for each share of common stock, warrant and unit
of AAAC on December 18, 2007, was $8.15, $2.92 and $11.20, respectively. AAAC
units commenced public trading on April 19, 2006 and common stock and warrants
commenced public trading on June 12, 2006. The table below sets forth, for the
calendar quarters indicated, the high and low closing prices of the AAAC common
stock, warrants and units as reported on the Over-the-Counter Bulletin Board.
The over-the-counter market quotations reported below reflect inter-dealer
prices, without markup, markdown or commissions and may not represent actual
transactions.
Over-the-Counter Bulletin Board
AAAC AAAC AAAC
Common Stock Warrants Units
------------- ------------- --------------
High Low High Low High Low
----- ----- ----- ----- ------ -----
2006 Second Quarter $8.65 $7.00 $1.50 $1.35 $10.16 $8.35
2006 Third Quarter $7.17 $7.00 $2.05 $1.56 $ 9.22 $8.56
2006 Fourth Quarter $8.08 $7.21 $2.14 $1.35 $10.22 $8.56
2007 First Quarter $8.40 $7.50 $2.16 $1.82 $10.56 $9.32
2007 Second Quarter $7.74 $7.42 $2.40 $1.97 $ 9.96 $9.38
2007 Third Quarter $8.15 $7.40 $2.95 $1.76 $10.70 $9.15
2007 Fourth Quarter $8.65 $7.64 $3.30 $1.90 $11.68 $9.42
HUNAN TONGXIN
Hunan Tongxin is a privately held company and no established public trading
market exists for its class of common stock.
There are 53 holders of Hunan Tongxin's class of common stock as of December
31, 2007.
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Holders of AAAC common stock, warrants and units should obtain current market
quotations for their securities. The market price of AAAC common stock, warrants
and units could vary at any time before consummation of the Equity Acquisition
Agreement.
In connection with the stock acquisition, AAAC has applied for the quotation of
the combined company's common stock, warrants and units on the NASDAQ Global
Market under the symbol "TXIC," "TXICW" and "TXICU," respectively. If the
securities are not listed on the NASDAQ Global Market, they will be traded on
the over-the-counter bulletin board.
HOLDERS
As of December 13, 2007, there was 115 holders of record of the units, 150
holders of record of the common stock and 36 holders of record of the warrants.
AAAC believes the beneficial holders of the units, common stock and warrants to
be in excess of 314 persons each. It is anticipated that the number of holders
of TI common stock after the Redomestication will be the same as the number of
holders of AAAC common stock.
DIVIDENDS
AAAC has not paid any cash dividends on its common stock to date and does not
intend to pay cash dividends prior to the completion of a business combination.
The payment of dividends by TI in the future will be contingent upon revenues
and earnings, if any, capital requirements and the general financial condition
of TI subsequent to completion of the business combination. The payment of any
dividends subsequent to the business combination will be within the discretion
of the then board of directors. It is the present intention of the board of
directors to retain all earnings, if any, for use in the business operations
and, accordingly, the board does not anticipate declaring any dividends in the
foreseeable future.
SHARES ELIGIBLE FOR FUTURE SALE
After the Redomestication and consummation of the equity acquisition of Hunan
Tongxin, there will be 6,380,250 shares of common stock outstanding. Of that
amount, 5,031,250 shares will be registered and freely tradable without
securities law restriction and 1,349,000 shares being held in escrow until April
19, 2008. Additionally, any of such shares held by "affiliates," as that term is
defined in Rule 144 under the Securities Act, which generally includes officers,
directors or 10% stockholders will also be restricted from public sale as
"restricted stock." In addition, there are outstanding 5,031,250 warrants issued
in the initial public offering, each to purchase one share of common stock that
will be freely tradable after the Redomestication. The common stock issuable
upon exercise of the warrants will be tradable, provided that there is no
stipulation to the registration statement. In addition, in connection with the
initial public offering, we issued a unit purchase option to the representative
of the underwriters which is exercisable for 350,000 units, comprised of 350,000
shares of common stock and 350,000 warrants, each warrant to purchase one share
of common stock. Such securities underlying the representative's unit purchase
option and underlying securities have
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registration rights and may be sold pursuant to Rule 144. Therefore, there are
an aggregate of 700,000 shares of common stock that may be issued in the future
upon exercise of outstanding warrants and options.
In general, under Rule 144, a person who has owned restricted shares of common
stock beneficially for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of the
then average preceding four weekly trading volume or 1% of the total number of
outstanding shares of common stock. Sales under Rule 144 are also subject to
manner of sale provisions, notice requirements and the availability of current
public information about the company. A person who has not been one of our
affiliates for at least the three months immediately preceding the sale and who
has beneficially owned shares of common stock for at least two years is entitled
to sell the shares under Rule 144 without regard to the limitations described
above.
Although the SEC had originally extended the ban on Rule 144 reliance for
companies that had been blank check companies even if they no longer were, the
SEC has now concluded that, because the reasons for prohibiting reliance on Rule
144 do not appear to be present after a reporting company has ceased to be a
shell company, reliance on Rule 144 for resales by a security holder would be
permitted when: (1) the issuer of the securities that was formerly a reporting
or non-reporting shell company has ceased to be a shell company; (2) the issuer
of the securities is subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act; (3) the issuer of the securities has filed all
reports and material required to be filed during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports and
materials); and (4) at least 90 days have elapsed from the time the issuer files
current "Form 10 information" (information ordinarily filed on a current report
on Form 8-K) with the Commission reflecting its status as an entity that is not
a shell company
Before the redomestication there was no market for the securities of TI, and no
prediction can be made about the effect that market sales of the common stock of
TI or the availability for sale of the common stock of TI will have on the
market price of the common stock. It is anticipated that the market should be
similar to that of AAAC because the redomestication will largely be substituting
one security for another on as equal terms as is possible. Nevertheless, sales
of substantial amounts of our common stock in the public market could adversely
affect the market price for our securities and could impair our future ability
to raise capital through the sale of common stock or securities linked to the
common stock.
It is the view of the SEC that both before and after a business combination with
an operating entity, the promoters or affiliates of a blank check company, as
well as their transferees are 'underwriters' of the securities issued, and Rule
144 is not available for resale transactions by such promoters or affiliates.
Pursuant to Rule 144(i)(2), as amended in Release No: 33-8869 issued December
6, 2007, affiliates of former blank check companies cannot use Rule 144 to sell
any unregistered securities until the passage of 12 months from the day the
issuer first filed 'Form 10 information' (as defined in Rule 144(i)(3)) with
the SEC.
DESCRIPTION OF THE COMBINED COMPANY'S SECURITIES FOLLOWING THE EQUITY
ACQUISITION
The following description of the material terms of the capital stock and
warrants of TI following the Equity Acquisition includes a summary of specified
provisions of the Memorandum of Association and Articles of Association of TI
that will be in effect upon completion of the equity acquisition and the merger.
This description is subject to the relevant provisions of the Corporation Law of
BVI and is qualified by reference to TI's Memorandum of Association and Articles
of Association, copies of which are attached to this proxy statement/prospectus
and are incorporated in this proxy statement/prospectus by reference.
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GENERAL
TI has no authorized share capital, but it will be authorized to issue
40,000,000 shares of all classes of capital stock, of which 39,000,000 will be
ordinary shares of $.001 par value and 1,000,000 will be preference shares of
$.001 par value. The capital of TI will be stated in United States dollars.
ORDINARY SHARES
The holders of the combined company's ordinary shares are entitled to one vote
for each share on all matters submitted to a vote of stockholders and do not
have cumulative voting rights. Subject to the preferences and rights, if any,
applicable to the shares of preference stock, the holders of the ordinary shares
are entitled to receive dividends if and when declared by the board of
directors. Subject to the prior rights of the holders, if any, of the preference
shares, the holders of the ordinary shares are entitled to share ratably in any
distribution of the assets of the combined company upon liquidation, dissolution
or winding-up, after satisfaction of all debts and other liabilities.
PREFERENCE STOCK
Shares of preference stock may be issued from time to time in one or more series
and the board of directors of TI, without approval of the stockholders, is
authorized to designate series of preference stock and to fix the rights,
privileges, restrictions and conditions to be attached to each such series of
shares of preference stock. The issuance of shares of preference stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of holders of the combined company's shares of common stock.
As of the date of this proxy statement, there are no outstanding shares of
preference stock of any series.
ANTI-TAKEOVER EFFECT OF UNISSUED SHARES OF CAPITAL STOCK
Common Stock. After the equity acquisition and redomestication merger, TI will
have outstanding approximately 6,380,250 shares of common stock, assuming that
none of the public stockholders elects to exercise the conversion rights. The
remaining shares of authorized and unissued common stock will be available for
future issuance without additional stockholder approval. While the additional
shares are not designed to deter or prevent a change of control, under some
circumstances the combined company could use the additional shares to create
voting impediments or to frustrate persons seeking to effect a takeover or
otherwise gain control by, for example, issuing those shares in private
placements to purchasers who might side with the combined company's board of
directors in opposing a hostile takeover bid.
Preference Stock. The memorandum and articles will grant the board of directors
the authority, without any further vote or action by the combined company's
stockholders, to issue preference stock in one or more series and to fix the
number of shares constituting any such series and the preferences, limitations
and relative rights, including dividend rights, dividend rate, voting rights,
terms of redemption, redemption price or prices, conversion rights and
liquidation preferences of the shares constituting any series. The existence of
authorized but unissued preference stock could reduce the combined company's
141
attractiveness as a target for an unsolicited takeover bid since the combined
company could, for example, issue shares of preference stock to parties who
might oppose such a takeover bid or shares that contain terms the potential
acquirer may find unattractive. This may have the effect of delaying or
preventing a change in control, may discourage bids for the common stock at a
premium over the market price of the common stock, and may adversely affect the
market price of, and the voting and other rights of the holders of, common
stock.
WARRANTS
As of September 30, 2007, there were warrants outstanding to purchase 5,031,250
shares of Common Stock. Each warrant entitles the registered holder to purchase
one share of our common stock at a price of $5.00 per share, subject to
adjustment as discussed below, at any time commencing on the later of:
The warrants will expire at 5:00 p.m., New York City time on April 19, 2011.
AAAC may call the warrants for redemption when the common stock price equals
or exceeds $10.00 per share, for any 20 trading days within a 30 trading day
period ending on the third trading day prior to the notice of redemption to
warrant holders.
The warrants have been issued in registered form under a warrant agreement
between Continental Stock Transfer & Trust Company, as warrant agent, and AAAC.
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, Equity Acquisition or
consolidation of the company. However, the warrants will not be adjusted for
issuances of common stock 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 check payable to us, 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 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.
The warrants may be deprived of any value and the market for the warrants may be
limited if the prospectus relating to the common stock issuable upon the
exercise of the warrants is not current or if the common stock is not qualified
or exempt from qualification in the jurisdictions in which the holders of the
warrants reside. No fractional shares will be issued upon exercise of the
warrants. However,
142
if a warrant holder exercises all warrants then owned of record by him, AAAC
will pay to the warrant holder, in lieu of the issuance of any fractional share
which is otherwise issuable to the warrant holder, an amount for such fractional
share in cash based on the market value of the common stock on the last trading
day prior to the exercise date.
PURCHASE OPTION
AAAC has issued to the representative of the underwriters of its initial public
offering an option to purchase up to a total of 350,000 units at a per-unit
price of $12.00, commencing on the later of the consummation of the Equity
Acquisition or April 19, 2007. The option expires on April 19, 2011. The units
issuable upon exercise of this option are the same as the publicly traded units,
consisting of one share of common stock and one warrants, except that the
warrants are exercisable at $6.65. The option contains demand and piggy-back
registration rights for period of five and seven years, respectively, and the
combined company will bear the expenses of the registration of the securities
for the holders of the option. The exercise price and number of units are
subject to adjustment in certain circumstances, including a stock dividend,
recapitalization reorganization, merger or consolidation.
REGISTRATION RIGHTS AGREEMENT
AAAC has entered into a registration rights agreement providing for the
registration of the shares of common stock issued prior to the initial public
offering and the shares included in the Equity Acquisition proposal. The
warrants, to be exercisable, must also continue to have the common stock
underlying the warrants registered on an effective registration statement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the shares of AAAC common stock, warrants
and units is Continental Stock Transfer and Trust, 212 Broad Street, New York,
NY 10019.
STOCKHOLDER PROPOSALS
If the equity acquisition is not consummated, the AAAC 2007 annual meeting of
stockholders will be held on or about April 1, 2008 unless the date is
changed by the board of directors. If you are a stockholder and you want to
include a proposal in the proxy statement for the AAAC 2007 annual meeting, you
need to provide it to us by no later than March 15, 2008. You should direct
any proposals to our secretary, Mr. David J. Brophy, at AAAC's principal office
at 199 Pierce Street, Suite 202, Birmingham, Michigan 48009. If you want to
present a matter of business to be considered at the AAAC 2007 annual meeting,
under AAAC by-laws you must give timely notice of the matter, in writing, to our
secretary. To be timely, the notice has to be given by March 15, 2008.
LEGAL MATTERS
King & Wood, counsel to Hunan Tongxin has opined as to the validity of the
Equity Acquisition Agreement. Reference to their opinion has been included in
this joint proxy statement/prospectus and given upon their authority as experts
in the law of the PRC. A copy of its opinion is filed as an exhibit to this
proxy statement/prospectus.
143
EXPERTS
The financial statements of Hunan Tongxin for the years ended December 31, 2004,
2005 and 2006 included in this proxy statement have been audited by LehmanBrown
PC, an independent registered public accounting firm, to the extent and for the
periods set forth in their report appearing elsewhere in this proxy statement
and are included in reliance upon the authority of LehmanBrown PC as experts in
auditing and accounting.
The financial statements of AAAC at December 31, 2006 and for the period from
June 20, 2005 (inception) to December 31, 2006, included in this proxy statement
and have been audited by Rothstein & Kass PC, an independent registered public
accounting firm, to the extent set forth in their report appearing elsewhere in
this proxy statement and are included herein in reliance upon the authority of
Rothstein & Kass PC as experts in accounting and auditing.
Strobl & Sharp, P.C. has provided its tax opinion on each material tax
consequence as a result of the redomestication. Reference to its opinion has
been included in this proxy statement/prospectus and given upon its authority as
experts in tax law. A copy of its opinion is filed as an exhibit to this proxy
statement/prospectus.
DELIVERY OF DOCUMENTS TO STOCKHOLDERS
Pursuant to the rules of the SEC, AAAC 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 AAAC annual
report to stockholders and AAAC's proxy statement. Upon written or oral request,
AAAC will deliver a separate copy of the annual report to stockholder and/or
proxy statement 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 AAAC deliver single copies of such documents
in the future. Stockholders may notify AAAC of their requests by calling or
writing David J. Brophy at its principal executive offices at AAAC, 199 Pierce
Street, Suite 202, Birmingham, Michigan, 48009. In addition, AAAC will make
available free of change through an Internet website its annual report,
quarterly reports, 8-K reports and other SEC filings.
144
WHERE YOU CAN FIND MORE INFORMATION
AAAC files quarterly 10-QSB, annual 10-KSB reports and other 8K reports with
the Securities and Exchange Commission as required by the Securities Exchange
Act of 1934, as amended. You may read and copy reports, proxy statements and
other information filed by AAAC with the Securities and Exchange Commission at
the Securities and Exchange Commission public reference room located at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference Room by calling
the Securities and Exchange Commission at 1-800-SEC-0330. You may also obtain
copies of the materials described above at prescribed rates by writing to the
Securities and Exchange Commission, Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. You may also access information on AAAC at the
Securities and Exchange Commission web site at: http://www.sec.gov.
After the equity acquisition, if the securities of Tongxin International are
listed on the NASDAQ Global Stock Market, unless you notify TI of your desire
not to receive these reports, the combined company will furnish to you all
periodic reports that it files with the Securities and Exchange Commission,
including audited annual consolidated financial statements and unaudited
quarterly consolidated financial statements, as well as proxy
statement/prospectuses and related materials for annual and special meetings of
stockholders.
Information and statements contained in this proxy statement or any annex to
this proxy statement/prospectus incorporated by reference in this proxy
statement/prospectus are qualified in all respects by reference to the copy of
the relevant contract or other annex filed as an exhibit to this proxy
statement/prospectus or incorporated in this proxy statement/prospectus by
reference.
All information contained in this proxy statement/prospectus or incorporated in
this proxy statement/prospectus by reference relating to AAAC has been supplied
by AAAC, and all such information relating to the Hunan Tongxin Enterprise Co.
Ltd. has been supplied by Hunan Tongxin Enterprise Co ltd. Information provided
by either of us does not constitute any representation, estimate or projection
of the other.
If you would like additional copies of this proxy statement/prospectus, or if
you have questions about the Equity Acquisition Proposal, you should contact:
David J. Brophy
C/o Asia Automotive Acquisition Corporation
199 Pierce Street, Suite 202
Birmingham, MI 48009
248 593 8330
145
EXHIBITS
A - KING AND WOOD OPINION LETTER
B - STROBE & SHARP, P.E. OPINION LETTER
FINANCIAL STATEMENTS
A - ASIA AUTOMOTIVE ACQUISITION CORPORATION AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 2006
B - Asia Automotive Acquisition Corporation Interim Consolidated Financial
Statements as of September 30, 2007
C - Hunan Tongxin Enterprise Co., Ltd., Interim Consolidated Financial
Statements as of September 30, 2007
D - Hunan Tongxin Enterprise Co., Ltd., Audited Consolidated Financial
Statements ended December 31, 2004, 2005 and 2006.
ANNEXES
A - EQUITY ACQUISITION AGREEMENT
B - KEY EMPLOYEES EMPLOYMENT AGREEMENT
C - MEMORANDUM OF ASSOCIATION OF TONGXIN INTERNATIONAL
D - ARTICLES OF ASSOCIATION OF TONGXIN INTERNATIONAL
E - TONGXIN INTERNATIONAL CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF
DIRECTORS
F - TONGXIN INTERNATIONAL CODE OF CONDUCT AND POLICY REGARDING REPORTING OF
POSSIBLE VIOLATIONS
G - TONGXIN INTERNATIONAL CHARTER OF THE NOMINATING AND GOVERNANCE COMMITTEE OF
THE BOARD OF DIRECTORS*
H - DELAWARE GENERAL CORPORATION LAW-SECTION 262 APPRAISAL RIGHTS
I - PERFORMANCE ORIENTED EARN-OUT AGREEMENT
J - CLARIFICATION AGREEMENT (UPO)
146
KING&WOOD PRC LAWYERS
40th Floor, Office Tower A, Beijing Fortune Plaza,
7 Dongsanhuan Zhonglu
Chaoyang District, Beijing 100020, China
KING AND WOOD OPINION LETTER
To: Asia Automotive Acquisition Corporation
199 Pierce Street, Suite 202, Birmingham, Michigan 48009
RE: Hunan TX Enterprise Co., Ltd.
November 6, 2007
Ladies and Gentlemen:
We are qualified lawyers of the People's Republic of China ("PRC") and as such
are qualified to issue this opinion on the PRC laws, regulations, rules, orders,
decrees, guidelines or notices effective as at the date hereof. We have acted as
PRC legal counsel for Hunan TX Enterprise Co., Ltd. (the "Company"), a company
incorporated under the PRC laws.
We have made no investigation of and express no opinion in relation to the laws
of any jurisdiction other than the PRC. This opinion is to be governed by and
construed in accordance with the laws of the PRC and is limited to and is given
on the basis of the current law and practice in the PRC.
This opinion is delivered to you with respect to the legality of the Company and
the Equity Acquisition transaction.
For the purposes of this opinion, we have examined such corporate records,
certificates and other documents, and such questions of law, as we consider
necessary or appropriate. In examining these documents, we have made the
following assumptions:
(a) that all documents provided to us as originals are authentic and all
documents submitted to us as copies conform to their originals;
(b) that all documents have been validly authorized, executed and delivered by
all of the parties thereto, and
(c) that the signatures, seals and chops on the documents submitted to us are
genuine.
Based on the foregoing examinations and assumptions and our review of the
relevant documents, we are of the opinion that:
147
1. The Company has been duly incorporated and validly exists as a limited
liability company and is in good standing under the PRC laws. The Company is an
independent legal person. The Articles of Association of the Company, the
business license and other constitutive documents of the Company comply with the
applicable requirements of the PRC laws, including the PRC Company Law and are
in full force and effect.
2. The Company has three wholly owned subsidiaries, Hunan TX Mould Manufacturing
Co., Ltd., Zhucheng TX Autobody Co., Ltd., and Hunan TX Ziyang Autobody Co.,
Ltd. Each of the subsidiaries has been duly incorporated and is validly existing
limited liability company and is in good standing under the PRC laws, with all
necessary legal right, power, corporate authority to own, use, lease and operate
its assets and conduct its business. Each of the subsidiaries has the status of
an independent legal person. The Articles of Association, the business license
and other constitutive documents of each subsidiary comply with the requirements
of applicable PRC laws and are in full force and effect.
3. With respect to the Equity Acquisition Agreements regarding the acquisition
of the Company made by Asia Automotive Acquisition Corporation ("AAAC"):
(a) AAAC acquired 100% equity interest in the Company from certain Chinese
citizens pursuant to the Equity Acquisition Agreement dated July 24, 2007, for
which an approval from the competent local delegate agency of the PRC Ministry
of Commerce was obtained on August 9, 2007, evidenced by a certificate of
foreign investment approval dated August 9, 2007, in proper form and content,
true and accurate.
(b) The acquisition by AAAC of the foregoing equity interests in the Company
did not conflict with any applicable laws, rules, regulations, ordinances,
codes or other obligations of any governmental body in the PRC.
(c) The acquisitions by AAAC of the equity interests in the Company was duly
authorized by all necessary actions on the part of the Company and their equity
holders.
This opinion is addressed to AAAC in connection with the transaction of
acquisition of the Company.
Yours faithfully
/s/ King and Wood PRC Lawyers
- ----------------------------------------
King and Wood PRC Lawyers
148
STROBL & SHARP
Professional Corporation
300 East Long Lake Road, Suite 200
Bloomfield Hills, MI 48304-2376
Phone (248) 540-2300 Fax 248 645-2690
January 8, 2008
Asia Automotive Acquisition Corporation
199 Pierce St., Ste. 202
Birmingham, Michigan 48009
Ladies and Gentlemen:
We have acted as counsel to Asia Automotive Acquisition Corporation, a
Delaware corporation ("AAAC"), and its wholly owned subsidiary, Tongxin
International, Ltd., a British Virgin Islands company ("TI"), in connection with
(i) the transactions described in the Stock Purchase Agreement (the "Stock
Purchase Agreement") entered into by and among AAAC, TI and Hunan Tongxin
Enterprises Co. Ltd, a corporation organized under the laws of the People's
Republic of China, ("HT") and (ii) the proposed merger of AAAC with and into TI
(the "Redomestication Merger"), pursuant to the Plan of Merger by and between
AAAC and TI ("Merger Agreement").
AAAC and TI are filing with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Securities Act"), a
registration statement on Form S-4 (the "Registration Statement") with respect
to the common stock and warrants of TI to be issued to AAAC stockholders
pursuant to the Merger Agreement. If the Redomestication Merger is consummated
on the terms and subject to the conditions set forth in the Merger Agreement,
then AAAC will merge with and into TI, the separate corporate existence of AAAC
will cease and TI will continue as the surviving corporation. In accordance with
the Merger Agreement, one new ordinary share of TI will be issued to the
stockholders of AAAC for each outstanding share of common stock of AAAC and TI
will issue one warrant for each outstanding warrant of AAAC and one unit
(consisting of one share and one warrant) for each outstanding unit of AAAC.
Concurrently with or as soon as practicable following the merger of AAAC with
and into TI, TI will consummate the acquisition of all the issued and
outstanding common stock of HT (the "Stock Purchase") in accordance with the
terms of the Stock Purchase Agreement. HT owns a controlling interest in one or
more operating businesses in the People's Republic of China. We have assumed for
purposes of the opinion set forth below that the Stock Purchase will be
consummated immediately following the Redomestication Merger as part of a single
integrated plan and that the Redomestication Merger will be consummated in
accordance with laws of the State of Delaware and the British Virgin Islands.
This opinion is being rendered pursuant to the requirements of Item
21(a) of Form S-4 under the Securities Act. In connection with this opinion, we
have examined, and are familiar with: (i) the Merger Agreement, (ii) the Stock
Purchase Agreement, (iii) the Registration Statement and the Proxy
Statement/Prospectus (the "Prospectus") which is contained in the Registration
Statement and (iv) such other presently existing documents,
151
STROBL & SHARP
Professional Corporation
300 East Long Lake Road, Suite 200
Bloomfield Hills, MI 48304-2376
Phone (248) 540-2300 Fax 248 645-2690
Asia Automotive Acquisition Corporation
January 8, 2008
Page Two
records and matters of law as we have deemed appropriate in order to enable us
to render this opinion.
In rendering this opinion, we have assumed the following (without any
independent investigation or review thereof):
1. The legal capacity of all natural persons, the authenticity of
original documents submitted to us, the conformity to original documents of all
documents submitted to us as copies and the authenticity of the originals of
such copies, the genuineness of all signatures and the due execution and
delivery of all documents;
2. The due execution and delivery of the Officer's Certificate
delivered to us by AAAC and TI on or before the date hereof (the "Officer's
Certificate");
3. The truth and accuracy at all relevant times of the representations,
warranties and statements of fact made or to be made by AAAC, TI and their
respective management, employees, officers and directors in connection with the
Redomestication Merger, including, but not limited to, those set forth in the
Registration Statement, the Prospectus, the Merger Agreement and the Officer's
Certificate;
4. Any representation or statement made "to the knowledge of" or
similarly qualified is correct without such qualification;
5. The Redomestication Merger will be consummated in accordance with
the terms and provisions of the Merger Agreement without any waiver or breach of
any material provision thereof, and the Redomestication Merger will be effective
under applicable law;
6. The Stock Purchase will be consummated in accordance with the terms
and provisions of the Stock Purchase Agreement without any waiver or breach of
any material provision thereof; and
7. The Redomestication Merger will be reported by AAAC on its federal
income tax return in a manner consistent with the treatment of the
Redomestication Merger as a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended.
152
STROBL & SHARP
Professional Corporation
300 East Long Lake Road, Suite 200
Bloomfield Hills, MI 48304-2376
Phone (248) 540-2300 Fax 248 645-2690
Asia Automotive Acquisition Corporation
January 8, 2008
Page Three
Based upon and subject to (i) the Redomestication Merger being consummated in
the manner described in the Merger Agreement, (ii) the Stock Purchase being
consummated in the manner described in the Stock Purchase Agreement, (iii) the
accuracy of the Registration Statement and the facts concerning the
Redomestication Merger and Exchange Offer that have come to our attention during
our engagement, and (iv) certain representations made by AAAC and TI in
connection with the issuance of our opinion, the discussions in the Registration
Statement under the caption "Material U.S. Federal Income Tax Considerations of
the Redomestication Merger" (the "Tax Section"), insofar as they relate to
statements of law or legal conclusions, set forth our opinion of the material
United States federal income tax considerations generally applicable to the
Redomestication Merger and Exchange Offer based upon current law and the facts
and assumptions stated or referred to therein.
We express no opinion as to United States federal, state, local,
foreign or other tax consequences, other than as set forth in the Tax Section.
Because this opinion is being delivered prior to the effective times of the
Redomestication Merger and the Stock Purchase, this opinion must be considered
prospective and dependent upon future events. There can be no assurance that
changes in the law will not take place which could affect the United States
federal income tax consequences of the Redomestication Merger, Stock Purchase or
Exchange Offer or that contrary positions may not be taken by the Internal
Revenue Service.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to our firm name in
the Registration Statement. By giving this consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder (the "Rules"), nor do we hereby admit that we
are experts with respect to any part of the Registration Statement within the
Securities Act or the Rules.
No opinion is expressed as to any federal income tax consequence of the
Redomestication Merger, Stock Purchase, Exchange Offer or the other transactions
contemplated by the Merger Agreement except as specifically set forth herein.
This opinion may not be relied upon except with respect to the consequences
specifically discussed herein. By rendering this opinion, we undertake no
responsibility to update this opinion after the date hereof for any reason,
including but not limited to, any new or
153
STROBL & SHARP
Professional Corporation
300 East Long Lake Road, Suite 200
Bloomfield Hills, MI 48304-2376
Phone (248) 540-2300 Fax 248 645-2690
Asia Automotive Acquisition Corporation
January 8, 2008
Page Four
changed facts or law which come to our attention after the date hereof. This
opinion is being delivered to you solely in connection with the filing of the
Registration Statement.
This opinion may not be relied upon or utilized for any other purpose without
our prior written consent.
Very truly yours,
/s/STROBL & SHARP, P.C.
154
ANNEX A
EQUITY ACQUISITION AGREEMENT AMONG:
ASIA AUTOMOTIVE ACQUISITION CORPORATION
HUNAN TX ENTERPRISE CO., LTD. AND
THE INDIVIDUALS SET FORTH ON SCHEDULE A
Dated: July 24, 2007
RECITALS 4
Article 1 THE TX CHINA ACQUISITION 4
Section 1.01 Purchase and Sale. 4
Section 1.02 Purchase Price. 4
Section 1.03 Payment of Purchase Price 6
ARTICLE 2 THE CLOSING 6
Section 2.01 The Closing. 6
Section 2.02 Deliveries. 6
Section 2.03 Additional Documents. 6
Section 2.04 Further Assurances. 6
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF TX CHINA AND THE TX
CHINA SHAREHOLDERS 7
Section 3.01 The TX China Equity. 7
Section 3.02 Organization of TX China. 7
Section 3.03 TX China Subsidiaries. 7
A-1
Section 3.04 Reorganization. 8
Section 3.05 Authority and Corporate Action; No Conflict. 8
Section 3.06 No Undisclosed Majo Liabilities. 8
Section 3.07 Real Property. 8
Section 3.08 Intellectual Property. 9
Section 3.09 Title and Condition to Assets. 9
Section 3.10 Compliance with Law. 9
Section 3.11 Disclosure. 9
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF AAAC 9
Section 4.01 Organization. 9
Section 4.02 Authority and Corporate Action; No Conflict. 10
Section 4.03 SEC Reports. 10
Section 4.04 Compliance with Law. 10
Section 4.05 Disclosure. 10
ARTCLE 5 COVENANTS OF TX CHINA AND THE TX CHINA SHAREHOLDERS 11
Section 5.01 Conduct of the Business. 11
Section 5.02 Fulfillment of Conditions. 11
Section 5.03 Disclosure of Certain Matters. 12
Section 5.04 Regulatory and Other Authorizations; Notices and Consents. 12
Section 5.05 Employment Agreements. 12
ARTICLE 6 COVENANTS OF AAAC 13
Section 6.01 Conduct of the Business. 13
Section 6.02 14A Proxy Statement Filing 13
Section 6.03 AAAC Special Shareholders' Meeting. 13
Section 6.04 Fulfillment of Conditions. 14
Section 6.05 Disclosure of Certain Matters. 14
Section 6.06 Regulatory and Other Authorizations; Notices and Consents. 14
Section 6.07 Key Employees Employment Agreement 15
Section 6.08 Future Incentive Plan. 15
Section 6.09 Survival of Representations and Warranties. 15
ARTICLE 7 ADDITIONAL AGREEMENTS AND COVENANTS OF THE PARTIES 15
Section 7.01 Change of Name. 15
Section 7.02 Other Information. 15
Section 7.03 Mail Received After Closing. 15
Section 7.04 Further Action. 16
Section 7.05 Schedules. 16
Section 7.06 Execution of Agreements. 16
Section 7.07 Confidentiality. 16
Section 7.08 Public Announcements. 17
Section 7.09 Board of Directors and Executive Officers of TX China. 17
Section 7.10 Board of Directors of TX International. 17
Section 7.11 Corporate Governance Practice. 18
Section 7.12 Future Transaction 20
ARTICLE 8 CONDITIONS TO CLOSING 21
Section 8.01 Conditions to Each Party's Obligations. 21
Section 8.02 Conditions to Obligations of TX China and the TX China
Shareholders. 21
Section 8.03 Conditions to Obligations of AAAC. 22
ARTICLE 9 TERMINATION AND ABANDONMENT 22
Section 9.01 Methods of Termination. 22
Section 9.02 Effect of Termination. 23
ARTICLE 10 DEFINITIONS 23
Section 10.01 Certain Defined Terms. 23
ARTICLE 11 GENERAL PROVISIONS 26
Section 11.01 Expenses. 26
Section 11.02 Notices. 26
Section 11.03 Amendment. 27
Section 11.04 Waiver. 27
Section 11.05 Headings. 28
Section 11.06 Severability. 28
Section 11.07 Entire Agreement. 28
Section 11.08 Successors. 28
Section 11.09 Arbitration. 28
Section 11.10 Governing Law. 29
Section 11.11 Language. 29
Section 11.12 Counterparts. 29
SCHEDULE A TX CHINA SHAREHOLDERS 28
SCHEDULE B TX CHINA SUBSIDIARIES 28
SCHEDULE C CERTIFICATE OF INCORPORATION OF TX INTERNATIONAL 28
SCHEDULE D DISCLOSURE SCHEDULE 28
SCHEDULE E MEMORANDUM OF REORGANIZATION 29
SCHEDULE F FORM OF MANAGEMENT EMPLOYMENT AGREEMENT 30
SCHEDULE G LABOR CONTRACT 30
SCHEDULE H CORPORATE GOVERNANCE RULES 30
EQUITY ACQUISITION AGREEMENT
THIS EQUITY ACQUISTION AGREEMENT (the "Agreement"), dated July 25, 2007, is
among ASIA AUTOMOTIVE ACQUISITION CORPORATION (a corporation registered in the
United States of America,hereinafter referred to as "AAAC"), and HUNAN TX
ENTERPRISE CO., LTD., (a limited liability company registered in the PRC,
hereinafter referred to as "TX China") and the individuals listed on Schedule A
hereto (collectively, the "TX China Shareholders"); and each of AAAC, TX China
and the TX China Shareholders are referred to herein individually as a "Party"
and collectively as the "Parties."
Capitalized terms used herein that are not otherwise defined shall have the
meanings ascribed to them in ARTICLE 10 hereof.
RECITALS
WHEREAS, TX China, together with the companies to be wholly owned subsidiaries
of TX China as listed on Schedule B
hereto (the "TX China Subsidiaries"), own and operate their auto parts
manufacturing business in the PRC; and
WHEREAS, the TX China Shareholders are the direct and beneficial owners of all
of the stock equity of TX China (the "TX China Equity"); and
WHEREAS, subject to the terms and conditions of this Agreement, AAAC, at the
Closing, shall acquire all of the TX China Equity from the TX China Shareholders
(the "TX China Acquisition"), representing 100% equity interest in TX China.
After the TX China Acquisition, AAAC will change its name into Tongxin
International Ltd. ("TX International").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, and
intending to be legally bound hereby, the Parties agree as follows:
ARTICLE 1
THE TX CHINA ACQUISITION
Section 1.01 Purchase and Sale.
Upon the terms and subject to the conditions hereof, at the Closing (as defined
in Section 2.01), the TX China Shareholders shall sell, transfer, assign and
convey to AAAC, and AAAC shall purchase from the TX China Shareholders, the TX
China Equity representing all of the registered capital of TX China and all of
the right, title and interest of the TX China
Shareholders in and to the TX China Equity.
Section 1.02 Purchase Price.
AAAC shall pay the total amount of US$13,000,000 dollars, or the equivalent RMB
(based on the US$/RMB exchange rate on the Closing Date), by cash to TX China
Shareholders on the Closing Date (as defined in Section 2.01).
Section 1.03 Payment of Purchase Price
AAAC shall deliver to TX China certified funds payable to TX China Shareholders
the purchase price under Section 1.02 on the Closing Date (as defined in Section
2.01).
ARTICLE 2
THE CLOSING
Section 2.01 The Closing.
Subject to the terms and conditions of this Agreement, the consummation of the
TX China Acquisition and the transactions contemplated by this Agreement shall
take place at a closing (the "Closing") to be held at 9 a.m., local time, on the
third Business Day after the date on which the last of the conditions to Closing
set forth in Article 8 is fulfilled, at the Beijing Office of King & Wood PRC
Lawyers or at such other time, date or place as the Parties may agree upon in
writing. The date on which the Closing occurs is referred to herein as the
"Closing Date."
Section 2.02 Deliveries.
(a) TX China Shareholders. At the Closing, each TX China Shareholder will
assign and transfer to AAAC all of such TX China Shareholder's right, title
and interest in and to his, her or its respective portion of the TX China
Equity by delivering to AAAC the certificates representing such TX China
Equity, free and clear of all liens.
(b) AAAC. At the Closing, AAAC shall deliver to TX China (i) the Purchase price
(as evidenced by a copy of the wire instructions to the Designated
Account), representing the Purchase Price to which each of the TX China
Shareholders is entitled pursuant to Section 1.02 and (ii) the
certificates, opinions and other agreements and instruments contemplated by
Article 8 hereof and the other provisions of this Agreement.
Section 2.03 Additional Documents.
At the Closing, the following documents (collectively, the "Transaction
Documents") will have been executed, delivered or otherwise effectuated:
(a) Certificate of Incorporation of Tongxin International Limited;
(b) Memorandum and Articles of Tongxin International Limited, as mutually
agreed by AAAC and TX China; and
(c) Written approval on the TX China Acquisition by authorized municipal bureau
of commerce of the PRC.
Section 2.04 Further Assurances.
Subject to the terms and conditions of this Agreement, at any time or from time
to time after the Closing, each of the Parties hereto shall execute and deliver
such 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.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF TX CHINA AND THE TX CHINA SHAREHOLDERS
Subject to the exceptions set forth in the Disclosure Schedule, TX China and the
TX China Shareholders represent and warrant to AAAC as of the date hereof and as
of the Closing as follows:
Section 3.01 The TX China Equity.
(a) Ownership. Each TX China Shareholder has exclusive legal right and title to
the TX China Equity, free from all Security Interest, such as liens,
charges and other encumbrances, and all claims of any creditor. Such TX
China Equity constitutes all of the registered capital of TX China.
(b) Capitalization. The registered capital of TX China is set forth in 3.01(b)
of the Disclosure Schedule. All the
registered capital of TX China has been duly paid in full.
Section 3.02 Organization of TX China.
TX China is a limited liability company duly organized, validly existing and in
good standing under the law of the PRC. TX China has the full power and right to
conduct its business in accordance with its business license, articles of
association or similar organizational documents.
Section 3.03 TX China Subsidiaries.
(a) Ownership. Except as otherwise disclosed in Section 3.03 of the Disclosure
Schedule, TX China shall be the only registered and beneficial owner of all
of the equity interests of each TX China Subsidiary free from all security
interest, such as liens, charges and other encumbrances, and all claims of
any creditor.
(b) Capitalization. The registered capital of each TX China Subsidiary is set
forth in Section 3.03 (b) of the Disclosure Schedule. All the registered
capital of each TX China Subsidiary has been duly paid in full.
(c) Organization of TX China Subsidiaries. Section 3.03 of the Disclosure
Schedule sets forth the name, the registered address, the legal
representative, the date of establishment, the valid duration and the
registered capital of such TX China Subsidiary. Each such TX China
Subsidiary is an entity duly organized, validly existing and in good
standing under the laws of the PRC. Each TX China Subsidiary has the full
power
and right to conduct its business in accordance with its business license,
articles of association or similar organizational documents.
Section 3.04 Reorganization.
The reorganization of TX China and the TX China Subsidiaries described in the
Memorandum of Reorganization attached hereto as Schedule E (the
"Reorganization") has been initiated. All required third party consents in
connection with the Reorganization have been duly obtained and are in full force
and effect. There is no litigation pending or threatened against TX China or any
of the TX China Subsidiaries in connection with or as a result of the
Reorganization.
Section 3.05 Authority and Corporate Action; No Conflict.
(a) Each of TX China and the TX China Shareholders has all necessary power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby.All action, corporate and otherwise, necessary to be
taken by TX China and TX China Shareholders to authorize the execution,
delivery and performance of this Agreement, the Transaction Documents and
all other agreements delivered in connection with this agreement has been
duly and validly taken. This Agreement has been duly executed and delivered
by TX China and each TX China Shareholder and constitutes the valid,
binding, and enforceable obligation of TX China and each TX China
Shareholder, enforceable in accordance with its terms.
(b) Neither the execution and delivery of this Agreement or
any of the Transaction Documents contemplated hereby by TX China or each TX
China Shareholder nor the consummation of the transactions contemplated
hereby will (i) conflict with the Articles of Association of TX China or
any applicable law, regulation, order, judgment or decree or (ii) result in
a breach or violation of or constitute a default under any instrument,
contract or other agreement to which TX China or an TX China Shareholder is
a party or by which it is subject or bound.
Section 3.06 No Undisclosed Major Liabilities.
Except as otherwise disclosed in Section 3.06 of the Disclosure Schedule,
neither TX China nor any TX China Subsidiary has any Major Liabilities in excess
of RMB 1,000,000 (inclusive of RMB 1,000,000) ("Major Liabilities").
Section 3.07 Real Property.
Section 3.07 of the Disclosure Schedule contains a list and description of (a)
all real properties with respect to which TX China or any TX China Subsidiary
holds valid land use rights as well as other real estate that is in the
possession of or leased by TX China or any TX China Subsidiary and the
improvements (including buildings and other structures) located on such real
estate (collectively, the "Real Property"), and (b) any leases under which such
Real Property is possessed (the "Real Estate Leases").
Section 3.08 Intellectual Property.
Section 3.08 of the Disclosure Schedule contains a list all Intellectual
Property owned by or licensed to TX China and TX China Subsidiaries. Except as
set forth in Section 3.08 of the Disclosure Schedule, TX China and TX China
Subsidiaries are the legitimate owners or licensees of the Intellectual
Property, free of any Security Interest. Neither the Intellectual Property nor
the use thereof by TX China and TX China subsidiaries infringes on any other
person's legitimate interests.
Section 3.09 Title and Condition to Assets.
Each of TX China and the TX China Subsidiaries has good and marketable title to
all the assets owned by it. Except as set forth in Section 3.09 of the
Disclosure Schedule, none of their Major Assets is subject to any Security
Interest, option to purchase or lease, restriction, or imperfection of title or
material adverse claim.
Section 3.10 Compliance with Law.
The business has been conducted, and is now being conducted, by TX China and TX
China Subsidiaries in compliance in all material respects with all applicable
Laws. None of TX, the TX China Subsidiaries and their respective officers,
directors and employees is, and during the past three (3) years was in any
material aspect in violation of all such applicable Laws with respect to the
conduct of the Business.
Section 3.11 Disclosure.
No representation or warranty by TX China or each TX China Shareholder contained
in this Agreement and no information contained in any Schedule or other
instrument furnished or to be furnished to AAAC pursuant to this Agreement or in
connection with the transactions contemplated hereby contains or will contain
any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements contained therein not
misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF AAAC
AAAC represents and warrants to TX China and each TX China Shareholder as of the
date hereof and as of the Closing as follows:
Section 4.01 Organization.
AAAC is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware, US, which shall redomesticate as a
corporation, duly organized, validly existing and in good standing under the
laws of the British Virgin Islands.
Section 4.02 Authority and Corporate Action; No Conflict.
(a) AAAC has all necessary power and authority to enter into this Agreement and
to consummate the transactions contemplated hereby. All action, corporate
and otherwise, necessary to be taken by AAAC to authorize the execution,
delivery and performance of this Agreement, the Transaction Documents and
all other agreements delivered in connection with this agreement has been
duly and validly taken. This Agreement has been duly executed and delivered
by AAAC and constitutes the valid, binding, and enforceable obligation of
AAAC, enforceable in accordance with its terms.
(b) Neither the execution and delivery of this Agreement or any of the
Transaction Documents contemplated hereby by nor the consummation of the
transactions contemplated hereby will (i) conflict with the Articles of
Association of AAAC or any applicable law, regulation, order, judgment or
decree or (ii) result in a breach or violation of or constitute a default
under any instrument, contract or other agreement to which AAAC is a party
or by which it is subject or bound.
Section 4.03 SEC Reports.
(a) AAAC has delivered to TX China or there have been available by public means
(i) AAAC's prospectus, dated April 11, 2006, relating to AAAC's initial
public offering, and (ii) all other reports filed by AAAC under the
Securities Act and the Exchange Act (all of such materials, together with
any amendments thereto and documents incorporated by reference therein, are
referred to herein as the "SEC Reports").
(b) As of its filing date or, if applicable, its effective date, each SEC
Report complied in all respects with the requirements of the Laws
applicable to AAAC for such SEC Report, including the Securities Act and
the Exchange Act.
(c) Each SEC Report as of its filing date and the prospectus
referred to in Section 4.03(a), as of its effective date, did not contain
any untrue statement of facts or omit to state any material fact necessary
in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. AAAC has filed
all reports under the Exchange Act that were required to be filed as of the
date hereof and will have filed all such reports required to have been
filed through the Closing Date and has otherwise complied with all
requirements of the Securities Act and the Exchange Act.
Section 4.04 Compliance with Law.
The business of AAAC has been conducted, and is now being conducted, in
compliance with all applicable Laws. AAAC and its officers, directors and
employees are not, and during the periods of AAAC's existence were not, in
violation of, or not in compliance with all such applicable Laws with any
material aspect with respect to the conduct of the businesses of AAAC.
Section 4.05 Disclosure.
No representation or warranty by AAAC contained in this Agreement and no
information contained in any Schedule or other instrument furnished or to be
furnished to TX China or the TX China Shareholders pursuant to this Agreement or
in connection with the transactions contemplated hereby contains or will contain
any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements contained therein not
misleading.
ARTCLE 5
COVENANTS OF TX CHINA AND THE TX CHINA SHAREHOLDERS
Section 5.01 Conduct of the Business.
TX China and each TX China Stockholder covenants and agrees that, from the date
hereof through the Closing Date, except as otherwise required as set forth in
this Agreement or with the prior written consent of AAAC, they shall use their
best efforts to cause each TX China Subsidiary to:
(a) conduct the business in the ordinary course and in a manner consistent with
the current practice of the Business, to preserve substantially intact the
business organization of TX China and each TX China Subsidiary, to keep
available the services of the current employees of TX China and each TX
China Subsidiary, to preserve the current relationships of TX China and
each TX China Subsidiary with customers and other persons with which TX
China and each TX China Subsidiary has significant business relations and
to comply with all material respects of Laws;
(b) not pledge, sell, transfer, dispose or otherwise encumber or grant any
rights or interests to others of any kind with respect to all or any part
of the TX China Equity or any equity interest of any TX China Subsidiary,
or enter into any discussions or negotiations with any other party to do
so;
(c) not pledge, sell, lease, transfer, dispose of or otherwise
encumber any assets of TX China or any TX China Subsidiary, other than
consistent with past practices and in the ordinary course of business of TX
China or any concerned TX China Subsidiary or enter into any discussions or
negotiations with any other party to do so; and
(d) not merge or consolidate with, or acquire all or substantially all the
assets of, or otherwise acquire any business operations of, any Person; and
Section 5.02 Fulfillment of Conditions.
From the date hereof to the Closing Date, TX China and the TX China shareholders
shall use its best efforts to fulfill the conditions specified in Article 8 to
the extent that the fulfillment of such conditions is within its control. The
foregoing obligation includes (a) the execution and delivery of documents
necessary or desirable to consummate the transactions contemplated hereby, and
(b) taking or refraining from such actions as may be necessary to fulfill such
conditions (including using their best efforts to conduct the business in such
manner that on the Closing Date the representations and warranties of TX China
and each TX China Shareholder contained herein shall be accurate as though then
made, except as contemplated by the terms hereof).
Section 5.03 Disclosure of Certain Matters.
From the date hereof through the Closing Date, TX China and each TX China
Shareholder shall give AAAC prompt written notice of any event or development
that occurs that (a) had it
existed or been known on the date hereof would have been required to be
disclosed under this Agreement, (b) would cause any of the representations and
warranties of TX China and each TX China shareholder contained herein to be
inaccurate or otherwise misleading, (c) gives AAAC any reason to believe that
any of the conditions set forth in Article 8 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 TX China or TX China Subsidiary, or (e)
would require any amendment or supplement to the Proxy Statement.
Section 5.04 Regulatory and Other Authorizations; Notices and Consents.
(a) TX China and each TX China Shareholder shall use their best efforts to
obtain all authorizations, consents, orders and approvals of all
Governmental Authorities and officials that may be or become necessary for
their execution and delivery of, and the performance of their obligations
pursuant to, this Agreement and the Transaction Documents and will
cooperate fully with AAAC in promptly seeking to obtain all such
authorizations, consents, orders and approvals.
(b) TX China and each TX China Shareholder shall give promptly such notices to
third parties and use its or their best efforts to obtain such third party
consents and estoppel certificates as AAAC may in reasonable discretion
deem necessary or desirable in connection with the transactions
contemplated by this Agreement.
Section 5.05 Employment Agreements.
(a) Each of the Managers of TX China and the TX China Subsidiaries shall have
entered into a management employment agreement (the "Management Employment
Agreement") in form of Schedule F with TX China or the relevant TX China
Subsidiary, as the case may be. These agreements generally are to provide
employment terms of 5 years include Intellectual Property assignment and
non-competition provisions for not less than 3 years after termination of
employment; and
(b) Each of all other employees of TX China and the TX China Subsidiaries shall
have entered into labor contract (the "Labor Contract") with TX China or
the relevant TX China Subsidiary, as the case may be, in the standard form
designated by the relevant Government Authority in the locality where such
employee is employed. Such these standard forms are attached to this
Agreement as Schedule G.
ARTICLE 6
COVENANTS OF AAAC
Section 6.01 Conduct of the Business.
AAAC covenants and agrees that, from the date hereof through the Closing Date,
unless otherwise set forth in this Agreement or with the prior written consent
of TX China, it shall:
(a) not pledge, sell, transfer, dispose or otherwise encumber or grant any
rights or interests to others of any kind with respect to all or any part
of the capital securities of AAAC;
(b) not pledge, sell, lease, transfer, dispose of or otherwise encumber any
assets of AAAC;
(c) except for the purposes as set forth in this Agreement, not issue any share
capital of AAAC or any other class of securities, whether debt (other than
debt incurred in the ordinary course of business and consistent with past
practice) or equity, of AAAC or any options therefor or any securities
convertible into or exchangeable for share capital of AAAC or enter into
any agreements in respect of the ownership or control of such share
capital; provided that such restriction shall not apply if the ultimate
beneficiaries of such issuance are employees, officers, directors or
consultants of AAAC at that time;
(d) not declare any dividend or make any distribution in cash, securities or
otherwise on the outstanding AAAC Ordinary Shares or directly or indirectly
redeem, purchase or in any other manner whatsoever advance, transfer (other
than in payment for goods received or services rendered in the ordinary
course of business), or distribute to any of their affiliates or otherwise
withdraw cash or cash equivalents in any manner inconsistent with
established cash management practices, except to pay existing indebtedness
of AAAC;
(e) not merge or consolidate with, or acquire all or substantially all the
assets of, or otherwise acquire any business operations of, any Person;
(f) not make any material capital expenditures, except in
accordance with prudent business and operational practices consistent with
prior practice; and
(g) Each stock (including stocks obtained after the exercise of option and
warrant) owned by the shareholders of TX International shall have one
voting right after the Closing.
Section 6.02 14A Proxy Statement Filing
AAAC shall use its commercially reasonable efforts to file a Schedule 14(a)
Proxy Statement with the SEC within fifteen (15) days after the completion by TX
China of an US GAAP audit. Subsequent to a final review by the SEC, AAAC shall
call a Special Meeting of its Shareholders as governed in Section 6.03 below.
Section 6.03 AAAC Special Shareholders' Meeting.
AAAC shall cause a meeting of its shareholders (the "AAAC Special Shareholders'
Meeting") to be duly called and held as soon as reasonably practicable for the
purpose of voting on the adoption of, among others, this Agreement and the
Memorandum and Articles as required by the Current Articles. The directors of
AAAC shall recommend to its shareholders that they vote in favor of the adoption
of such matters. In connection with such meeting, AAAC (a) will file with the
United States Securities and Exchange Commission (the "SEC") as promptly as
practicable a proxy statement meeting the requirements of the Exchange Act (the
"Proxy Statement") and all other proxy materials for such meeting, (b) upon
receipt of approval from the SEC, will mail to its shareholders the Proxy
Statement and
other proxy materials, (c) will use its best efforts to obtain the
necessary approvals by its shareholders of this Agreement and the transactions
contemplated hereby, and (d) will otherwise comply with all legal requirements
applicable to such meeting.
Section 6.04 Fulfillment of Conditions.
From the date hereof to the Closing Date, AAAC shall use its best efforts to
fulfill the conditions specified in Article 8 to the extent that the fulfillment
of such conditions is within its control. The foregoing obligation includes (a)
the execution and delivery of documents necessary or desirable to consummate the
transactions contemplated hereby, and (b) taking or refraining from such actions
as may be necessary to fulfill such conditions.
Section 6.05 Disclosure of Certain Matters.
From the date hereof through the Closing Date, AAAC shall give TX China and the
TX China Shareholders prompt written notice of any event or development that
occurs that (a) had it existed or been known on the date hereof would have been
required to be disclosed under this Agreement, (b) would cause any of the
representations and warranties of AAAC contained herein to be inaccurate or
otherwise misleading, (c) gives AAAC any reason to believe that any of the
conditions set forth in Article 8 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 AAAC, (e) would require any amendment or supplement
to the Proxy Statement, or (f) information that becomes available through
discussions with AAAC investors.
Section 6.06 Regulatory and Other Authorizations; Notices and Consents.
(a) AAAC shall use its commercially reasonable efforts to obtain all
authorizations, consents, orders and approvals of all Governmental
Authorities and officials that may be or become necessary for its execution
and delivery of, and the performance of its obligations pursuant to, this
Agreement and the Transaction Documents and will cooperate fully with TX
China or TX China Shareholders in promptly seeking to obtain all such
authorizations, consents, orders and approvals.
(b) AAAC shall give promptly such notices to third parties and use its best
efforts to obtain such third party consents and estoppel certificates as TX
China or TX China Shareholders may in their reasonable discretion deem
necessary or desirable in connection with the transactions contemplated by
this Agreement.
Section 6.07 Key Employees Employment Agreement
AAAC shall execute Key Employees Employment Agreements with certain Executives
and Key Employees by issuing stocks of AAAC according to its compensation plan,
incentive plan, and stock option (warrant) plan, as AAAC considers necessary.
Section 6.08 Future Incentive Plan.
At the first board meeting of TX International, the Board will
discuss and decide upon an incentive plan with certain Executives and Key
Employees to urge TX China to achieve a predetermined level of net income for
fiscal years 2008 and 2009.
Section 6.09 Survival of Representations and Warranties.
The representations and warranties of AAAC set forth in this Agreement shall
survive the Closing.
ARTICLE 7
ADDITIONAL AGREEMENTS AND COVENANTS OF THE PARTIES
Section 7.01 Change of Name.
Upon the Closing, the name of AAAC shall be changed to a name mutually agreed by
the Parties, which shall include the name "Hunan Tongxin".
Section 7.02 Other Information.
If in order to properly prepare documents required to be filed with any
Governmental Authority or financial statements of TX China, it is necessary that
any Party be furnished with additional information relating to TX China or the
Business, and such information is in the possession of any other Party or
Parties, such Party may request such other Party or Parties to, and such other
Party or Parties hereby agree to use its or their best efforts to, furnish such
information in a timely
manner to the requesting Party, at the cost and expense of the requesting Party.
Section 7.03 Mail Received After Closing.
(a) If AAAC or TX China receives after the Closing any mail or other
communications addressed to any TX China Shareholder, AAAC shall promptly
notify the TX China Shareholders.
(b) If any TX China Shareholder receives after the Closing Date mail or other
communications addressed to them which relate to TX China or the TX China
Subsidiaries, they shall promptly deliver or cause to be delivered all such
mail and the contents thereof to AAAC, and TX China.
Section 7.04 Further Action.
Each of the Parties shall execute such documents and other papers and take such
further actions as may be reasonably required or desirable to carry out the
provisions hereof and the transactions contemplated hereby. Upon the terms and
subject to the conditions hereof, each of the Parties shall use its best efforts
to take, or cause to be taken, all actions and to do, or cause to be done, all
other things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement.
Section 7.05 Schedules.
The Parties shall have the obligation to supplement or amend
the Schedules being delivered concurrently with the execution of this Agreement
and annexed hereto 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 Schedules. The obligations of the
Parties to amend or supplement the Schedules being delivered herewith shall
terminate on the Closing Date. Notwithstanding any such amendment or
supplementation, the representations and warranties of the Parties shall be made
with reference to the Schedules as they exist at the time of execution of this
Agreement.
Section 7.06 Execution of Agreements.
On or before the Closing Date, AAAC, TX China and each TX China Shareholder
shall execute and deliver each Transaction Document to which it is a party.
Section 7.07 Confidentiality.
TX China and each TX China Shareholder, on the one hand, and AAAC, on the other
hand, on and before the Closing Date, shall hold and shall cause their
respective Representatives to hold in strict confidence, unless compelled to
disclose by judicial or administrative process or by other requirements of law,
all documents and information concerning the other Party furnished it by such
other Party or its Representatives in connection with the transactions
contemplated by this Agreement (except to the extent that such information can
be shown to have been (a) previously known by the Party to which it was
furnished, (b) in the public domain through no fault of
such Party or (c) later lawfully acquired from other sources, which source is
not the agent of the other Party, by the Party to which it was furnished), and
each Party shall not release or disclose such information to any other person,
except its Representatives in connection with this Agreement. Each Party shall
be deemed to have satisfied its obligations to hold confidential information
concerning or supplied by the other Party if it exercises the same care as it
takes to preserve confidentiality for its own similar information.
Section 7.08 Public Announcements.
From the date of this Agreement until Closing or termination, AAAC, TX China and
each TX China Shareholder 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 none of the foregoing shall issue or otherwise
make any public announcement or communication pertaining to this Agreement or
the transaction without the prior consent of AAAC (in the case of TX China and
each TX China Shareholder) or TX China (in the case of AAAC), except as required
by Law 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 Parties 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 Parties 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.
Section 7.09 Board of Directors and Executive Officers of TX China.
TX International shall appoint Mr. Duanxiang Zhang, Mr. Weiwu Peng, and Mr.
Wenming Luo to serve as the Chairman of the board, CEO, and CFO of TX China
respectively in responsible for the overall operation of TX China, a wholly
owned subsidiary of TX International, for a term of at least three (3) years.
Subject to the approval of TX International's Board, TX International shall
further undertake that the above officers shall not be removed, unless for the
causes of material illegal activities and misconduct, from the positions of TX.
Section 7.10 Board of Directors of TX International.
(a) From Closing through a period of two (2) calendar years ("Initial Board")
the board of TX International will be comprised of 9 directors. TX
International shall appoint Four (4) directors nominated by TX China
including two (2) independent directors; and Five (5) directors nominated
by AAAC's former shareholders, including Mr. Herren (Chairman), Mr.Wilson
and three (3) independent directors.
(b) Following the Initial Board period, the board of TX International will be
comprised of 7 directors. TX International shall appoint Four (4) directors
nominated by TX China including two (2) independent directors; and Three
(3) directors nominated by AAAC's former shareholders, including two (2)
independent directors.
Section 7.11 Corporate Governance Practice.
(a) Each of the Parties hereby agrees and undertakes that, following the
Closing, it or he or she (as the case may be) shall fully comply with, and
shall cause to be complied with, all of the corporate governance policies,
procedures, rules and requirements of AAAC adopted or to be adopted from
time to time by the Board (collectively, the "Corporate Governance Rules"),
including but not limited to those set forth in Schedule H attached hereto.
(b) After the Closing Date, AAAC agrees not to sign a letter of intent, or
other agreement with any third Person regarding a sale of the shares,
assets or other interest in such Person or a business combination with such
third Person.
Section 7.12 Future Transaction
TX China will cause Changsha Meihua Automobile Company to form a 50%/50% joint
venture with TX International in China.
ARTICLE 8
CONDITIONS TO CLOSING
Section 8.01 Conditions to Each Party's Obligations.
The respective obligations of each Party to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment or waiver, at
or prior to the Closing, of each of the following conditions.
(a) Permits of PRC Government Authorities. All the required Permits of the
relevant PRC government authorities in connection with the TX China
Acquisition shall have been duly obtained.
(b) Approval by AAAC's Shareholders. This Agreement and the transactions
contemplated hereby shall have been approved by a majority-in-interest of
the shareholders of AAAC in accordance with AAAC's Articles of Association
and the aggregate number of AAAC Ordinary Shares held by public
shareholders of AAAC who exercise their redemption rights with respect to
their AAAC Ordinary Share in accordance with the Articles of Association
shall not constitute twenty percent (20%) or more of the AAAC Ordinary
Shares sold in AAAC's Public Offering. It is being expressly understood by
and among the Parties hereto, that the transactions contemplated by this
agreement are subject and contingent upon the approval of the shareholders
of AAAC. In the event the majority of the shareholders of AAAC fail to
ratify and confirm the transactions contemplated by this agreement, this
agreement shall become null and void with no liability to either party.
(c) Memorandum and Articles of TX International. The Memorandum and Articles of
TX International shall have taken effect on the Closing Date.
(d) Transaction Documents. Each of the Transaction Documents shall have been
executed and delivered to each relevant Party.
Section 8.02 Conditions to Obligations of TX China and the TX China
Shareholders.
The obligations of TX China and each TX China Shareholder to consummate the
transactions contemplated by this Agreement shall be subject to the fulfillment
or waiver, at or prior to the Closing, of each of the following conditions:
(a) Deliveries. shall have made the payments specified in Section 1.02 of this
Agreement and the TX China Shareholders shall have received such documents,
certificates and instruments as may be reasonably requested by TX China and
TX China Shareholders.
(b) Regulatory Approvals. Any Governmental Authority whose approval or consent
is required shall have approved of the transactions contemplated by this
Agreement. The registrations, filings and updates with any government
authorities as required in connection with the transactions contemplated by
this Agreement, shall have been duly completed;
(c) Necessary Proceedings. All proceedings, corporate or
otherwise, to be taken by AAAC a in connection with the consummation of the
transactions contemplated by this Agreement shall have been duly and
validly taken, and copies of all documents, resolutions and certificates
incident thereto, duly certified by AAAC as of the Closing, shall have been
delivered to TX China and the TX China Shareholders.
Section 8.03 Conditions to Obligations of AAAC.
The obligations of AAAC to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment or waiver, at or prior to the
Closing, of each of the following conditions:
(a) Deliveries. The TX China Shareholders shall have delivered to AAAC the TX
China Stocks and AAAC shall have received the same and such other
documents, certificates and instruments as may be reasonably requested by
AAAC;
(b) Regulatory Approvals. Any governmental authority whose approval or consent
is required shall have approved of the transactions contemplated by this
Agreement. The registrations, filings and updates with any government
authorities as required in connection with the transactions contemplated by
this Agreement, shall have been duly completed;
(c) Necessary Proceedings. All proceedings, corporate or otherwise, to be taken
by TX China and each TX China Shareholder in connection with the
consummation of the transactions contemplated by this Agreement shall have
been
duly and validly taken, and copies of all documents, resolutions and
certificates incident thereto, duly certified by TX China and each TX China
Shareholder, as appropriate, as of the Closing, shall have been delivered
to AAAC.
ARTICLE 9 TERMINATION AND ABANDONMENT
Section 9.01 Methods of Termination.
The transactions contemplated herein may be terminated and/or abandoned at any
time but not later than the Closing:
(a) by mutual written consent of the Parties;
(b) by either AAAC or TX, if the Closing has not occurred by November 15, 2007
(or such other date as may be extended from time to time by written
agreement of the Parties); provided, however, that the right to terminate
this Agreement under this Section 9.01(b) shall not be available to any
Party that is then in breach of any of its covenants, representations or
warranties in this Agreement;
(c) by TX China or AAAC (i) if there has been a breach of any of its covenants
in this Agreement or (ii) if the representations and warranties of AAAC
contained in this Agreement shall not be true and correct in material
respects, at the time made, or (iii) if such representations and warranties
shall not be true and correct at and as of the Closing Date as though such
representations and warranties were made again at and as of the Closing
Date, except to the extent that such representations are made herein as of
a
specific date prior to the Closing Date, and in any such event, if such
breach is subject to cure, AAAC has not cured such breach within ten (10)
Business Days of TX's notice of an intent to terminate;
(d) by TX China, if the Board (or any committee thereof) at the time of the
signing of this Agreement shall have failed to recommend or withdrawn or
modified in a manner adverse to TX China its approval or recommendation of
this Agreement and any of the transactions contemplated hereby;
(e) by either AAAC or TX China, if, at the AAAC Shareholders' Meeting
(including any adjournments thereof), this Agreement and the transactions
contemplated hereby shall fail to be approved and adopted by the
affirmative vote of the holders of AAAC Ordinary Shares required under its
Articles of Association, and the aggregate number of AAAC Ordinary Shares
held by public shareholders of AAAC who exercise their redemption rights
with respect to their AAAC Ordinary Shares in accordance with the Articles
of Association constitutes twenty percent (20%) or more of the AAAC
Ordinary Shares sold in AAAC's Public Offering.
Section 9.02 Effect of Termination.
In the event of termination and abandonment by AAAC or by TX China, or both,
pursuant to Section 9.01 hereof, written notice thereof shall forthwith be given
to the other Party, and except as otherwise provided in this Agreement or
pursuant to relevant Laws, all further obligations of the Parties shall
terminate, no Party shall have any right against the other
Party hereto.
ARTICLE 10
DEFINITIONS
Section 10.01 Certain Defined Terms.
As used in this Agreement, the following terms shall have the following
meanings:
"AAAC Ordinary Shares" shall mean ordinary shares of AAAC, par value US $0.001
per share.
"AAAC's Public Offering" shall mean the initial public offering of AAAC
completed on April 18, 2006, in which AAAC sold 5,031,250 units at a price of
US$8.00 per unit. Each unit consists of one (1) AAAC Ordinary Share and one (1)
warrant.
"Affiliate" shall mean any Person that directly or indirectly through one or
more intermediaries, controls or is controlled by or is under common control
with the Person specified. For purposes of this definition, control of a Person
means the power, direct or indirect, to direct or cause the direction of the
management and policies of such Person whether by Contract or otherwise and, in
any event and without limitation of the previous sentence, any Person owning
twenty percent (10%) or more of the voting securities of a second Person shall
be deemed to control that second Person. For the purposes of this definition, a
Person shall be deemed to
control any of his or her immediate family members.
"Board" shall mean the board of directors of AAAC (or TX International after the
TX China Acquisition).
"Business Day" shall mean a day of the year on which banks are not required or
authorized to be closed in the City of New York, Hong Kong and the PRC.
"Certificate of Incorporation" shall mean the Certificate of Incorporation of TX
International in the form of Schedule C attached hereto.
"Disclosure Schedule" shall mean the Disclosure Schedule attached hereto as
Schedule D, dated as of the date hereof, delivered to AAAC by TX China in
connection with this Agreement.
"Exchange Act" shall mean the United States Securities Exchange Act of 1934, as
amended.
"Executives and Key Employees" shall mean the senior officers and employees of
TX International at various posts, including but not limited to chief executive
officer, chief operating officer, chief engineer, financial controller, plant
manger, who play critical role to TX China's business.
"Governmental Authority" shall mean any PRC or non-PRC national, supranational,
state, provincial, local or similar government, governmental, regulatory or
administrative authority, agency or commission or any court, tribunal or
judicial or arbitral body.
"TX China" shall mean Hunan TX Enterprise Co., Ltd.
"Intellectual Property" shall mean patents, copyrights, trademarks and service
marks, exclusive of know-how, trade secrete, and confidential and proprietary
processes and technology.
"Laws" shall mean all applicable statutes, rules, regulations, ordinances,
orders, writs, injunctions, judgments, decrees and awards of the PRC, USA or
other applicable jurisdictions.
"Liabilities" of any Person shall mean all obligations of such Person (i) for
borrowed money, (ii) evidenced by notes, bonds, debentures or similar
instruments, (iii) for the deferred purchase price of goods or services (other
than trade payables, installment payments or accruals incurred in the ordinary
course of business), (iv) under capital leases, or (v) in the nature of
guarantees of the obligations described in clauses (i) through (iv) above of any
other Person.
"Major Assets" shall mean any tangible and intangible assets owned by TX China
or TX China subsidiaries worth RMB 1,000,000 or more.
"Memorandum and Articles" shall mean the Memorandum and Articles of Association
of TX International mutually agreed by AAAC and TX China.
"Permits" shall mean all governmental registrations, licenses, permits,
authorizations and approvals.
"Person" shall mean an individual, partnership, corporation, joint venture,
unincorporated organization, cooperative or a governmental entity or agency
thereof.
"PRC" shall mean the People's Republic of China, for the purposes of this
Agreement, excluding the Hong Kong Special Administrative Region and the Macao
Special Administrative Region and Taiwan.
"Representatives" of either Party shall mean such Party's employees,
accountants, auditors, actuaries, counsel, financial advisors, bankers,
investment bankers and consultants.
"RMB" shall mean the official currency of the PRC.
"Securities Act" shall mean the US Securities Act of 1933, as amended.
"Security Interest" shall mean any mortgage, pledge, assessment, security
interest, lease, lien, adverse claim, levy, charge or other encumbrance of any
kind, or any condition sale Contract, title retention Contract or other Contract
to give any of the foregoing.
"Tax" or "Taxes" shall mean all income, gross receipts, sales, stock transfer,
excise, bulk transfer, use, employment, social security, franchise, profits,
property or other taxes,
tariffs, imposts, fees, stamp taxes and duties, assessments, levies or other
charges of any kind whatsoever (whether payable directly or by withholding),
together with any interest and any penalties, additions to tax or additional
amounts imposed by any government or taxing authority with respect thereto.
"TX International" shall mean TX International Ltd., the successor of AAAC after
TX China Acquisition.
"TX China's Auditors" shall mean Lehman Brown CPA Limited.
"US" or "United States" shall mean the United States of America.
"US$" shall mean the official currency of the United States.
"US GAAP" shall mean generally accepted accounting principles, consistently
applied in the United States.
ARTICLE 11
GENERAL PROVISIONS
Section 11.01 Expenses.
Except as otherwise provided herein, all costs and expenses, including, without
limitation, fees and disbursements of Representatives, incurred in connection
with the preparation
of this Agreement and the transactions contemplated hereby shall be paid by the
Party incurring such costs and expenses, whether or not the Closing shall have
occurred. TX China and AAAC shall each share 50% of the cost for hiring a chief
financial officer before the Closing.
TX China shall pay all the cost relating to the auditing. However, in the event
that for any reason that the transactions contemplated hereby could not be
completed, TX China shall pay 75% of the cost of the auditing and AAAC shall pay
25% of the auditing, unless the auditor cannot issue a "no reservation" opinion.
Section 11.02 Notices.
All notices and other communications given or made pursuant hereto shall be in
writing and shall be deemed to have been duly given or made as of the date
delivered or mailed if delivered personally or by nationally recognized courier
or mailed by registered mail (postage prepaid, return receipt requested) or by
telecopy to the Parties at the following addresses (or at such other address for
a Party as shall be specified by like notice, except that notices of changes of
address shall be effective upon receipt):
If to TX China and the TX China Shareholders:
Peng Weiwu
Hunan TX Enterprise Co., Ltd.
Jiangbei Village, Changsha County
Hunan 410135, China
Tel: 86-731-6292058
Fax: 86-731-6290047
With a copy to:
Charles Law
King & Wood
40th Floor, Office Tower A, Beijing Fortune
Plaza
7 Dongsanhuan Zhonglu
Chaoyang District
Beijing 100020, China
Tel. 8610-5878-5023
Fax: 8610-5878-5566
If to AAAC:
Rudy Wilson
Asia Automotive Acquisition Corporation
199 Pierce Street, Suite 202
Birmingham, Michigan, 480009, USA
Tel: 1-248-252-4743
Fax: 1-248-203-9950
With a copy to:
Scott M. Norton
Norton & Norton Layers P.C.
199 Pierce Street, Suite 202
Birmingham, Michigan, 480009, USA
Tel: 248-203-9940
Fax: 248-203-9950
Section 11.03 Amendment.
This Agreement may not be amended or modified except by an instrument in writing
signed by the Parties.
Section 11.04 Waiver.
At any time prior to the Closing, either Party may (a) extend the time for the
performance of any of the obligations or other acts of the other Party, (b)
waive any inaccuracies in the representations and warranties contained herein or
in any document delivered pursuant hereto and (c) waive compliance with any of
the agreements or conditions contained herein. Any such extension or waiver
shall be valid only if set forth in an instrument in writing signed by the Party
to be bound thereby.
Section 11.05 Headings.
The headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
Section 11.06 Severability.
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any Party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the Parties shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the Parties as closely as
possible in an acceptable manner to the end that transactions contemplated
hereby are fulfilled to the extent possible.
Section 11.07 Entire Agreement.
This Agreement and the Schedules and Exhibits hereto constitute the entire
agreement and supersede all prior agreements and undertakings, both written and
oral, between TX China and any TX China Shareholder and AAAC with respect to the
subject matter hereof and, except as otherwise expressly provided herein, are
not intended to confer upon any other person any rights or remedies hereunder.
Section 11.08 Successors.
The terms of this Agreement will remain in effect and shall be binding upon the
successor of AAAC. Notwithstanding and subject to the foregoing, this Agreement
shall be binding upon and shall inure to the benefit of the AAAC and its legal
representatives, successor, and shall not benefit any person or entity other
than those enumerated above.
Section 11.09 Arbitration.
(a) Any dispute, controversy or claim arising out of or
relating to this Agreement, or the interpretation, breach, termination or
validity hereof, shall be resolved through consultation. Such consultation
shall begin immediately after one Party hereto has delivered to the other
Party hereto a written request for such consultation. If within thirty (30)
days following the date on which such notice is given the dispute cannot be
resolved, the dispute shall be submitted to arbitration upon the request of
any Party with notice to the others.
(b) The arbitration shall be conducted in Hong Kong by the Hong Kong
International Arbitration Center in accordance with its arbitration rules
then in effect. The arbitration proceedings shall be conducted in Chinese.
(c) The award of the arbitration tribunal shall be final and binding upon the
disputing Parties, and any Party may apply to a court of competent
jurisdiction for enforcement of such award.
Section 11.10 Governing Law.
This Agreement shall be governed by and construed in accordance with the laws of
the People's Republic of China without regard to the conflicts of laws rules and
principles thereof.
Section 11.11 Language.
This Agreement is written in English and Chinese languages. Both versions shall
be equally valid and binding.
Section 11.12 Counterparts.
This Agreement may be executed in one or more counterparts, and by the different
Parties in separate counterparts, each of which when executed shall be deemed to
be an original but all of which when taken together shall constitute one and the
same agreement.
(The following are the signature pages of the Equity Acquisition Agreement.)
ASIA AUTOMOTIVE ACQUISITION CORPORATION
By: /s/ William R. Herren
William R. Herren
Chairman of the Board
By: /s/ Rudy Wilson
Rudy Wilson
Chief Executive Officer
HUNAN TX ENTERPRISE CO., LTD. (SEAL)
Legal Representative:
Name: Duanxiang Zhang
TX CHINA SHAREHOLDERS SIGNATURE
Duanxiang Zhang
Biao Cao
Jianguo Jiang
Dian Luo
Heping Zhang
Weiwu Peng
Zhengming Pei
Huakun Mao
Wenming Luo
Xichun Zhu
Luoxiang Tang
Yiqiang Chen
Wenbo Zhu
Tiejun Zhang
Binlin Tang
Heping Sheng
Jianbo Zhou
Zhengming Li
Heping Zhang*
Zhongliang Chen
Yougen Peng
Deyun Huang
Luoxun Sheng
Fake Xiong
Jinling Pei
Jianhui Zhang
Donghui Su
Zhengxiang Zhang
Luhui Peng
Junliang Liu
Junwei Zhang
Xinhui Zhang
Zhenyu Liu
Jianjun Jiang
Lijun Hu
Yunjun Pei
Yongdong Peng
Shuwei Chen
Zihuai Peng
Zhonghua Li
Xiaozhi Li
Duyun Zhang
Zhongyi Zhang
Jichun You
Bingxia Peng
Shusheng Luo
SCHEDULE A TX CHINA SHAREHOLDERS
Duanxiang Zhang
Biao Cao
Jianguo Jiang
Dian Luo
Heping Zhang
Weiwu Peng
Zhengming Pei
Huakun Mao
Wenming Luo
Xichun Zhu
Luoxiang Tang
Yiqiang Chen
Wenbo Zhu
Tiejun Zhang
Binlin Tang
Heping Sheng
Jianbo Zhou
Zhengming Li
Heping Zhang*
Zhongliang Chen
Yougen Peng
Deyun Huang
Luoxun Sheng
Fake Xiong
Jinling Pei
Jianhui Zhang
Donghui Su
Zhengxiang Zhang
Luhui Peng
Junliang Liu
Junwei Zhang
Xinhui Zhang
Zhenyu Liu
Jianjun Jiang
Lijun Hu
Yunjun Pei
Yongdong Peng
Shuwei Chen
Zihuai Peng
Zhonghua Li
Xiaozhi Li
Duyun Zhang
Zhongyi Zhang
Jichun You
Bingxia Peng
Shusheng Luo
SCHEDULE B TX CHINA SUBSIDIARIES
Hunan TX Mould Manufacturing Co., Ltd.
Zhucheng TX Autobody Co., Ltd.
Hunan TX Ziyang Autobody Co., Ltd.
SCHEDULE C CERTIFICATE OF INCORPORATION OF TX INTERNATIONAL
SCHEDULE D DISCLOSURE SCHEDULE
The disclosures in this Disclosure Schedule shall modify and relate to the
representations and warranties in Section 3 of
the Equity Acquisition Agreement (the "EAA") among AAAC, TX China and TX China
Shareholders. This Disclosure Schedule is intended to give AAAC a complete and
precise understanding of TX China and TX China Subsidiaries. The numbers listed
below correspond to the enumerated sections and subsections of Section 3 of the
EAA. Capitalized terms used herein without definition shall have the meanings
ascribed to them in the EAA.
The information and disclosures contained in this Disclosure Schedule are
intended only to qualify and limit the representations and warranties of TX
China and TX China Shareholders contained in Section 3 of the EAA and shall not
be deemed to expand in any way the scope or effect of any of such
representations or warranties.
3.01 Hunan Tongxin Stock Right
(a) Ownership
No exception
(b) Stock
Hunan Tongxin registered capital is 72,521,700 RMB. Actual received capital
is 72,521,700 RMB.
3.02 Hunan Tongxin Organization
No exception
3.03 Hunan Tongxin Subsidiaries
(a) Ownership
Hunan Hunan Tongxin Enterprise Co., Ltd (the predecessor of TX China) and Hunan
Foton Dynamic Co., Ltd hold 50% equity interest of Changsha Foton Fengjing Bus
Co., Ltd respectively. Changsha Foton Fengjing Bus Co., Ltd is not within the
scope of this reorganization.
(b) Registered Capital
Hunan Hunan Tongxin Moulding Manufacturing Co., Ltd. 10,000,000 RMB
Zhucheng Hunan Tongxin Autobody Co. Ltd. 5,000,000 RMB
Hunan Tongxin Ziyang Autobody Co., Ltd. 21,000,000 RMB
Changsha Futian Fengjing Bus Ltd. 10,000,000 RMB
(c) Hunan Tongxin Subsidiaries Organization
Hunan Hunan Tongxin Moulding Company
Register address: Changsha Jiangbei Zhuqiao Village
Legal representative: Luo Dian
Establish date: July 27, 2005
Business term: July 26, 2025
Zhucheng Hunan Tongxin Vehicle Body Ltd.
Register address: LongDu Industrial Garden
Legal representative: Zhang Duanxiang
Establish date: Jan. 19, 2007
Business term: Jan. 19, 2007-Jan. 18, 2017
Hunan Tongxin Ziyang Co., Ltd.
Register address: Ziyang Waihuan Lu, Industrial Garden
Legal representative: Zhang Duanxiang
Establish date: March 24, 2003
Business term: March 12, 2003 - forever
Changsha Futian Fengjing Bus Co., Ltd.
Register address: Hunan Changsha Jiangbei Yangque Village
Legal representative: Zhang Xiyong
Establish date: July 16, 1999
Business term: July 16, 1999-July 15, 2019
After its establishment, Changsha Foton Fengjing Bus Co., Ltd has never
undergone any annual examinations.
3.04 Re-organization
No exception
3.05 Authorization and legal person conduct
No exception
3.06 There is no visible debt that has not been disclosed:
Hunan Hunan Tongxin Enterprise Company has the following major undue
debts:
Amt.In Form of
Loan Contract No. Creditor 10,000RMB Loan Term Guarantee
- ----------------- ------------ --------- ----------- -----------
(430103101)2006 Agriculture 750 2006.9.30- The maximum
No. 0011 Bank 2007.9.30 Amt.
Changsha mortgage
Branch
43101200600003024 Agriculture 1000 2006.11.27- The maximum
Bank 2007.11.27 Amt.
Changsha mortgage
Branch
512007125001000 Changsha 1300 2007.2.16- Mortgage
Commercial 2007.12.16
Bank Sifang
Branch
43101200700000758 Agriculture 2250 2007.4.27- Mortgage
Bank 2008.4.26
Changsha
Branch
43101200700000950 Agriculture 1000 2007.5.24- Mortgage
Bank 2008.5.23
Changsha
Branch
(2007)(0525) Changsha 1000 2007.5.25- Mortgage
No.1 Jiangbei 2008.5.25
Village
Credit Union
(2006)No.22501 Changsha 1000 2006.12.25- Mortgage
Jiangbei 2008.6.25
Village
Credit Union
(2006) No.(_____) Changsha 1000 2007.1.5- Mortgage
Jiangbei 2008.6.25
Village
Credit Union
43101200700002572 Agriculture 1600 2007.6.29- Mortgage
Bank 2008.6.28
Changsha
Branch
Ziyang Automobile Company has Major undue Debts:
Amt.In Form of
Loan Contract No. Creditor 10,000RMB Loan Term Guarantee
- ----------------- ------------ --------- ----------- -----------
51101200600010719 Agriculture 800 2006.11.29- Mortgage
Bank Ziyang 2007.11.29
Branch
51101200600007815 Agriculture 1500 2006.8.28- Mortgage
Bank Ziyang 2007.8.27
Branch
3.07 Real Property
(1) Land
Hunan Hunan Tongxin Enterprise Company has the land using right as following:
Land in Use Termination Mortgaged
Land use certificate No. (square meter) Date or Not
- ------------------------ -------------- ----------- ---------
Chang Guo Yong(2002)No. 007 15208.2 2052.1.9 Yes
Chang Guo Yong(2004)No. 345 19200 2054.7.1 Yes
Chang Guo Yong(2005)No. 266 75557.5 2052.1.8 Yes
Chang Guo Yong(2005)No. 267 83180 2052.1.8 Yes
Ziyang Automobile Company
Land in Use Termination Mortgaged Mortgage
Land use certificate No. (square meter) Date or Not Period
- ------------------------ -------------- ----------- --------- ----------
Ziyang Guo Yong
(2004)No.BA220311 69999.0 2054.1.9 Yes 2005.8.28-
2007.8.29
(2) Building
Hunan Hunan Tongxin Enterprise Company owns the following land use rights:
Land in Use Mortgaged
Land use certificate No. (Square meter) or Not Mortgage Period
- ------------------------ -------------- --------- ---------------------
00003455 42.43 Write off N/A
00003456 302.21 Yes 2005.11.22-2008.11.22
00003457 384.30 Yes 2005.11.22-2008.11.22
00003458 384.82 Yes 2005.11.22-2008.11.22
00003459 704.29 Yes 2005.11.22-2008.11.22
00003460 81.65 Write off N/A
00003461 93.85 Write off N/A
00003462 91.87 Write off N/A
00003463 912.42 Yes 2005.11.22-2008.11.22
00003464 1188.90 Yes 2005.11.22-2008.11.22
00003465 248.94 Yes 2005.11.22-2008.11.22
00003466 748.35 Yes 2005.11.22-2008.11.22
00003467 1437.96 Yes 2005.11.22-2008.11.22
00003468 1539.30 Yes 2005.11.22-2008.11.22
00003469 1423.86 Yes 2005.11.22-2008.11.22
00003470 1423.86 Yes 2005.11.22-2008.11.22
00003471 560.34 Yes 2005.11.22-2008.11.22
00003472 1234.79 Yes 2005.11.22-2008.11.22
00003473 1109.96 Yes 2005.11.22-2008.11.22
00003474 794.22 Yes 2005.11.22-2008.11.22
00003477 1219.26 Yes 2005.11.22-2008.11.22
00003478 120.76 Yes 2005.11.22-2008.11.22
00003479 771.96 Yes 2005.11.22-2008.11.22
00003480 678.49 Yes 2005.11.22-2008.11.22
00003481 835.45 Yes 2005.11.22-2008.11.22
00003482 1964.31 Yes 2005.11.22-2008.11.22
00003483 487.64 Yes 2005.11.22-2008.11.22
00003484 808.19 Yes 2005.11.22-2008.11.22
00003485 1267.83 Yes 2005.11.22-2008.11.22
00003486 181.28 Yes 2005.11.22-2008.11.22
00003487 69.59 Yes N/A
00003488 396.17 Yes 2005.11.22-2008.11.22
00003489 1501.08 Yes 2005.11.22-2008.11.22
00003490 2452.92 Yes 2005.11.22-2008.11.22
00003491 334.08 Yes 2005.11.22-2008.11.22
00003492 74.48 Write off N/A
00003493 36.59 Write off N/A
00003494 3037.87 Yes 2005.11.22-2008.11.22
00003504 117.09 Write off N/A
00003505 3133.67 Yes 2005.11.22-2008.11.22
00003508 128.44 Yes 2005.11.22-2008.11.22
00008061 716.51 Yes 2005.11.22-2008.11.22
00008062 2345.36 Yes 2005.11.22-2008.11.22
00008063 2602.77 Yes 2005.11.22-2008.11.22
00008064 917.86 Yes 2005.12.23-2007.12.23
00008065 153.78 Yes 2005.12.23-2007.12.23
00008066 4878.40 Yes 2005.12.23-2007.12.23
00024025 4718.70 Yes 2005.11.22-2008.11.22
00024026 516.06 Yes 2005.11.22-2008.11.22
00024027 142.06 Yes 2005.11.22-2008.11.22
00024028 78.05 No N/A
00024029 92.62 No N/A
00024030 125.34 Yes 2005.11.22-2008.11.22
00024031 40.41 No N/A
00024038 2243.16 Yes 2005.11.29-2008.11.29
00024039 546.00 Yes 2005.11.29-2008.11.29
00024040 4747.78 Yes 2005.11.29-2008.11.29
00024041 102.30 Yes 2005.11.29-2008.11.29
00003495 5227.02 Yes 2005.12.23-2007.12.23
00003496 1833.04 Yes 2005.12.23-2007.12.23
00003497 2528.69 Yes 2005.12.23-2007.12.23
00003498 553.74 Yes 2005.12.23-2007.12.23
00003499 492.54 Yes 2005.12.23-2007.12.23
00003500 4598.40 Yes 2005.12.23-2007.12.23
00003501 50.27 Write off N/A
00003502 161.66 Yes 2005.12.23-2007.12.23
00003503 1589.99 Yes 2005.12.23-2007.12.23
00003507 9653.86 Yes 2005.12.23-2007.12.23
00024021 28.77 No N/A
00024022 13831.70 Yes 2005.12.23-2007.12.23
00024023 1832.26 Yes 2005.12.23-2007.12.23
00024024 75557.50 No N/A
00003445 1013.08 Yes 2005.12.13-2007.12.23
00003446 1556.29 Yes 2005.12.23-2007.12.23
00003447 101.34 Yes 2005.12.23-2007.12.23
00003448 907.47 Yes 2005.12.23-2007.12.23
00003499 512.83 Yes 2005.12.23-2007.12.23
00003450 276.47 Yes 2005.12.23-2007.12.23
00003452 58.02 Yes 2005.12.23-2007.12.23
00003453 951.39 Yes 2005.12.23-2007.12.23
00003454 1172.68 Yes 2005.12.23-2007.12.23
00003475 64.52 Yes 2005.12.23-2007.12.23
00003476 1333.51 Yes 2005.12.23-2007.12.23
Ziyang Automobile Company Building:
Land in Use Mortgaged
Land Use Certificate No. (square meter) or not Mortgage Period
- ------------------------ -------------- --------- ---------------------
2006-034404 11024.97 No N/A
2006-034405 2238.24 No N/A
2006-034406 7076.81 No N/A
Zhucheng Hunan Tongxin Autobody Co., Ltd. owns the using right of following
leasing building:
As stipulated in the contract entered by and between Zhucheng TX Autobody Co.,
Ltd and Zhucheng Renhe Hardwares Co., Ltd on September 8, 2006, Zhucheng TX
Autobody Co., Ltd leases the houses in Longdu Industrial Park, Zhucheng City
with a lease term of 5 years from October 10, 2006 to October 9, 2011 at an
annual rent of RMB 300,000 yuan
3.08 Intellectual Property
(1) Pantent
Hunan Hunan Tongxin Enterprise has the following patent on exterior design:
Patent Title Patent No.
- -------------------- ----------------
Heavy Duty Truck Cab ZL02320670.5
Cab(I) ZL200330106217.3
Cab(II) ZL200330106218.8
Cab(Meihua1021) ZL200530049012.5
(2) Register Trademark
Hunan Hunan Tongxin Enterprise Company has the following register land mark
Trademark
Registration No. Expiration Date
- ---------------- ----------------------
No.1757292 2002. 4. 28-2012. 4.27
No. 3000104 2003.1.21-2013.1.20
No. 834535 1996.4.28-2006.4.27
Effective period is extended from
2006.4.28-2016.4.27
3.09 Title and Condition to Assets
No exception
3.11 Compliance with Law
Hunan Tongxin and it's subsidiaries have not paid social insurance fees for
their employees other than their shareholders. According to a reply made by the
Labor and Social Security Bureau of Changsha County of Hunan Province on May 10,
2006, Hunan Tongxin and Hunan Hunan Tongxin Moulding Company may improve their
social insurance systems gradually.
3.12 Disclosure
No exception
SCHEDULE E MEMORANDUM OF REORGANIZATION
Prior to the reorganization of TX, TX's ownership structure is as follows:
- - TX and TX shareholders jointly own:
- Hunan TX Ziyang Auto Body Co Ltd.
- Hunan TX Mould Manufacturing Co Ltd.
- - TX shareholders as a group own
- Zhucheng TX Autobody Co. Ltd.
Upon the reorganization TX and issuance of new business licenses for each of the
three subsidiaries the TX ownership structure will be as follows:
- - TX 100% wholly owned subsidiaries
- Hunan TX Ziyang Auto Body Co Ltd.
- Hunan TX Mould Manufacturing Co Ltd.
- Zhucheng TX Autobody Co. Ltd.
SCHEDULE F FORM OF MANAGEMENT EMPLOYMENT AGREEMENT
Hunan TX Enterprise Co., Ltd
Management Employment Agreement
This agreement is entered into by and between the following parties on [Month]
[Day], [Year]:
Party A: Hunan TX Enterprise Co., Ltd (the "Company")
Party B: ____________ (the "Manager")
ID No.: __________________________
To clarify each party's rights, interests and obligations,
the two parties, after friendly negotiation, agree as follows:
1. Definitions and Explanations
1.1 Definitions
Except as otherwise defined, the following words shall have the following
meanings in this agreement:
"Manager" shall mean General Manager, vice General Manager, Financial Manager
and mangers of each department engaged by the Company in accordance with this
agreement, and the actual position is detailed in Section 2.1 of this agreement.
"The Articles of Association" shall mean the current Articles of Association of
the Company, including its legally amended and effective articles.
"China" shall mean the People's Republic of China, but excluding Hong Kong
Special Administrative Region, Macau Special Administrative Region, and Taiwan
region.
"Company Law" shall mean the Company Law of the People's Republic of China,
approved by National People's Congress on October 27, 2005 and effective on
January 1, 2006.
"Subsidiary" shall mean any other company controlled by the Company currently
and/or in future.
1.2 Explanations
Except as otherwise stipulated in this agreement,
1.2.1 Article or item means an article or item agreed upon and stipulated by
both parties;
1.2.2 Law includes but is not limited to current and effective Laws, codes,
effective modifications, supplements or amendments to the above Laws or codes
made by appropriate authorities after signing of this agreement;
1.2.3 No article or item in this agreement prohibits extension, modification,
amendment of or supplement to this agreement, if such act has been approved by
both parties;
1.2.4 All headlines in this agreement are only for convenience of reference and
shall have no influence on the explanation of this agreement.
2. Term of Employment
2.1 Party A appoints Party B as the Company's ____ with a term of ____ years.
After this agreement terminates, Party B may be reappointed for another term
upon both parties's consent.
2.2 The term of ____ years starts from the signature date.
3. Responsibilities and Obligations
Manager exercises all powers and functions granted by the Company.
3.2 Manager promises to the Company that in this employment term he shall:
3.2.1 submit materials related to the Company's affairs to the Company's board
of directors upon its reasonable request.
3.2.2 sincerely and diligently devote him/her to performing the functions,
responsibilities and rights assigned or granted by the Company to the Manager;
3.2.3 abide by all regulations or byLaws of the Company applicable to
administrative officers and managers;
3.2.4 act with due care, diligence and skill of a reasonably careful individual
in similar circumstances, when exercising his/her powers or performing his/her
obligations.
3.3 When exercising powers or functions granted by Law or the Company, Manager
shall perform the following obligations in compliance with the principle of
fiduciary and due-diligence:
3.3.1 Manager shall exercise the above powers and functions personally and
independently, in compliance with the objectives of Law or the Company, and
unless otherwise permitted by Law or approved by board of directors, Manager
shall not transfer the Manager's powers or functions to other individual or act
in excess of his/her powers and functions;
3.3.2 Manager shall accept legal supervision on his performance of his powers or
obligations of and reasonable suggestion submitted by the Company's board of
directors or supervisors;
3.3.3 Manager shall abide by his/her obligations to shareholders as stipulated
in the Company's Articles of Association, and fairly and equally maintain the
interests of the Company and its shareholders;
3.3.4 Manager shall not seek interests for himself/herself or other individual
by utilizing private information;
3.3.5 Manager shall not accept bribes or other illegal interests, or encroach
upon the Company's assets by utilizing his powers or functions;
3.3.6 Manager shall not open accounts in his name or other individual to deposit
the Company's assets.
3.3.7 Manager shall not provide a guarantee in the Company's name for debts of a
shareholder of the company or other individual with the company's assets.
3.3.8 Unless approved by the Company's board of directors, Manager shall not
accept commission or kickback related to the Company's business.
3.4 Through his term of duty, Manager shall timely and fully inform (or inform
in written as required) the Company's board of directors of the Company's
business or affairs, and explain as required by board of directors.
4. Rewards
4.1 Party A abides by the rule of "distribution according to work". In
accordance with the Company's practical operation, regulations and rules, and
Party B's actual work and performance, Party A may determine Party B's salary
and bonus. After approved by the Company and agreed by Manager, both parties may
adjust the actual amount of rewards.
4.2 Party B's salary paid by Party A is before-tax salary, and Party B's
individual income tax shall be withheld and paid, on behalf Party B, by Party A.
4.3 During legal festivals and holidays, yearly holidays, holidays for marriage
or funeral, maternity leave, Party A shall pay salary to Party B as usual.
4.4 Besides the rewards above-mentioned in section 4.1, Manager shall have the
right to enjoy allowance and interests granted by the Company to other
employees.
5. Expenses
All reasonable expenses (including but not limited to tour expenses, board and
lodging expenses and other actual cost) incurred from Manager's exercise of his
powers or functions stipulated in this agreement shall be reimbursed by the
Company, and for such expenses, the Company may require Manager to provide
relative receipts and vouchers.
6. Confidential Information
6.1 Unless otherwise ordered by Law, approved by shareholders'
meeting or in other special circumstances, within or after his term of duty,
Manager shall not disclose or inform any individual (except that the Company's
senior management officers have the right to require related information, or
other individual required by Law); or use for his private or other reason other
than for the Company; or for omission or lack of investigation, so that the
Company's following confidential, secret or private information are disclosed:
6.1.1 the Company's exclusive information, technical data, business secrets or
know-how; including but without limitation to research and production plan,
services, users list and consumer relationship (including but without limitation
to consumer relationships developed and formed within the Manager's term of
duty); software development, invention, technical process, formula, technology,
design, drawing, engineering, hardware structure information, marketing,
financial information, and other information directly or indirectly received in
written, oral, illustration or other patterns by Manager, but exclusive of
public information or the information may be received legally from any third
party by normal methods (hereinafter abbreviated as confidential information);
6.1.2 confidential information used or kept by the Company or its any
subsidiary, or technical process developed or information invented in the
Manager's term of duty;
6.1.3 on condition that the Company having performed its obligation on
confidential information, the confidential information only for certain
intentions received from any third
party;
6.1.4 any invention, creation, know-how, works, drawing, plan and so on,
independently or jointly with others, achieved by the Manager consigned by the
Company and using the Company's resources in his term of duty.
6.2 The restrictions stipulated in section 6.1 are not applicable to the
information or data that is accessible to public without important labor,
technical or monetary cost, except for the information disclosed by the Manager
breaching his obligations.
6.3 Unless permitted by the Company in written, the Manager shall not engage in
any side occupation in his term of duty.
6.4 The Manager shall not copy any information, documents, data and other files
of the Company irrelevant to his work to his own computer. If needs of work, the
above-mentioned information, documents, data files shall be deleted from the
Manger's own computer after treatment of them.
7. Prohibition of Lobby
7.1 The Manager promises, within his employment in the Company or 36 months
after such employment, that he must not lobby or lure the following individuals
or entities to separate from the Company in China or other places where the
Company has business, for whatever reason:
7.1.1 Individuals, trade names, firms or other organizations,
which are the Company's consumers or have business with the Company on or within
12 months before the above expiration date, and have touch with or are known by
the Manager in his term of duty;
7.1.2 Individuals, trade names, firms or other organizations, with which the
Manager, on behalf of the Company, has a great deal of regular, successive
business;
7.1.3 The Company's employees, directors, managers or counselors and so on.
7.2 The Manager shall not employ or engage the Company's employees, counselors
or other individuals entering service contracts with the Company, or engage them
to provide same services.
8. Non-competition
8.1 Unless otherwise approved by Board of Directors, the Manager in his
employment by the Company, shall not directly or indirectly be engaged or
involve in any other enterprise's activities, or own any economic interests in
any other enterprise, if Board of Directors reasonably consider:
8.1.1 Such enterprise competes or has a trend to compete with the Company's
business;
8.1.2 It is disgraceful for the Company to have relation with such enterprise;
8.1.3 To be engaged by such enterprise will obstruct the Manager to fully and
normally perform his responsibilities or functions.
8.2 Unless approved by Board of Directors in advance, within 12 months after his
employment expires, the Manager shall not:
8.2.1 By himself or proxy, engage in any business with competition to the
Company's business;
8.2.2 In name of administrative officer, technician, counselor or any other
name, directly or indirectly be employed by or involved in rival enterprise that
directly competes with the business of the Company or its any subsidiary.
8.3 The Company's Manager must obey confidentiality agreement, and must not
involve in any activity conflicting or conflicting in suspicion with the
Company's interests. The above activity includes but without limitation to:
8.3.1 Damage the Company's interests on purpose for seeking his own interests,
or caused by material fault.
8.3.2 Accept or donate too expensive gifts, pay too much entertainment expense
and other activities that may result in bad effects and degrade the Company's
reputation;
8.3.3 Engage direct relative into the Company and conceal such relationship;
8.3.4 Without authorized, discuss the Company's price, cost,
consumer relationship, markets and other confidential information with any
enterprise or individual other than the Company;
8.3.5 Engage any activity that may result in the Company's legal rights damaged
or badly impacted;
8.3.6 Except for stipulated in the Company's articles of the association or
approved by Board of Directors, the Manager shall not enter into a contract or
make a transaction with the Company;
8.3.7 For his own or other individual operate a business similar to the Company
or engage in any activity conflicting with the Company's interests;
8.3.8 Can't taking advantage of his duty, occupy or accept business due to the
Company.
9. Document Rreturn
Whenever the Company needs or this agreement legally expires, the Manager shall
promptly return the Company's due equipments and information to the Company or
an individual assigned by the Company, which are made, possessed, retained or
controlled by the Manager in the Manager's term of duty, and include but without
limitation to records, data, notes, reports, suggestions, business letters,
specifications, quotation information, drawings and other information and
equipments. The Manager shall not have the right to retain any copy, duplicate,
or any other kind of backup of the above-mentioned
information or equipments, and all ownerships and intellectual properties of the
above-mentioned items shall be reserved by the Company.
10. Termination of this Agreement
10.1 If one of the following circumstances occurs, the Company shall have the
right to terminate this agreement, but upon 30 days notice in written to the
Manager is necessary:
10.1.1 The Manager becomes disqualified or is prohibited to be a manager by Law,
or has involved the activities prohibited by section 9 in this agreement;
10.1.2 For illness, accident or any other reason, the Manager fails to perform
his responsibilities or functions stipulated in this agreement up to ______
months successively or ______ working days totally.
10.2 The Company shall not dismiss the Manager without cause.
10.3 The Manager shall notify the Company in written and 1 month before his
resignation.
10.4 If the Manager, offending the provision in section 10.3, leaves his job and
results in the Company's loss, the Company shall have the right to claim to be
compensated by the Manager.
10.5 If this agreement is terminated for whatever reason, the force and effect
of section 7, 8, 9 shall not be prejudiced, and all these articles shall
survive.
11. Information
11.1 All notices sent in accordance with or related to this agreement shall be
in written.
11.2 Any above-mentioned shall send to the Company's current registered address,
or the Manager's working address or other proper address. On each of the
following condition, notice shall be deemed to be serviced formally:
11.2.1 If by courier service, notice has been delivered to the address of
related party;
11.2.2 If by mail, 3 days after mail has been sent;
11.2.3 If by fax, after fax has been sent.
12. Force
12.1 If any article of this agreement conflicts with the Articles of the
Association, the latter shall prevail, except for otherwise provided by Law.
12.2 For any matter not mentioned herein, both parties shall exercise their
powers and perform their obligations and responsibilities in accordance with the
requirements of Company Law, the Company's Articles of Association and other
Law.
12.3 When exercising his duties, the Manager offends Laws,
administrative regulations or the Company's Articles of Association, which
results in loss of the Company, the Manager shall have the obligation to
compensate for the Company legally.
13. Jurisdiction
13.1 Formation, effectiveness, performance, termination, explanation and
revision of this agreement shall be governed by China Laws.
13.2 Any dispute about performing this agreement shall be solved by both parties
by kindly negotiation, and if negotiation fails, any party shall have the right
to submit the dispute to labor dispute arbitration committee.
14. Supplementary Provisions
14.1 Any matter not mentioned herein shall be decided otherwise by both parties
by discussion.
14.2 After signed by both parties, this agreement shall be effective on the date
first above written.
14.3 This agreement has 2 counterparts, and each party holds 1 counterpart.
Hunan TX Enterprise Co., Ltd
(Stamp)
Legal representative (or authorized representative)
(Signature)
(Year) (Month) (Day)
Manager
Signature:
(Year) (Month) (Day)
SCHEDULE G LABOR CONTRACT
Hunan TX Enterprise Co., Ltd
Labor Contract
This Labor Contract is signed by and between the following two parties:
Party A: Hunan TX Enterprise Co., Ltd (hereinafter abbreviated as the"Company")
Party B: Name: __________________________ Gender: _____ Birth date: ____________
ID No.: ___________________
In accordance with related provisions of Labor Law of the People's Republic of
China ("PRC") and other relevant PRC laws and regulations, both parties, on the
basis of equality and voluntary will, agree as follows:
Article 1 Employment
1. Party B is engaged voluntarily by Party A as a ______.
2. Party B promises that he has no labor relationship with any other
enterprise when he signs this contract.
Article 2 Employment period
1. The period of Party A employing Party B is from [Month] [Day], [Year] to
[Month] [Day], [Year].
2. If both parties negotiate to reach an agreement, this contract may be
renewed upon employment period's expiration, shortened, or terminated ahead
of its expiration.
Article 3 Rewards
1. Party A applies the principle of"distribution according to work". In
accordance with the Company's practical operation, regulations and rules,
and Party B's actual work and performance, Party A may determine Party B's
salary and bonus. Party B's salary shall not be lower than the lowest
salary standard stipulated by Changsha City.
2. Party B's salary paid by Party A is before tax, and the individual income
tax for Party B shall be deducted and paid by Party A.
3. Within legal festivals and holidays, yearly holidays, holidays for marriage
or funeral, maternity leave, Party A shall pay salary to Party B as usual.
Article 4 Labor Conditions and Protection
1. According to Party A's arrangement, Party B shall exercise timing work
system. Party B's working time is 8 hours daily, 5 working days a week.
Practical working time shall be executed in accordance with Party A's
provisions.
2. Party A shall provide a safety and sanitary working environment, and in
accordance with national regulations provide labor protection necessities
and health care products to Party B if needed by work.
3. In accordance with national regulations, Party A shall offer special labor
protection to female employee during her menstrual, pregnant, puerperal,
breast-feeding period.
Article 5 Work Discipline
1. Party A is responsible to train Party B about ideology education,
professional ethics, vocational techniques, labor safety, legal propaganda
and the Company's culture..
2. Party B shall abide by all provisions of national laws, all regulations and
rules legally stipulated by Party A. If Party B violates work discipline,
Party A, in accordance with its regulations and rules, may give Party B
necessary disciplinary punishment until dismissing Party B and terminating
this contract.
3. Party B shall work daily in accordance with the Company's requirements,
timely accomplish his work with reasonable amount and quality standard as
provided
4. For employees' confidential matters, confidentiality agreement shall be
entered otherwise.
Article 6 Insurance and Welfare
1. Party A shall pay all social insurance premiums for Party B in accordance
with national regulations and Party B's due payment may be deducted and
paid by Party A from Party B's salary.
2. Party A will not pay any social insurance premium for Party B after this
labor contract is terminated or expired.
3. If Party B has any work-related disease, injures suffered at work or not at
work, his salary and medical insurance shall be treated in accordance with
the national related regulations.
4. Party B legally enjoys the national statutory paid rest, holiday, holidays
for marriage or funeral, maternity leave, and the detailed information sees
Party A's related regulations.
Article 7 Contract Revision
1. If one of the following circumstances occurs, both parties may revise the
labor contract:
(1) Both parties negotiate to reach an agreement.
(2) Laws or regulations as bases of this labor contract have been modified.
(3) Party A's operational conditions and economic situation have been
significantly changed, and Party A fails to continuously perform this labor
contract.
(4) Other situations stipulated by law.
2. Either party, which wants to revise the labor contract, shall notify the
other party by writing 30 days in advance, and all procedures related to
the revision of the labor contract shall be followed by writing.
Article 8 Termination of the Labor Contract
1. This labor contract may be terminated at any time upon agreement of the two
parties.
2. On each of the following conditions, Party A may terminate this labor
contract at any time:
(1) Party A finds that Party B has not terminated the labor contract with his
former employer, or has other employment relationship with other party
without approval of Party A;
(2) Party B does not perform his responsibilities or functions without any
reasonable cause, and still fails to correct after Party A's criticism,
education or punishment;
(3) Party B seriously violates work disciplines or regulations and rules
legally stipulated by Party A;
(4) Party B causes great losses to Party B due to serious dereliction of duty;
(5) Party B violates national laws or regulations, and has been labor-educated
or investigated for criminal responsibility in accordance with the law.
3. On each of the following conditions, Party A may terminate this labor
contract, but shall notify Party B by writing 30 days in advance:
(1) After recovering from work-related illness or injure, Party B fails to do
the former work or other work otherwise arranged by Party A;
(2) Party B is not competent to his work;
(3) Objective situation is changed greatly, on which this labor contract is
signed, so that this labor contract is impossible to be performed, and
fails to be changed through both Parties' discussion.
(4) On other condition as stipulated by related national laws or regulations,
this labor contract may be terminated.
4. On each of the following conditions, Party A must not terminate this labor
contract in accordance with the above provision:
(1) Party B has occupational disease or has been injured at work, and has lost
all or partial labor ability as confirmed
by labor appraisal committee;
(2) Party B is receiving medical treatment for disease or injures within the
prescribed period of time;
(3) Female employee is in maternity, pregnancy or lactation;
(4) On other condition as stipulated by related national laws or regulations,
this labor contract must not be terminated.
5. On each of the following conditions, Party B may terminate this labor
contract at any time:
(1) Party A fails to pay labor rewards or offer labor conditions as stipulated
in this labor contract;
(2) As confirmed by related authorities of the state, work conditions and
environments offered by Party A are bad and greatly harm Party B's body
safety and physical and mental health;
(3) Party A, by violence, threat, or illegally restricting personal liberty,
forces Party B to labor.
6. On each of the following conditions, Party B may terminate this labor
contract, however, shall notify Party A by writing 30 days ahead of time:
(1) Party B engages in advanced study without working after approved by Party
A;
(2) Party B wants to resign in accordance with the national regulations; or
(3) Other situations approved by Party A.
7. Except for upon the above item 5 or item 6, Party B shall not terminate
this contract on each of the following conditions:
(1) The term of this labor contract does not expires;
(2) Party B has not fulfill economic compensation, economic punishment, or
administrational or disciplinary punishment;
(3) Other situations stipulated by national laws or regulations.
Article 9 Liabilities of Breach
1. If Party A violates the stipulations of this contract, so that this
contract is terminated and Party B is damaged, Party B's losses shall be
compensated by Party A.
2. If Party B violates the stipulations of this contract, so that this
contract is terminated and Party A is damaged, Party B shall be responsible
for the compensation legally.
Article 10 Force and Other Matters
1. For any matter not mentioned herein, both parties may make supplementary
provision after discussion. Supplementary
provisions shall have legal effect equal to this contract.
2. This contract becomes effective upon signatures or seals of both parties.
3. This contract has 2 counterparts with equal legal effect, and each party
holds one counterpart.
Party A: Hunan TX Enterprise Co., Ltd
(Stamp)(Signature)
Legal representative
(or authorized representative):
(Signature)
(Year) (Month) (Day)
Party B: _________________________
(Year) (Month) (Day)
SCHEDULE H CORPORATE GOVERNANCE RULES
ANNEX B
ASIA AUTOMOTIVE ACQUISITION CORPORATION
KEY EMPLOYEES EMPLOYMENT AGREEMENT
This KEY EMPLOYEES EMPLOYMENT AGREEMENT (the "Agreement"), is entered into as of
July 24, 2007 by and between ASIA AUTOMOTIVE ACQUISITION CORPORATION, a US
public company (the "Company") and the selected executives and employees
(hereinafter referred to as "Key Employees" collectively or "Key Employee" as
individual, the names of such Key Employees are attached as Exhibit A of this
Agreement; collectively, the "Parties").
RECITALS
The Company desires to retain and employ the Key Employees listed in Exhibit A
and to assure itself of the services of the Key Employees for the Period of
Employment (as defined below). The Key Employees desire to be retained and
employed by the Company for the Period of Employment and upon the terms and
conditions of this Agreement.
AGREEMENT
ACCORDINGLY, the Parties agree as follows:
1. Term of Employment. The Company shall employ the Key Employees to render
services to the Company in the position and with the duties and responsibilities
described in Section 2 from the date of this Agreement till December 31, 2007
(the "Period of Employment"), unless the Period of Employment is terminated
sooner in accordance with Section 4 or 5 below or extended upon mutual agreement
of the Parties.
2. Position, Duties, Responsibilities.
2.1 Position. The Key Employees shall render services to the Company in the
position as designated by the Chief Executive Officer of the Company and shall
perform all services appropriate to that position as well as such other services
as may reasonably be assigned by the Company, including serving in HUNAN TX
ENTERPRISE CO., LTD., a subsidiary of the Company established in the People's
Republic of China (the "PRC") ("TX China"). Each Key Employee's principal place
of employment shall be at any location in the PRC decided by the board of
directors of the Company. Each of the Key Employees shall devote his/her best
efforts and full-time attention to the performance of his/her duties. The Key
Employees shall report to the Chief Executive Officer of the Company.
2.2 Other Activities. Except upon the prior written consent of the board of
directors of the Company, the Key Employees shall not (i) accept any other
employment (except for academic employment, position in industrial or
professional associations, non-executive director of other companies which do
not compete with the Company's business provided that such other companies
purchase director liability insurance), (ii) engage, invest or assist, directly
or indirectly, in any other business activity (whether or not pursued for
pecuniary advantage) that is or may be in conflict with, or that might place the
Key Employees in a conflicting position to that of the Company or (iii) act as
the legal representative or an executive officer of another company within or
outside the PRC.
2.3 Execution of TX China Employment Agreement. The Key Employees shall upon
request of the Company execute an employment agreement (the "TX China Employment
Agreement") with TX China in accordance with PRC laws and regulations, in the
form substantially identical to this Agreement except for adjustments or
alterations required to comply with the relevant laws and regulations of the
PRC.
3. Compensation.
In consideration of the services to be rendered under this Agreement, the Key
Employees shall have the sole discretion to accept, abandon or transfer the
following shares:
3.1 Common Stock Consideration. Four million and five hundred thousand
(4,500,000) shares of the Company's common stock ("Employment Stocks") shall be
issued to the Key Employees as compensation no later than three months from the
date of this Agreement. The shares to be received by each of the Key Employees
are listed individually as indicated in Exhibit B of this Agreement.
3.2 Conditional Share Issuance. If Company calls for its
5,000,000 outstanding warrants for redemption from the holders, Company shall
issue 2,000,000 shares of the Company's common stock to Key Employees, with no
consideration paid by Key Employees. Each of the Key Employees shall receive
his/her portion according to the ratio as indicated in Exhibit B of this
Agreement.
3.3 Other Compensation. The salary and welfare provided respectively in the TX
China Employment Agreement and this Agreement shall not be cumulative.
4. Termination by Company.
4.1 Termination for Cause. For purposes of this Agreement, "For Cause" shall
mean the occurrence of any of the following, subject only to any statutory
requirement of any applicable law: (i) the failure of the Key Employee to
properly carry out his/her duties after notice by the Company of the failure to
do so and a reasonable opportunity for the Key Employee to correct the same
within a reasonable period specified by the Company; (ii) any breach by the Key
Employee of one or more provisions of any written agreement with, or written
policies of, the Company or his/her fiduciary duties to the Company likely to
cause material harm to the Company and its affiliates, at the Company's
reasonable discretion, or (iii) any theft, fraud, dishonesty or serious
misconduct by the Key Employee involving his/her duties or the property,
business, reputation or affairs of the Company and its affiliates. The Company
may terminate the Key Employee's employment For Cause at any time, with an
advance notice or payment in lieu of notice.
4.2 By Death. The Key Employee's employment shall terminate
automatically upon the Key Employee's death. The Company shall pay to the Key
Employee's beneficiaries or estate, as appropriate, any compensation then due
and owing under Section 3 hereof to which the Key Employee is entitled up
through the date of termination, subject to any other rights or remedies of the
Company under law, and thereafter all obligations of the Company under this
Agreement shall cease. Nothing in this section shall affect any entitlement of
the Key Employee's heirs or devisees to the benefits of any life insurance plan
or other applicable benefits, if any.
4.3 By Disability. If the Key Employee is unable to carry out the
responsibilities and functions of the position held by the Key Employee by
reason of any physical or mental impairment for more than ninety (90)
consecutive days or more than one hundred twenty (120) days in any twelve-month
period, then, to the extent permitted by law, the Company may terminate the Key
Employee's employment. The Company shall pay to the Key Employee all
compensation prescribed under Section 3 hereof to which the Key Employee is
entitled up through the date of termination, and thereafter all obligations of
the Company under this Agreement shall cease. Nothing in this section shall
affect the Key Employee's rights under any disability plan in which the Key
Employee is a participant, if any.
5. Termination by Key Employee.
5.1 Termination by Key Employee other than for Good Reason. The Key Employee may
terminate employment with the Company at any time for any reason or no reason at
all, upon three (3) months' advance written notice. During such notice period
the Key
Employee shall continue to diligently perform all of the Key Employee's duties
hereunder. The Company shall have the option, in its sole discretion, to make
the Key Employee's termination effective at any time prior to the end of such
notice period as long as the Company pays the Key Employee all compensation
under Section 3 hereof to which the Key Employee is entitled up through the last
day of the three (3) months' notice period. Thereafter all obligations of the
Company shall cease.
5.2 Termination for Good Reason after Change in Control. The Key Employee's
termination shall be for Good Reason (as defined below) if the Key Employee
provides written notice to the Company of the Good Reason within three (3)
months of the event constituting Good Reason and provides the Company with a
period of twenty (20) days to cure the Good Reason and the Company fails to cure
the Good Reason within that period. For purposes of this Agreement, "Good
Reason" shall mean any of the following events if (i) the event is effected by
the Company without the consent of the Key Employee and (ii) such event occurs
within three (3) months after a Change in Control (as hereinafter defined): (A)
a change in the Key Employee's position with the Company which materially
reduces the Key Employee's level of responsibility; or (B) a relocation of the
Key Employee's principal place of employment by more than one hundred
kilometers. For purposes of this Agreement, a "Change in Control" of the Company
shall be deemed to have occurred when: (i) the shareholders of the Company
approve a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the shareholders of
the Company immediately prior thereto holding fifty percent (50%) or more of the
outstanding voting securities of the Company or the surviving entity immediately
after such
merger or consolidation; or (ii) the shareholders of the Company approve either
a plan of liquidation or dissolution of the Company or an agreement for the
sale, lease, exchange or other transfer or disposition by the Company of
fifty-percent (50%) or more of the Company's assets.
6. Termination Obligations.
The Company agrees that its obligation to pay the consideration to the Key
Employee will not be affected in anyhow no matter this Agreement is terminated
for any reason as stated in Section 4 and 5 above.
The Key Employee agrees that on or before termination of employment, he will
promptly return to the Company all documents and materials of any nature
pertaining to his/her work with the Company, including all originals and copies
of all or any part of any Proprietary Information or Inventions (as defined
below) along with any and all equipment and other tangible and intangible
property of the Company. The Key Employee agrees not to retain any documents or
materials or copies thereof containing any Proprietary Information or
Inventions.
The Key Employee further agrees that: (i) all representations, warranties, and
obligations under Articles 6, 7, 8, 12, 14.1, 14.2 and 14.3 contained in this
Agreement shall survive the termination of the Period of Employment; (ii) the
Key Employee's representations, warranties and obligations under Articles 6, 7,
8, 12, 14.1, 14.2 and 14.3 shall also survive the expiration of this Agreement;
and (iii) following any termination of the Period of Employment, the Key
Employee shall fully
cooperate with the Company in all matters relating to his/her continuing
obligations under this Agreement, including but not limited to the winding up of
pending work on behalf of the Company, the orderly transfer of work to the other
employees of the Company, and the defense of any action brought by any third
party against the Company that relates in any way to the Key Employee's acts or
omissions while employed by the Company. The Key Employee also agrees to sign
and deliver the Termination Certificate attached hereto as Exhibit C prior to
his/her termination of employment with the Company.
7. Post-Termination Activity.
7.1 No Use of Proprietary Information. The Key Employee acknowledges that the
pursuit of the activities forbidden by this subsection would necessarily involve
the use or disclosure of Proprietary Information in breach of this Agreement,
but that proof of such a breach would be extremely difficult. To forestall such
disclosure, use, and breach, and in consideration of the employment under this
Agreement, the Key Employee also agrees that while employed by the Company, and
for a period of three (3) years after termination of the Key Employee's
employment, the Key Employee shall not, directly or indirectly:
(i) divert or attempt to divert from the Company or any Affiliate ("Affiliate"
shall mean any person or entity that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with
such entity. For the purposes of this definition "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a person,
whether through the ownership of voting securities, by contract or otherwise,
and includes (x) ownership directly or indirectly of 50% or more of the shares
in issue or other equity interests of such person, (y) possession directly or
indirectly of 50% or more of the voting power of such person or (z) the power
directly or indirectly to appoint a majority of the members of the board of
directors or similar governing body of such person, and the terms "controlling"
and "controlled" have meanings correlative to the foregoing) any business of any
kind in which it is engaged, including, without limitation, soliciting business
from or performing services for, any persons, company or other entity which at
any time during the Key Employee's employment by the Company is a client,
supplier, or customer of the Company or prospective client, supplier, or
customer of the Company if such business or services are of the same general
character as those engaged in or performed by the Company;
(ii) solicit or otherwise induce any person to terminate his/her employment or
consulting relationship with the Company or any Affiliate; and
(iii) engage, invest or assist in any business activity that directly or
indirectly competes with the business or future business plans of the Company or
any Affiliate.
In addition, because the Key Employee acknowledges the difficulty of
establishing when any intellectual property, invention, or proprietary
information is first conceived or developed by the Key Employee, or whether it
results from access to Proprietary Information or the Company equipment,
supplies, facilities, or data, the Key Employee agrees that any intellectual
property, invention, or proprietary information shall be reported to the Company
and, unless proven otherwise to the reasonable satisfaction of the Company,
shall be presumed to be an Invention for the purpose of this Agreement and shall
be subject to all terms and conditions hereof, if reduced to practice by the Key
Employee or with the aid of the Key Employee within two (2) years after
termination of the Period of Employment.
7.2 No Competition. Notwithstanding Section 7.1 above, while employed by the
Company and for a period of three (3) years after the termination of the Key
Employee's employment with the Company for any reason whatsoever, the Key
Employee shall not, directly or indirectly, as an Key Employee, employer,
employee, consultant, agent, principal, partner, manager, stockholder, officer,
director, or in any other individual or representative capacity, engage or
participate in any business within the PRC that is competitive with the business
of the Company or any Affiliate, except if this Agreement expires, then a period
of three (3) years shall apply. Notwithstanding the foregoing, the Key Employee
may own less than one percent (10%) of any class of stock or security of any
corporation listed on an internationally recognized securities exchange which
competes with the Company.
7.3 Enforceability. The covenants of this Article 7 are several and separate,
and the unenforceability of any specific covenant shall not affect the
provisions of any other covenant. If any provision of this Article 7 relating to
the time period or geographic area of the restrictive covenants shall be
declared by a court of competent jurisdiction to exceed the maximum time period
or geographic area, as applicable, that such court deems reasonable and
enforceable, then this Agreement shall
automatically be considered to have been amended and revised to reflect the
maximum time period or geographic area that such court deems enforceable.
7.4 Independent Covenants. All of the covenants in this Article 7 shall be
construed as an agreement independent of any other provision in this Agreement,
and the existence of any claim or cause of action of the Key Employee against
the Company or any of its Affiliates, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Company of
such covenants.
8. Proprietary Information.
The Key Employee agrees during his/her employment with the Company and within
three (3) years thereafter, to hold in strictest confidence and trust, and not
to use or disclose to any person, firm or corporation any Proprietary
Information without the prior written consent of the Company, except as
necessary in carrying out his/her duties as an employee of the Company for the
benefit of the Company. "Proprietary Information" means any information of a
proprietary, confidential or secret nature that may be disclosed to the Key
Employee that relates to the business of the Company or of any parent,
subsidiary, Affiliate, customer or supplier of the Company or any other party
with whom the Company agrees to hold information of such party in confidence
("Relevant Parties"). Such Proprietary Information includes, but is not limited
to, Inventions, research, product plans, products, services, business
strategies, personnel information, customer lists, customers, markets, technical
information, forecasts, marketing, finances or other business information of the
Company
and its Affiliates. This information shall remain confidential whether
it was disclosed to the Key Employee either directly or indirectly in writing,
orally or by drawings or observation. The Key Employee understands that
Proprietary Information does not include any of the foregoing items which has
become publicly known and made generally available through no wrongful act of
the Key Employee or others who were under confidentiality obligations as to the
items involved.
9. Former Employer Information.
The Key Employee agrees that he will not, during his/her employment with the
Company, improperly use or disclose any proprietary information or trade
secrets, or bring onto the premises of the Company any unpublished document or
proprietary information belonging to any former or concurrent employer (except
TX China) or other person or entity.
10. Third Party Information.
The Key Employee recognizes that the Company has received and in the future will
receive confidential or proprietary information from third Parties. The Key
Employee agrees to hold all such confidential or proprietary information in the
strictest confidence and trust, and not to disclose it to any person, firm or
corporation or to use it except as necessary in carrying out his/her work for
the Company consistent with the Company's agreement with such third party.
11. No Conflict.
The Key Employee represents and warrants that the Key Employee's execution of
this Agreement, his/her employment with the Company, and the performance of
his/her proposed duties under this Agreement shall not violate any obligations
he may have to any former employer or other party, including any obligations
with respect to proprietary or confidential information or intellectual property
rights of such party.
12. Inventions.
12.1 Inventions Retained and Licensed. If the Key Employee has any inventions,
original works of authorship, developments, improvements, and trade secrets
which were made by the Key Employee prior to the Key Employee's employment with
the Company ("Prior Inventions"), which belong to the Key Employee, and which
relate to the Company's actual and/or proposed business, products or research
and development. If, in the course of his/her employment with the Company, the
Key Employee incorporates into a Company product, process or machine a Prior
Invention owned by the Key Employee or in which the Key Employee has an
interest, the Company is hereby granted and shall have a non-exclusive,
royalty-free, irrevocable, perpetual, worldwide license to make, have made,
modify, use and sell such Prior Invention as part of or in connection with such
product, process or machine.
12.2 Assignment of Inventions. The Key Employee agrees that he will promptly
make full written disclosure to the Company, will hold in trust for the sole
right and benefit of the Company, and hereby irrevocably assign to the Company,
or its designee, all the Key Employee's right, title, and interest in and to any
and all inventions, original works of authorship, developments, concepts,
improvements, designs, drawings, discoveries, ideas, formulas, processes,
compositions of matter, software, databases, mask works, computer programs
(including all source codes) and related documentation, algorithms, engineering
and reverse engineering, technology, hardware configuration information, logos,
trade names, trademarks, patents, patent applications, copyrights, trade secrets
or know-how, which the Key Employee may solely or jointly conceive or develop or
reduce to practice, or cause to be conceived or developed or reduced to practice
("Inventions"), while the Key Employee is employed by the Company. The Key
Employee further acknowledges that all original works of authorship which are
made by the Key Employee (solely or jointly with others) within the scope of and
during his/her employment with the Company and which are protectable by
copyright are "works made for hire," as that term is defined in the United
States Copyright Act and that the Company will be considered the author and
owner of such works. The Key Employee understands and agrees that the decision
whether or not to commercialize or market any Invention developed by the Key
Employee solely or jointly with others is within the Company's sole discretion
and for the Company's sole benefit and that no royalty will be due to the Key
Employee as a result of the Company's efforts to commercialize or market any
such Invention.
12.3 Waiver of Moral Rights. To the utmost extent legally permitted, the Key
Employee also hereby forever waives and agrees never to assert any and all Moral
Rights (as defined below) he may have in or with respect to any Invention, even
after termination of his/her work on behalf of the Company. "Moral Rights" mean
any rights to claim authorship of an Invention to object to or prevent the
modification of any Invention, or to withdraw from circulation
or control the publication or distribution of any Invention, and any similar
right, existing under judicial or statutory law of any country in the world, or
under any treaty, regardless of whether or not such right is denominated or
generally referred to as a "moral right."
12.4 Maintenance of Records. The Key Employee agrees to keep and maintain
adequate and current written records of all Inventions made by the Key Employee
(solely or jointly with others) during the Key Employee's employment with the
Company. The records will be in the form of notes, sketches, drawings, and any
other format that may be specified by the Company. The records will be provided
to, and remain the sole property of, the Company at all times.
12.5 Patent and Copyright Registrations. The Key Employee agrees to assist the
Company, or its designee, at the Company's expense, in every proper way, to
secure the Company's rights in the Inventions and any copyrights, patents, mask
work rights, trade secret rights or other intellectual property rights relating
thereto in any and all countries. The Key Employee will disclose to the Company
all pertinent information and data which the Company deems necessary for the
execution of all applications, specifications, oaths, assignments and execute
all instruments necessary to apply for and obtain such rights and in order to
assign and convey to the Company, its successors, assigns, and nominees, the
sole and exclusive right, title and interest in and to such Inventions, and any
copyrights, patents, mask work rights, or other intellectual property rights
relating thereto. The Key Employee further agrees that the Key Employee's
obligation to execute or cause to be executed, when it is in the Key Employee
power to do so, any such instrument or papers shall continue after the
termination of this Agreement. If the Company is unable, because of the Key
Employee's mental or physical incapacity or for any other reason, to secure
his/her signature to apply for or to pursue any application for any patents or
copyright registrations covering the Inventions assigned to the Company as
above, then the Key Employee hereby irrevocably designates and appoints the
Company and its duly authorized officers and agents as his/her agent and
attorney in fact, to act for and in the Key Employee's behalf and stead to
execute and file any such applications and to do all other lawfully permitted
acts to further the prosecution and issuance of letters, patent or copyright
registrations thereon with the same legal force and effect as if executed by the
Key Employee.
13. Alternative Dispute Resolution.
The Company and Key Employee mutually agree that any controversy or claim
arising out of or relating to this Agreement or the breach thereof, or any other
dispute between the Parties, shall be submitted to mediation before a mutually
agreeable mediator, which cost is to be borne equally by the Parties hereto. In
the event the Parties fail to agree on a mediator, or mediation is unsuccessful
in resolving the claim or controversy within one (1) month after the
commencement of mediation, such claim or controversy shall be resolved by
litigation in the competent court.
14. Miscellaneous.
14.1 Continuing Obligations. The obligations in this
Agreement will continue in the event that the Key Employee is hired, renders
services to or for the benefit of or is otherwise retained at any time by any
present or future Affiliates of the Company. Any reference to the Company in
this Agreement will include such Affiliates. Upon the expiration or termination
for any reason whatsoever of this Agreement, the Key Employee shall forthwith
resign from any employment of office with an Affiliate of the Company unless the
board of directors of the Company requests otherwise.
14.2 Notification. The Key Employee hereby authorizes the Company to notify
his/her actual or future employers of the terms of this Agreement and his/her
responsibilities hereunder.
14.3 Name and Likeness Rights. The Key Employee hereby authorizes the Company to
use, reuse, and to grant others the right to use and reuse, his/her name,
photograph, likeness (including caricature), voice, and biographical
information, and any reproduction or simulation thereof, in any media now known
or hereafter developed (including but not limited to film, video and digital or
other electronic media), both during and after his/her employment, for whatever
purposes the Company deems necessary.
14.4 Injunctive Relief. The Key Employee understands that in the event of a
breach or threatened breach of this Agreement by him, the Company may suffer
irreparable harm and will therefore be entitled to injunctive relief to enforce
this Agreement.
14.5 Legal Fees. In any dispute arising under or in connection with this
Agreement, the prevailing party shall be entitled to recover reasonable
attorney's fees.
14.6 Entire Agreement. This Agreement, including the exhibits attached hereto,
is intended to be the final, complete, and exclusive statement regarding their
subject matter, except for other agreements specifically referenced herein.
Unless otherwise specifically provided for herein, this Agreement supersedes all
other prior and contemporaneous agreements and statements pertaining to this
subject matter, and may not be contradicted by evidence of any prior or
contemporaneous statements or agreements. To the extent that the practices,
policies, or procedures of the Company, now or in the future, apply to the Key
Employee and are inconsistent with the terms of this Agreement, the provisions
of this Agreement shall control.
14.7 Amendments, Renewals and Waivers. This Agreement may not be modified,
amended, renewed or terminated except by an instrument in writing, signed by the
Key Employee and by a duly authorized representative of the Company other than
the Key Employee. No failure to exercise and no delay in exercising any right,
remedy, or power under this Agreement shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, remedy, or power under this
Agreement preclude any other or further exercise thereof, or the exercise of any
other right, remedy, or power provided herein or by law or in equity.
14.8 Assignment; Successors and Assigns. The Key Employee agrees that he will
not assign, sell, transfer, delegate or otherwise dispose of, whether
voluntarily or involuntarily, or by operation of law, any rights or obligations
under this Agreement, nor shall the Key Employee's rights be subject to
encumbrance or the claims of creditors. Any purported assignment, transfer, or
delegation shall be null and void. Nothing in this Agreement shall prevent the
consolidation of the Company with, or its merger into, any other corporation, or
the sale by the Company of all or substantially all of its properties or assets,
or the assignment by the Company of this Agreement and the performance of its
obligations hereunder to any successor in interest. In the event of a change in
ownership or control of the Company, the terms of this Agreement will remain in
effect and shall be binding upon any successor in interest. Notwithstanding and
subject to the foregoing, this Agreement shall be binding upon and shall inure
to the benefit of the Parties and their respective heirs, legal representatives,
successors, and permitted assigns, and shall not benefit any person or entity
other than those enumerated above.
14.9 Notices. All notices and other communications given or made pursuant hereto
shall be in writing and shall be deemed to have been duly given or made as of
the date delivered or mailed if delivered personally or by nationally recognized
courier or mailed by registered mail (postage prepaid, return receipt requested)
or by telecopy to the Parties at the following addresses (or at such other
address for a party as shall be specified by like notice, except that notices of
changes of address shall be effective upon receipt):
To: Asia Automotive Acquisition Corporation
Contact Address: 199 Pierce Street, Suite 202,Birmingham,
Michigan, 480009, USA
Attention: Rudy Wilson
Facsimile Number: 248-203-9950
To: Key Employees
Contact Address: Hunan TX Enterprise Co., Ltd.
Jiangbei Village, Changsha County, 410135, PRC
Attention: Peng Weiwu
Facsimile Number: 86-731-6290047
14.10 Waiver of Immunity. To the extent that any Party (including its assignees
of any such rights or obligations hereunder) may be entitled, in any
jurisdiction, to claim for itself (or himself or herself) or its revenues or
assets or properties, immunity from service of process, suit, the jurisdiction
of any court, an interlocutory order or injunction or the enforcement of the
same against its property in such court, attachment prior to judgment,
attachment in aid of execution of an arbitral award or judgment (interlocutory
or final) or any other legal process, and to the extent that, in any such
jurisdiction there may be attributed such immunity (whether claimed or not),
such Party hereby irrevocably waive such immunity.
14.11 Severability; Enforcement. If any provision of this Agreement, or its
application to any person, place, or circumstance, is held by an arbitrator or a
court of competent jurisdiction to be invalid, unenforceable, or void, such
provision shall be enforced (by blue-penciling or otherwise) to the maximum
extent permissible under applicable law, and the remainder of this Agreement and
such provision as applied to other persons, places, and circumstances shall
remain in full force and effect.
14.12 Governing Law. This Agreement shall in all respects be construed and
enforced in accordance with and governed by the laws of the State of Delaware of
the United States.
14.13 Interpretation. This Agreement shall be construed as a whole, according to
its fair meaning, and not in favor of or against any party. Sections and section
headings contained in this Agreement are for reference purposes only, and shall
not affect in any manner the meaning or interpretation of this Agreement.
Whenever the context requires, references to the singular shall include the
plural and the plural the singular. References to one gender include both
genders.
14.14 Obligations Survive Termination of Employment. The Key Employee agrees
that any and all of the Key Employee's obligations under this Agreement capable
of execution after the termination of the Key Employee's employment, including
but not limited to those contained in exhibits attached hereto, shall survive
the termination of employment and the termination of this Agreement.
14.15 Language. This Agreement is written in English and Chinese languages. Both
versions shall be equally valid and binding.
14.16 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original of this Agreement, but
all of which together shall constitute one and the same instrument.
KEY EMPLOYEE ACKNOWLEDGEMENT. The Key Employee acknowledges (i) that he has
consulted with or has had the opportunity to consult with independent counsel of
his/her own choice concerning this Agreement and has been advised to do so by
the Company, and (ii) that he has read and understands the Agreement, is fully
aware of its legal effect, and has entered into it freely based on his/her own
judgment. The Key Employee hereby agrees that his/her obligations set forth in
Sections 7, 8, and 9 hereof and the definitions of Proprietary Information and
Inventions contained therein shall be equally applicable to Proprietary
Information and Inventions relating to any work performed by the Key Employee
for the Company prior to the execution of this Agreement.
The Parties have duly executed this Agreement as of the date first written
above.
COMPANY:
ASIA AUTOMOTIVE ACQUISITION CORPORATION
By: /s/ William R. Herren
William R. Herren
Chairman of the Board
By: /s/ Rudy Wilson
Rudy Wilson
Chief Executive Officer
EXHIBIT A
NAMES AND SIGNATURES OF KEY EMPLOYEES
EXHIBIT B
SHARES OF THE COMMON STOCK OF THE COMPANY TO BE RECEIVED BY EACH OF THE KEY
EMPLOYEES
EXHIBIT C
TERMINATION CERTIFICATE This is to certify that I have returned all personal
property of AAAC (the "Company") and the Relevant Parties, including, without
limitation, all source code listings, flowcharts, books, manuals, records,
models, drawings, reports, notes, contracts, lists, blueprints, and other
documents and materials, electronic data recorded or retrieved by any means,
Proprietary Information, and equipment furnished to or prepared by me in the
course of or incident to my employment with the Company, and that I did not make
or distribute any copies of the foregoing.
I further certify that I have reviewed the Key Employee Employment Agreement
(the "Agreement") signed by me and that I have complied with and will continue
to comply with all of its terms, including, without limitation, (i) the
reporting of any Inventions or any improvement, rights, or claims related to the
foregoing, conceived or developed by me and covered by the Agreement; (ii) the
preservation as confidential of all Proprietary Information pertaining to the
Company and the Relevant Parties; (iii) not participating in any business
competitive with the business of the Company; (iv) not acting as the legal
representative or an executive officer of any other company within and outside
the People's Republic of China, and (v) the reporting of any remuneration paid
to me due to any employment or self- employment during the severance period, if
any. This certificate in no way limits my responsibilities or the Company's
rights under the Agreement.
On termination of my employment with the Company, I will be employed by [name of
new employer] in the [division name] division and I will be working in
connection with the following projects:
[generally describe the projects]
Date:
Key Employee's Name (Print)
Key Employee's Signature
ANNEX C
MEMORANDUM OF ASSOCIATION OF TONGXIN INTERNATIONAL
1 NAME
The name of the Company is Tongxin International, Ltd.
2 COMPANY LIMITED BY SHARES
The Company is a company limited by shares. The liability of each member is
limited to the amount from time to time unpaid on such member's shares.
3 REGISTERED OFFICE
The first registered office of the Company will be situated at the office of the
registered agent which is at PO Box 173 Kingston Chambers Road Town, Tortola
British Virgin Islands, British Virgin Islands or such other place as the
directors or members may from time to time decide, being the office of the
registered agent.
4 REGISTERED AGENT
The first registered agent of the Company will be Maples Finance Limited British
Virgin Islands or such other registered agent as the directors or members may
decide from time to time.
5 GENERAL OBJECTS AND POWERS
Subject to Regulation 6 below the objects for which the Company is established
are unrestricted and the Company shall have full power and authority to carry
out any object not prohibited by the BVI Business Companies Act, 2004 or as the
same may be revised from time to time, or any other law of the British Virgin
Islands.
6 LIMITATIONS ON THE COMPANY'S BUSINESS
For the purposes of section 9(4) of the Act the Company has no power to:
(a) carry on banking or trust business, unless it is licensed under the Banks
and Trust Companies Act, 1990;
(b) carry on business as an insurance or as a reinsurance company, insurance
agent or insurance broker, unless it is licensed under an enactment
authorizing it to carry on that business;
(c) carry on the business of company management unless it is licensed under the
Companies Management Act, 1990;
(d) carry on the business of providing the registered office or the registered
agent for companies incorporated in the British Virgin Islands; or
(e) carry on the business as a mutual fund, mutual fund manager or mutual fund
administrator unless it is licensed under the Mutual Funds Act, 1996.
7 AUTHORIZED SHARES
(a) The Company is authorized to issue forty million shares of two classes as
follows:-
(i) Thirty nine million shares in one series of US$0.001 par value each
("Ordinary Shares"); and
(ii) one million preference shares in one series of
US$0.001 par value each ("Preferred Shares").
(b) The shares in the Company shall be issued in the currency of the United
States of America.
(c) Each Ordinary Share in the Company confers on the holder:
(i) the right to one vote at a meeting of the members of the Company or on
any resolution of the members of the Company;
(ii) the right to an equal share in any dividend paid by the Company in
accordance with the Act; and
(iii) the right to an equal share in the distribution of the surplus assets
of the Company.
(d)Preferred Shares
(i) The rights, privileges, restrictions and conditions attaching to the
Preferred Shares shall be those provided pursuant to the Act as
modified or negated by the directors of the Company on the issuance of
the Preferred Shares.
(ii) The Board of Directors of the Company is authorized, subject to
limitations prescribed by law and the provisions of this Clause 7, to
amend the Company's Memorandum of Association
to provide for the creation from time to time of one or more series of
Preferred Shares or classes of shares having preferred rights, and
pursuant to such amendment to establish the number of shares and
series to be included in each such class, and to fix the designation,
relative rights, preferences, qualifications and limitations of the
shares of each such class. The authority of the Board of Directors
with respect to each class shall include, but not be limited to,
determination of the following:
(a) the number of shares and series constituting that class and the distinctive
designation of that class;
(b) the distribution rate on the shares of that class, whether distributions
shall be cumulative, and, if so, from which date or dates, and whether they
shall be payable in preference to, or in another relation to, the
distributions payable on any other class or classes of shares;
(c) whether that class shall have voting rights, in addition to the voting
rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that class shall have conversion or exchange privileges, and, if
so, the terms and
conditions of such conversion or exchange, including provision for
adjustment of the conversion or exchange rate in such events as the Board
of Directors shall determine;
(e) whether or not the shares of that class shall be redeemable, and, if so,
the terms and conditions of such redemption, including the manner of
selecting shares for redemption if less than all shares are to be redeemed,
the date or dates upon or after which they shall be redeemable, and the
amount per share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates;
(f) whether that class shall be entitled to the benefit of a sinking fund to be
applied to the purchase or redemption of shares of that class, and, if so,
the terms and amounts of such sinking fund;
(g) the right of the shares of that class to the benefit of conditions and
restrictions upon the creation of indebtedness of the Company or any
subsidiary, upon the issue of any additional shares (including additional
shares of such class of any other class) and upon the payment of dividends
or the making of other distribution on, and the purchase, redemption or
other acquisition by the Company or any
subsidiary of any outstanding shares of the Company;
(h) the right of the shares of that class in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company and
whether such rights shall be in preference to, or in another relation to,
the comparable rights of any other class or classes of shares; and
(i) any other relative, participating, optional or other special rights,
qualifications, limitations or restrictions of that class.
8 REGISTERED SHARES ONLY
Shares in the Company may only be issued as registered shares and the Company is
not authorized to issue bearer shares. Registered shares may not be exchanged
for bearer shares or converted to bearer shares.
9 AMENDMENTS
Subject to the provisions of the Act, the Company shall by resolution of the
directors or members have the power to amend or modify any of the conditions
contained in this Memorandum of Association.
We, ____________________ British Virgin Islands in our capacity as registered
agent for the Company hereby apply to the Registrar for the incorporation of the
Company this __________ of __________ 2007.
Incorporator
_____________________________________
_____________________________________
_____________________________________
_____________________________________
Annex D
TERRITORY OF THE BRITISH VIRGIN ISLANDS
THE BVI BUSINESS COMPANIES ACT, 2004
ARTICLES OF ASSOCIATION
OF
TONGXIN INTERNATIONAL, LTD.
INTERPRETATION
1 References in these Articles of Association ("Articles") to the Act shall mean
the BVI Business Companies Act,
2004. The following Articles shall constitute the Articles of the Company. In
these Articles, words and expressions defined in the Act shall have the same
meaning and, unless otherwise required by the context, the singular shall
include the plural and vice versa, the masculine shall include the feminine and
the neuter and references to persons shall include corporations and all legal
entities capable of having a legal existence.
SHARES
2 Every person whose name is entered as a member in the share register, being
the holder of registered shares, shall without payment, be entitled to a
certificate signed by a director or under the common seal of the Company with or
without the signature of any director or officer of the Company specifying the
share or shares held and the par value thereof, provided that in respect of
shares held jointly by several persons, the Company shall not be bound to issue
more than one certificate and delivery of a certificate for a share to one of
several joint holders shall be sufficient delivery to all.
3 If a certificate is worn out or lost it may be renewed on production of the
worn out certificate, or on satisfactory proof of its loss together with such
indemnity as the directors may reasonably require. Any member receiving a share
certificate shall indemnify and hold the Company and its officers harmless from
any loss or liability which it or they may incur by reason of wrongful or
fraudulent use or representation made by any person by virtue of the
possession of such a certificate.
SHARES AND VARIATION OF RIGHTS
4 Subject to the provisions of the Memorandum of Association and these Articles,
the unissued shares of the Company (whether forming part of the original or any
increased authorised shares) shall be at the disposal of the directors who may
offer, allot, grant options over or otherwise dispose of them to such persons at
such times and for such consideration, being not less than the par value of the
shares being disposed of, and upon such terms and conditions as the directors
may determine, and in the absence of fraud the decision of the directors as to
the value of the consideration received by the Company in respect of the issue
is conclusive unless a question of law is involved.
5 Without prejudice to any special rights previously conferred on the holders of
any existing shares or class of shares, any share in the Company may be issued
with such preferred, deferred or other special rights or such restrictions,
whether in regard to dividend, voting or otherwise as the directors may from
time to time determine.
6 Subject to the provisions of the Act in this regard, shares may be issued on
the terms that they are redeemable, or at the option of the Company be liable to
be redeemed on such terms and in such manner as the directors before or at the
time of the issue of such
shares may determine.
7 Shares in the Company may be issued for money, services rendered, personal
property, an estate in real property, a promissory note or other binding
obligation to contribute money or property or any combination of the foregoing
as shall be determined by a resolution of directors.
8 A share issued by the Company upon conversion of, or in exchange for, another
share or a debt obligation or other security in the Company, shall be treated
for all purposes as having been issued for money equal to the consideration
received or deemed to have been received by the Company in respect of the other
share, debt obligation or security.
9 The Company may issue fractions of a share and a fractional share shall have
the same corresponding fractional liabilities, limitations, preferences,
privileges, qualifications, restrictions, rights and other attributes of a whole
share of the same class or series of shares.
10 The directors may redeem any share issued by the Company at a premium.
11 If at any time the Company is authorised to issue shares of more than one
class the rights attached to any class (unless otherwise provided by the terms
of issue of the shares of that class) may, whether or not the Company is
being wound up, be varied with the consent in writing of the holders of a
majority of the issued shares of that class and the holders of a majority of the
issued shares of any other class of shares which may be affected by such
variation.
12 The rights conferred upon the holders of the shares of any class issued with
preferred or other rights shall not, unless otherwise expressly provided by the
terms of issue of the shares of that class, be deemed to be varied by the
creation or issue of further shares ranking pari passu therewith.
13 Except as required by the Act, no person shall be recognized by the Company
as holding any share upon any trust, and the Company shall not be bound by or be
compelled in any way to recognize (even when having notice thereof) any
equitable, contingent, future or partial interest in any share or any interest
in any fractional part of a share or (except as provided by these Articles or by
the Act) any other rights in respect of any share except any absolute right to
the entirety thereof by the registered holder.
TRANSFER OF SHARES
14 Subject to any limitations in the Memorandum of Association, shares in the
Company shall be transferred by a written instrument of transfer signed by the
transferor and containing the name and address of the transferee. The instrument
of transfer shall also be
signed by the transferee if registration as a holder of the shares imposes a
liability to the Company on the transferee. The instrument of transfer of a
registered share shall be sent to the Company for registration.
15 Subject to the Memorandum of Association, these Articles and to Section 54(5)
of the Act, the Company shall, on receipt of an instrument of transfer, enter
the name of the transferee of the share in the register of members unless the
directors resolve to refuse or delay the registration of the transfer for
reasons that shall be specified in the resolution.
TRANSMISSION OF SHARES
16 Subject to Sections 52(2) and 53 of the Act, the executor or administrator of
a deceased member, the guardian of an incompetent member or the trustee of a
bankrupt member shall be the only person recognized by the Company as having any
title to his share, save that and only in the event of death, incompetence or
bankruptcy of any member or members of the Company as a consequence of which the
Company no longer has any directors or members, then upon the production of any
documentation which is reasonable evidence of the applicant being entitled to:
(a) a grant of probate of the deceased's will, or grant of letters of
administration of the deceased's estate, or confirmation of the appointment
as executor or administrator (as the case may be), of a deceased member's
estate; or
(b) the appointment of a guardian of an incompetent member; or
(c) the appointment as trustee of a bankrupt member; or
(d) upon production of any other reasonable evidence of the applicant's
beneficial ownership of, or entitlement to the shares,
to the Company's registered agent in the British Virgin Islands together with
(if so requested by the registered agent) a notarized copy of the share
certificate(s) of the deceased, incompetent or bankrupt member, an indemnity in
favor of the registered agent and appropriate legal advice in respect of any
document issued by a foreign court, then the administrator, executor, guardian
or trustee in bankruptcy (as the case may be) notwithstanding that their name
has not been entered in the share register of the Company, may by written
resolution of the applicant, endorsed with written approval by the registered
agent, be appointed a director of the Company or entered in the share register
as the legal and or beneficial owner of the shares.
17 The production to the Company of any document which is reasonable evidence
of:
(a) a grant of probate of the will, or grant of letters of administration of
the estate, or confirmation of the appointment as executor, of a deceased
member;
or
(b) the appointment of a guardian of an incompetent member; or
(c) the trustee of a bankrupt member; or
(d) the applicant's legal and or beneficial ownership of the shares,
shall be accepted by the Company even if the deceased, incompetent member or
bankrupt member is domiciled outside the British Virgin Islands if the document
is issued by a foreign court which had competent jurisdiction in the matter. For
the purposes of establishing whether or not a foreign court had competent
jurisdiction in such a matter the directors may obtain appropriate legal advice.
The directors may also require an indemnity to be given by the executor,
administrator, guardian or trustee in bankruptcy.
18 Any person becoming entitled by operation of law or otherwise to a share or
shares in consequence of the death, incompetence or bankruptcy of any member may
be registered as a member upon such evidence being produced as may reasonably be
required by the directors. An application by any such person to be registered as
a member shall for all purposes be deemed to be a transfer of shares of the
deceased, incompetent or bankrupt member and the directors shall treat it as
such.
19 Any person who has become entitled to a share or shares
in consequence of the death, incompetence or bankruptcy of any member may,
instead of being registered himself, request in writing that some person to be
named by him be registered as the transferee of such share or shares and such
request shall likewise be treated as if it were a transfer.
20 What amounts to incompetence on the part of a person is a matter to be
determined by the court having regard to all the relevant evidence and the
circumstances of the case.
ACQUISITION OF OWN SHARES
21 Subject to the provisions of the Act in this regard, the directors may, on
behalf of the Company purchase, redeem or otherwise acquire any of the Company's
own shares for such consideration as they consider fit, and either cancel or
hold such shares as treasury shares. The directors may dispose of any shares
held as treasury shares on such terms and conditions as they may from time to
time determine. Shares may be purchased or otherwise acquired in exchange for
newly issued shares in the Company.
22 No purchase, redemption or other acquisition of shares shall be made unless
the directors determine that immediately after the purchase, redemption or other
acquisition the Company will be able to pay its debts as they fall due and the
value of the assets of the Company exceeds its liabilities.
23 Shares that the Company purchases, redeems or otherwise acquires pursuant to
the preceding Regulation may be cancelled or held as treasury shares except to
the extent that such shares are in excess of 80 percent of the issued shares of
the Company in which case they shall be cancelled but they shall be available
for reissue.
24 Subject to the provisions to the contrary in;
(a) the Memorandum of Association or these Articles;
(b) the designations, powers, preferences, rights, qualifications, limitations
and restrictions with which the shares were issued; or
(c) the subscription agreement for the issue of the shares;
the Company may not purchase, redeem or otherwise acquire its own shares without
the consent of members whose shares are to be purchased, redeemed or otherwise
acquired.
MEETINGS OF MEMBERS
25 Any action required or permitted to be taken by the members must be effected
at a duly called meeting (as described in Regulations 28, 29 and 30) of the
members entitled to vote on such action and may not be effected by written
resolution.
26 The directors may convene meetings of the members of the
Company at such times and in such manner and places as the directors consider
necessary or desirable, and they shall convene such a meeting upon the written
request of members entitled to exercise at least fifty (50) percent of the
voting rights in respect of the matter for which the meeting is requested.
27 An annual meeting of members for election of directors and for such other
business as may come before the meeting shall be held each year at such date and
time as may be determined by the directors.
28 Seven (7) days notice at the least specifying the place, the day and the hour
of the meeting and general nature of the business to be conducted shall be given
in the manner hereinafter mentioned to such persons whose names on the date the
notice is given appear as members in the share register of the Company and are
entitled to vote at the meeting.
29 The directors may fix the record date for determining those shares that are
entitled to vote at the meeting.
30 Notwithstanding Article 28, a meeting of members held in contravention of the
requirement to give notice is valid if members holding a ninety (90) percent
majority of:
(a) the total voting rights on all the matters to be considered at the meeting;
or
(b) the votes of each class or series of shares where
members are entitled to vote thereon as a class or series together with an
absolute majority of the remaining votes,
have waived notice of the meeting and, for this purpose, the presence of a
member in person or by proxy at the meeting shall be deemed to constitute waiver
on his part.
31 The inadvertent failure of the directors to give notice of a meeting to a
member or the fact that a member has not received the notice, shall not
invalidate the meeting.
32 A member shall be deemed to be present at a meeting of members if he
participates by telephone or other electronic means and all members
participating in the meeting are able to hear each other.
33 The following shall apply in respect of joint ownership of shares:
(a) if two or more persons hold shares jointly each of them may be present in
person or by proxy at a meeting of members and may speak as a member;
(b) if only one of the joint owners is present in person or by proxy he may
vote on behalf of all joint owners; and
(c) if two or more of the joint owners are present in person or by proxy they
must vote as one.
PROCEEDINGS AT MEETINGS OF MEMBERS
34 No business shall be transacted at any meeting unless a quorum of members is
present at the time when the meeting proceeds to business. Save as set out in
Regulation 35 a quorum shall consist of the holder or holders present in person
or by proxy entitled to exercise at least fifty (50) percent of the voting
rights of the shares of each class or series of shares entitled to vote as a
class or series thereon and the same proportion of the votes of the remaining
shares entitled to vote thereon.
35 If, within two hours from the time appointed for the meeting, a quorum is not
present, the meeting, if convened upon the requisition of members, shall be
dissolved; in any other case it shall stand adjourned to the next business day
at the same time and place or to such other time and place as the directors may
determine, and if at the adjourned meeting there are present within one hour
from the time appointed for the meeting in person or by proxy not less than one
third of the votes of the shares or each class or series of shares entitled to
vote on the resolutions to be considered by the meeting, those present shall
constitute a quorum but other wise the meeting shall be dissolved.
36 At every meeting the members present shall choose someone of their number to
be the chairman (the "Chairman"). If the members are unable to choose a Chairman
for any reason, then the person representing the greatest number
of voting shares present at the meeting shall preside as Chairman failing which
the oldest individual member present at the meeting or failing any member
personally attending the meeting, the proxy present at the meeting representing
the oldest member of the Company, shall take the chair.
37 At any meeting of members, only such business shall be conducted as shall
have been brought before such meeting:
(a) by or at the direction of the Chairman of the Board of Directors (as
defined in Regulation 84); or
(b) by any member who is a holder of record at the time of the giving of the
notice provided for in Regulation 28 who is entitled to vote at the meeting
and who complies with the procedures set out in Regulation 43.
38 The Chairman may, with the consent of the meeting, adjourn any meeting from
time to time, and from place to place, but no business shall be transacted at
any adjourned meeting other than the business left unfinished at the meeting
from which the adjournment took place.
39 At any meeting a resolution put to the vote of the meeting shall be decided
on a show of hands by a simple majority unless a poll is (before or on the
declaration of the result of the show of hands) demanded:
(a) by the Chairman; or
(b) by any member present in person or by proxy and holding not less than one
tenth of the total voting shares issued by the Company and having the right
to vote at the meeting.
40 Unless a poll be so demanded, a declaration by the Chairman that a resolution
has, on a show of hands been carried, and an entry to that effect in the book
containing the minutes of the proceedings of the Company, shall be sufficient
evidence of the fact, without proof of the number or proportion of the votes
recorded in favor of or against such resolution.
41 If a poll is duly demanded it shall be taken in such manner as the Chairman
directs, and the result of the poll shall be deemed to be the resolution of the
meeting at which the poll was demanded. The demand for a poll may be withdrawn.
42 In the case of an equality of votes, whether on a show of hands, or on a
poll, the Chairman of the meeting at which the show of hands takes place, or at
which the poll is demanded, shall be entitled to a second or casting vote.
43 For business to be properly brought to the annual meeting of members by a
member, the member must have given timely written notice thereof, either by
personal delivery or by prepaid registered post to the secretary of the Company
(the "Secretary") at the principal executive offices of the Company. To be
timely, a member's notice must be
received at the principal executive offices of the Company, not less than 120
days in advance of the first anniversary of the date that the Company's (or the
Company's predecessor's) proxy statement was sent to members in connection with
the previous year's annual meeting of members, except that if no annual meeting
was held in the previous year or the date of the annual meeting is more than 30
calendar days earlier than the date of the prior year's annual meeting, notice
by a member to be timely must be received not later than the close of business
on the tenth day following the day on which the date of the annual meeting is
publicly announced (including by disclosure in a press release or in a document
filed with the Securities and Exchange Commission). For the purposes of this
Article 43, any adjournment(s) or postponement(s) of the original meeting
whereby the meeting will reconvene within 30 days from original date shall be
deemed, for purposes of notice, to be a continuation of the original meeting and
no business may be brought before any reconvened meeting unless such timely
notice of such business was given to the Secretary for the meeting as original
scheduled. A member's notice to the Secretary shall set out as to each matter
that the member wishes to be brought before the meeting of members:
(i) a brief description of the business desired to be brought before the
meeting;
(ii) the name and address of record of the member proposing such business;
(iii) the class and number of shares of the Company which are beneficially owned
by such member;
(iv) any material interest of such member in such business; and
(v) if the member intends to solicit proxies in support of such member's
proposal, a representation to that effect.
44 Notwithstanding the a foregoing, nothing in Regulation 43 shall be
interpreted or construed to require the inclusion of information about any such
proposal in any proxy statement distributed by, at the direction of, or on
behalf of, the directors. The chairman of a meeting of members shall, if the
facts so warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Regulation 44 and, if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted. However, the notice requirements set out in Regulation 43 shall be
deemed satisfied by a member if the member has notified the Company of his
intention to present a proposal at a meeting of members and such member's
proposal has been included in a proxy statement that has been distributed by, at
the direction of, or on behalf of, the directors to solicit proxies for such
meeting; provided that, if such member does not appear or send a qualified
representative, as determined
by the chairman of the meeting, to present such proposal at such meeting, the
Company need not present such proposal for a vote at such meeting
notwithstanding that proxies in respect of such vote may have been received by
the Company.
VOTES OF MEMBERS
45 At any meeting of members whether on a show of hands or on a poll every
holder of a voting share present in person or by proxy shall have one vote for
every voting share of which he is the holder.
46 Subject to the Memorandum of Association or these Articles, an action that
may be taken by members of the Company at a meeting of members may also be taken
by a resolution of members consented to in writing or by telex, telegram, cable
or other written electronic communication, without the need for any notice.
47 If a committee is appointed for any member who is of unsound mind, that
member may vote by such committee.
48 Any person other than an individual which is a member of the Company may by
resolution of its directors or other governing body authorise such person as it
thinks fit to act as its representative at any meeting of the Company or of any
class of members of the Company, and the person so authorised shall be entitled
to exercise the same powers on behalf of the person which he represents as that
person could exercise if it were an individual
member of the Company.
49 Votes may be given either personally or by proxy.
50 The instrument appointing a proxy shall be produced at the place appointed
for the meeting before the time for holding the meeting at which the person
named in such instrument proposes to vote.
51 Subject to Article 53 below, an instrument appointing a proxy shall be in
such form as the Chairman of the meeting shall accept as properly evidencing the
wishes of the member appointing the proxy.
52 The instrument appointing a proxy shall be in writing under the hand of the
appointer or in electronic form signed by the appointer unless the appointer is
a corporation or other form of legal entity other than one or more individuals
holding as joint owner in which case the instrument appointing a proxy shall be
in writing under the hand of an individual duly authorised by such corporation
or legal entity to execute the same. The Chairman of any meeting at which a vote
is cast by proxy so authorised may call for a notarially certified copy of such
authority which shall be produced within seven days of being so requested
failing which the vote or votes cast by such proxy shall be disregarded.
53 Directors of the Company may attend and speak with members of the Company and
at any separate meeting of the holders of any class or series of shares in the
Company.
54 No business of the Company shall be conducted at a meeting of members except
in accordance with the provisions of these Regulations 34 to 55.
CORPORATIONS ACTING BY REPRESENTATIVES AT MEETINGS
55 Any corporation or other form of corporate legal entity which is a member of
the Company may by resolution of its directors or other governing body authorise
such person as it thinks fit to act as its representative at any meeting of the
members or any class of members of the Company, and the person so authorised
shall be entitled to exercise the same powers on behalf of the corporation which
he represents as that corporation could exercise if it were an individual member
of the Company.
(A) DIRECTORS
56 Subject to any subsequent amendment to change the number of directors, the
number of the directors shall be not less than one or more than fifteen. Subject
to the requirements of the Memorandum of Association, the directors may by a
resolution of directors, amend this Regulation 57 to change the number of
directors.
57 Subject to Regulation 57 to change the number of directors, the continuing
directors may act, notwithstanding any casual vacancy in their body, so long as
there remain in office not less than the prescribed minimum of directors duly
qualified to act, but if the
number falls below the prescribed minimum, the remaining directors shall not act
except for the purpose of filling such vacancy.
58 The first director or directors shall be appointed by the registered agent of
the Company. Thereafter, the directors shall be appointed by the members or the
directors for such terms as the members or directors may determine and may be
removed by a resolution of the majority of the members of the Company, being for
the purposes of this Regulation 59 only, an affirmative vote of the holders of
66 2/3 percent or more of the outstanding votes of the shares entitled to vote
thereon or by a resolution of directors.
59 Notwithstanding the provisions of Section 114 of the Act, each director holds
office until his successor takes office or until his earlier death, resignation
or removal by the members as per Regulation 59 or a resolution passed by the
majority of the remaining directors.
60 A vacancy in the board of directors may be filled by a resolution of members
or a resolution passed by the majority of the remaining directors.
61 A director shall not require a share qualification, but nevertheless shall be
entitled to attend and speak at any meeting of the members and at any separate
meeting of the holders of any class of shares in the Company. A director must be
an individual.
62 A director, by writing under his hand deposited at the registered office of
the Company, may from time to time appoint another director or another person to
be his alternate. Every such alternate shall be entitled to be given notice of
meetings of the directors and to attend and vote as a director at any such
meeting at which the director appointing him is not personally present and
generally at such meeting to have and exercise all the powers, rights, duties
and authorities of the director appointing him. Every such alternate shall be
deemed to be an officer of the Company and shall not be deemed to be an agent of
the director appointing him. If undue delay or difficulty would be occasioned by
giving notice to a director of a resolution of which his approval is sought in
accordance with Article 92 his alternate (if any) shall be entitled to signify
approval of the same on behalf of that director. The remuneration of an
alternate shall be payable out of the remuneration payable to the director
appointing him, and shall consist of such portion of the last mentioned
remuneration as shall be agreed between such alternate and the director
appointing him. A director by writing under his hand deposited at the registered
office of the Company may at any time revoke the appointment of an alternate
appointed by him. If a director shall die or cease to hold the office of
director, the appointment of his alternate shall thereupon cease and terminate.
63 The directors may, by resolution, fix the emolument of directors in respect
of services rendered or to be rendered in any capacity to the Company. The
directors
may also be paid such travelling, hotel and other expenses properly incurred by
them in attending and returning from meetings of the directors, or any committee
of the directors or meetings of the members, or in connection with the business
of the Company as shall be approved by resolution of the directors.
64 Any director who, by request, goes or resides abroad for any purposes of the
Company, or who performs services which in the opinion of the Board go beyond
the ordinary duties of a director, may be paid such extra remuneration (whether
by way of salary, commission, participation in profits or otherwise) as shall be
approved by resolution of the directors.
65 The Company may pay to a director who at the request of the Company holds any
office (including a directorship) in, or renders services to, any company in
which the Company may be interested, such remuneration (whether by way of
salary, commission, participation in profits or otherwise) in respect of such
office or services as shall be approved by resolution of the directors.
66 (a) Nominations of persons for election to the Board of Directors shall be
made only at a meeting of members and only:
(i) by or at the direction of the directors; or
(ii) by a member entitled to vote for the election of directors who complies
with the notice
procedures set out below.
(b) Such nominations, other than those made by or at the direction of the
directors, shall be made pursuant to timely notice in writing to the Secretary.
To be timely, a member's notice must be received at the principal executive
offices of the Company not less than 120 days in advance of the first
anniversary of the date that the Company's (or the Company's predecessor's)
proxy statement was sent to members in connection with the previous year's
annual meeting of members, except that if no annual meeting was held in the
previous year or the date of the annual meeting is more than 30 calendar days
earlier than the date of the prior year's annual meeting, notice by a member to
be timely must be received not later than the close of business on the tenth day
following the day on which the date of the annual meeting is publicly announced
(including by disclosure in a press release or in a document filed with the
Securities and Exchange Commission).. For the purposes of this Regulation 67,
any adjournment or postponement of the original meeting whereby the meeting will
reconvene within 30 days from the original date shall be deemed for the purposes
of this notice to be a continuation of the original meeting and no nominations
by a member of persons to be elected directors of the Company may be made at any
such reconvened meeting unless pursuant to a notice which was timely for the
meeting on the date original scheduled. Each such notice shall set out
(i) the name and address of the member who intends to make the nomination and
of the persons to be nominated.
(ii) a representation that the member is a holder of record of shares in the
Company entitled to vote at such meeting and that he intends to appear in
person or by proxy at the meeting to nominate the persons specified in the
notice;
(iii) a description of all arrangements or understandings between the member and
each nominee and any other person (naming such person) pursuant to which
the nominations are to be made by the member.
(iv) such other information regarding each nominee proposed by such member as
would have been required to be included in a proxy statement filed pursuant
to the proxy rules of the United States Securities and Exchange Commission,
had each nominee been nominated, or intended to be nominated, by the
directors;
(v) the consent of each nominee to serve as a director of the Company if so
elected; and
(vi) if the member intends to solicit proxies in support of such member's
nominees, a representation to that effect.
67 The office of director shall be vacated if the director:
(a) is removed from office by resolution of members; or
(b) is removed from office by resolution of the directors of the Company;
(c) becomes disqualified to act as a director under Section 111 of the Act;
(d) absent from meetings of the directors for six consecutive months without
leave of the board of directors, provided that the directors shall have
power to grant any director leave of absence for any or an indefinite
period;
(e) if he dies; or
(f) if he becomes of unsound mind.
68 (a) A director may hold any other office or position of profit under the
Company (except that of auditor) in conjunction with his office of director, and
may act in a professional capacity to the Company on such terms as to
remuneration and otherwise as the directors shall arrange.
(b) A director may be or become a director or officer of, or otherwise be
interested in any company promoted by the Company, or in which the Company may
be interested, as a member or otherwise and no such director shall be
accountable for any remuneration or other benefits received by him as director
or officer or from his interest in such other company. The directors may also
exercise the voting powers conferred by the shares in any other company held or
owned by the Company in such manner in all respects as they think fit, including
the exercise thereof in favour of any resolutions appointing them, or of their
number, directors or officers of such other company, or voting or providing for
the payment of remuneration to the directors or officers of such other company.
A director may vote in favour of the exercise of such voting rights in the
manner aforesaid notwithstanding that he may be, or be about to become, a
director or officer of such other company, and as such in any other manner is,
or may be, interested in the exercise of such voting rights in the manner
aforesaid.
(c) No director shall be disqualified by his office from contracting with the
Company either as a vendor, purchaser or otherwise, nor shall any such contract
or arrangement entered into by or on behalf of the Company in which any director
shall be in any way interested be voided, nor shall any director so contracting
or being so interested be liable to account to the Company for any profit
realised by any such contract or arrangement, by reason of such director holding
that office or by reason of the fiduciary relationship thereby established,
provided
the procedure in Regulation 69 (d) below is followed.
(d) A director of the Company shall, immediately after becoming aware of the
fact that he is interested in a transaction entered into or to be entered into
by the Company, disclose such interest to the board of directors.
(e) A director of the Company is not required to comply with Regulation 69 (d)
above if:
(i) the transaction or proposed transaction is between the director and the
Company; and
(ii) the transaction or proposed transaction is or is to be entered into in the
ordinary course of the Company's business and on usual terms and
conditions.
(f) For the purposes of Regulation 69(d) above, a disclosure to the board to the
effect that a director is a member, director, officer or trustee of another
named company or other person and is to be regarded as interested in any
transaction which may, after the date of the entry or disclosure, be entered
into with that company or person, is a sufficient disclosure of interest in
relation to that transaction.
(g) Subject to Section 125(1) of the Act, the failure by
a director to comply with Regulation 69(d) does not affect the validity of a
transaction entered into by the director or the Company.
OFFICERS
69 The directors of the Company may, by resolution of directors, appoint
officers of the Company at such times as shall be considered necessary or
expedient, and such officers may consist of a President, one or more Vice
Presidents, a Secretary, and a Treasurer and/or such other officers as may from
time to time be deemed desirable. The officers shall perform such duties as
shall be prescribed at the time of their appointment subject to any
modifications in such duties as may be prescribed by the directors thereafter,
but in the absence of any specific allocation of duties it shall be the
responsibility of the President to manage the day to day affairs of the Company,
the Vice Presidents to act in order of seniority in the absence of the
President, but otherwise to perform such duties as may be delegated to them by
the President, the Secretary to maintain the registers, minute books and records
(other than financial records) of the Company and to ensure compliance with all
procedural requirements imposed on the Company by applicable law, and the
Treasurer to be responsible for the financial affairs of the Company.
70 Any person may hold more than one office and no officer need be a director or
member of the Company. The officers shall remain in office until removed from
office by the
directors, whether or not a successor is appointed.
71 Any officer who is a body corporate may appoint any person its duly
authorised representative for the purpose of representing it and of transacting
any of the business of the officers.
(B) MANAGING DIRECTORS
72 The directors may from time to time and by resolution of directors appoint
one or more of their number to be a managing director or joint managing director
and may, subject to any contract between him or them and the Company, from time
to time terminate his or their appointment and appoint another or others in his
or their place or places.
73 A director appointed in terms of the provisions of Regulation 75 to the
office of managing director of the Company may be paid, in addition to the
remuneration payable in terms of Regulation 66, such remuneration not exceeding
a reasonable maximum in each year in respect of such office as may be determined
by a disinterested quorum of the directors.
74 The directors may from time to time, by resolution of directors, entrust and
confer upon a managing director for the time being such of the powers and
authorities vested in them as they think fit, save that no managing director
shall have any power or authority with respect to the matters requiring a
resolution of directors under
the Act.
POWERS OF DIRECTORS
75 The business of the Company shall be managed by the directors who may pay all
expenses incurred preliminary to and in connection with the formation and
registration of the Company, and may exercise all such powers of the Company
necessary for managing and for directing and supervising, the business and
affairs of the Company as are not by the Act or by these Articles required to be
exercised by the members subject to any delegation of such powers as may be
authorised by these Articles and permitted by the Act and to such requirements
as may be prescribed by resolution of the members, but no requirement made by
resolution of the members shall prevail if it be inconsistent with these
Articles nor shall such requirement invalidate any prior act of the directors
which would have been valid if such requirement had not been made.
76 The board of directors may entrust to and confer upon any director or officer
any of the powers exercisable by it upon such terms and conditions and with such
restrictions as it thinks fit, and either collaterally with, or to the exclusion
of, its own powers, and may from time to time revoke, withdraw, alter or vary
all or any of such powers. Subject to the provisions of Section 110 of the Act,
the directors may delegate any of their powers to committees consisting of such
member or members of their body as they think fit. Any committees so formed
shall in
the exercise of powers so delegated conform to any regulations that may be
imposed on it by the directors or the provisions of the Act.
77 The directors may from time to time by power of attorney appoint any company,
firm or person or body of persons to be the attorney or attorneys of the Company
for such purposes and with such powers, authorities and discretions (not
exceeding those vested in or exercisable by the directors under these Articles)
and for such period and subject to such conditions as the directors think fit.
78 Any director who is a body corporate may appoint any person its duly
authorised representative for the purpose of representing it at meetings of the
directors and of transacting any of the business of the directors.
79 All cheques, promissory notes, drafts, bills of exchange and other negotiable
instruments and all receipts for monies paid to the Company, shall be signed,
drawn, accepted, endorsed or otherwise executed as the case may be, in such
manner as the directors shall from time to time by resolution determine.
80 The directors may exercise all the powers of the Company to borrow money and
to mortgage or charge its undertakings and property, to issue debentures,
debenture stock and other securities whenever money is borrowed or as security
for any debt, liability or obligation of the Company or of any third party.
81 The continuing directors may act notwithstanding any vacancy in their body,
save that if the number of directors shall have been fixed at two or more
persons and by reason of vacancies having occurred in the board of directors
there shall be only one continuing director, he shall be authorised to act alone
only for the purpose of appointing another director.
PROCEEDINGS OF DIRECTORS
82 The meetings of the board of directors and any committee thereof shall be
held at such place or places as the directors shall decide.
83 The directors may elect a chairman (the "Chairman of the Board of Directors")
of their meeting and determine the period for which he is to hold office. If no
such Chairman of the Board of Directors is elected, or if at any meeting the
Chairman of the Board of Directors is not present at the time appointed for
holding the meeting, the directors present may choose one of their number to be
Chairman of the Board of Directors for the meeting. If the directors are unable
to choose a Chairman of the Board of Directors, for any reason, then the oldest
director present at the meeting shall preside as the Chairman of the Board of
Directors.
84 The directors may meet together for the dispatch of business, adjourn and
otherwise regulate their meetings as they think fit. Questions arising at any
meeting shall
be decided by a majority of votes. In case of an equality in votes the Chairman
shall have a second or casting vote. A director may at any time summon a meeting
of the directors. If the Company shall have only one director, the provisions
hereinafter contained for meetings of the directors shall not apply but such
sole director shall have full power to represent and act for the Company in all
matters and in lieu of minutes of a meeting shall record in writing and sign a
note of memorandum of all matters requiring a resolution of the directors. Such
note or memorandum shall constitute sufficient evidence of such resolution for
all purposes.
85 A director shall be given not less than three (3) days notice of a meeting of
the directors.
86 Notwithstanding Regulation 88, a meeting of directors held in contravention
of Regulation 884 is valid if a majority of the directors, entitled to vote at
the meeting, have waived the notice of the meeting; and, for this purpose, the
presence of a director at the meeting shall be deemed to constitute waiver on
his part.
87 The inadvertent failure to give notice of a meeting to a director, or the
fact that a director has not received the notice shall not invalidate the
meeting.
88 A meeting of the directors is duly constituted for all purposes if at the
commencement of the meeting there are present in person or by alternate not less
than one-half of the total number of directors unless there are only 2
directors in which case the quorum shall be 2.
89 If within half an hour from the time appointed for the meeting a quorum is
not present, the meeting shall be dissolved.
90 Any one or more members of the board of directors or any committee thereof
may participate in a meeting of such board of directors or committee by means of
a conference telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. Participating
by such means shall constitute presence in person at a meeting.
91 A resolution approved by a majority of the directors for the time being
entitled to receive notice of a meeting of the directors or of a committee of
the directors and taking the form of one or more documents in writing or by
telefax or other written or electronic communication shall be as valid and
effectual as if it had been passed at a meeting of the directors or of such
committee duly convened and held, without the need for any notice.
COMMITTEES
92 The directors may, by resolution of directors, designate one or more
committees, each consisting of one or more directors.
93 Each committee of directors has such powers and authorities of the directors,
including the power and
authority to affix the Seal, as are set forth in the resolution of directors
establishing the committee, except that no committee has any power or authority
to amend the Memorandum of Association or these Articles, to appoint directors
or fix their emoluments or to appoint officers or agents of the Company.
94 The meeting and proceedings of each committee of directors consisting of 2 or
more directors shall be governed mutatis mutandis by the provisions of these
Articles regulating the proceedings of directors so far as the same are not
superseded by any provisions in the resolution establishing the committee.
(ii) INDEMNITY
95 Subject to the provisions of the Act, the Company may indemnify against all
expenses, including legal fees, and against all judgments, fines and amounts
paid in settlement and reasonably incurred in connection with legal,
administrative or investigative proceedings any person who:
(a) is or was a party or is threatened to be made a party to any
threatened, pending or completed proceedings, whether civil, criminal,
administrative or investigative, by reason of the fact that the person
is or was a director of the Company; or
(b) is or was, at the request of the Company, serving as a director of, or
in any other capacity is or was
acting for, another company or a partnership, joint venture, trust or
other enterprise.
(b) CONFLICT OF INTERESTS
96 No agreement or transaction between the Company and one or more of its
directors or any person in which any director has a financial interest or to
whom any director is related, including as a director of that other person, is
void or voidable for this reason only or by reason only that the director is
present at the meeting of directors or at the meeting of the committee of
directors that approves the agreement or transaction or that the vote or consent
of the director is counted for that purpose if the material facts of the
interest of each director in the agreement or transaction and his interest in or
relationship to any other party to the agreement or transaction are disclosed in
good faith or are known by the other directors.
97 A director who has an interest in any particular business to be considered at
a meeting of directors or members may be counted for purposes of determining
whether the meeting is duly constituted.
SEAL
98 The directors shall provide for the safe custody of the common seal (if any)
of the Company. The common seal when affixed to any instrument except as
provided in Regulation 2, shall be witnessed by a director or officer
of the Company or any other person so authorised from time to time by the
directors. The directors may provide for a facsimile of the common seal and
approve the signature of any director or authorised person which may be
reproduced by printing or other means on any instrument and it shall have the
same force and validity as if the common seal has been affixed to such
instrument and the same had been signed as hereinbefore described.
(c) DISTRIBUTIONS
99 Subject to the provisions of the Act, the directors of a Company may, by
resolution, authorise a distribution by the Company at a time, and of an amount,
and to any members they think fit if they are satisfied, on reasonable grounds,
that the Company will, immediately after the distribution, satisfy the solvency
test as stipulated in Section 56 of the Act.
100 Subject to the rights of the holders of shares entitled to special rights as
to distributions, all distributions shall be declared and paid according to the
par value of the shares in issue, excluding those shares which are held by the
Company as Treasury Shares at the date of declaration of the distribution.
101 The directors may, before recommending any distribution, set aside out of
the profits of the Company such sums as they think proper as a reserve or
reserves which shall, at their discretion, either be employed in the business of
the Company or be invested in such investments as the
directors may from time to time think fit.
102 If several persons are registered as joint holders of any share, any of them
may give effectual receipt for any distribution or other monies payable on or in
respect of the share.
103 Notice of any distribution that may have been declared shall be given to
each member in manner hereinafter mentioned and all distributions unclaimed for
three years after having been declared may be forfeited by the directors for the
benefit of the Company.
104 No distribution shall bear interest against the Company and no distribution
shall be paid on treasury shares or shares held by another company of which the
Company holds, directly or indirectly, shares having more than 50 percent of the
vote in electing directors.
105 A share issued as a distribution by the Company shall be treated for all
purposes as having been issued for money equal to the surplus that is
transferred to capital upon the issue of the share.
(d)COMPANY RECORDS
106 The Company shall keep records that:
(a) are sufficient to show and explain the Company's transactions; and
(b) will, at any time, enable the financial position of the Company to be
determined with reasonable accuracy.
107 The Company shall keep:
(a) minutes of all meetings of:
(i) directors,
(ii) members,
(iii) committees of directors, and
(iv) committees of members;
(b) copies of all resolutions consented to by:
(i) directors,
(ii) members,
(iii) committees of directors, and
(iv) committees of members;
(c) an imprint of the common seal at the registered office of the Company.
108 The Company shall keep the following records at the office of its registered
agent or at such other place or
places, within or outside the British Virgin Islands, as the directors may
determine:
(a) minutes of meetings and resolutions of members and of classes of members
maintained in accordance with Regulation 110; and
(b) minutes of meetings and resolutions of directors and committees of
directors maintained in accordance with Regulation 110.
109 The Company shall keep the following documents at the office of its
registered agent:
(a) the Memorandum of Association and Articles of the Company;
(b) the register of members maintained in accordance with Regulation 115 or a
copy of the register of members;
(c) the register of directors maintained in accordance with Regulation 115 or a
copy of the register of directors;
(d) copies of all notices and other documents filed by the Company in the
previous ten years; and
(e) a copy of the register of charges kept by the Company pursuant to Section
162(1) of the Act.
110 (a) Where the Company keeps a copy of the register of members or the
register of directors at the office of its registered agent, it shall
(i) within 15 days of any change in the register, notify the registered agent,
in writing, of the change; and
(ii)provide the registered agent with a written record of the physical address
of the place or places at which the original register of members or the
original register of directors is kept.
(b) Where the place at which the original register of members or the original
register of directors is changed, the Company shall provide the registered agent
with the physical address of the new location of the records within 14 days of
the change of location.
111 The Company shall keep a register to be known as a register of directors
containing the names and addresses of the persons who are directors of the
Company, the date on which each person whose name is entered in the register was
appointed as a director of the Company, the date on which each person named as a
director ceased to be a director of the Company, and such other information as
may be prescribed.
112 The Company shall maintain an accurate and complete
register of members showing the full names and addresses of all persons holding
registered shares in the Company, the number of each class and series of
registered shares held by such person, the date on which the name of each member
was entered in the register of members and where applicable, the date such
person ceased to hold any registered shares in the Company.
113 The records, documents and registers required by Articles 108 to 114
inclusive shall be open to the inspection of the directors at all times.
114 The directors shall from time to time determine whether and to what extent
and at what times and places and under what conditions the records, documents
and registers of the Company or any of them shall be open to the inspection of
members not being directors, and no member (not being a director) shall have any
right of inspecting any records, documents or registers of the Company except as
conferred by the Act or authorised by resolution of the directors.
(i) AUDIT
115 The members may by resolution call for the accounts of the Company to be
examined by an auditor.
116 The directors may be resolution determine the audit committee to be
appointed by them at such remuneration as may from time to time be agreed, to be
solely responsible for selecting the independent accountants to audit the
Company's financial records.
117 The Company may by resolution of members call for the directors to prepare
periodically a profit and loss account and a balance sheet. The profit and loss
account and balance sheet shall be drawn up so as to give respectively a true
and fair view of the profit and loss of the Company for the financial period and
a true and fair view of the state of affairs of the Company as at the end of the
financial period.
118 The auditor may be a member of the company but no director or officer shall
be eligible during his continuance in office.
119 Every auditor of the Company shall have a right of access at all times to
the books of accounts of the Company, and shall be entitled to require from the
officers of the Company such information and explanations as he thinks necessary
for the performance of his duties.
120 The report of the auditor shall be annexed to the accounts upon which he
reports, and the auditor shall be entitled to receive notice of, and to attend,
any meeting at which the Company's audited Profit and Loss Account and Balance
Sheet is to be presented.
(ii) NOTICES
121 Any notice, information or written statement required to be given to members
shall be served by mail addressed to
each member at the address shown in the share register.
122 All notices directed to be given to the members shall, with respect to any
registered shares to which persons are jointly entitled, be given to whichever
of such persons is named first in the share register, and notice so given shall
be sufficient notice to all the holders of such shares.
123 Any notice, if served by post, shall be deemed to have been served within
five days of posting, and in proving such service it shall be sufficient to
prove that the letter containing the notice was properly addressed and mailed
with the postage prepaid.
(iii) PENSION AND SUPERANNUATION FUND
124 The directors may establish and maintain or procure the establishment and
maintenance of any non-contributory or contributory pension or superannuation
funds for the benefit of, and give or procure the giving of donations,
gratuities, pensions, allowances or emoluments to any persons who are or were at
any time in the employment or service of the Company or any company which is a
subsidiary of the Company or is allied to or associated with the Company or with
any such subsidiary, or who are or were at any time directors or officers of the
Company or of any such other company as aforesaid or who hold or held any
salaried employment or office in the Company or such other company, or any
persons in whose welfare the Company or any such other company as aforesaid is,
or has
been at any time, interested, and to the wives, widows, families and dependents
of any such persons, and make payments for or towards the insurance of such
persons as aforesaid, and may do any of the matters aforesaid either alone or in
conjunction with any such other company as aforesaid. A director holding any
such employment or office shall be entitled to participate in and retain for his
own benefit any such donation, gratuity, pension, allowance or emolument.
(iv) WINDING UP
125 The Company may be voluntarily liquidated under Part XII of the Act if it
has no liabilities and it is able to pay its debts as they become due. If the
Company shall be wound up, the liquidator may, in accordance with a resolution
of members, divide amongst the members in specie or in kind the whole or any
part of the assets of the Company (whether they shall consist of property of the
same kind or not) and may for such purpose set such value as he deems fair upon
any such property to be divided as aforesaid and may determine how such division
shall be carried out as between the members or different classes of members. The
liquidator may vest the whole or any part of such assets in trustees upon such
trust for the benefit of the contributors as the liquidator shall think fit, but
so that no member shall be compelled to accept any shares or other securities
whereon there is any liability.
AMENDMENT TO ARTICLES
126 The Company may alter or modify the conditions contained in these Articles
as originally drafted or as amended from time to time by a resolution of the
directors or the members.
CONTINUATION
127 The Company may by resolution of members or by a resolution passed
unanimously by all directors of the Company continue as a company incorporated
under the laws of a jurisdiction outside the British Virgin Islands in the
manner provided under those laws.
We,
________________________________________________________________________________
________________________________________________________________________________
________________________________________________ in our capacity as registered
agent for the Company hereby apply to the Registrar for the incorporation of the
Company this _____ day of ________ 2007.
Incorporator
_____________________________________
_____________________________________
Authorised Signatory
_____________________________________
ANNEX E
TONGXIN INTERNATIONAL LTD.
CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
I. STATEMENT OF POLICY
This Charter specifies the scope of the responsibilities of the Audit Committee
(the "Committee") of the Board of Directors (the "Board") of Tongxin
International Ltd.(the "Company") and the manner in which those responsibilities
shall be performed, including its structure, processes and membership
requirements.
The primary purpose of the Committee is to oversee the accounting and financial
reporting processes of the Company and the audits of the Company's financial
statements. The Committee shall also review the qualifications, independence and
performance, and approve the terms of engagement of the Company's independent
auditor and prepare any reports required of the Committee under rules of the
Securities and Exchange Commission ("SEC").
The Company shall provide appropriate funding, as determined by the Committee,
to permit the Committee to perform its duties under this Charter, to compensate
its advisors and to compensate any registered public accounting firm engaged for
the purpose of rendering or issuing an audit report or related work or
performing other audit, review or attest services for the Company. The
Committee, at its discretion, has the authority to initiate investigations, and
hire legal, accounting or other outside advisors or experts to assist the
Committee, as it deems necessary
to fulfill its duties under this Charter. The Committee may also perform such
other activities consistent with this Charter, the Company's Bylaws and
governing law, as the Committee or the Board deems necessary or appropriate.
II. ORGANIZATION AND MEMBERSHIP REQUIREMENTS
The Committee shall comprise three or more directors selected by the Board, each
of whom shall satisfy the independence and experience requirements of the Nasdaq
Stock Market, provided that one director who does not meet the independence
criteria of Nasdaq, but is not a current employee or officer, or an immediate
family member of an employee or officer, may be appointed to the Committee,
subject to the approval of the Board pursuant to, and subject to the limitations
under, the "exceptional and limited circumstances" exceptions as provided under
the rules of Nasdaq. In addition, the Committee shall not include any member
who:
* has participated in the preparation of the financial statements of the
Company or any current subsidiary at any time during the past three (3)
years; or
* accepts any consulting, advisory, or other compensatory fee, directly or
indirectly, from the Company, other than in his or her capacity as a member
of the Committee, the Board, or any other committee of the Board; or
* is an affiliate of the Company or any subsidiary of the Company, other than
a director who meets the independence requirements of the Nasdaq Stock
Market.
Each member of the Committee must be able to read and understand fundamental
financial statements, including a balance sheet, income statement and cash flow
statement. In addition, at least one member shall have past employment
experience in finance or accounting, professional certification in accounting,
or other comparable experience or background resulting in the individual being
financially sophisticated, which may include being or having been a chief
executive, chief financial or other senior officer with financial oversight
responsibilities.
The members of the Committee shall be appointed by the Board on the
recommendation of the Nominating and Corporate Governance Committee and shall
serve until their successors are duly elected and qualified or their earlier
resignation or removal. Any member of the Committee may be replaced by the Board
on the recommendation of the Nominating and Corporate Governance Committee.
Unless a chairman is elected by the full Board, the members of the Committee may
designate a chairman by majority vote of the full Committee membership.
III. MEETINGS
The Committee shall meet as often as it determines, but not less frequently than
quarterly. A majority of the members shall represent a quorum of the Committee,
and, if a quorum is present, any action approved by at least a majority of the
members present shall represent the valid action of the Committee. The Committee
may form and delegate authority to subcommittees, or to one or more members of
the Committee, when appropriate. The Committee shall meet with management and
the
independent auditor in separate executive sessions as appropriate. The Committee
shall meet with the independent auditor and management to review the Company's
financial statements and financial reports.
The Committee shall maintain written minutes of its meetings, which minutes will
be filed with the minutes of the meetings of the Board.
IV. COMMITTEE AUTHORITY AND RESPONSIBILITIES
To fulfill its responsibilities and duties, the Committee shall:
A. Oversight of the Company's Independent Auditor
1. Be directly and solely responsible for the appointment, compensation,
retention and oversight of any independent auditor (including resolution of
disagreements between management and the independent auditor regarding financial
reporting) engaged by the Company for the purpose of preparing or issuing an
audit report or related work, with each such auditor reporting directly to the
Committee.
1. Periodically review and discuss with the independent auditor (i) the matters
required to be discussed by Statement on Auditing Standards No.61, as amended,
and (ii) any formal written statements received from the independent auditor
consistent with and in satisfaction of Independence Standards Board Standard
No.1, as amended, including without limitation, descriptions of (x) all
relationships
between the independent auditor and the Company, (y) any disclosed relationships
or services that may impact the independent auditor's objectivity and
independence and (z) whether any of the Company's senior finance personnel were
recently employed by the independent auditor.
3. Consult with the independent auditor to assure the rotation of the lead audit
partner having primary responsibility for the audit and the audit partner
responsible for reviewing the audit every five years, consider issues related to
the timing of such rotation and the transition to new lead and reviewing
partners, and consider whether, in order to assure continuing auditor
independence, there should be regular rotation of the audit firm, and report to
the Board on its conclusions.
4. Approve in advance the engagement of the independent auditor for all audit
services and non-audit services, based on independence, qualifications and, if
applicable, performance, and approve the fees and other terms of any such
engagement; provided, however, that (i) the Committee may establish pre-approval
policies and procedures for any engagement to render such services, provided
that such policies and procedures (x) are detailed as to particular services,
(y) do not involve delegation to management of the Committee's responsibilities
hereunder and (z) provide that, at its next scheduled meeting, the Committee is
informed as to each such service for which the independent auditor is engaged
pursuant to such policies and procedures, and (ii) the Committee may delegate to
one or more members of the Committee the authority to grant pre-approvals for
such services, provided that the decisions of such member(s) to grant any such
pre-approval shall be
presented to the Committee at its next scheduled meeting.
5. Meet with the independent auditor prior to the audit to discuss the planning
and staffing of the audit.
6. Approve as necessary the termination of the engagement of the independent
auditor.
7. Establish policies for the hiring of employees or former employees of the
independent auditor who participated in any capacity in the audit of the
Company, taking into account the impact of such policies on auditor
independence.
8. Regularly review with the independent auditor any significant difficulties
encountered during the course of the audit, any restrictions on the scope of
work or access to required information and any significant disagreement among
management and the independent auditor in connection with the preparation of the
financial statements. Review with the independent auditor any accounting
adjustments that were noted or proposed by the independent auditor but that were
"passed" (as immaterial or otherwise), any communications between the audit team
and the independent auditor's national office respecting auditing or accounting
issues presented by the engagement, any "management" or"internal control"letter
or schedule of unadjusted differences issued, or proposed to be issued, by the
independent auditor to the Company, orany other material written communication
provided by the independent auditor to the Company's management.
9. Review with the independent auditor the critical accounting policies and
practices used by the Company, all alternative
treatments of financial information within generally accepted accounting
principles ("GAAP") that the independent auditor has discussed with management,
the ramifications of the use of such alternative disclosures and treatments and
the treatment preferred by the independent auditor.
B. Review of Financial Reporting, Policies and Processes
1. Review and discuss with management and the independent auditor the Company's
annual audited financial statements and any certification, report, opinion or
review rendered by the independent auditor, and recommend to the Board whether
the audited financial statements should be included in the Company's annual
report on Form 10-K.
2. Review and discuss with management and the independent auditor the Company's
quarterly financial statements.
3. Review and discuss with management and the independent auditor the Company's
disclosure under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing in the Company's periodic reports.
4. Review and discuss earnings press releases and other information provided to
securities analysts and rating agencies, including any "pro forma" or adjusted
financial information.
5. Periodically meet separately with management and with the independent
auditor.
6. Review with management and the independent auditor any
significant judgments made in management's preparation of the financial
statements and the view of each as to appropriateness of such judgments.
7. Review with management its assessment of the effectiveness and adequacy of
the Company's internal control structure and procedures for financial reporting
("Internal Controls"), review with the independent auditor the attestation to
and report on the assessment made by management, and consider with management
and the independent auditor whether any changes to the Internal Controls are
appropriate in light of management's assessment or the independent auditor's
attestation.
8. To the extent that it deems appropriate, review with management its
evaluation of the Company's procedures and controls designed to assure that
information required to be disclosed in its periodic public reports is recorded,
processed, summarized and reported in such reports within the time periods
specified by the SEC for the filing of such reports ("Disclosure Controls"), and
consider whether any changes are appropriate in light of management's evaluation
of the effectiveness of such Disclosure Controls.
9. Review and discuss with management and the independent auditor any
off-balance sheet transactions or structures and their effect on the Company's
financial results and operations, as well as the disclosure regarding such
transactions and structures in the Company's public filings.
10. Review with management and the independent auditor the effect of regulatory
and accounting initiatives on the financial
statements. Review any major issues regarding accounting principles and
financial statement presentations, including any significant changes in
selection of an application of accounting principles. Consider and approve, if
appropriate, changes to the Company's auditing and accounting principles and
practices as suggested by the independent auditor or management.
11. Review any special audit steps adopted in light of material control
deficiencies.
C. Risk Management, Related Party Transactions, Legal Compliance and Ethics
1. Review with the chief executive and chief financial officer of the Company
any report on significant deficiencies in the design or operation of the
Internal Controls that could adversely affect the Company's ability to record,
process, summarize or report financial data, any material weaknesses in Internal
Controls identified to the auditors, and any fraud, whether or not material that
involves management or other employees who have a significant role in the
Company's Internal Controls.
2. Review and approve any related-party transactions, after reviewing each such
transaction for potential conflicts of interests and other improprieties.
3. Establish procedures for the receipt, retention and treatment of complaints
received by the Company regarding accounting, internal accounting controls or
auditing matters, and the confidential, anonymous submission by employees of the
Company of concerns regarding questionable accounting or
auditing matters. Adopt, as necessary, appropriate remedial measures or actions
with respect to such complaints or concerns.
4. In consultation with the Nominating and Corporate Governance Committee,
consider and present to the Board for adoption a Code of Conduct for all
employees and directors, which meets the requirements of Item 406 of the SEC's
Regulation S-K, and provide for and review prompt disclosure to the public of
any change in, or waiver of, such Code of Conduct. Review such Code of Conduct
periodically and recommend such changes to such Code of Conduct as the Committee
shall deem appropriate, and adopt procedures for monitoring and enforcing
compliance with such Code of Conduct.
5. As requested by the Board, review and investigate conduct alleged by the
Board to be in violation of the Company's Code of Conduct, and adopt as
necessary or appropriate, remedial, disciplinary, or other measures with respect
to such conduct.
6. Discuss with management and the independent auditor any c orrespondence with
regulators or governmental agencies that raise material issues regarding the
Company's financial statements or accounting policies.
7. Prepare the report required by the rules of the SEC to be included in the
Company's annual proxy statement.
8. Regularly report to the Board on the Committee's activities, recommendations
and conclusions.
9. Review and reassess the Charter's adequacy at least annually.
ANNEX F
TONGXIN INTERNATIONAL LTD.
CODE OF CONDUCT AND POLICY
REGARDING REPORTING OF POSSIBLE VIOLATIONS
Tongxin International Ltd. (the "Company") is committed to being a good
corporate citizen. The Company's policy is to conduct its business affairs
honestly and in an ethical manner. This Code of Conduct ("Code") provides a
general statement of the expectations of the Company regarding the ethical
standards that each director, officer and employee should adhere to while acting
on behalf of the Company. It does not cover every issue that may arise, but it
sets out basic principles to guide all employees, officers and directors of the
Company. All of our employees, officers and directors must conduct themselves
accordingly and seek to avoid even the appearance of improper behavior. This
Code of Conduct applies to all officers, full and part time employees, contract
workers, directors and anyone who conducts business with the Company. Conduct in
violation of this policy is unacceptable in the workplace and in any
work-related setting outside the workplace. Any employee or contract worker who
violates this Code will be subject to disciplinary action, up to and including
termination of his/her employment or engagement.
Compliance with Laws
You must comply with all federal, state and local laws applicable
to your activities on behalf of the Company and shall perform your duties to the
Company in an honest and ethical manner. If a law conflicts with a policy in
this Code, you must comply with the law; however, if a local custom or policy
conflicts with this Code, you must comply with the Code. If you have any
questions about these conflicts, you should ask your supervisor or the General
Counsel's office how to handle the situation.
Conflicts of Interest
You should avoid situations in which your personal, family or financial
interests conflict or even appear to conflict with those of the Company or
compromise its interests. You should handle all actual or apparent conflicts of
interest between your personal and professional relationships in an honest and
ethical manner. Conflicts are not always clear-cut. Examples of actual or
potential conflicts of interest are set forth on Appendix A. A "conflict of
interest" exists when a person's private interest interferes in any way with the
interests of the Company. A conflict situation can arise when an employee,
officer or director takes action or has interests that may make it difficult to
perform his or her Company work objectively and effectively. Conflicts of
interest may also arise when an employee, officer or director, or a member of
his or her family receives improper personal benefits as a result of his or her
position in the Company. Loans to, or guarantees of obligations of, employees
and their family members may create conflicts of interest.
It is almost always a conflict of interest for a Company employee to work
simultaneously for a competitor, customer or
supplier. You are not allowed to work for a competitor as a consultant or board
member. The best policy is to avoid any direct or indirect business connection
with our customers, suppliers or competitors, except on the Company's behalf. In
addition, employees, officers and directors are prohibited from taking for
themselves personally any opportunities that are discovered through the use of
corporate property, information or position, except with the consent of the
Board of Directors. Employees, officers and directors owe a duty to the Company
to advance its legitimate interests when the opportunity to do so arises. If you
become aware of a conflict or potential conflict of interest, contact your own
or any other Company supervisor for further guidance.
Disclosure
It is of paramount importance to the Company that all disclosure in documents
filed by the Company with the Securities and Exchange Commission or in other
public communications by the Company is full, fair, accurate, timely and
understandable. All officers, directors, employees and contract workers must
take all steps necessary to assist the Company in fulfilling these
responsibilities, consistent with each person's role in the Company. You should
give prompt, accurate answers to all inquiries in connection with the Company's
preparation of public disclosures and reports.
Code of Ethics for Senior Officers
The Company's Chief Executive Officer, the Chief Financial Officer and the
Controller (the "Senior Officers") each bear
a special responsibility for promoting integrity throughout the Company.
Furthermore, the Senior Officers have a responsibility to foster a culture
throughout the Company as a whole that ensures the fair and timely reporting of
the Company's results of operation and financial condition and other financial
information.
Because of this special role, the Senior Officers are bound by the following
Senior Officer Code of Ethics, and each agrees that he or she will:
- - Perform his or her duties in an honest and ethical manner.
- - Handle all actual or apparent conflicts of interest between his or her
personal and professional relationships in an ethical manner.
- - Take all necessary actions to ensure full, fair, accurate, timely, and
understandable disclosure in reports and documents that the Company files
with, or submits to, government agencies and in other public
communications.
- - Company with all applicable laws, rules and regulations of federal, state
and local governments.
- - Proactively promote and be an example of ethical behavior in the work
environment.
Reporting and Compliance
If you become aware of conduct by an officer, director, employee
or contract worker which you believe in good faith is a potential violation of
this Code of Conduct, you should notify you're own or any other Company
supervisor, the Chief Executive Officer, the General Counsel or the Chief
Financial Officer as soon as possible. You should also report any complaint or
concern regarding the Company's accounting, internal accounting controls, or
auditing matters, or any concerns regarding questionable accounting or auditing
matters. Supervisors are required to refer all reports of possible violations to
the Chief Executive Officer, the General Counsel, the Chief Financial Officer or
the Chair of the Audit Committee.
Alternatively, if you wish to report such matters anonymously, you may mail a
description of the concern or complaint to the attention of the General Counsel,
the Chief Financial Officer or the Chair of the Audit Committee, at the
following address:
199 Pierce Street, Suite 202
Birmingham, MI 48009
Persons outside the Company may also report complaints or concerns the Company
personnel; such matters should be reported promptly on receipt to your own or
any other Company supervisor, the Chief Executive Officer, the General Counsel,
the Chief Financial Officer, or the Audit Committee Chair. Supervisors are
required to report such matters as noted above.
All reports of complaints or concerns shall be recorded in a log, indicating the
description of the matter reported, the date of the report and a brief summary
of the disposition. The log shall be maintained by the General Counsel and shall
be reviewed
periodically with the Audit Committee. This log shall be retained for five
years.
Allegations of violations of the Code should be made only in good faith and not
to embarrass or put someone in a false light. If you become aware of a suspected
or potential violation don't try to investigate or resolve it on your own.
Prompt disclosure under this Code is vital to ensuring a timely and thorough
investigation and resolution. You are expected to cooperate in internal or
external investigations or alleged violations of the Code.
In response to every report made in good faith of conduct potentially in
violation of the Code of Conduct, the Company will undertake an effective and
thorough investigation, and if improper conduct is found, the Company will take
appropriate disciplinary and remedial action. Compliance procedures are set
forth in Appendix B to this Code. The Company will attempt to keep its
discussions with any person reporting a violation confidential to the extent
reasonably possible without compromising the effectiveness of the investigation.
If you believe your report is not properly explained or resolved, you may take
your concern or complaint to the Audit Committee of the Board of Directors.
Employees and contract workers are protected by law from retaliation for
reporting possible violations of this Code of Conduct or for participating in
procedures connected with an investigation, proceeding or hearing conducted by
the Company or a government agency with respect to such complaints. The Company
will take disciplinary action up to and including the mmediate termination of
any employee or contract worker who
retaliates against another employee or contract worker for reporting any of
these alleged activities.
Further Information
Please contact the Chief Executive Officer, the General Counsel or the Chief
Financial Officer if you have any questions about this Code or require further
information.
The most current version of this Code will be posted on the Company's website
and filed as an exhibit to the Company's Annual Report on Form 10-K. Any
substantive amendment or waiver of this Code may be made only by the Board of
Directors upon a recommendation of the Audit Committee, and will be disclosed,
including the reasons for such action, on the Company's website and by a filing
with the Securities and Exchange Commission on Form 8-K within four days of such
action. The Company will maintain disclosure about such amendment or waiver on
the website for at least twelve months and shall retain the disclosure
concerning the action for at least 5 years.
APPENDIX A
The following are examples of actual or potential conflicts:
- - you, or a member of your family, receive improper personal benefits as a
result of your position in the Company;
- - you use Company's property for your personal benefit;
- - you engage in activities that interfere with your loyalty to the Company
- - or your ability to perform Company duties or responsibilities effectively;
- - you, or a member of your family, have a financial interest in a customer,
supplier, or competitor which is significant enough to cause divided
loyalty with the Company or the appearance of divided loyalty (the
significance of a financial interest depends on many factors, such as size
of investment in relation to your income, net worth and/or financial needs,
your potential to influence decisions that could impact your interests, and
the nature of the business or level of competition between the Company and
the supplier, customer or competitor);
- - you, or a member of your family, acquire an interest in property (such as
real estate, patent or other intellectual property rights or securities) in
which you have reason to know the Company has, or might have, a legitimate
interest;
- - you, or a member of your family, receive a loan or a guarantee of a loan
from a customer, supplier or competitor (other than a loan from a financial
institution made in the ordinary course of business and on an arm's-length
basis);
- - you divulge or use the Company's confidential
information - such as financial data, customer information, or computer
programs - for your own personal or business purposes;
- - you make gifts or payments, or provide special favors, to customers,
suppliers or competitors (or their immediate family members) with a value
significant enough to cause the customer, supplier or competitor to make a
purchase, or take or forego other action, which is beneficial to the
Company and which the customer, supplier or competitor would not otherwise
have taken; or
- - you are given the right to buy stock in other companies or you receive cash
or other payments in return for promoting the services of an advisor, such
as an investment banker, to the Company.
APPENDIX B
COMPLIANCE PROCEDURES
- - Compliance Officer. The Corporate Compliance Officer is the General
Counsel, or in the absence of such person, the Chief Financial Officer. The
Compliance Officer's responsibility is to ensure communication, training,
monitoring, and overall compliance with the Code. The Compliance Officer
will, with the assistance and cooperation of the Company's officers,
directors and managers, foster an atmosphere where employees are
comfortable in communicating and reporting concerns
and possible Code violations.
- - Access to the Code. The Company shall ensure that employees, officers and
directors may access the Code on the Company's website. New employees will
receive a copy of the Code as part of their new hire information.
- - Monitoring. Managers are the "go to" persons for employee questions and
concerns relating to the Code. Managers or supervisors will immediately
report any violations or allegations of violations to the Compliance
Officer. Managers will work with the Compliance Officer in assessing areas
of concern, potential violations, any needs for enhancement of the Code or
remedial actions to affect the Code's policies and overall compliance with
the Code and other related policies.
- - Internal Investigation. When an alleged violation of the Code is reported,
the Company shall take prompt and appropriate action in accordance with the
law and regulations and otherwise consistent with good business practice.
If the suspected violation appears to involve either a possible violation
of law or an issue of significant corporate interest, or if the report
involves a complaint or concern of any person, whether employee, a
stockholder or other interested person regarding the Company's financia
disclosure, internal accounting controls, questionable auditing or
accounting matters or practices or other
issues relating to the Company's accounting or auditing, then the manager
or investigator should immediately notify the Compliance Officer, who, in
turn, shall notify the Chair of the Audit Committee. If a suspected
violation involves any director or executive officer or if the suspected
violation concerns any fraud, whether or not material, involving management
or other employees who have a significant role in the Company's internal
controls, any person who received such report should immediately report the
alleged violation to the Compliance Officer and, in every such case, the
Chair of the Audit Committee. The Compliance Officer or the Chair of the
Audit Committee, as applicable, shall assess the situation and determine
the appropriate course of action,including the conduct of an investigation
as appropriate.
- - Disciplinary Actions. Subject to the following sentence, the Compliance
Officer, after consultation with the Vice President of Human
Resources,shall be responsible for implementing the appropriate
disciplinary action in accordance with the Company's policies and
procedures for any employee who is found to have violated the Code? If a
violation has been reported to the Audit Committee or another committee of
the Board, that Committee shall be responsible for determining appropriate
disciplinary action. Any violation of applicable law or any deviation from
the standards embodied in this Code will result in disciplinary action, up
to and including termination of employment. In addition to imposing
discipline upon employees involved in non-compliant conduct, the Company
also will impose discipline, as appropriate,upon an employee's
supervisor, if any, who directs or approves such employees' improper
actions, or is aware of those actions but does not act appropriately to
correct them,and upon other individuals who fail to report known
non-compliant conduct. In addition toimposing its own discipline, the
Company will bring any violations of law to the attention of appropriate
law enforcement personnel.
- - Retention of Reports and Complaints. All reports and complaints made to or
received by the Compliance Officer or the Chair of the Audit Committee
relating to violations of this Code shall be logged into a record
maintained for this purpose by the Compliance Officer and this record of
such report shall be retained for five years.
- - Required Government Reporting. Whenever conduct occurs that requires a
report to the government, the Compliance Officer shall be responsible for
complying with such reporting requirements.
- - Corrective Actions. Subject to the following sentence, in the event of a
violation of the Code, the manager and the Compliance Officer should assess
the situation to determine whether the violation demonstrates a problem
that requires remedial action as to Company policies and procedures. If a
violation has been reported to the Audit Committee or another committee of
the Board, that committee shall be responsible for determining appropriate
remedial or corrective actions. Such corrective action may include
providing revised public disclosure, retraining Company employees,
modifying Company policies and procedures, improving monitoring of
compliance under existing procedures and other action necessary to detect
similar non-compliant conduct and prevent it from occurring in the future.
Such corrective action shall be documented, as appropriate.
ANNEX G
TONGXIN INTERNATIONAL
CHARTER OF THE NOMINATING AND GOVERNANCE
COMMITTEE OF THE BOARD OF DIRECTORS
I. STATEMENT OF POLICY
This Charter specifies the scope of the responsibilities of the Nominating and
Corporate Governance Committee (the "Committee") of the Board of Directors (the
"Board") of Tongxin International (the "Company") and the manner in which those
responsibilities shall be performed,including its structure, processes and
membership requirements.
The primary responsibilities of the Committee are to (i) identify individuals
qualified to become Board members; (ii) select, or recommend to the Board,
director nominees for each election of directors; (iii) develop and recommend to
the Board criteria for selecting qualified director candidates; (iv) consider
committee member qualifications, appointment and removal; (v) recommend
corporate governance principles, codes of conduct and compliance mechanisms
applicable to the Company, and
(vi) provide oversight in the evaluation of the Board and each committee.
II.ORGANIZATION AND MEMBERSHIP REQUIREMENTS
The Committee shall be comprised of three or more directors, each of whom shall
satisfy the independence requirements established by the rules of Nasdaq,
provided that one director who does not meet the independence criteria of Nasdaq
may, subject to the approval of the Board, serve on the Committee pursuant to,
and subject to the limitation under, the "exceptional and limited circumstances"
exception as provided under the rules of Nasdaq.
The members of the Committee shall be appointed by the Board and shall serve
until their successors are duly elected and qualified or their earlier
resignation or removal. Any member of the Committee may be removed or replaced
by the Board. Unless a chairman is elected by the full Board, the members of the
Committee may designate a chairman by majority vote of the full Committee
membership. The Committee may, from time to time, delegate duties or
responsibilities to subcommittees or to one member of the Committee.
A majority of the members shall represent a quorum of the Committee, and, if a
quorum is present, any action approved by at least a majority of the members
present shall represent the valid action of the Committee.
The Committee shall have the authority to obtain advice
or assistance from consultants, legal counsel, accounting or other advisors as
appropriate to perform its duties hereunder, and to determine the terms, costs
and fees for such engagements. Without limitation, the Committee shall have the
sole authority to retain or terminate any search firm to be used to identify
director
candidates and to determine and approve the terms, costs and fees for such
engagements. The fees and costs of any consultant or advisor engaged by the
Committee to assist the Committee in performing its duties hereunder shall be
borne by the Company.
III.MEETINGS
The Committee shall meet as often as it deems necessary to fulfill its
responsibilities hereunder, and may meet with management or individual directors
at any time it deems appropriate to discuss any matters before the Committee.
The Committee shall maintain written minutes of its meetings, which minutes will
be filed with the minutes of the meetings of the Board.
IV.COMMITTEE AUTHORITY AND RESPONSIBILITY
To fulfill its responsibilities and duties hereunder, the Committee shall:
A. Nominating Functions
1. Evaluate and select, or recommend to the Board,director nominees for each
election of directors,except that if the Company is at any time legally required
by contract or otherwise to provide any third party with the ability to nominate
a director, the Committee need not evaluate or propose such nomination, unless
required by contract or requested by the Board.
2. Determine criteria for selecting new directors,including desired board skills
and attributes, and identify and actively seek individuals qualified to become
directors.
3. Consider any nominations of director candidates validly made by stockholders.
4. Review and make recommendations to the Board concerning qualifications,
appointment and removal of committee members.
5. Review and make recommendations to the Board concerning Board and committee
compensation.
B. Corporate Governance Functions
1. Develop, recommend for Board approval, and review on an ongoing basis the
adequacy of, the corporate governance principles applicable to the Company. Such
principles shall include, at a minimum, director qualification standards,
director responsibilities, committee responsibilities,director access to
management and independent advisors, director compensation, director orientation
and continuing education,
management succession and annual performance evaluation of the Board and
committees.
2. In consultation with the Audit Committee, consider and present to the Board
for adoption a Code of Conduct applicable to all employees and directors, which
meets the requirements of Item 406 of the SEC's Regulation S-K, and provide for
and review prompt disclosure to the public of any change in, or waiver of, such
Code of Conduct, review such Code of Conduct periodically and recommend such
changes to such Code of Conduct as the Committee shall deem appropriate, and
adopt procedures for monitoring and enforcing compliance with such Code of
Conduct.
3. Review,at least annually,the Company's compliance with the Nasdaq corporate
governance listing requirements,and report to the Board regarding the same.
4. Assist the Board in developing criteria for the evaluation of Board and
committee performance.
5. Evaluate the Committee's own performance on an annual basis.
6. If requested by the Board, assist the Board in its evaluation of the
performance of the Board and each committee of the Board.
7. Review and recommend to the Board changes to the Company's bylaws as needed.
8. Develop orientation materials for new directors and corporate
governance-related continuing education for all Board members.
9. Make regular reports to the Board regarding the foregoing.
10. Review and reassess the adequacy of this Charter as appropriate and
recommend any proposed changes to the Board for approval.
11. Perform any other activities consistent with this Charter, the Company's
Bylaws and governing law,as the Committee or the Board deems necessary or
appropriate.
ANNEX H
DELAWARE GENERAL CORPORATION LAW-SECTION 262 APPRAISAL RIGHTS
SS. 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to ss. 228 of this
title shall be entitled to
an appraisal by the Court of Chancery of the fair value of the stockholder's
shares of stock under the circumstances described in subsections (b) and (c) of
this section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof,solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to ss. 251 (other than a merger effected pursuant to ss. 251(g) of this
title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of stock
of a constituent corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to ss.ss. 251, 252, 254, 257,
258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in respect
thereof, which shares of stock (or depository receipts in respect thereof) or
depository receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository receipts described
in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party to
a merger effected under ss. 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof
that appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such stockholder's
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of such stockholder's
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against the
merger or consolidation shall not constitute such a demand. A stockholder
electing to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective;or
(2) If the merger or consolidation was approved pursuant to ss. 228 or ss. 253
of this title, then either a constituent corporation before the effective date
of the merger or consolidation or the surviving or resulting corporation within
10 days thereafter shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights of
the approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section. Such
notice may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of the
merger or consolidation. Any stockholder entitled to appraisal rights may,
within 20 days after the date of mailing of such notice, demand in writing from
the surviving or resulting corporation the appraisal of such holder's shares.
Such demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either (i)
each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence of
fraud, be prima
facie evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares
not voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of holders of
such shares. Such written statement shall be mailed to the stockholder within 10
days after such stockholder's written request for such a statement is received
by the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d)
hereof,whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by
mail and by publication shall be approved by the Court, and the costs thereof
shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder whose
name appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted such
stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation,
reasonable attorney's fees and the fees and expenses of experts, to be charged
pro rata against the value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
ANNEX I
ASIA AUTOMOTIVE ACQUISITION CORPORATION
PERFORMANCE ORIENTED EARN-OUT AGREEMENT
This PERFORMANCE ORIENTED EARN-OUT AGREEMENT (the "Agreement"), is entered into
as of July 24, 2007 by and between ASIA AUTOMOTIVE ACQUISITION CORPORATION, a
public company in the United States ("Party A", or the "Company") and the
executives listed on Schedule A hereto ("Party B", or the "Executives"). The
Company and Executives are referred to collectively as the "Parties".
RECITALS
WHEREAS THE COMPANY SHALL EMPLOY THE EXECUTIVES FOR A PERIOD OF ONE (1) YEAR
STARTING FROM THE DATE OF THIS AGREEMENT, AND THE COMPANY AGREES TO PROVIDE
EARN-OUT SHARE PAYMENTS TO THE EXECUTIVES ACCORDING TO THE BUSINESS PERFORMANCE
OF Hunan TX Enterprise Co., Ltd. ("TX CHINA"), THE PARTIES AGREE AS FOLLOWS:
AGREEMENT
1. Issuance of Incentive Shares
(1) If the Company achieves or exceeds the Targeted After-
Tax Profit of the 2007 financial year (as defined in Article 2), the Executives
or the persons designated by the Executives shall receive, and AAAC shall issue
and deliver, two million (2,000,000) shares of the Company's common stock to the
Executives within 30 days following the date of filing of the audit of financial
statement for the 2007 financial year, with no consideration paid by the
Executives ("Incentive Shares");
(2) The Executives may distribute the Incentive Shares among them at their sole
discretion;
(3) In the event that the Company does not achieve the Targeted After-Tax Profit
for the 2007 financial year, the Company shall not issue any common stock to the
Executive with no consideration.
2. Targeted After-Tax Profit
The Company's Targeted After-Tax Profit for the 2007 financial year shall be
US$9,500,000 ("Targeted After-Tax Profit"). Such amount shall be exclusive of
all one time charges or expenses associated with the acquisition transaction
between the Company and TX China, including but not limited to US GAAP audit
fees, consulting fees, legal service fees, and non-cash expenses (if any)
incurred from the granting of 2,000,000 Incentive Shares, 4,500,000 shares of
employment stocks and 2,000,000 conditional shares as stipulated in the Key
Employees Employment Agreement to its key employees(the above fees, expenses and
all the shares issued to the key employees are collectively referred to as
"Transaction Expenses").
Targeted After-Tax Profit=FY2007 After-Tax Profit + Transaction Expenses "FY2007
After-Tax Profit" shall mean the consolidated after-tax profit of TX China and
its wholly owned subsidiaries audited in accordance with US GAAP for the 2007
financial year.
3. Disposal of the Incentive Shares
Each of the Executives, at his sole discretion, may receive the Incentive
Shares, and may assign, sell, transfer, delegate or otherwise dispose of, or
abandon the Incentive Shares issued to him.
4. Responsibilities of the Executives
Each of the Executives shall perform all services appropriate to that position
as well as such other services as may reasonably be assigned by the Company,
including serving in TX China. Each of the Executives shall devote his best
efforts and full time attention to the performance of his duties. The Executives
shall report to the Chief Executive Officer of the Company.
5. Termination of the Performance-Oriented Incentive
Within 30 days following the date of filing of the audit of financial statement
for the 2007 financial year, if one of Executives quits, his right to receive
the Incentive Shares shall be terminated when he ceases to be the Company's
employee. The other Executives' rights under this Agreement shall not be
adversely affected.
6. Governing Law
This Agreement shall be governed by and construed in accordance with the laws of
the People's Republic of China.
7. Dispute Resolution
(a) Any dispute, controversy or claim arising out of or relating to this
Agreement, or the interpretation, breach, termination or validity hereof, shall
be resolved through consultation. Such consultation shall begin immediately
after one Party hereto has delivered to the other Party hereto a written request
for such consultation. If within thirty (30) days following the date on which
such notice is given the dispute cannot be resolved, the dispute shall be
submitted to arbitration upon the request of any Party with notice to the
others.
(b) The arbitration shall be conducted in Hong Kong by the Hong Kong
International Arbitration Center in accordance with its arbitration rules then
in effect. The arbitration proceedings shall be conducted in Chinese.
(c) The award of the arbitration tribunal shall be final and binding upon the
disputing Parties, and any Party may apply to a court of competent jurisdiction
for enforcement of such award.
8. Successor
The Company will redomesticate and convert as Tongxin International Co., Ltd., a
company organized and validly existing under the laws of the British Virgin
Islands ("Successor"). This
Agreement shall be binding upon the Successor.
9. Miscellaneous
(1) Counterparts
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original of this Agreement, but all of which together shall
constitute one and the same instrument.
(2) Language
This Agreement is written in English and Chinese languages. Both versions shall
be equally valid and binding.
The Parties have duly executed this Agreement as of the date first written
above.
COMPANY:
ASIA AUTOMOTIVE ACQUISITION CORPORATION
By: /s/ William R. Herren
William R. Herren
Chairman of the Board
By: /s/ Rudy Wilson
Rudy Wilson
Chief Executive Officer
EXECUTIVES (Signature)
EXHIBIT A
NAMES OF THE EXECUTIVES
August 21, 2007 Draft
ANNEX J
CLARIFICATION AGREEMENT (UPO)
This Clarification Agreement (UPO) (this" Agreement"), dated December __,
2006, is to the Unit Purchase Option, dated as of April 19, 2006 (the "UPO"),
issued by Asia Automotive Acquisition Corporation, a Delaware corporation
("Company") to Rodman & Renshaw LLC and Chardan Capital Markets LLC ("Holders").
WHEREAS, Sections 5.1 and 5.2 of the UPO impose obligations to register the
securities underlying the UPO, which obligation includes a "best efforts"
obligation; and
WHEREAS, as a result of certain questions that have arisen regarding the
accounting treatment applicable to the UPO, the parties hereto deem it necessary
and desirable to amend the UPO to clarify that the Holder does not have the
right to receive a net cash settlement (and there will be no liability on the
part of the Company) in the event the Company does not maintain a current
prospectus relating to the securities underlying the UPO.
NOW, THEREFORE, in consideration of the mutual agreements contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree to amend the UPO as set forth herein.
1. UPO. The UPO is hereby clarified by adding the following sentence as the
last sentence of Section 5.3:
"Notwithstanding anything to the contrary set forth herein, if the
Company is unable to (i) deliver any securities pursuant to the exercise of
This UPO (including the exercise of any Warrants) or (ii) maintain an
effective registration statement and current prospectus covering the
securities underlying the UPO, the Company will have no obligation to pay
such Holder(s) any cash or other consideration or otherwise "net cash
settle" any portion of the UPO (including any Warrants). The Holder
acknowledges and agrees that the UPO may expire unexercised or unredeemed
if there is no effective registration event."
2. Miscellaneous.
(a) Governing Law. The validity, interpretation, and performance of this
Agreement and of the UPO shall be governed in all respects by the laws of the
State of New York, without giving effect to conflicts of law principles that
would result in the application of the substantive laws of another jurisdiction.
1
(b) Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and to their respective heirs, legal
representatives, successors and assigns.
(c) Entire Agreement. This Agreement sets forth the entire agreement and
understanding between the parties as to the subject matter hereof and merges and
supersedes all prior discussions, agreements and understandings of any and every
nature among them. Except as set forth in the Agreement, provisions of the UPO
which are not inconsistent with this Agreement shall remain in full force and
effect. This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the parties hereto have executed this Clarification
Agreement (UPO) as of the date first written above.
ASIA AUTOMOTIVE ACQUISITION CORPORATION
By:
------------------------------------
By:
------------------------------------
2
FI-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Asia Automotive Acquisition Corporation
We have audited the accompanying balance sheet of Asia Automotive Acquisition
Corporation (a corporation in the development stage) (the "Company") as of
December 31, 2006 and the related statements of operations, stockholders' equity
and cash flows for the year ended December 31, 2006, for the period from June
20, 2005 (date of inception) through December 31, 2005, and the period from June
20, 2005 (date of inception) through December 31, 2006. 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 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 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 the Company as of December 31,
2006 and the results of its operations and its cash flows for the year ended
December 31, 2006, for the period from June 20, 2005 (date of inception) through
December 31, 2005, and for the period from June 20, 2005 (date of inception)
through December 31, 2006 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that Asia
Automotive Acquisition Corporation will continue as a going concern. As
discussed in Note 1 to the financial statements, Asia Automotive Acquisition
Corporation will face a mandatory liquidation if a business combination is not
consummated by October 18, 2007, which raises substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 2, 2007
FI-1
Asia Automotive Acquisition Corporation
(a corporation in the development stage)
BALANCE SHEET
December 31,2006
----------------
ASSETS
Current assets
Cash and cash equivalents $ 384,162
Other assets -0-
Cash held in trust account 38,726,883
------------
Total assets $ 39,111,045
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accrued expenses $ 111,750
Accrued taxes payable 458,109
Warrant liability 11,166,563
Deferred underwriter's fee 966,121
------------
Total current liabilities 12,702,543
------------
Common stock, subject to possible redemption,
1,005,746 shares at redemption value plus interest
income of $170,070 (net of taxes) 7,649,928
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, authorized 1,000,000
shares; none issued and outstanding
Common stock, $.001 par value, authorized 39,000,000
shares; issued and outstanding 6,380,250 shares (of
which 1,005,746 shares subject to possible redemption) 6,380
Additional paid-in capital 22,327,433
Deficit accumulated during the development stage (3,575,239)
------------
Total stockholders' equity 18,758,574
Total liabilities and stockholders' equity $ 39,111,045
------------
See accompanying notes to financial statements.
FI-2
Asia Automotive Acquisition Corporation
(a corporation in the development stage)
STATEMENTS OF OPERATIONS
June 20, 2005 June 20, 2005
Year ended (inception) to (inception) to
December December December 31,
31, 2006 31,2005 2006
----------- -------------- --------------
Interest income $ 1,308,883 $ -0- $ 1,308,883
Unrealized loss on warrant liability (3,783,750) -0- (3,783,750)
Formation and operating costs (636,637) (5,626) (642,263)
----------- ----------- -----------
Loss before taxes (3,111,504) (5,626) (3,117,130)
Income taxes (458,109) -0- (458,109)
----------- ----------- -----------
Net loss $(3,569,613) $ (5,626) $(3,575,239)
----------- ----------- -----------
Interest income attributable to
common stock subject to possible
conversion (net of taxes) 170,070 170,070
----------- -----------
Net loss allocable to common
stockholders not subject to
possible conversion (net of taxes) $(3,739,683) $ (5,626) $(3,745,309)
----------- ----------- -----------
Weighted average shares
outstanding (basic and diluted) 4,901,284 1,349,000 3,662,115
----------- ----------- -----------
Net loss per common share
(basic and diluted) $ (.73) $ -0- $ (.98)
See accompanying notes to financial statements.
FI-3
Asia Automotive Acquisition Corporation
(a corporation in the development stage)
STATEMENT OF STOCKHOLDERS' EQUITY
Deficit
accumulated
Common Stock Additional during
------------------------ paid in development
Shares Amount capital stage Total
---------- ----------- ----------- ------------ -----------
Balances at June 20,
2005(date of inception) $ -0- $ -0- $ -0- $ -0- $ -0-
Issuance of common stock
to existing shareholders 1,349,000 1,349 23,651 25,000
Net loss (5,626) (5,626)
---------- ----------- ----------- ------------ -----------
Balances at December
31, 2005 1,349,000 1,349 23,651 (5,626) 19,374
---------- ----------- ----------- ------------ -----------
Sale of 5,031,250 units
on April 18,
2006 at a price of
$8.00 per unit, net of
underwriter's discount
and offering
expenses (including
1,005,746 shares
subject to possible
redemption) 5,031,250 5,031 37,166,353 37,171,384
Sale of option on April
18, 2006 at a
price of $100 for
350,000 units 100 100
Proceeds subject to
possible conversion of
shares, 1,005,746 shares (7,479,858) (7,479,858)
Warrant liability (7,382,813) (7,382,813)
Net loss (3,569,613) (3,569,613)
---------- ----------- ----------- ------------ -----------
Balances at December
31, 2006 6,380,250 $ 6,380 $22,327,433 $ (3,575,239) $18,758,574
---------- ----------- ----------- ------------ -----------
See accompanying notes to financial statements.
FI-4
Asia Automotive Acquisition Corporation
(a corporation in the development stage)
STATEMENTS OF CASH FLOWS
June 20,2005 June 20,2005
Year ended (Date of (Date of
December 31, inception) to inception) to
2006 December 31, 2005 December 31, 2006
------------ ----------------- -----------------
Cash flows from operating activities:
Net loss $ (3,569,613) $ (5,626) $ (3,575,239)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Loss from warrant liability 3,783,750 -0- 3,783,750
Income taxes payable 458,109 -0- 458,109
Accrued expenses 111,750 -0- 111,750
------------ --------- ------------
Net cash provided by (used in) operating
activities 783,996 (5,626) 778,370
------------ --------- ------------
Net cash used in investing activities:
Cash held in trust account (38,726,883) -0- (38,726,883)
Cash flows from financing activities:
Proceeds from note payable 20,250 25,000 45,250
Proceeds from issuance of common stock to
existing stockholders 25,000 25,000
Proceeds from sale of option to
to underwriter 100 -0- 100
Gross proceeds of public offering 40,250,000 -0- 40,250,000
Repayment of notes payable to
stockholders (45,250) -0- (45,250)
Payments of deferred offering
costs (1,912,794) (29,631) (1,942,425)
------------ --------- ------------
Net cash provided by financing activities 38,312,306 20,369 38,332,675
------------ --------- ------------
Net increase in cash and cash equivalents 369,419 14,743 -0-
Cash and cash equivalents, beginning of
period 14,743 -0- -0-
------------ --------- ------------
Cash and cash equivalents, end of period $ 384,162 $ 14,743 $ 384,162
------------ --------- ------------
Supplemental disclosure of non-cash
financing activity:
Deferred underwriter's fees $ 1,207,500 $ -0- $ 1,207,500
Accrued offering costs $ -0- $ 235,369 $ -0-
See accompanying notes to financial statements.
FI-5
Asia Automotive Acquisition Corporation
(a corporation in the development stage)
Notes to Financial Statements
1. ORGANIZATION AND BUSINESS OPERATIONS
Asia Automotive Acquisition Corporation (the "Company") was incorporated in
Delaware on June 20, 2005 as a blank check company formed to acquire, through
merger, capital stock exchange, asset acquisition or other similar business
combination, a business in the automotive supplier industry. The Company has
neither engaged in any operations nor generated revenues to date. The Company is
considered to be in the development stage and is subject to the risks associated
with activities of development stage companies. The Company has elected December
31st as its fiscal year end.
The registration statement for the Company's initial public offering (the
"Public Offering") was declared effective on April 11, 2006. The Company
consummated the Public Offering on April 18, 2006 and received net proceeds of
approximately $ 37,171,000. The Company's management has broad discretion with
respect to the specific application of the net proceeds of the Public Offering
(the "Offering") (as described in Note 3), although substantially all of the net
proceeds of the Offering are intended to be generally applied toward
consummating a business combination with a target company. As used herein, a
"target business" shall include an operating business in the security industry
and a "business combination" shall mean the acquisition by the Company of a
target business.
Of the proceeds of the Offering, $37,418,000 (plus interest income) is being
held in a trust account ("Trust Account") and invested until the earlier of (i)
the consummation of the first business combination or (ii) the distribution of
the Trust Account as described below. The amount in the Trust Account include $
1,207,500 of contingent underwriting compensation, which will be paid to the
underwriters if a business combination is consummated, but which will be
forfeited in part if public stockholders elect to have their shares redeemed for
cash if a business combination is not consummated. Deferred underwriter's fee is
reflected on the balance sheet at $966,121, an additional $241,379 is included
in common stock, subject to possible conversion, for a total of $1,207,500. The
remaining proceeds 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 public stockholders owning a majority of the outstanding stock sold
in the Offerings vote against the business combination and elect to have the
Company redeem their shares for cash, including all of the officers and
directors of the Company ("Initial Stockholders"), have agreed to vote their
1,349,000 founding shares of common stock in accordance with the vote of the
majority in interest of all other stockholders of the Company with respect to
any business combination and to vote any shares they acquire in the aftermarket
in favor of the business combination. After consummation of the Company's first
business combination, all of these voting safeguards will no longer be
applicable.
With respect to the first business combination which is approved and
consummated, any holder of shares sold in the Public Offering, other than the
Initial Stockholders and their nominees (the "Public Stockholders") who voted
against the business combination may demand that the Company redeem his or her
shares. The per share redemption price will equal $ 7.44 per share plus interest
earned thereon in the Trust Account. Accordingly, Public Stockholders holding
19.99% of the aggregate number of shares sold in this offering and the private
placement may seek redemption of their shares in the event of a business
combination.
The Company's Certificate of Incorporation provides for mandatory liquidation of
the Company, without stockholder approval, in the event that the Company does
not consummate a business combination within 18 months from the date of
consummation of the Public Offering, or 24 months from the consummation of the
Public Offering if certain extension criteria have been satisfied. The Initial
Stockholders have waived their right to liquidation distributions with respect
to the shares of common stock included in such units. Accordingly, in the event
of such liquidation, the amount in the Trust Account will be distributed to the
holders of the shares sold in the Public Offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Common stock:
On January 23, 2006, the Company effected a stock split in the form of a
dividend of .233 shares of common stock for each outstanding share of common
stock. All references in the accompanying financial statements to the number of
shares of common stock and loss per share have been retroactively restated to
reflect these transactions.
Warrant liability
The Company has outstanding warrants, which provides for the Company to register
the shares underlying the warrants and is silent as to the penalty to be
incurred in the absence of the Company's ability to deliver registered shares to
the warrant holders upon warrant exercise. Under EITF No. 00-19 "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 00-19"), registration of the common stock
underlying the Company's warrants is not within the Company's control. As a
result, the company must assume that it could be required to settle the warrants
on a net-cash basis, thereby necessitating the treatment of the potential
settlement obligation as a liability. Further EITF No. 00-19, requires the
Company to record the potential settlement liability at each reporting date
using the current estimated fair value of the warrants, with any changes being
recorded through the Company's statement of operations. The potential settlement
obligation related to the warrants will continue to be reported as a liability
until such time that the warrants are exercised, expire, or the Company is
otherwise able to modify the registration requirements in the warrant agreement
to remove the provisions which require this treatment. The fair value of the
warrant liability is determined using the trading value of the warrants.
Loss per common share:
Loss per common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS No. 128, "Earnings Per Share." SFAS
No. 128 requires dual presentation of basic and diluted income per share for all
periods presented. Basic loss per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted loss 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 share in the income of the Company.
Since the effects of the outstanding warrants are anti-dilutive, it has been
excluded from the computation of loss per common share.
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 contingent assets
and
contingent liabilities at the date of the financial statements and the reported
amounts of expenses during the reporting period. Actual results could differ
from those estimates.
Income tax:
The Company complies with the Financial Accounting Standards Board ("FASB") SFAS
109, "Accounting for Income Taxes," which requires an asset and liability
approach to financial accounting and reporting for income taxes. Deferred income
tax assets and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result in future
taxable or deductible amounts, based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
Cash and cash equivalents:
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Recently issued accounting standards:
On July 13, 2006, FASB released FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes ("FIN 48"). FIN 48 provides guidance for how
uncertain tax positions should be recognized, measured, presented and disclosed
in the financial statements. FIN 48 requires the evaluation of tax positions
taken in the course of preparing the Company's tax returns to determine whether
the tax positions are "more-likely-than-not" of being sustained by the
applicable tax authority. Tax benefits of positions nor deemed to meet the
more-likely-than-not threshold would be recorded as a tax expense in the current
year. Adoption of FIN 48 is required for fiscal years beginning after December
15, 2006 and is to be applied to all open tax years as of the effective date. At
this time, management is evaluating the implications of FIN 48 and its impact on
the financial statements has not yet been determined.
In addition, in September 2006, the Statement of Financial Accounting Standard
No. 157, Fair Value Measurements ("SFAS 157"), was issued and is effective for
fiscal years beginning after November 15,2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 will have on the Company's financial statements and their
disclosures and its impact has not yet been determined.
3. THE OFFERING
On April 18, 2006, the Company sold 5,031,250 units (including the underwriters
full exercise of an over allotment option with respect to 656,250 units) to the
public at a price of $8.00 per unit. Each unit consists of one share of the
Company's common stock,
$0.001 par value, and one redeemable common stock purchase warrant ("warrant").
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 with a target business or April 10, 2007
and expiring April 11, 2012. The warrants are redeemable 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 $10.00 per share
for any 20 trading days within a 30 trading day period ending three business
days before we send the notice of redemption.
4. INCOME TAXES
Income tax expense for the twelve months ended December 31, 2006 was
approximately $458,000. The expense is for current federal income taxes. The
effective income tax rate was (15%) which differs from the statutory rate of 34%
principally due to a permanent difference due to the unrealized loss on the
warrant liability.
5. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company presently occupies office space provided by Asia Development Capital
LLC ("ADC"), an affiliate and stockholder of the Company. ADC 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 on
the effective date of the Offering, April 18, 2006.
The Company has engaged Rodman & Renshaw, the representative of the
underwriters, on a non-exclusive basis, as the Company's agent for the
solicitation of the exercise of the warrants. To the extent not inconsistent
with the guidelines of the NASD and the rules and regulations of the SEC, the
Company has agreed to pay the representative for bona fide services rendered a
commission equal to 2.5% of the exercise price for each warrant exercised more
than one year after the date of the prospectus if the exercise was solicited by
the underwriters. In addition to soliciting, either orally or in writing, the
exercise of the warrants, the representative's services may also include
disseminating information, either orally or in writing, to warrant holders about
the Company or the market for our securities, and assisting in the processing of
the exercise of the warrants. No compensation will be paid to the representative
upon the exercise of the warrants if:
* the market price of the underlying shares of common stock is lower than the
exercise price;
* the holder of the warrants has not confirmed in writing that the underwriters
solicited the exercise;
* the warrants are held in a discretionary account;
* the warrants are exercised in an unsolicited transaction; or
* the arrangement to pay the commission is not disclosed in the prospectus
provided to warrant holders at the time of exercise.
The Company has sold to Rodman & Renshaw, LLC (the "Representative" of the
underwriters), for $100, as additional compensation, an option to purchase up to
a total of 350,000 units at a per-unit price of $10.00. The units issuable upon
exercise of this option are also identical to those offered by the Offering
except that the warrants included in the option have an exercise price of $6.65
(133% of the exercise price of the warrants included in the units sold in the
offering.) The Company will pay the underwriters in the Offering an underwriting
discount of 7% of the gross proceeds of this Offering (of which 3% is deferred
until the consummation of a business combination).
The sale of the option will be accounted for as an equity transaction.
Accordingly, there will be no net impact on the Company's financial position or
results of operations, except for the recording of the $100 proceeds from the
sale. The Company has determined, based upon a Black-Scholes model, that the
fair value of the option on the date of sale would be approximately $3.10 per
unit, or $1,086,001 total, using an expected life of five years, volatility of
45.47% and a risk-free interest rate of 4.39%.
The volatility calculation of 45.47% is based on the 365-day average volatility
of a representative sample of ten (10) companies with market capitalizations
under $500 million that management believes to be engaged in the business of
auto component parts (the "Sample Companies"). Because the Company does not have
a trading history, the Company needed to estimate the potential volatility of
its common stock price, which will depend on a number of factors which cannot be
ascertained at this time. The Company referred to the 365-day average volatility
of the Sample Companies because management believes that the average volatility
of such companies is a reasonable benchmark to use in estimating the expected
volatility of the Company's common stock post-business combination. Although an
expected life of five years was taken into account for purposes of assigning a
fair value to the option, if the Company does not consummate a business
combination within the prescribed time period and liquidates, the option would
become worthless.
6. COMMITMENTS AND RELATED PARTY TRANSACTIONS (CONTINUED)
Pursuant to letter agreements 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.
Certain of the Company's officers, directors, or their designees have agreed
with the Representative that upon consummation of the Offering and during the 45
trading day period commencing on the later of the date that the securities
comprising the units begin separate trading or 60 days following the
consummation of the Offering, that they will purchase up to 320,000 warrants in
the public marketplace at prices not to exceed $1.40
per Warrant. As of December 31, 2006, William R. Herren, Mr. Rudy Wilson, Chun
Hao and Asia Development Capital held 290,000 warrants to purchase the Company's
securities.
The Initial Stockholders will be entitled to registration rights with respect to
their founding shares pursuant to an agreement to be signed prior to or on the
effective date of the Offering. The holders of the majority of these shares are
entitled to make up to two demands that the Company register these shares at any
time commencing three months prior to the third anniversary of the effective
date of the Offering. In addition, the Initial Stockholders have certain
"piggy-back" registration rights on registration statements filed subsequent to
the third anniversary of the effective date of the Offering.
Rodman & Renshaw has entered into a letter agreement with us pursuant to which
it agreed to purchase up to 125,000 warrants in the public marketplace at prices
not to exceed $1.40 per warrant during the 45 trading day period commencing on
the later of the date separate trading of the warrants has commenced or 60 days
following the consummation of this offering.
Chardan Capital Markets has entered into a letter agreement with us pursuant to
which it agreed to purchase up to 125,000 warrants in the public marketplace at
prices not to exceed $1.40 per warrant during the 45 trading day period
commencing on the later of the date separate trading of the warrants has
commenced or 60 days following the consummation of this offering.
On February 8, 2006, five stockholders entered into five separate letter
agreements with the representatives of the underwriters pursuant to which they
agreed to purchase in aggregate up to $2,000,000 in warrants at prices not to
exceed $1.40 per warrant during the 45 day trading period commencing on the
later of the date separate trading of the Warrants has commenced or 60 calendar
days following the consummation of the Offering. These entities have agreed that
any warrants purchased by them pursuant to this agreement will not be sold or
transferred until after a completed business combination. As of December 31,
2006, these five stockholders held 20,000 warrants to purchase the Company's
securities.
7. 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.
SIGNATURE AND POWER OF ATTORNEY
The undersigned hereby appoint William R. Herren and Rudy Wilson, and each of
the, as attorneys and agents for the undersigned, with full power of
substitution, for and in the name, place and stead of the undersigned, to sign
and file with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, any and all exhibits and amendments to this
10-KSB, and any and all instruments and other documents to be filed with the
Securities and Exchange Commission pertaining to this 10-KSB, with full power
and authority to do and perform any and all acts and things whatsoever requisite
or desirable.
Pursuant to the requirements of Section 13 or 159(d); of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: April 17, 2007 By: /s/ William R. Herren
------------------------------------
William R. Herren
Chairman of the Board
Date: April 17, 2007 By: /s/ Rudy Wilson
------------------------------------
Rudy Wilson
Chief Executive Officer
Pursuant to the requirements of Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant, in the capacities and on the dates indicated.
Date: April 17, 2007 By: /s/ William R. Herren
------------------------------------
William R. Herren
Chairman of the Board
Date: April 17, 2007 By: /s/ Rudy Wilson
------------------------------------
Rudy Wilson
Chief Executive Officer
Date: April 17, 2007 By: /s/ David J. Brophy
------------------------------------
David J. Brophy
Chief Financial Officer
Date: April 17, 2007 By: /s/ Chun Y. Hao
------------------------------------
Chun Y. Hao
President, China Operations
Date: April 17, 2007 By: /s/ Donald L. Runkle
------------------------------------
Donald R. Runkle
Director
Exhibit 31.1 CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
I, William R. Herren, certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Asia Automotive
Acquisition Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be signed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant' s other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant' s auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Dated: April 17, 2007 /s/ William R. Herren
----------------------------------------
William R. Herren
Chairman of the Board
Exhibit 32.1 CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code), each of the
undersigned officers of Asia Automotive Acquisition Corporation, a Delaware
corporation (the "Company"), does hereby certify, to such officer's knowledge,
that:
The Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006
(the "Form 10-KSB") of the Company fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information
contained in the Form 10-KSB fairly presents, in all material aspects, the
financial condition and results of operations of the Company.
Dated: April 17, 2007 /s/ William R. Herren
----------------------------------------
William R. Herren
Chairman of the Board
/s/ Rudy Wilson
----------------------------------------
Rudy Wilson
Chief Executive Officer
/s/ David J. Brophy
----------------------------------------
David J. Brophy
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2007
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 333-127755
ASIA AUTOMOTIVE ACQUISITION CORPORATION
Delaware 20 -3022522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
199 Pierce Street, Suite 202 Birmingham, Michigan 48009
(Address of principal executive offices) (Zip Code)
(248) 593-8330
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ ]
As of October 22, 2007, 6,031,250 shares of the registrant's common stock, par
value $0.001 per share, were outstanding excluding.
ASIA AUTOMOTIVE ACQUSITION CORPORATION
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheet
Condensed Statements of Operations
Condensed Statements of Cash Flows
Notes to Condensed Financial Statements
Item 2 Management 's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
SIGNATURES
Item 1. Financial Statements.
Asia Automotive Acquisition Corporation
(a corporation in the development stage)
CONDENSED BALANCE SHEET
September 30, 2007
(unaudited)
------------------
ASSETS
Current assets
Cash and cash equivalents 60,386
Other assets
Deferred income taxes 358,377
Cash held in trust account 39,192,048
-----------
Total assets 39,610,811
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accrued expenses 383,040
Warrant liability 9,599,144
Deferred underwriter's fee 966,121
-----------
Total current liabilities 10,948,305
-----------
Common stock, subject to possible redemption, 1,005,746
shares at redemption value plus interest income
(net of taxes) of $348,967 7,828,825
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, authorized 1,000,000
shares; none issued and outstanding
Common stock, $.001 par value, authorized 39,000,000
shares; issued and outstanding 6,380,250 shares (of
which 1,005,746 shares subject to possible redemption) 6,380
Additional paid-in capital 22,327,433
Deficit accumulated during the development stage (1,500,132)
Total stockholders' equity 20,833,681
-----------
Total liabilities and stockholders' equity 39,610,811
-----------
The accompanying notes are an intergral part of these condensed consolidated
financial statements.
Asia Automotive Acquisition Corporation
(a corporation in the development stage)
CONDENSED STATEMENTS OF OPERATIONS
Three months Nine months
ended September 30 ended September 30 June 20, 2005
------------------------- ------------------------- (date of inception)
2007 2006 2007 2006 to September 30, 2007
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
$ $ $ $ $
----------- ----------- ----------- ----------- ---------------------
Interest income, net 504,254 476,560 1,376,821 821,991 2,685,704
Gain (loss) on warrant
Liability 2,258,883 (2,088,434) 1,567,419 (2,364,497) (2,216,331)
Formation and operating
costs (87,682) (303,242) (589,632) (407,153) (1,061,825)
--------- ---------- --------- ---------- ----------
Gain (Loss) before taxes 2,675,455 (1,915,116) 2,354,608 (1,949,659) (592,452)
Income taxes (90,410) (23,124) (100,604) (144,025) (558,713)
--------- ---------- --------- ---------- ----------
Net gain (loss) 2,585,045 (1,938,240) 2,254,004 (2,093,684) (1,151,165)
Interest income attributable
to common stock subject to
possible conversion
(net of taxes) 65,520 61,946 178,897 106,848 348,967
Net gain (loss) allocable to
common stockholders not
subject to possible
conversion (net of taxes) 2,519,525 (2,000,186) 2,075,107 (2,200,532) (1,500,132)
Weighted average shares
outstanding (basic and
diluted) 6,380,250 6,380,250 6,380,250 4,401,045 4,554,003
Weighted average shares
outstanding (diluted) 8,115,444 6,380,250 8,110,518 4,401,045 4,554,003
--------- ---------- --------- ---------- ----------
Net gain (loss) per share
(basic) .41 (.30) .35 (.48) (.25)
Net gain (loss) per share
(diluted) .32 (.30) .28 (.48) (.25)
The accompanying notes are an integral part of these condensed consolidate
financial statements.
Asia Automotive Acquisition Corporation
(a corporation in the development stage)
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Nine Months June 20, 2005
Ended Ended (Date of Inception)
September 30, September 30, September 30,
2007 2006 2007
(unaudited) (unaudited) (unaudited)
$ $ $
------------- ------------- -------------------
Cash flows from operating activities:
Net gain (loss) 2,254,004 (2,093,684) (1,151,165)
Changes in operating assets and liabilities:
Deferred tax benefit (358,377) -- (358,377)
Warrant liability (1,567,419) 2,364,497 2,216,331
Income taxes Payable (458,109) 144,025 --
Accrued expenses 271,290 (185,119) 383,040
---------- ----------- -----------
Net cash provided by activities 141,389 229,719 1,089,829
---------- ----------- -----------
Net cash used in investing activities:
Cash held in trust account (465,165) (38,241,322) (39,192,048)
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from note payable -- 20,250 45,250
Proceeds from issuance of common stock to
existing stockholders' -- -- 25,000
Proceeds from sale of option to the
Underwriter -- 100 100
Gross proceeds of public offering -- 40,250,000 40,250,000
Repayment of notes payable to Stockholders -- (45,250) (45,250)
Payments of deferred offering costs -- (1,749,143) (2,112,495)
---------- ----------- -----------
Net cash provided by financing Activities -- 38,475,957 38,162,605
---------- ----------- -----------
Net increase (decrease) in cash and cash
Equivalents (323,776) 464,354 60,386
Cash and cash equivalents, beginning of
Period 384,162 14,743 --
Cash and cash equivalents, end of period 60,386 479,097 60,386
---------- ----------- -----------
Supplemental disclosure of non-cash
financing activity:
Deferred underwriter's fees 1,207,500 1,207,500
---------- ----------- -----------
Supplemental cash flow disclosure:
Cash paid for taxes 907,000 -- 907,000
The accompanying notes are an intergral part of these condensed consolidated
financial statements.
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared by
the Company and reflect all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
presentation of the financial position as of September 30, 2007 and the
financial results for the three and nine months ended September 30, 2007 and
2006 and the period June 20, 2005 (date of inception) to September 30, 2007, in
accordance with accounting principles generally accepted in the United States of
America for interim financial statements and pursuant to Form 10-QSB and
Securities and Exchange ("SEC") Regulation SB.
Certain financial information and footnote disclosure normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations. The results of operations for the three and nine
months ended September 30, 2007 are not necessarily indicative of the results of
operations to be expected for a full fiscal year. These interim condensed
financial statements should be read in conjunction with the financial statements
for the fiscal year end December 31, 2006, which are included in the Company's
annual report on form 10-KSB as filed with the SEC.
2. ORGANIZATION AND BUSINESS OPERATIONS
Asia Automotive Acquisition Corporation (the "Company") was incorporated in
Delaware on June 20, 2005 as a blank check company formed to acquire, through
merger, capital stock exchange, asset acquisition or other similar business
combination, a business in the automotive supplier industry. The Company has
neither engaged in any operations nor generated revenues to date. 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 elected December 31st as its fiscal
year end.
The registration statement for the Company's initial public offering (the
"Public Offering") was declared effective on April 11, 2006. The Company
consummated the Public Offering on April 18, 2006 and received net proceeds of
approximately $ 37,171,000. The Company's management has broad discretion with
respect to the specific application of the net proceeds of the Public Offering
(the "Offering") (as described in Note 4), although substantially all of the net
proceeds of the Offering are intended to be generally applied toward
consummating a business combination with a target company. As used herein, a
"target business" shall include an operating business in the security industry
and a "business combination" shall mean the acquisition by the Company of a
target business.
Of the proceeds of the Offering, $37,418,000 (plus interest income) is being
held in a trust account ("Trust Account") and invested until the earlier of (i)
the consummation of the first business combination or (ii) the distribution of
the Trust Account as described below. The amount in the Trust Account includes
$1,207,500 of contingent underwriting compensation, which will be paid to the
underwriters if a business combination is consummated, but which will be
forfeited in part if public stockholders elect to have their shares redeemed for
cash if a business combination is not consummated. Deferred underwriter's fee is
reflected on the balance sheet at $966,121, an additional $241,379 is included
in common stock, subject to possible conversion, for a total of $1,207,500. The
remaining proceeds may be used to pay for business, legal and accounting due
diligence on prospective acquisitions and continuing general and administrative
expenses.
2. ORGANIZATION AND BUSINESS OPERATIONS (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 public stockholders owning a majority of the outstanding stock sold
in the Offerings vote against the business combination and elect to have the
Company redeem their shares for cash, including all of the officers and
directors of the Company ("Initial Stockholders"), have agreed to vote their
1,349,000 founding shares of common stock in accordance with the vote of the
majority in interest of all other stockholders of the Company with respect to
any business combination and to vote any shares they acquire in the aftermarket
in favor of the business combination. After consummation of the Company's first
business combination, all of these voting safeguards will no longer be
applicable.
With respect to the first business combination which is approved and
consummated, any holder of shares sold in the Public Offering, other than the
Initial Stockholders and their nominees (the "Public Stockholders") who voted
against the business combination may demand that the Company redeem his or her
shares. The per share redemption price will equal $7.44 per share plus interest
earned thereon in the Trust Account. Accordingly, Public Stockholders holding
19.99% of the aggregate number of shares sold in this offering and the private
placement may seek redemption of their shares in the event of a business
combination.
The Company's Certificate of Incorporation provides for mandatory liquidation of
the Company, without stockholder approval, in the event that the Company does
not consummate a business combination within 18 months from the date of
consummation of the Public Offering, or 24 months from the consummation of the
Public Offering if certain extension criteria have been satisfied. The Initial
Stockholders have waived their right to liquidation distributions with respect
to the shares of common stock included in such units. Accordingly, in the event
of such liquidation, the amount in the Trust Account will be distributed to the
holders of the shares sold in the Public Offering.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Common stock:
On January 23, 2006, the Company effected a stock split in the form of a
dividend of .233 shares of common stock for each outstanding share of common
stock. All references in the accompanying financial statements to the number of
shares of common stock and loss per share have been retroactively restated to
reflect these transactions.
Warrant liability:
The Company has outstanding warrants, which provides for the Company to register
the shares underlying the warrants and is silent as to the penalty to be
incurred in the absence of the Company's ability to deliver registered shares to
the warrant holders upon warrant exercise. Under EITF No. 00-19 "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 00-19"), registration of the common stock
underlying the Company's warrants is not within the Company's control. As a
result, the company must assume that it could be required to settle the warrants
on a net-cash basis, thereby necessitating the treatment of the potential
settlement obligation as a liability. Further EITF No. 00-19, requires the
Company to record the potential settlement liability at each reporting date
using the current estimated fair value of the warrants, with any changes being
recorded through the Company's statement of operations. The potential settlement
obligation related to the warrants will continue to be reported as a liability
until such time that the warrants are exercised, expire, or the Company is
otherwise able to modify the registration requirements in the warrant agreement
to remove the provisions which require this treatment.
Fair Value of financial instruments:
The fair value of the Company's assets and liabilities, which qualify as
financial intruments under SFAS 107, "Disclosure About Fair Value of Financial
Intruments," approximates the carrying amounts represented in the condensed
balance sheet.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net income (Loss) per common share:
Net income (loss) per common share is based on the weighted average number of
common shares outstanding. The Company complies with SFAS No. 128, "Earnings Per
Share." SFAS No. 128 requires dual presentation of basic and diluted income per
share for all periods presented. Basic income (loss) per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted net
income 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 share in the income
of the Company.
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 contingent assets
and contingent liabilities at the date of the financial statements and the
reported amounts of expenses during the reporting period. Actual results could
differ from those estimates.
Income taxes:
The Company complies with the Financial Accounting Standards Board ("FASB") SFAS
109, "Accounting for Income Taxes," which requires an asset and liability
approach to financial accounting and reporting for income taxes. Deferred income
tax assets and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result in future
taxable or deductible amounts, based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. As of September 30, 2007 no
valuation allowance has been established on the deferred tax asset of $358,000.
Effective January 1, 2007, the Company adopted the provisions of the Financial
Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" ("FIN
48"). There were no unrecognized tax benefits as of January 1, 2007 and as of
September 30, 2007. FIN 48 prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For those benefits to
be recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. The Company recognizes accrued interest and
penalties related to unrecognized tax benefits as income tax expense. No amounts
were accrued for the payment of interest and penalties at January 1, 2007. There
was no change to this balance at September 30, 2007. Management is currently
unaware of any issues under review that could result in significant payments,
accruals or material deviations from its position. The adoption of the
provisions of FIN 48 did not have a material impact on the Company's financial
position, results of operations and cash flows.
Cash and cash equivalents:
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Recently issued accounting standards:
In September 2006, the Statement of Financial Accounting Standard No. 157, Fair
Value Measurements ("SFAS 157"), was issued and is effective for fiscal years
beginning after November 15, 2007. SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. Management is currently evaluating the impact the adoption of
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS 157 will have on the Company's financial statements and their disclosures
and its impact has not yet been determined.
4. THE OFFERING
On April 18, 2006, the Company sold 5,031,250 units (including the underwriters
full exercise of an over allotment option with respect to 656,250 units) to the
public at a price of $8.00 per unit. Each unit consists of one share of the
Company's common stock, $0.001 par value, and one redeemable common stock
purchase warrant ("warrant"). 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 with a target business or
April 10, 2007 and expiring April 11, 2012. The warrants are redeemable 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 $10.00 per share for any 20 trading days within a 30 trading day period
ending three business days before we send the notice of redemption.
5. INCOME TAXES
Income tax expense for the three and nine months ended September 30, 2007 and
the period from June 20, 2005 (date of inception) to September 30, 2007 was
approximately $90,000, $101,000, and $559,000, respectively, which is net of the
expense for current federal income taxes and the deferred tax benefit recorded
for the three and nine months ended September 30, 2007 and the period from June
20, 2005 (date of inception) to September 30, 2007.
The Company has not begun its trade or business for U.S. tax purposes.
Accordingly, it could not yet recognize losses for start-up expenditures. As a
result a deferred tax asset of approximately $358,000 at September 30, 2007 was
established for these start-up expenditures.
6. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company presently occupies office space provided by Asia Development Capital
LLC ("ADC"), an affiliate and stockholder of the Company. ADC 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 on
the effective date of the Offering, April 18, 2006.
The Company has engaged Rodman & Renshaw LLC, ("the representative of the
underwriters"), on a non-exclusive basis, as the Company's agent for the
solicitation of the exercise of the warrants. To the extent not inconsistent
with the guidelines of the NASD and the rules and regulations of the SEC, the
Company has agreed to pay the representative for bona fide services rendered a
commission equal to 2.5% of the exercise price for each warrant exercised more
than one year after the date of the prospectus if the exercise was solicited by
the underwriters. In addition to soliciting, either orally or in writing, the
exercise of the warrants, the representative's services may also include
disseminating information, either orally or in writing, to warrant holders about
the Company or the market for our securities, and assisting in the processing of
the exercise of the warrants. No compensation will be paid to the representative
upon the exercise of the warrants if:
* the market price of the underlying shares of common stock is lower than the
exercise price;
* the holder of the warrants has not confirmed in writing that the
underwriters solicited the exercise;
* the warrants are held in a discretionary account;
6. COMMITMENTS AND RELATED PARTY TRANSACTIONS (CONTINUED)
* the warrants are exercised in an unsolicited transaction; or
* the arrangement to pay the commission is not disclosed in the prospectus
provided to warrant holders at the time of exercise.
The Company has sold to the representative of the underwriters, for $100, as
additional compensation, an option to purchase up to a total of 350,000 units at
a per-unit price of $10.00. The units issuable upon exercise of this option are
also identical to those offered by the Offering except that the warrants
included in the option have an exercise price of $6.65 (133% of the exercise
price of the warrants included in the units sold in the offering.) The Company
will pay the underwriters in the Offering an underwriting discount of 7% of the
gross proceeds of this Offering (of which 3% is deferred until the consummation
of a business combination).
The sale of the option will be accounted for as an equity transaction.
Accordingly, there will be no net impact on the Company's financial position or
results of operations, except for the recording of the $100 proceeds from the
sale. The Company has determined, based upon a Black-Scholes model, that the
fair value of the option on the date of sale would be approximately $3.10 per
unit, or $1,086,001 total, using an expected life of five years, volatility of
45.47% and a risk-free interest rate of 4.39%.
The volatility calculation of 45.47% is based on the 365-day average volatility
of a representative sample of ten (10) companies with market capitalizations
under $500 million that management believes to be engaged in the business of
auto component parts (the "Sample Companies"). Because the Company does not have
a trading history, the Company needed to estimate the potential volatility of
its common stock price, which will depend on a number of factors which cannot be
ascertained at this time. The Company referred to the 365-day average volatility
of the Sample Companies because management believes that the average volatility
of such companies is a reasonable benchmark to use in estimating the expected
volatility of the Company's common stock post-business combination. Although an
expected life of five years was taken into account for purposes of assigning a
fair value to the option, if the Company does not consummate a business
combination within the prescribed time period and liquidates, the option would
becomeworthless.
Pursuant to letter agreements with the Company and the Representative of the
underwriters, the Initial Stockholders have waived their right to receive
distributions with respect to their founding shares upon the Company's
liquidation.
Certain of the Company's officers, directors, or their designees have agreed
with the Representative that upon consummation of the Offering and during the 45
trading day period commencing on the later of the date that the securities
comprising the units begin separate trading or 60 days following the
consummation of the Offering, that they will purchase up to 320,000 warrants in
the public marketplace at prices not to exceed $1.40 per warrant. As of
September 30, 2007, William R Herren, Mr. Rudy Wilson,and Chun Hao held 290,000
warrants to purchase the Company's securities.
The Initial Stockholders will be entitled to registration rights with respect to
their founding shares pursuant to an agreement to be signed prior to or on the
effective date of the Offering. The holders of the majority of these shares are
entitled to make up to two demands that the Company register these shares at any
time commencing three months prior to the third anniversary of the effective
date of the Offering. In addition, the Initial Stockholders have certain
"piggy-back" registration rights on registration statements filed subsequent to
the third anniversary of the effective date of the Offering.
Rodman & Renshaw has entered into a letter agreement with us pursuant to which
it agreed to purchase up to 125,000 warrants in the public marketplace at prices
not to exceed $1.40 per warrant during the 45 trading day period commencing on
the later of the date separate trading of the warrants has commenced or 60 days
following the consummation of this offering.
6. COMMITMENTS AND RELATED PARTY TRANSACTIONS (CONTINUED)
Chardan Capital Markets has entered into a letter agreement with us pursuant to
which it agreed to purchase up to 125,000 warrants in the public marketplace at
prices not to exceed $1.40 per warrant during the 45 trading day period
commencing on the later of the date separate trading of the warrants has
commenced or 60 days following the consummation of this offering.
On February 8, 2006, five stockholders entered into five separate letter
agreements with the Representatives of the underwriters pursuant to which they
agreed to purchase in aggregate up to $2,000,000 in warrants at prices not to
exceed $1.40 per warrant during the 45 day trading period commencing on the
later of the date separate trading of the warrants has commenced or 60 calendar
days following the consummation of the Offering. These entities have agreed that
any warrants purchased by them pursuant to this agreement will not be sold or
transferred until after a completed business combination. As of September 30,
2007, these five stockholders held 20,000 warrants to purchase the Company's
securities.
7. 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.
8. SUBSEQUENT EVENT
On July 19, 2007, at a meeting of the Company's Board of Directors ("BOD") at
which a quorum was present, legal counsel for Hunan TX Enterprise Co Ltd. ("TX")
informed the Board that registration of TX has been completed with the local
Chinese government authorities, permitting the execution of the Equity
Acquisition Agreement ("EAA") on July 24, 2007. The Board deemed it appropriate
to make a public announcement by the filing of a Form 8K with the SEC on JUly
24, 2005. Pursuant to EAA the Company, which shall be renamed TX International,
Ltd. ("TI") and redomesticated as a British Virgin Islands Company, would merge
with TI resulting in TX becoming a wholly owned subsidiary of the TI. At the
closing of the acquisition, the stockholders of TX will receive $13.0 million in
cash. Additionally, the Company and TX executed a Key Employee Employment
Agreement and Performance Earn-Out Agreement which will provide for certain
retention and incentive bonuses.The closing of the acquisition is subject to
certain conditions, including the approval of the transaction by the majority of
the Company's stockholders and that fewer than 20% of the Company's stockholders
exercise their right to redeem their shares of common stock for cash.
On August 10, 2007, the Company was informed by legal counsel for TX that the
Changsha Ministry of Commerce had approved the EAA previously executed among and
between the Company and TX on July 24, 2007.The Board deemed it appropriate to
make a public announcement by the filing of a Form 8K with the SEC on August 13,
2007
On August 29, 2007 at a meeting of the Company's BOD, the directors approved an
amendment of the Company's By-Laws to allow the BOD (by simple majority) rather
than shareholders to remove a director. Pusuant to this amendment Mr. Vinit
Bansal and Mr. Chun Hao as Class A directors were not nominated for reelection.
On September 18, 2007 the Company filed a Form 8K with the SEC stating its
intent to commence holding presentations for its stockholders regarding its
proposed acquisition of TX as described in AAAC's Current Reports on Form 8-K
dated July 25, 2007, and August 13, 2007.
On September 20, 2007 the Company's BOD met to consider Proposals for a special
meeting of shareholders pursuant to the acquisition. After careful
consideration, the BOD determined unanimously that each of the Equity
Acquisition Proposal and the Redomestication merger Proposal is fair to and in
the best interests of AAAC and its stockholders. AAAC's BOD has approved and
declared advisable the Equity Acquisition Proposal and the Redomestication
merger proposal and unanimously recommends that the shareholders vote or give
instructions to vote "FOR" each of the Proposals to adopt the Equity Acquistion
Proposal and the Redomestication merger Proposal. Subsequently, the Company
filed a Schedule 14(a) Preliminary Proxy Statement with the SEC for a special
meeting of shareholders to be held to consider AAAC's pending acquisition of TX.
The Preliminary Proxy Statement is subject to SEC review. The date of the
special meeting of shareholders and the record date for the meeting will be
specified in a definitive proxy statement to be mailed to shareholders following
such review.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Quarterly Report on Form 10-QSB includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to known and
unknown risks,uncertainties and assumptions about us that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"should," "could," "would,""expect," "plan," "anticipate," "believe,"
"estimate," "continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those described in our other Securities and
Exchange Commission filings. The following discussion should be read in
conjunction with our Financial Statements and related Notes thereto included
elsewhere in this report.
We were formed on June 20, 2005, to serve as a vehicle to effect a merger,
capital stock exchange, asset acquisition or other similar business combination
with an operating business. Our initial business combination must be with a
target business or businesses whose fair market value is at least equal to 80%
of net assets at the time of such acquisition. We intend to utilize cash derived
from the proceeds of our recently completed public offering, our capital stock,
debt or a combination of cash, capital stock and debt, in effecting a business
combination.
Since our initial public offering, we have been actively engaged in sourcing a
suitable business combination candidate. We have met with target companies,
service professionals and other intermediaries to discuss with them our company,
the background of our management and our combination preferences. In the course
of these discussions, we have also spent time explaining the capital structure
of the initial public offering, the combination approval process, and the
timeline under which we are operating before the proceeds of the offering are
returned to investors.
Most of the activity from June 20, 2005 (inception) to June 30, 2007 relates to
the Company's formation and public offering described below.
Nine Months Ended September 30, 2007
For the nine months ended September, 2007, we had a net gain of approximately
$2,254,000 consisting of interest income of approximately $1,377,000, a gain on
warrant liability of approximately $1,567,000 and formational operating costs of
approximately $590,000. Interest income is derived primarily from investment of
our cash balances held in trust, which aggregated approximately $39,192,000 at
Setpember 30, 2007. The cash balance held in trust is invested primarily in
treasury bills.
Three Months Ended September 30, 2007
For the three months ended September 30, 2007, we had a net gain of
approximately $2,585,000 consisting of interest income of approximately
$504,000, a gain on warrant liability of approximately $2,259,000 and
formational operating costs of approximately $88,000. Interest income is derived
primarily from investment of our cash balances held in trust, which aggregated
approximately $39,192,000 at September 30, 2007. The cash balance held in trust
is invested primarily in treasury bills.
Nine Months Ended September 30, 2006
For the nine months ended September 30, 2006, we had a net loss of approximately
$2,094,000 consisting of interest income of approximately $822,000 offset by a
loss on warrant liability of $2,364,000 and formational operating costs of
approximately $407,000. Interest income is derived primarily from investment of
our cash balances held in trust, which aggregated approximately $38,240,000 at
September 30, 2006. The cash balance held in trust is invested primarily in
treasury bills.
Three Months Ended September 30, 2006
For the three months ended September 30, 2006, we had a net loss of
approximately $1,938,000, consisting of interest income of approximately
$477,000 offset by a loss on warrant liability of approximately $2,088,000 and
formational operating costs of approximately $303,000. Interest income is
derived primarily from investment of our cash balances held in trust, which
aggregated approximately $38,240,000 at September 30, 2006. The cash balance
held in trust is invested primarily in treasury bills.
LIQUIDITY AND CAPITAL RESOURCES
On April 19, 2006, we consummated our initial public offering of 5,031,250 units
including an additional 656,250 units that were subject to the underwriters'
over-allotment option. Each unit consists of one share of common stock and one
redeemable common stock purchase warrant. Each warrant entitles the holder to
purchase from us one share of our common stock at an exercise price of $5.00.
Of the proceeds of the Offering, $37,418,000 (plus interest expense) is being
held in a trust account ("Trust Account") and invested until the earlier of (i)
the consummation of the first business combination or (ii) the distribution of
the Trust Account as described below. The amount in the Trust Account includes
$1,207,500 of contingent underwriting compensation, which will be paid to the
underwriters if a business combination is consummated, but which will be
forfeited in part if public stockholders elect to have their shares redeemed for
cash if a business combination is not consummated. Deferred underwriter's fee is
reflected on the balance sheet at $966,121, an additional $241,379 is included
in common stock, subject to possible conversion, for a total of $1,207,500. The
remaining proceeds may be used to pay for business, legal and accounting due
diligence on prospective acquisitions and continuing general and administrative
expenses.
We pay Asia Development Capital LLC., an affiliate, an aggregate fee of $7,500
per month which includes the cost of the office space and the cost of other
general and administrative services provided to us by such affiliate.
Item 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
of the Company's effectiveness of disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") as of the end of the period covered by this Quarterly Report on
Form 10-QSB. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures have not
been operating effectively as of the end of the period covered by this report.
In connection with the preparation of our Report of Form 10-QSB, management
identified a material weakness, due to an insufficient number of resources in
the accounting and finance department, resulting in (i) an ineffective review,
monitoring and analysis of schedules, reconciliations and financial statement
disclosures and (ii) the misapplication of U.S. GAAP and SEC reporting
requirements.Due to the pervasive effect of the lack of resources, including a
lack of resources that are appropriately qualified in the areas of U.S. GAAP and
SEC reporting, and the potential impact on the financial statements and
disclosures and the importance of the annual and interim financialclosing and
reporting process, in the aggregate, there is more than a remote likelihood that
a material misstatement of the annual financial statements would not have been
prevented or detected.
There has not been any change in our internal control over financial reporting
in connection with the evaluation required by Rule 13a-15(d) under the Exchange
Act that occurred during the quarter ended September 30, 2007, that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II-OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending against us.
Item 2 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 3. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
Item 5. OTHER INFORMATION
Not Applicable.
Item 6. EXHIBITS
Exhibit No. Description of Exhibits
- ----------- -----------------------
31.1 Section 302 Certification of Principal Executive Officer
32.1 Section 906 Certification
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: November 14, 2007
By: /s/ William R. Herren
---------------------------------
William R. Herren
Chairman
(Principal Executive Officer)
By: /s/ Rudy Wilson
---------------------------------
Rudy Wilson
Chief Executive Officer
(Principal Executive Officer)
By: /s/ David J. Brophy
---------------------------------
David J. Brophy
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Exhibit No. Description of Exhibits
- ----------- -----------------------
31.1 Section 302 Certification of Principal Executive Officer
32.1 Section 906 Certification
Exhibit 31.1
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
I, William R. Herren, certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of Asia Automotive
Acquisition Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, mot misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed,based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: November 14, 2007
/s/ William R. Herren
- -------------------------------------
William R. Herren
Chairman of the Board
Exhibit 32.1
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code), each of the
undersigned officers of Asia Automotive Acquisition Corporation, a Delaware
corporation (the "Company"), does hereby certify, to such officer's knowledge,
that:
The Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007
(the "Form 10-QSB") of the Company fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information
contained in the Form 10-QSB fairly presents, in all material aspects, the
financial condition and results of operations of the Company.
Dated: November 14, 2007
/s/ William R. Herren
- -------------------------------------
William R. Herren
Chairman of the Board
/s/ Rudy Wilson
- -------------------------------------
Rudy Wilson
Chief Executive Officer
/s/ David J. Brophy
- -------------------------------------
David J. Brophy
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
FII-1
LehmanBrown
6/F Dongwai Diplomatic Office building
23 Dongzhimenwai Dajie
Beijing 100600, China
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Hunan Tongxin Enterprise Co., Ltd.
Changsha Hunan Province the People's Republic of china
We have audited the accompanying consolidated balance sheets of Hunan Tongxin
Enterprise Co., Ltd. ("Tongxin") and its subsidiaries as of December 31, 2005
and 2006 and the consolidated statements of operations, change in stockholders'
equity and cash flows for the years ended December 31, 2004, 2005 and 2006.
These financial statements are the responsibility of Tongxin'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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hunan Tongxin
Enterprise Co., Ltd. and its subsidiaries as of December 31, 2005 and 2006 and
the results of their operations and its cash flows for the years ended December
31, 2004, 2005 and 2006, in conformity with accounting principles generally
accepted in the United States of America.
/s/ LehmanBrown Lu Hua CPA Firm
Beijing, China
November 06, 2007
FII-1
HUNAN TONGXIN ENTERPRISE CO., LTD
CONSOLIDATED BALANCE SHEETS
(US$ amounts expressed in thousands, except for share data and earnings per
share)
Year Ended
December 31, Nine Months Ended
--------------------- September 30,
2005 2006 2007
--------- --------- -----------------
(Audited) (Audited) (Unaudited)
ASSETS
Current assets
Cash and cash equivalents 1,190 3,582 7,646
Accounts and notes receivables, net of allowance for doubtful
accounts of $4,017 and $4,688 and $5,017, respectively 10,750 16,616 16,902
Inventories 7,507 8,771 15,403
Other receivalbes, net of allowance of bd debt of $283
and $311, and $311 respectively 2,840 514 4,309
Other receivalbes due from related parties 5,316 8,928 10,056
Prepaid expenses 1,485 2,599 1,635
Advances to suppliers 1,760
Deferred tax assets 1,415 1,644 1,710
------ ------ ------
Total current assets 30,503 42,654 59,421
Investments in operating businesses 771 797 5,225
Property, plant and equipment, net of accumulcated depreciation
of $5,738 and $8,034, and $9,670 respectively 17,088 20,183 24,002
Land occupancy rights 1,836 1,859 1,876
------ ------ ------
Total assets 50,198 65,493 90,524
------ ------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 8,152 10,338 16,215
Accrued expenses and other liabilities 7,614 7,644 4,894
Taxes payable 950 4,812 11,068
Dividend payable -- 5,078 5,279
Advances from customers 2,813
Short-term loans 17,055 15,140 15,871
Shotr-term loan from individuals 2,062
Short-term loans from shareholders 673 5,179 4,912
------ ------ ------
Total current liabilities 34,444 48,191 63,114
Long-term liabilities
Long-term loans -- 3,970 4,394
Long-term payables 5 13 630
------ ------ ------
Total liabilities 34,449 52,174 68,138
Shareholders' equity:
Paid in capital
(authorized, 72,521,705 common shares, US$0.12 par value
per share, issued and outstanding 72,521,705 common shares) 8,762 8,762 8,762
Reserve funds 1,448 1,994 1,994
Other comprehensive income 408 875 2,421
Retained earnings 5,131 1,688 9,209
------ ------ ------
Total shareholders' equity 15,749 13,319 22,386
------ ------ ------
Total liabilities and shareholders' equity 50,198 65,493 90,524
------ ------ ------
HUNAN TONGXIN ENTERPRISE CO., LTD
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$ amounts expressed in thousands, except for share data and earnings per
share)
Nine Months
Years Ended December 31, Ended September 30,
------------------------------------ ------------------------
2004 2005 2006 2006 2007
---------- ---------- ---------- ----------- -----------
(Audited) (Audited) (Audited) (Unaudited) (Unaudited)
Revenues, net 45,178 56,865 64,297 47,156 62,922
Sales of goods to related party 1,118 1,713 1,908
Cost of goods sold (30,671) (40,167) (42,933) (33,749) (43,066)
Purchases of goods from related party (7,450) (9,030) (4,808)
---------- ---------- ----------
Gross profit 8,175 9,381 18,464 13,407 19,856
Operating expenses:
Selling, general and administrative expenses (7,712) (7,240) (8,492) (6,718) (7,270)
---------- ---------- ---------- ---------- ----------
Income from operations 463 2,141 9,972 6,689 12,586
Interest expense (1,083) (1,082) (1,707) (1,276) (1,520)
Other income, net 186 233 400 299 73
Equity in ernings (loss) of associated company (71) -- -- 0 7
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (505) 1,292 8,665 5,712 11,146
Income taxes (424) (528) (2,946) (1,885) (3,625)
---------- ---------- ---------- ---------- ----------
Net income (loss) (929) 764 5,719 3,827 7,521
========== ========== ========== ========== ==========
Net income (loss) per common share (0.0217) 0.0112 0.0788 0.0528 0.1037
========== ========== ========== ========== ==========
Net income (loss) per common share - diluted (0.0217) 0.0112 0.0788 0.0528 0.1037
========== ========== ========== ========== ==========
Weighted average shares outstanding 42,743,400 68,493,335 72,521,705 72,521,705 72,521,705
Weighted average shares outstanding - diluted 42,743,400 68,493,335 72,521,705 72,521,705 72,521,705
Hunan Tongxin Enterprise Co., Ltd.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2004, 2005 AND 2006
(In US Dollars, in thousands, except for share data)
Common Other
Stock Par Reserve Retained Comprehensive
Shares Value Funds Earnings Income(Loss) Total
---------- ------ ------ -------- ------------- -------
Balance at Jan. 1, 2004 42,743,400 $5,146 $1,169 $ 7,729 $ -0- $ 14,062
Net loss -0- -0- -0- (941) -0- (941)
Appropriation -0- -0- 282 (282) -0- -0-
Dividends declared -0- -0- -0- (395) -0- (395)
---------- ------ ------ -------- ----- --------
Balances at Dec. 31, 2004 42,743,400 $5,164 $1,451 $ 6,111 -0- $ 12,726
Cash contribution from shareholders 29,778,305 $3,598 -0- -0- -0- 3,598
Net income -0- -0- -0- 752 -0- 752
Appropriation -0- -0- 241 (241) -0- -0-
Dividends declared -0- -0- -0- (1,759) -0- (1,759)
Translation adjustments -0- -0- -0- -0- 407 407
---------- ------ ------ -------- ----- --------
Balances Dec. 31, 2005 72,521,705 $8,762 $1,692 $ 4,863 407 $ 15,724
Net income -0- -0- -0- 5,703 -0- 5,703
Appropriation -0- -0- 167 (167) -0- -0-
Dividends declared -0- -0- -0- (8,616) -0- (8,616)
Translation adjustments -0- -0- -0- -0- 466 466
---------- ------ ------ -------- ----- --------
Balance at Dec. 31, 2006 72,521,705 $8,762 $1,859 $ 1,783 873 $ 13,277
The accompanying notes are an integral part of these consolidated financial
statements.
HUNAN TONGXIN ENTERPRISE CO., LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Years Ended December 31, Nine Months Ended September 30,
--------------------------------- -------------------------------
2004 2005 2006 2006 2007
--------- --------- --------- ----------- -----------
(Audited) (Audited) (Audited) (Unaudited) (Unaudited)
Cash flows from operating activities:
Net income (loss) (941) 752 5,703 3,827 7,521
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Allowance for doubtful accounts 443 (306) 545 408 0
Depreciation expense 1,305 1,757 2,182 1,636 2,500
Amortization expense 12 35 38 36 47
Changes in
- Decrease in tax payable (144) 0 0 0 0
- Increase in inventories (188) (3,307) (1,264) (7,476) (5,494)
- Increase of accounts and notes receivable (2,598) (3,467) (8,042) (766) (799)
- Decrease (increase) of prepaid expenses 180 (1,341) (1,114) (378) (484)
- Increase of accounts payable 3,527 4,529 5,728 5,966 5,626
- Increase (decrease) in accrued expenses 535 (596) 361 247 420
------ ------- ------- ------- -------
Net cash provided by operating activities 2,131 (1,944) 4,137 3,500 9,337
------ ------- ------- ------- -------
Cash flows fro investing activities:
Purchase of property, plant and equipment (6,535) (4,558) (5,271) (4,230) (6,711)
------ ------- ------- -------
Net cash in investing activities (6,535) (4,558) (5,271) (4,230) (6,711)
------ ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from capital contributions 0 3,598 0 0 0
Proceeds from loans 17,191 23,587 28,231 28,231 22,379
Dividends paid (395) (1,759) (3,576) 0 0
Cash repayments of amounts borrowed (8,317) (23,788) (22,301) (27,301) (21,875)
------ ------- ------- ------- -------
Net cash provided by financing activities 8,479 1,638 2,354 930 504
------ ------- ------- ------- -------
Effect of foreign exchange rate changes (1) 906 1,172 672 276
Net increase (decrease) in cash and cash equivalents 4,074 (3,958) 2,392 872 3,406
Cash and cash equivalents at beginning of year 1,074 5,148 1,190 3,368 4,240
------ ------- ------- ------- -------
Cash and cash equivalents at the end of year 5,148 1,190 3,582 4,240 7,646
------ ------- ------- ------- -------
Hunan Tongxin Enterprise Co., Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED
DECEMBER 31, 2004, 2005 AND 2006
INTERIM FINANCIAL STATEMENTS FOR NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
NOTE 1 - BACKGROUND AND PRINCIPAL ACTIVITIES
Hunan Tongxin Enterprise Co., Ltd. ("Hunan Tongxin") was established on
November 27, 1984 and originally known as Changsha Meihua Automobile Body
Factory, a private domestic Chinese automotive supplier based in Changsha City,
Hunan Province, the People's Republic of China ("PRC"). In November 2000, Hunan
Tongxin completed its stock holding reorganization and changed its name.
Hunan Tongxin is engaged in designing, developing and manufacturing engineered
vehicle body structures ("EVBS") for light, medium and heavy duty commercial
vehicles in addition to designing, fabricating and testing progressive stamping
dies used in the fabrication of EVBS. EVBS consists of complete cab structures
and exterior body panels including doors, floor pans,hoods,side panels and
fenders. These panels must meet specified dimensions for fit and finish before
they are assembled together into a body structure and painted.
NOTE 2 - BASIS OF PRESENTATION
The consolidated financial statements for years ended December 31, 2004, 2005
and 2006 have been prepared in accordance with the accounting principles
generally accepted in the United States of America ("U.S. GAAP").
The interim financial data as of September 30, 2007 and for the nine months
ended September 30, 2007 and September 30, 2006 is unaudited; however in the
opinion of Hunan Tongxin, the interim data involves all adjustments, consisting
only of normal recording adjustments, necessary for a fair statement of the
results for the interim periods.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of Hunan
Tongxin, its subsidiaries and those entities that Hunan Tongxin has determined
it has a direct or indirect controlling financial interests. All significant
inter-company balances and transactions have been eliminated in consolidation.
Investments in unconsolidated subsidiaries representing ownership of at least
20%, but less than 50%, are accounted for under the equity method. Nonmarketable
investments in which Hunan Tongxin has less than 20% ownership and in which it
does not have the ability to exercise significant influence over the investee
are initially recorded at cost and periodically reviewed for impairment.
Hunan Tongxin evaluates its relationships with other entities to identify
whether they are variable interest entities as defined by the Financial
Accounting Standard Board Interpretation No. 46(R),"Consolidation of Variable
Interest Entities" and to assess whether it is the primary beneficiary of such
entities. If the determination is made that Hunan Tongxin is the primary
beneficiary, then that entity is included in the consolidated financial
statements.
Hunan Tongxin owns 50% of the voting rights in Changsha Futianfengjing Bus Co.,
Ltd.. However,Hunan Tongxin has not been able to control Changsha Futianfengjing
Bus Co., Ltd., given that important operational and financial policies have to
be approved by shareholders with more than 50% of the voting rights (the only
other equity owner owns the remaining 50% of the voting rights), Hunan Tongxin
accounted for its investment in Changsha Futianfengjing Bus Co., Ltd. by the
equity method.
Changsha Futianfengjing Bus Co., Ltd. owns 80% of the equity interest in
Changsha Meihua Vehicle Manufacture Co., Ltd.through Tongxin. On December 25,
2003, Changsha Futianfengjing Bus Co., Ltd.authorized Tongxin, together with
other equity holders of Changsha Meihua Vehicle Manufacture Co., Ltd., to enter
into an agreement with an individual to handover all the assets used in
production and operation of Changsha Meihua Vehicle Manufacture Co.,Ltd.. Based
on Changsha Futianfengjing Bus Co., Ltd.'s evaluation, it is not the primary
beneficiary of Changsha Meihua Vehicle Manufacture Co., Ltd.. In
addition,Changsha Futianfengjing Bus Co., Ltd. also has no significant influence
over Changsha Meihua Vehicle Manufacture Co., Ltd. Accordingly, Changsha
Futianfengjing Bus Co., Ltd. recorded its investment in Changsha Meihua Vehicle
Manufacture Co., Ltd. at cost and subject to periodical review for impairment.
As disclosed in Note 20 to the financial statements, Changsha Futianfengjing Bus
Co., Ltd. has disposed of its investment in Changsha Meihua Vehicle Manufacture
Co., Ltd.at cost on July 4,2007.
(B) USE OF ESTIMATES
The preparation of the consolidated financial statements in accordance with U.S.
GAAP requires management of Hunan Tongxin to make a number of estimates and
assumptions relating to the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(C) REVENUE RECOGNITION
Hunan Tongxin recognizes revenue when persuasive evidence of an arrangement
exists, services have been rendered, the sales price is fixed or determinable,
and collectibility is reasonably assured. This typically occurs when the product
is shipped.
Revenue from the sale of goods represents the invoiced value of goods, net of
value added tax, sales returns and trade discounts.
The following is a description of Tongxin's general revenue transaction and how
each of the SAB 104 criteria are met:
- - Persuasive evidence of an arrangement exists: Hunan Tongxin negotiate
contracts on a yearly basis during the January-February time frame. It
reaches a final understanding with its customers during this period as to
the specific nature and terms of the agreed-upon transaction and executes a
yearly sales contract with the customer.
- - Delivery has occurred or services have been rendered: The product
(Engineered Vehicle Body Structure(s) or component(s), are manufactured to
the customer's agreed upon specifications. Delivery is considered to have
occurred and revenue recognized, when the customer has taken title and
assumed the ownership of the products specified in the customer's sales
agreement.
- - Its price to the customer is fixed or determinable: the price, along with
the payment terms, delivery terms and other contractual conditions is fixed
at that the time of executing the sales contact. The prices are adjusted
quarterly per the material escalation clause which allows Hunan Tongxin to
increase or decrease the selling price to reflect changes in the cost of
raw steel.
- - Collectibility is reasonably assured: Hunan Tongxin and the customer have
agreed upon payment terms as part of the sales contract including cash in
advance, cash of delivery, letter of credit, or other terms depending upon
the customer.
Additionally, Hunan Tongxin does not sell products through distributors and
there is no right of the customers to return products back to Tongxin.
(D) SHIPPING AND HANDLING COSTS
Costs incurred by Hunan Tongxin for shipping and handling of inbound freight
for material is included in Cost of Goods Sold. The cost of outbound freight
for finished product is included in SGA as a selling expense and is also
included in Gross Revenue. As disclosed on Results of Operations.
Nine Months Ended
($ Thousands) 2004 2005 2006 September 30, 2007
- ------------- ----- ----- ----- ------------------
$ $ $ $
Inbound freight expense
charged to Cost of Goods
Sold: 4,020 4,314 4,114 3,556
Outbound freight for
finished product charged
to SGA: 541 605 414 589
(E) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
For purposes of the consolidated statements of cash flows, Hunan Tongxin
considered all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents. None of Hunan Tongxin's cash is
restricted as to withdrawal. Cash deposits with banks are held in financial
institutions in China, which has no federally insured deposit protection.
Accordingly, Hunan Tongxin has a concentration of credit risk related to these
uninsured deposits.
(F) TRADE ACCOUNTS RECEIVABLE AND THE ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is Hunan Tongxin's best estimate of the
amount of probable credit losses in its existing accounts receivable. Hunan
Tongxin's estimate is based on historical collection experience and a review of
the current status of trade accounts receivable.
(G) INVENTORIES
Inventories consist of raw materials, work-in-progress and finished goods.
Inventories are stated at the lower of cost or market value. Costs are
calculated on the weighted average basis and are comprised of direct materials,
direct labor and a relevant portion of all production overhead expenditures.
Slow-moving inventories are periodically reviewed for impairment in value.
(H) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are stated net of
accumulated depreciation. Depreciation expense is calculated using the
straight-line method over the estimated useful lives of the assets, taking into
account the estimated residual value. The estimated useful lives are as follows:
* Buildings 20 years
* Machinery 10 years
* Motor vehicles 5 years
* Office and computer equipment 5 years
Maintenance and repairs are charged directly to expense as incurred, whereas
betterment and renewals are generally capitalized in their respective property
accounts. When an
item is retired or otherwise disposed of, the cost and applicable accumulated
depreciation are removed and the resulting gain or loss is recognized and
reflected as an item before operating income (loss).
(I) CONSTRUCTION IN PROGRESS
Construction in progress represents factories under construction and machinery
and equipment pending installation. All direct costs relating to the acquisition
or construction of buildings machinery and equipment, including interest charges
on borrowings, are capitalized as construction in progress. No depreciation is
provided in respect of construction in progress.
Construction in progress is transferred to property, plant and equipment and
depreciation commences when the asset has been substantially completed and ready
for its intended use.
(J) LAND OCCUPANCY RIGHTS
Land occupancy rights are paid to the PRC land bureau and represent payments to
the PRC for the right to use the land over the term of the land occupancy
agreement. Land occupancy rights are carried at cost and amortized on a
straight-line basis over the term of 46 and 50 years.
(K) INVESTMENTS IN INVESTEES
SUBSIDIARIES:
Subsidiaries are those in which Hunan Tongxin has a direct interest of more than
50% of the share capital. Subsidiaries are consolidated from the date on which
control is transferred to Hunan Tongxin and are no longer consolidated from the
date that control ceases. The purchase method of accounting is used to account
for the acquisition from third parties and the pooling of interests method is
used to account for the acquisition of entities that were under common control.
The cost of an acquisition is measured as the fair value of the assets given up,
shares issued and liabilities undertaken at the date of acquisition plus costs
directly attributable to the acquisition. The excess of the cost of acquisition
over the fair value of the net assets of subsidiaries acquired is recorded as
goodwill. The excess of fair value of the net assets over the cost of
acquisition gives rise to negative goodwill, which reduces the value assigned to
certain long-term assets. If all eligible assets are reduced to zero and an
amount of negative goodwill still remains, the remaining unallocated negative
goodwill is recognized as extraordinary gain.
ASSOCIATES:
Associates are entities over which Hunan Tongxin generally have between 20% and
50% of the voting rights, or over which Hunan Tongxin has significant influence,
but which they do not control. Investments in associates are accounted for by
the equity method of
accounting. Under this method, Hunan Tongxin's share of the post-acquisition
profits or losses of associates is recognized in the statement of operations and
comprehensive income/(loss) and its share of post-acquisition movements in
reserves is recognized in reserves. The cumulative post-acquisition movements
are adjusted against the cost of the investment. Unrealized gains on
transactions between Hunan Tongxin, its subsidiaries and its associates are
eliminated to the extent of Hunan Tongxin's interest in the associates,
unrealized losses are also eliminated unless the transaction provides evidence
of and impairment of the asset transferred. Hunan Tongxin's investments in
associates include goodwill on acquisition. When Hunan Tongxin's share of losses
in an associate equals or exceeds their interest in the associate,further losses
are not recognized, unless Hunan Tongxin has incurred obligations or made
payments on behalf of the associates.
(L) IMPAIRMENT OF LONG-LIVED ASSETS
Whenever events or changes in circumstances indicate that its carrying amount
may not be recoverable, Hunan Tongxin evaluates the recoverability of the net
carrying value of its property, plant and equipment and its intangible assets by
comparing the carrying values to the estimated future undiscounted cash flows. A
deficiency in these cash flows relative to the carrying amounts is an indication
of the need for a write-down due to impairment. The impairment write-down would
be the difference between the carrying amounts and the fair value of these
assets. A loss on impairment would be recognized by a charge to earnings.
(M) FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION
The Renminbi ("RMB"), the national currency of China, is the primary currency of
the economic environment in which the operations of Hunan Tongxin are conducted.
Hunan Tongxin uses the United States dollar for financial reporting purposes.
Hunan Tongxin translates assets and liabilities into United States dollars using
the rate of exchange prevailing at the balance sheet date, and the consolidated
statement of income is translated at average rates during the reporting period.
Adjustments resulting from the translation of financial statements from RMB into
U.S.dollars are recorded in shareholders' equity as part of accumulated
comprehensive income (loss). Gains or losses resulting from transactions in
currencies other than RMB are reflected in income for the reporting period.
(N) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statements carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry-forwards. Deferred tax assets are reduced by a
valuation allowance to the extent Hunan Tongxin 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, if any,
is recognized in the statements of income in the financial year that includes
the enactment date.
(O) VALUE ADDED TAX
Hunan Tongxin is subject to value added tax ("VAT") imposed by Chinese
government on its domestic product sales. The output VAT is charged to customers
who purchase goods from Hunan Tongxin and the input VAT is paid when Hunan
Tongxin purchases goods from its vendors. VAT rate is 17%, in general, depending
on the types of product purchased and sold. The input VAT can be offset against
the output VAT. VAT payable or receivable balance represents either the input
VAT less than or larger than the output VAT. The debit balance represents a
credit against future collection of output VAT instead of a receivable.
Pursuant to EITF 06-3 "How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement", Hunan
Tongxin has elected to present revenue on net basis (net of VAT) within the
statements of operations.
(P) WARRANTY
Hunan Tongxin provides warranties on its products, for terms of from three to
twelve months. Warranty costs are estimated based on historical experience and
are accrued.
(Q) RECENT ACCOUNTING PRONOUNCEMENTS
Hunan Tongxin does not expect the adoption of any recently issued accounting
pronouncements to have a significant impact on their consolidated financial
position, results of operations, or cash flows.
(R) EARNINGS PER SHARE
Basic net earnings (loss) per common share is computed by dividing net earnings
(loss) applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted net earnings (loss) per
common share is determined using the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive effect of common stock
equivalents, consisting of shares that might be issued upon exercise of common
stock options. In periods where losses are reported, the weighted-average number
of common shares outstanding excludes common stock equivalents, because their
inclusion would be anti-dilutive.
(S) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- - Selling
- 75% attributed to order shipment, and delivery of finished products
from the Tongxin's warehouse to its customers' premise; and
- 25% represents compensation for sales and marketing personnel and
miscellaneous including travel, telephone and other similar expenses
- - R&D and Product Engineering
- 75% attributed to steel material consumption for product, mold and die
development;
- 15% represents compensation for technical personnel; and
- 12% attributed to supplies and other perishable material expense
- - General & Administrative
- 80% attributed to salary and bonuses for the management; and
- 20% represents miscellaneous expenses such as office utilities,
telephone, and supplies.
NOTE 4 - ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
Accounts and notes receivable as of December 31, 2005 & 2006 consist of the
following:
December 31
2005 2006
-------- ---------
Trade accounts receivable $ 12,882 $ 19,773
Less: Allowance for
doubtful accounts (4,017) (4,688)
-------- ---------
8,865 15,085
Notes receivable 1,885 1,531
-------- ---------
10,750 16,616
Changes of the allowance for doubtful accounts for 2005 and 2006 are as follows:
December 31
2005 2006
-------- ---------
Balance at beginning of year $ 4,247 $ 4,017
Translation difference 104 145
Add: Charge (written back)
to statements of operations (334) (526)
Balance at end of year 4,017 4,688
-------- ---------
Notes receivable represent amounts due from customers. As of December 31, 2006,
$1,885 of these notes receivable were guaranteed by financial institutions (as
of December 31, 2005, $1,531). These notes bear no interest and generally mature
within six months from the date of issuance. As of December 31, 2006, no trade
receivables were pledged for bank loan arrangements (as of December 31, 2005:
Nil).
NOTE 5 - INVENTORIES
Inventories as of December 31, 2005 & 2006 consist of the following:
December 31
2005 2006
-------- ---------
Raw materials $ 4,248 $ 4,806
Work in progress 2,918 2,732
Finished goods 341 1,233
-------- ---------
Total 7,507 8,771
As of December 31, 2006, no inventories were used as collateral for bank loan
arrangements (as of December 31, 2005: Nil).
NOTE 6 - OTHER RECEIVABLES
Other receivables as of December 31, 2005 & 2006 consist of the following:
December 31
2005 2006
-------- ---------
Receivables from transporters $ 297 $ 154
Receivables from shareholders 50 -0-
Staff advances 219 189
Advanced payment for land
occupancy right 2,201 -0-
Others 356 1,132
-------- ---------
3,123 1,475
Less:Allowance for doubtful
accounts (283) (311)
-------- ---------
2,840 1,164
Receivables from transporters consist of advances to transporters for purchase
of trucks and operating expenses. These advances are subject to annual interest
rate of 5.40% (2005: 5.4 %) and they are recoverable through offsetting against
future transportation fees.
Receivables from shareholders are contribution to pension fund made on behalf of
theshareholders, who are also employees of Hunan Tongxin. These amounts are
recoverable through a deduction of future dividend distribution to these
shareholders.
Staff advances consist of advances to employees for expenses to be incurred in
the normal course of business of Hunan Tongxin and advanced salary payment to
employees.
NOTE 7 - INVESTMENTS IN OPERATING BUSINESSES
Investments as of December 31, 2005 & 2006 consist of the following:
Equity in
Interest Investment Investee
December 31, 2005 Held At Cost Company Subtotal
- ----------------- -------- ---------- --------- --------
<s>
Equity Method
*Changsha Futianfengjing Bus Co.,Ltd 50% $ 1,561 $ (966) $ 595
Cost Method Jiangbei Credit Union 1% 114 -0- 114
Hunan Xingsha Credit Warranty Co., Ltd. 1% 62 -0- 62
------ ---------- --------- -------
Total 1,737 (966) 771
Equity in
Interest Investment Investee
December 31, 2005 Held At Cost Company Subtotal
- ----------------- -------- ---------- --------- --------
<s>
Equity Method
*Changsha Futianfengjing Bus Co.,Ltd 50% $ 1,613 $ (998) $ 615
Cost Method Jiangbei Credit Union 1% 118 -0- 118
Hunan Xingsha Credit Warranty Co., Ltd. 1% 64 -0- 64
------ ---------- --------- --------
Total 1,795 (998) 797
- -----------
* This company is not audited by LehmanBrown LU Hua CPA Firm.
On December 31, 2006, Hunan Tongxin performed an impairment review for its
investment in Changsha Futianfengjing Bus Co., Ltd.. Given that Hunan Tongxin's
share of net assets in Changsha Futianfengjing Bus Co., Ltd. as of December 31,
2006 is higher than the carrying value, Hunan Tongxin believes that its
investment in Changsha Futianfengjing Bus Co., Ltd. is not impaired as of that
date.
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT
Property, plant & equipment as of December 31, 2005 & 2006 consists of the
following:
December 31
2005 2006
-------- --------
Buildings $ 8,072 $ 8,751
Machinery 13,654 17,987
Motor vehicles 284 322
Office and computer equipment 411 456
-------- --------
22,421 27,516
Less:Accumulated depreciation (5,738) (8,034)
-------- --------
Property, plant and equipment,net 16,683 19,482
Construction in progress 405 701
-------- --------
17,088 20,183
The depreciation expense for the years ended December 31, 2004, 2005 and 2006
was $1,306, $1,677 and $2,296, respectively.
As of December 31, 2006, certain machinery and buildings with an aggregate
carrying value of $2,736 were used as collateral for short-term loan
arrangements (as of December 31, 2005:$2,827) (see Note 12).
As of December 31, 2006, certain machinery and buildings with an aggregate
carrying value of $1,945 were used as collateral for long-term loan arrangements
(see Note 13).
NOTE 9 - LAND OCCUPANCY RIGHTS
December 31
2005 2006
------- ------
Land occupancy rights $ 1,871 $1,932
Less:Accumulated amortization (35) (73)
------- ------
Land occupancy rights, net 1,836 1,859
For the year ended December 31, 2006, amortization of $38 (for the year ended
December 31,2005: $36) was recorded.
As of December 31, 2006, land occupancy rights with carrying value totaling $135
was used as collateral for a long-term loan.
NOTE 10 - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities as of December 31, 2005 & 2006 consist of
the following:
December 31
2005 2006
------ ------
Advances from customers $3,381 $2,705
Payable to employees 557 308
Deposit 553 489
Advances 825 1,234
Accrued expenses 114 434
Interest payable 716 731
Accrued payroll and welfare 1,030 1,292
Other payables 438 447
------ ------
7,614 7,640
Advances from customers are amounts received in advanced from customers for
future delivery of goods from Hunan Tongxin.
Advances from customers are advanced receipts from customers where the relevant
products have not been delivered or sold. They are not related to transactions
where partial performance has occurred but revenue recognition has been
deferred.
Depending upon previous experience, credit worthiness, or the size of an
individual customer, Hunan Tongxin may extend credit terms or will receive cash
in advance during specific stages of production, or prior to delivery of the
finished product, form certain customers, as stated in the commercial contract.
Prepayments vary in size and range from covering the cost of purchasing raw
material to the cost of fulfilling a specific production order.
Advances are recorded as such and reflected as a liability on the balance sheet
until such time as delivery of the product to the customer occurs at which time
the revenue is recognized and the Liability account is relieved. In fiscal year
2006 the company received cash advances in the aggregate amount of
approximately $2.7 million or 4.5% of total revenues.
NOTE 11 PROVISION FOR PRODUCT WARRANTY
A analysis of the provision for product warranty for the years ended December
31,2005 and December 31, 2006 is as follows:
December 31
2005 2006
----------- -------------
Balance at beginning of year $ 12 $ 26
Allowance charged to earnings 86 125
Less: Amount utilized (72) (97)
----------- -------------
Balance at end of year 26 54
------------ -------------
NOTE 12 - SHORT-TERM LOANS
The following summarized list represents short-term loans at December 31, 2005
and 2006:
(Renminbi denominated loans)
Changsha Agricultural Bank of China
December 31, 2005 Maturity date $'000 Interest rate
- ---------------------------- ------------- --------- -------------
Short-term loan I 02/02/2006 $ 310 6.138%
Short-term loan II 07/18/2006 744 6.138%
Short-term loan III 09/09/2006 1,611 6.138%
Short-term loan IV 10/31/2006 372 6.138%
Short-term loan V 11/24/2006 991 6.138%
Short-term loan VI 12/05/2006 2,478 6.138%
Jiangbei Credit Union
Short-term I 11/30/2006 2,478 6.525%
Short-term II 12/31/2006 1,239 6.525%
Agricultural Bank of China
Ziyang Branch
Short-term loan I 11/20/2006 991 6.696%
Loans from other individuals 5,841 5.400%
---------
17,055
Loans from shareholders 673 5.400%
---------
17,728
(Renminbi denominated loans)
Changsha Agricultural Bank of China
December 31, 2006 Maturity date $'000 Interest rate
- ---------------------------- ------------- --------- -------------
Short-term loan I 03/22/2007 $ 320 6.138%
Short-term loan II 04/21/2007 2,561 6.138%
Short-term loan III 05/26/2007 2,561 6.435%
Short-term loan IV 11/27/2007 1,281 7.344%
Short-term loan V 09/30/2007 961 7.344%
Jiangbei Credit Union
Short-term I 02/21/2007 256 6.510%
Short-term II 02/21/2007 256 6.510%
Short-term III 02/21/2007 256 6.510%
Short-term IV 01/31/2007 1,281 6.525%
Agricultural Bank of China
Ziyang Branch
Short-term loan I 08/27/2007 1,921 6.732%
Short-term loan II 11/29/2007 1,024 6.732%
Loans from other individuals 2,462 5.400%
---------
15,140
Loans from shareholders 5,179 5.400%
---------
20,319
Weighted average interest rate for short-term loans as of December 31, 2006 is
6.267% (as of December 31, 2005: 5.979%).
As of December 31, 2005, $6,506 of Agricultural Bank of China's short-term loans
were secured by buildings of Hunan Tongxin with carrying amount of $2,827 and
buildings owned by Changsha Meihua Vehicle Manufacture Co., Ltd.
As of December 31, 2005, $991 of Agricultural Bank of China Ziyang Branch's
short-term loans was secured by land occupancy right of Ziyang with carrying
amount of $626.
As of December 31, 2006, $7,684 of Agricultural Bank of China's short-term loans
were secured by buildings of Hunan Tongxin with carrying amount of $2,736 and
buildings owned by Changsha Meihua Vehicle Manufacture Co., Ltd.
As of December 31, 2006, $1,024 of Agricultural Bank of China Ziyang Branch's
short-term loans were secured by land occupancy right of Ziyang with carrying
amount of $633.
As of December 31, 2006, $1,921 of Agricultural Bank of China Ziyang Branch's
short-term loans were guaranteed by Hunan Tongxin.
Fair market value of the assets collateralizing these credit facilities amounted
to $26,938.
As of December 31, 2006, there was no un-used line of credit amounted to $4,676
for Hunan Tongxin (as of December 31,2005: $3,719).
NOTE 13 - LONG-TERM LOANS
Long-term loans as of December 31, 2006 (as of December 31, 2005: Nil) consists
of the following:
December 31, 2006
Maturity Date US $'000 Interest Rate
------------- --------- -------------
Changsha Xingcheng
Construction
Investment Co., Ltd (a) 29/06/2009 $ 2,561 6.03%
Changsha Jiangbei
Rural Credit Cooperative (b) 25/06/2008 1,409 9.18%
---------
Total 3,970
As of December 31, 2006, Hunan Tongxin has obtained long-term loans totaling
US$3,970 from Changsha Xingcheng Construction Investment Co., Ltd. ("CXCI") and
Changsha Jiangbei Rural Credit Cooperative ("CJRCC"). These loans are
collateralized by the buildings and land occupancy rights of Hunan Tongxin. As
of December 31, 2006, $2,080 of buildings and land occupancy right was pledged
as collateral.
Fair market value of the assets collateralizing these credit credit facilities
amounted to $16,815.
Future repayments for the long-term loans for the years subsequent to the
balance sheet date are as follows:
Repayable by Total
- ------------ ------
2008 1,409
2009 2,561
------
3,970
As of July 05, 2007, Hunan Tongxin has repaid the loan from CXCI.
NOTE 14 - LONG-TERM PAYABLE
December 31
2005 2006
------- -------
Reserve fund for employees $ 5 $ 13
------- -------
$ 5 $ 13
Payable to employees representing a portion of salaries payable for technical
employees. According to the terms of the labor contract entered into with these
technical employees, Hunan Tongxin withholds 25% of their monthly salary. This
amount is payable upon expiry of the labor contracts.
NOTE 15 RESERVES
The Company's attributable share in the statutory reserves of Hunan Tongxin and
its subsidiaries for the three years ended December 31, 2006 is as follows:
Years Ended December 31,
2004 2005 2006
------ ------ -------
Statutory genearl reserve
Balance at January 1 $ 193 $ 345 $ 500
Transfer from consolidated
statements of income 152 155 167
Transfer from statutory
public welfare fund -0- -0- 417
------ ------ -------
Balance at December 31 345 500 1,084
------ ------ -------
Statutory public welfare fund
Balance at January 1 $ 201 $ 331 $ 417
Transfer from consolidated
statements of income 130 86 -0-
Transfer from statutory
public welfare fund -0- -0- (417)
------ ------ -------
Balance at December 31
331 417 -0-
------ ------ -------
General surplus reserve
Balance at January 1 and
December 31 529 529 529
------ ------ -------
Capital surplus
Balance at January 1 and
December 31 246 246 246
------ ------ -------
Total 1,451 1,692 1,859
------ ------ -------
Notes:
(i) In accordance with the relevant regulations in China, Hunan Tongxin is
required to provice certain statutory reserves that are designated for specific
purposes based on the net income reported in the PRC GAAP financial statements.
These reserves are not distributable in the form of cash dividends.
(ii) In accordance with the relevant regulations in China, a 10% appropriation
to the statutory general reserve based on the net income reported in the PRC
financial statements is required until the balance reaches 50% of the registered
capital of the company. Statutory general reserve can be used to make good
previous years' losses, if any, and may be converted into capital by increasing
the paid-in capital, provided that the reserve balance after such conversion is
not less than 25% of the registered capital.
(iii)Prior to 2006, Hunan Tongxin shall determine to transfer 5% to 10% of its
net income reported in the PRC financial statements to the statutory public
welfare fund. There is no limit on the amount that may be allocated to this
fund. This fund can only be utilized on capital expenditure for the collective
welfare of Tongxin's employees, such as the construction of dormitories, canteen
and other welfare facilities, and cannot be utilized to pay staff welfare
expenses.
Pursuant to the Company Law of the PRC revised on October 27, 2005 and carried
out as of January 1, 2006, Hunan Tongxin is required to cease to draw the
statutory public welfare fund from January 1, 2006. In accordance with the
Circular on Accounting Treatment Following the Implementation of "Company Law"
issued by the Ministry of Finance of the PRC on March 15, 2006, Hunan Tongxin
transferred the statutory public welfare fund balance as at the December 31,
2005 into the statutory general reserve.
(iv) In addition to statutory general reserve and statutory public welfare fund,
Hunan Tongxin had made additional appropriation of net profit to a general
surplus reserve. This general surplus reserve can be used to make good previous
years' losses, if any, and may be converted into capital by increasing the
paid-in capital, provided that the reserve balance after such conversion is not
less than 25% of the registered capital.
(v) Capital surplus, arising from waiver of debt by a creditor, can be used to
increase the paid-in capital.
NOTE 16 - INCOME TAXES
Hunan Tongxin is subject to the PRC Income Tax Laws applicable to domestic
enterprises. Hunan Tongxin is subject to income tax rate of 33% in 2004, 2005
and 2006, which comprised 30% state income tax and 3% local income tax. The PRC
income tax rate applicable to Hunan Tongxin's subsidiaries is 15% to 33% in
2004, 2005 and 2006.
The income tax expense in the consolidated statements of income consists of:
Years Ended December 31,
2004 2005 2006
------ ------ -------
Income taxes:
Current $ 569 $ 424 $ 3,118
Deferred (145) 103 (179)
------ ------ -------
424 527 2,939
A reconciliation of the difference between the effective income tax rate and the
statutory income tax rate is as follows:
Years Ended December 31,
2004 2005 2006
----- ----- ----
Statutory income tax rate 33% 33% 33%
Preferential tax policy 19% (24)% (2)%
Permanent tax difference 43% 26% 3%
Overpayment of taxes 91% 8% -0-
Unrealized profit (loss) -0- (2)% 4%
Tax incentive for purchase
of domestically produced
machinery -0- -0- (4)%
----- ----- ----
Effective income tax rate (82)% 41% 34%
The tax effects of temporary differences that have given rise to the deferred
income tax assets consist of the following:
Years Ended December 31,
2005 2006
--------- -------
Allowance for doubtful accounts $ 1,415 $ 1,644
Less: Valuation allowance -0- -0-
------- -------
Net deferred tax assets $ 1,415 $ 1,644
NOTE 17 - RELATED PARTY RELATIONSHIP AND TRANSACTIONS
(a) Relationship
Name of the related party Relationship with Hunan Tongxin
- ---------------------------------- -------------------------------
Hunan Tongxin Development and Controlled by a family
Construction Co., Ltd. member of the major
shareholder of Hunan Tongxin
Changsha Meihua Vehicle Controlled by a family
Manufacture Co., Ltd. member of the major
shareholder of Hunan Tongxin
(b) Significant outstanding balances with the related
parties as of December 31, 2005 and 2006 are as follows:
(i) Short-term loans from shareholders
Years Ended December 31,
2005 2006
----------- ------------
Loans from shareholders $ 673 $ 5,179
Short-term loans from shareholders are unsecured, with no fixed repayment term
and carry interest rate of 5.40% (2005: 5.40%) per annum.
(ii) Other receivables
Years Ended December 31,
2005 2006
------------ ------------
Changsha Meihua Vehicle
Manufacture Co., Ltd. $ 5,316 $ 5,113
Hunan Hunan Tongxin Development
and Construction Co., Ltd. -0- 3,127
----------- -----------
$ 5,316 $ 8,240
These other receivables from related parties are not secured and have no fixed
payment term.
`
(c) Significant transactions with the related parties during the years ended
December 31, 2005 and 2006 are as follows:
(i) Sales of goods to
During fiscal
2005 2006
---------- ----------
Changsha Meihua Vehicle
Manufacture Co., Ltd. $ 1,713 $ 1,908
(ii) Purchases of goods from
During fiscal
2005 2006
---------- ----------
Changsha Meihua Vehicle
Manufacture Co., Ltd. $ 9,030 $ 4,808
NOTE 18 - CONCENTRATION OF CREDIT RISKS
The following table summarizes the percentage of revenues from continuing
operation from the top 5 customers for the years ended 2006 and December 31,
2005:
2005 2006
------ ------
Customer A 11% 8%
Customer B 9% 8%
Customer C 4% 6%
Customer D 4% 5%
Customer E 4% 4%
----- -----
32% 31%
NOTE 19 - COMMITMENTS
Capital expenditure commitments
At December 31, 2006, Hunan Tongxin has the following commitments:
2006
----------
Authorized but not contracted for:
Improvement to existing production facilities $ 430
----------
NOTE 20 - SUBSEQUENT ENENTS
On March 16, 2007, the National People's Congress approved the Corporate Income
Tax Law of the People's Republic of China (the "new CIT law"), which is
effective from January 1, 2008. Subject to detailed measures and other related
regulations concerning computation of taxable income, as well as specific
preferential tax treatments and their related transitional provisions,Hunan
Tongxin is currently evaluating the impact of the new CIT law, and will further
evaluate the impact to its operating results and financial positions of future
periods as more detailed measures and other related regulations are announced.
On July 4, 2007, Changsha Futianfengjing Bus Co., Ltd.disposed of its investment
of 80% equity interest in Changsha Meihua Vehicle Manufacture Co., Ltd. at cost.
PROXY
ASIA AUTOMOTIVE ACQUISITION CORPORATION
199 Pierce Street, Suite 202
Birmingham, Michigan 48009
SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF ASIA AUTOMOTIVE ACQUISITION CORPORATION
The undersigned appoints William R. Herren, Rudy Wilson, and each of them, with
full power to act without the others, as proxies, each with the power to appoint
a substitute, for the undersigned in connection with the Special Meeting of
Stockholders (the "Special Meeting") of Asia Automotive Acquisition Corporation
("AAAC") to be held on January 24, 2008, The undersigned hereby authorizes each
of such proxies to represent the undersigned at the Special Meeting and to vote,
as designated on the reverse side, all shares of AAAC common stock (including
any shares which are part of units each consisting of one share of common stock
and one warrant) which are held of record by the undersigned on the record date
for the Special Meeting.
THIS PROXY WILL BE VOTED AS DIRECTED ON THE REVERSE SIDE. IF THIS PROXY IS
SIGNED AND RETURNED BUT NO DIRECTIONS ARE GIVEN ON THE REVERSE SIDE AS TO THE
PROPOSALS, THIS PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS NUMBERED 1, and
2 ON THE REVERSE SIDE. THE AAAC BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
"FOR" EACH OF SUCH PROPOSALS.
(Continued and to be signed on reverse side)
PROXY
THIS PROXY WILL BE VOTED AS DIRECTED BELOW. IF NO DIRECTIONS AREGIVEN, THIS
PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS NUMBERED 1, AND 2 BELOW. THE
BOARD OF DIRECTORS OF ASIA AUTOMOTIVE ACQUISITION CORPORATION ("AAAC")
UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH OF SUCH PROPOSALS.
1. To approve the acquisition by AAAC of Hunan FOR AGAINST ABSTAIN
Tongxin Enterprise Co. Ltd. ("Hunan Tongxin") [ ] [ ] [ ]
substantially on the terms set forth in the
Equity Acquisition Agreement dated July 24, 2007,
by and among Hunan Tongxin, the stockholders of
Hunan Tongxin, and AAAC, and the other
transactions contemplated by the Equity
Acquisition Agreement.
PR-1
If you voted "AGAINST" Proposal Number 1 and you hold I HEREBY
shares of AAAC common stock (including shares which EXERCISE MY
are part of units) issued in AAAC's initial public CONVERSION
offering, you may exercise your conversion rights and RIGHTS
demand that AAAC convert your shares of common stock [ ]
into a pro rata portion of the trust account (net of
accrued taxes) by marking the "I Hereby Exercise My
Conversion Rights" box to the right. If you exercise
your conversion rights, then you will be exchanging
your shares of AAAC common stock for cash and will no
longer own your shares. You will only be entitled to
receive cash for your shares if the acquisition is
completed and you comply with the stock certificate
delivery requirements described in the proxy statement
under Conversion Rights. Failure to (a) vote against
Proposal Number 1, (b) check the "I Hereby Exercise My
Conversion Rights" box to the right and (c) submit
this proxy to AAAC prior to the Special Meeting will
result in the loss of your conversion rights.
2. To approve the merger of AAAC with and into a FOR AGAINST ABSTAIN
wholly owned subsidiary formed under the laws of [ ] [ ] [ ]
BVI with the name Tongxin International, Ltd.
("TI") for the purposes of redomestication of the
company to the British Virgin Islands (the
"Redomestication") and acquiring Hunan Tongxin
Signature Signature Date
Please sign exactly as your name appears on this proxy card. If shares are held
jointly, each holder should sign. Executors, administrators, trustees,
guardians, attorneys and agents should give their full titles. If the
stockholder is a corporation, please sign in the full name of such corporation
by an authorized officer. If the stockholder is a partnership or limited
liability company, please sign in the full name of such entity by an authorized
person.
PR-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 132 of the BVI Business Companies Act ("BCA") generally provides
for indemnification and permits a company to obtain insurance. The Memorandum of
Association of the Registrant follows the statute. The Registrant intends to
obtain director and officer insurance at the consummation of the acquisition of
Hunan Tongxin
The following is a statement of Section 132 of the BCA, as amended by
Section 67 of the BCA Amendment Act:
INDEMNIFICATION.
(1) Subject to subsection (2) and its memorandum or articles, a company may
indemnify against all expenses, including legal fees, and against all judgments,
fines and amounts paid in settlement and reasonably incurred in connection with
legal, administrative or investigative proceedings any person who
(a) is or was a party or is threatened to be made a party to any
threatened, pending or completed proceedings, whether civil, criminal,
administrative or investigative, by reason of the fact that the person is or was
a director of the company; or
(b) is or was, at the request of the company, serving as a director of, or
in any other capacity is or was acting for, another body corporate or a
partnership, joint venture, trust or other enterprise.
(2) Subsection (1) does not apply to a person referred to in that
subsection unless the person acted honestly and in good faith and in what he
believed to be in the best interests of the company and, in the case of criminal
proceedings, the person had no reasonable cause to believe that his conduct was
unlawful.
(2A) For the purposes of subsection (2), a director acts in the best
interests of the company if he acts in the best interests of:
(a) the company's holding company; or
(b) a shareholder or shareholders of the company;
in either case, in the circumstances specified in section 120(2), (3) or
(4), as the case may be;
(3) The termination of any proceedings by any judgment, order, settlement,
conviction or the entering of a nolle prosequi does not, by itself, create a
presumption that the person did not act honestly and in good faith and with a
view to the best interests of the company or that the person had reasonable
cause to believe that his conduct was unlawful.
(3A) Expenses, including legal fees, incurred by a director in defending
any legal, administrative or investigative proceedings may be paid by the
company in advance of the final disposition of such proceedings upon receipt of
an undertaking by or on behalf of the director to repay the amount if it shall
ultimately be determined that the director is not entitled to be indemnified by
the company in accordance with subsection (1).
(3B) Expenses, including legal fees, incurred by a former director in
defending any legal, administrative or investigative proceedings may be paid by
the company in advance of the final disposition of such proceedings upon receipt
of an undertaking by or on behalf of the former director to repay the amount if
it shall ultimately be determined that the former director is not entitled to be
indemnified by the company in accordance with subsection (1) and upon such other
terms and conditions, if any, as the company deems appropriate.
II-1
(3C) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section is not exclusive of any other rights to which
the person seeking indemnification or advancement of expenses may be entitled
under any agreement, resolution of members, resolution of disinterested
directors or otherwise, both as to acting in the person's official capacity and
as to acting in another capacity while serving as a director of the company; and
(4) If a person referred to in subsection (1) has been successful in
defense of any proceedings referred to in subsection (1), the person is entitled
to be indemnified against all expenses, including legal fees, and against all
judgments, fines and amounts paid in settlement and reasonably incurred by the
person in connection with the proceedings.
(5) A company shall not indemnify a person in breach of subsection (2) and,
any indemnity given in breach of that section is void and of no effect.
The following is a statement of Section 133 of the BCA, as amended by
Section 68 of the BCA Amendment Act:
INSURANCE.
A company may purchase and maintain insurance in relation to any person,
who is or was a director of the company, or who at the request of the company is
or was serving as a director of, or in any other capacity is or was acting for,
another body corporate or a partnership, joint venture, trust or other
enterprise, against any liability asserted against the person and incurred by
the person in that capacity, whether or not the company has or would have had
the power to indemnify the person against the liability under section 132.
UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant to
paragraph (h)(l) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415 of the SEC, will
be filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered thereby, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-2
Item 21. Exhibit Index
Exhibit No:
2. Equity Acquisition Agreement Included in Prospectus/Proxy Statement as Annex A
3. a. (i) Charter of AAAC Incorporated by reference from Form S-1,
Reg. No. 333-127755
Filed
(ii) Charter of TI Included in Prospectus/Proxy Statement as Annex C
b. (i) By-Laws of AAAC Incorporated by reference from Form S-1,
Reg. NO. 333-127755
Filed
(ii) By-laws of TI Included in Prospectus/Proxy Statement As Annex D
4. a. Certificates of AAAC Incorporated by reference from Form S-1,
Reg. No. 333-127755
Filed
Warrants of AAAC Incorporated by reference from Form S-1,
Reg. No. 333-127755
Filed
b. Certificates of TI
Warrants of TI
5. Opinion re: Legality Previously filed with Form S-4
8. Tax Opinion Included in Prospectus/Proxy Statement
as Exhibit D
10. a. Key Employees Included in Prospectus/Proxy Statement
Employment Agreement as Annex B
b. Performance Earn Out Included in Prospectus/Proxy Statement
Employment Agreement as Annex I
11. Statement of Computation Included in Prospectus/Proxy Statement
Per share earnings as Consolidated Financial Statements
12. Statement of Computation Included in prospectus/Proxy Statement
of Ratios as Management's Discussion and Analysis
of Financial Condition and Results of
Operations.
15. Letter regarding Included in Prospectus/Proxy Statement
Unaudited Interim Financial
Statements
21. List of Subsidiaries of AAAC Referred in Proxy Statement/Prospectus
as Tongxin International, Ltd.
23. a. Consent of
Rothstein & Kass Included in Prospectus/Proxy Statement
as Exhibit C
b. Consent of Lehman Brown Included in Prospectus/Proxy Statement as Exhibit B
24. Power of Attorney Included on Signature Page of Form S-4/A
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Birmingham, State of
Michigan, on the 8th of January, 2008.
ASIA AUTOMOTIVE ACQUISITION
CORPORATION
By: /s/ Rudy Wilson
------------------------------------
Rudy Wilson
Chief Executive Officer and Director
(Principal Executive Officer)
and By: /s/ Dr. David J. Brophy
------------------------------------
Dr. David J. Brophy
Chief Financial Officer and Director
(Principal Accounting and Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
NAME POSITION DATE
- --------------------------------- ------------------------------------ ---------------------
/s/ William R. Herren Chairman of the Board of Directors January 8, 2008
- --------------------------------- and Director
William R. Herren
/s/ Rudy Wilson Director January 8, 2008
- ---------------------------------
Rudy Wilson
/s/ Dr. David J. Brophy Director January 8, 2008
- ---------------------------------
Dr. David J. Brophy
/s/ Donald L. Runkle Director January 8, 2008
- ---------------------------------
Donald L. Runkle
II-4
LehmanBrown
6/F Dongwai Diplomatic Office building
23 Dongzhimenwai Dajie
Beijing 100600, China
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Hunan Tongxin Enterprise Co., Ltd.
Changsha Hunan Province the People's Republic of china
We consent to the use in this Registration Statement on Form S-4/A of our report
dated July 31, 2007, relating to the financial statements of Hunan Tongxin
Enterprise Co., Ltd., and its subsidiaries, and to the reference to our Firm
under the caption "Experts" in the Form S-4/A.
/s/ LehmanBrown Lu Hua CPA Firm
Beijing, China
January 08, 2008
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Registration Statement of Asia Automotive
Acquisition Corporation on Form S-4/A of our report, dated March 2, 2007, of
Asia Automotive Acquisition Corporation (the "Company") as of December 31, 2006
and the related statements of operations, changes in stockholders' equity, and
cash flows for the period from June 20, 2005 (date of inception) through
December 31, 2005, for the year ended December 31, 2006 and the period from June
20, 2005 (date of inception) through December 31, 2006. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
January 08, 2008