Attached files
file | filename |
---|---|
EX-32 - CS China Acquisition Corp. | v165987_ex32.htm |
EX-31.1 - CS China Acquisition Corp. | v165987_ex31-1.htm |
EX-31.2 - CS China Acquisition Corp. | v165987_ex31-2.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
x
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the fiscal year ended: July 31, 2009
¨
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the transition period from ______________to ______________
Commission
File Number 000-53087
CS
China Acquisition Corp.
(Exact
name of registrant as specified in its Charter)
Cayman
Islands
(State
or other jurisdiction of
incorporation
or organization)
|
N/A
(I.R.S.
Employer
Identification
Number)
|
Room
1708 Dominion Centre, 43-59 Queen’s Road
East,
Wanchai, Hong Kong
(Address
of principal executive offices)
|
N/A
(zip
code)
|
305-576-1600
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Units
consisting of one Ordinary Share, par value $.0001 per share, and two
Warrants
Ordinary
Shares, $.0001 par value per share
Warrants
to purchase Ordinary Shares
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. ¨
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirement for the past 90
days.Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files.Yes ¨ No ¨
Indicate
by check mark if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.x
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
x No
¨
As of
January 31, 2009 (the Registrant’s most recently completed second fiscal
quarter), the aggregate market value of the Ordinary Shares held by
non-affiliates of the registrant was approximately $27,655,200.
As of
November 13, 2009, there
were 6,900,000 Ordinary Shares, $.0001 par value per share,
outstanding.
CS
CHINA ACQUISITION CORP.
FORM
10-K
TABLE
OF CONTENTS
PART
I
|
|
1
|
||
ITEM
1.
|
BUSINESS.
|
1
|
||
ITEM
1A.
|
RISK
FACTORS.
|
19
|
||
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
44
|
||
ITEM
2.
|
PROPERTIES.
|
44
|
||
ITEM
3.
|
LEGAL
PROCEEDINGS.
|
44
|
||
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
44
|
||
PART
II
|
|
45
|
||
ITEM
5.
|
MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
|
45
|
||
ITEM
6.
|
SELECTED
FINANCIAL DATA.
|
47
|
||
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
47
|
||
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
50
|
||
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
50
|
||
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
50
|
||
ITEM
9A(T).
|
CONTROLS
AND PROCEDURES.
|
50
|
||
ITEM
9B.
|
OTHER
INFORMATION.
|
52
|
||
PART
III
|
|
53
|
||
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
53
|
||
ITEM
11.
|
EXECUTIVE
COMPENSATION.
|
58
|
||
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
|
59
|
||
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
62
|
||
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
64
|
||
65
|
||||
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
|
65
|
i
PART
I
ITEM
1.
|
BUSINESS.
|
Background
CS China
Acquisition Corp. (the “Company”) is a blank check company formed on September
24, 2007 for the purpose of acquiring, through a merger, capital stock exchange,
asset acquisition or other similar business combination, an operating business,
or control of such operating business through contractual arrangements, that has
its principal operations located in the People’s Republic of China (“PRC”).
References herein to “we,” “us” or “our” refer to the Company.
On August
15, 2008, we consummated our initial public offering (“IPO”) of 4,800,000 Units
(“Units”). On August 21, 2008, we consummated the closing of and
additional 720,000 Units which were subject to the underwriters’ over-allotment
option. Each Unit consists of one Ordinary Share, $.0001 par
value per share (“Ordinary Share(s)”), and two Redeemable Ordinary Share
Purchase Warrants (“Warrant(s)”). Each Warrant entitles the holder to
purchase one Ordinary Share at an exercise price of $5.00 commencing upon the
later of the completion of a business combination or August 11, 2009 and
expiring August 10, 2013. Simultaneously with the consummation of IPO and the
consummation of the sale of additional Units pursuant to the underwriters’
over-allotment option, we consummated the sale of an aggregate of 3,608,000
Warrants (“Insider Warrants”) at $0.50 per Warrant (for an aggregate purchase
price of $1,804,000) in a private placement. Gross proceeds from our
IPO (including from our private placement of Insider Warrants and exercise of
the underwriters’ over-allotment option) were $34,924,000. We paid a
total of $1,324,800 in underwriting discounts and commissions (after deferring
$993,600) and for costs and expenses related to our IPO. After deducting the
underwriting discounts and commissions and offering expenses, the total net
proceeds to us from our IPO (including the over-allotment option and the private
sale) were $33,280,880, of which $32,899,200 was deposited into the trust
account and the remaining proceeds became available to be used to provide for
business, legal and accounting due diligence on prospective business
combinations and continuing general and administrative expenses. In addition, we may draw
for use of working capital up to $1,050,000 of interest earned on the trust
account, as well as any amounts necessary to pay our tax
obligations. Through July 31, 2009, we have used all of the net
proceeds that were not deposited into the trust fund to pay general and
administrative expenses, and we have drawn interest income in the amount of
$339,631 for our working capital. The net proceeds deposited into the
trust fund remain on deposit in the trust fund earning interest. As of July 31,
2009, there was $32,899,200 plus undrawn accrued interest of $15,967 held in the
trust fund.
1
Recent
Developments
AGRL is
an investment holding company. The principal business activities of its wholly
owned subsidiaries are to hold Profit Agreements with VIP Room gaming promoter
companies (“Promoters”) and to receive 100% of the profit streams from the
Promoters. The Promoters currently participate in the promotion of
two major luxury VIP gaming facilities (“VIP rooms”) in Macau, China, the
largest gaming market in the world. One of the Macau VIP rooms is
located at the top-tier MGM Grand Macau Casino in downtown Macau and is operated
by the MGM Grand Paradise S.A. Another Macau VIP gaming facility is
operated by Galaxy Casino, S.A. and is located in the luxury 5-star hotel, the
Star World Hotel & Casino in downtown Macau. In addition, the
Promoters plan to promote the first luxury VIP room in Jeju Island in South
Korea, which will offer Macau-style gaming, and have concluded a favorable trial
operation there.
The
transaction is expected to be consummated no later than the fourth business day
after the date on which the last of the conditions set forth in the Agreement is
fulfilled.
The
aggregate consideration (“Purchase Consideration”) to be paid by us to the
Shareholder for the shares of AGRL Stock will be (a) 10,350,000 Ordinary Shares,
par value $0.0001 per share (“CS China Stock”), which shall be paid at the
closing of the transaction and (b) 4,120,000 Ordinary Shares of CS China Stock
which shall be paid no later than 5 business days after the filing of our Annual
Report for the fiscal year ending December 31, 2010.
In
addition, the Shareholder shall be entitled to receive additional Ordinary
Shares of CS China Stock for each of the years 2009, 2010, 2011 and 2012 in
which AGRL has net after tax income that equals or exceeds the target specified
for such year in the Agreement (the “Incentive Target”). The total
maximum number of incentive shares that the Shareholder may receive is
17,196,000. With respect to year 2009, the Shareholder will not be
entitled to receive any incentive shares unless, in addition to achieving the
Incentive Target, AGRL’s rolling chip turnover (as such term is commonly
understood in the gaming and junket operations industry) exceeds $3,668,257,008,
and with respect to years 2009 and 2010, the maximum aggregate number of
incentive shares that the Shareholder will be entitled to receive is
12,050,000
In
addition, for each of the years 2009, 2010, 2011 and 2012, we will issue 530,000
Ordinary Shares of CS China Stock if AGRL has adjusted net income equal to or
greater than $29 million, $60 million, $75 million and $82.5 million,
respectively.
For a
more complete discussion of our proposed business combination, see our Report of
Foreign Private Issuer on Form 6-K dated October 13, 2009 and filed with the SEC
on October 13, 2009, as subsequently amended.
We expect
that the transaction will be consummated shortly after the special meeting of
shareholders that we will schedule to approve the
transaction. However unless otherwise indicated, the remainder of
this Annual Report on Form 10-K assumes that the foregoing transaction is not
consummated and that we must seek a different business combination.
2
Opportunities
in China
Opportunities
for market expansion have emerged for businesses with operations in China due to
certain changes in the PRC’s political, economic and social policies as well as
certain fundamental changes affecting the PRC and its neighboring countries. We
believe that China represents both a favorable environment for making
acquisitions and an attractive operating environment for a target business for
several reasons, including:
•
|
prolonged
economic expansion within China, including gross domestic product growth
of approximately 9% on average over the last 25 years, including 10.1% in
2004, 9.9% in 2005, 11.1% in 2006, 11.4% in 2007, with a projected rate of
9.8% for 2008 (National Bureau of Statistics of
China);
|
•
|
increased
government focus within China on privatizing assets, improving foreign
trade and encouraging business and economic
activity;
|
•
|
favorable
labor rates and efficient, low-cost manufacturing
capabilities;
|
•
|
the
recent entry of China into the World Trade Organization, the sole global
international organization dealing with the rules of trade between
nations, which may lead to a reduction on tariffs for industrial products,
a reduction in trade restrictions and an increase in trading with the
United States; and
|
•
|
the
fact that China’s public equity markets are not as well developed and
active as the equity markets within the United States and are
characterized by companies with relatively small market capitalizations
and low trading volumes, thereby causing Chinese companies to attempt to
be listed on the United States equity
markets.
|
We
believe that these factors and others should enable us to acquire a target
business with growth potential on favorable terms.
Government
Regulations
Government
Regulations Relating to Foreign Exchange Controls
The
principal regulation governing foreign exchange in China is the Foreign Currency
Administration Rules (IPPS), as amended. Under these rules, the Renminbi,
China’s currency, is freely convertible for trade and service related foreign
exchange transactions (such as normal purchases and sales of goods and services
from providers in foreign countries), but not for direct investment, loan or
investment in securities outside of China unless the prior approval of the State
Administration for Foreign Exchange (“SAFE”) of China is obtained. Foreign
investment enterprises (“FIEs”) are required to apply to the SAFE for “Foreign
Exchange Registration Certificates for FIEs.” Following a business combination,
involving a change of equity ownership of a PRC operating entity or through
contractual arrangements with a PRC operating entity. Our subsidiary will likely
be an FIE as a result of our ownership structure. With such registration
certificates, which need to be renewed annually, FIEs are allowed to open
foreign currency accounts including a “basic account” and “capital account.”
Currency translation within the scope of the “basic account,” such as remittance
of foreign currencies for payment of dividends, can be effected without
requiring the approval of the SAFE. However, conversion of currency in the
“capital account,” including capital items such as direct investment, loans and
securities, still require approval of the SAFE. This prior approval may delay or
impair our ability to operate following a business combination. On November 21,
2005, the SAFE issued Notice 75 on “Relevant Issues Concerning Foreign Exchange
Control on Domestic Residents’ Corporate Financing and Roundtrip Investment
Through Offshore Special Purpose Vehicles.” Notice 75 confirms that the use of
offshore special purpose vehicles as holding companies for PRC investments are
permitted as long as proper foreign exchange registrations are made with the
SAFE on May 28, 2007, SAFE issued Notice 106 to further clarify Note
75.
3
Government
Regulations Relating to Taxation
According
to the PRC income Tax Law of Foreign Investment Enterprises and Foreign
Enterprises and the Implementation Rules for the Income Tax Law, the standard
Enterprise Income Tax (“EIT”) rate of FIEs is 33%, reduced or exempted in some
cases under any applicable laws or regulations. Income such as dividends and
profits derived from the PRC by a foreign enterprise which has no establishment
in the PRC is subject to a 20% withholding tax, unless reduced or exempted by
any applicable laws or regulations. The profit derived by a foreign investor
from a FIE is currently exempted from EIT. The EIT Law of the People’s Republic
of China (“New EIT Law”), was promulgated on March 16, 2007 and will become
effective on January 1, 2008. The New EIT Law lowers the EIT from 33% to 25%.
The tax preferential treatments that are generally available to existing FIEs
will be either removed or phased out after January 1, 2008, and will no longer
be available to new FIEs that are established after January 1, 2008. Certain
special tax treatments will be made available to companies that are conducting
business in certain sectors that are considered “encouraged” by the government
such as clean energy, high-tech business, etc. It is also believed that the New
EIT Law will remove the dividend tax exemption that is currently enjoyed by
foreign investors that are shareholders of FIEs in China.
Regulation
of Foreign Currency Exchange and Dividend Distribution
Foreign Currency
Exchange. Foreign currency exchange in China is governed by a
series of regulations, including the Foreign Currency Administrative Rules
(1996), as amended, and the Administrative Regulations Regarding Settlement,
Sale and Payment of Foreign Exchange (1996), as amended. Under these
regulations, the Renminbi is freely convertible for trade and service-related
foreign exchange transactions, but not for direct investment, loans or
investments in securities outside China without the prior approval of the
SAFE. Pursuant to the Administrative Regulations Regarding
Settlement, Sale and Payment of Foreign Exchange, foreign-invested enterprises
in China may purchase foreign exchange without the approval of SAFE for trade
and service-related foreign exchange transactions by providing commercial
documents evidencing these transactions. They may also retain foreign exchange,
subject to a cap approved by SAFE, to satisfy foreign exchange liabilities or to
pay dividends. However, the relevant Chinese government authorities may limit or
eliminate the ability of foreign-invested enterprises to purchase and retain
foreign currencies in the future. In addition, foreign exchange transactions for
direct investment, loan and investment in securities outside China are still
subject to limitations and require approvals from SAFE.
4
Regulation of Foreign Exchange in
Certain Onshore and Offshore Transactions. Pursuant to recent
regulations issued by the SAFE, PRC residents are required to register with and
receive approvals from SAFE in connection with offshore investment activities.
SAFE has stated that the purpose of these regulations is to ensure the proper
balance of foreign exchange and the standardization of the cross-border flow of
funds.
On
January 24, 2005, SAFE issued a regulation stating that SAFE approval is
required for any sale or transfer by the PRC residents of a PRC company’s assets
or equity interests to foreign entities in exchange for the equity interests or
assets of the foreign entities. The regulation also states that, when
registering with the foreign exchange authorities, a PRC company acquired by an
offshore company must clarify whether the offshore company is controlled or
owned by PRC residents and whether there is any share or asset link between or
among the parties to the acquisition transaction.
On April
8, 2005, SAFE issued another regulation further explaining and expanding upon
the January regulation. The April regulation clarified that, where a PRC company
is acquired by an offshore company in which PRC residents directly or indirectly
hold shares, such PRC residents must (i) register with the local SAFE regarding
their respective ownership interests in the offshore company, even if the
transaction occurred prior to the January regulation, and (ii) file amendments
to such registration concerning any material events of the offshore company,
such as changes in share capital and share transfers. The April regulation also
expanded the statutory definition of the term “foreign acquisition”, making the
regulations applicable to any transaction that results in PRC residents directly
or indirectly holding shares in the offshore company that has an ownership
interest in a PRC company. The April regulation also provides that failure to
comply with the registration procedures set forth therein may result in the
imposition of restrictions on the PRC company’s foreign exchange activities and
its ability to distribute profits to its offshore parent company.
On
October 21, 2005, SAFE issued the Notice on Issues Relating to the
Administration of Foreign Exchange in Fund-raising and Reverse Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose
Companies, or Notice 75, which became effective as of November 1, 2005. Notice
75 replaced the two rules issued by SAFE in January and April 2005 mentioned
above.
According
to Notice 75:
•
|
prior
to establishing or assuming control of an offshore company for the purpose
of financing that offshore company with assets or equity interests in an
onshore enterprise in the PRC, each PRC resident, whether a natural or
legal person, must complete the overseas investment foreign exchange
registration procedures with the relevant local SAFE
branch;
|
•
|
an
amendment to the registration with the local SAFE branch is required to be
filed by any PRC resident that directly or indirectly holds interests in
that offshore company upon either (1) the injection of equity interests or
assets of an onshore enterprise to the offshore company, or (2) the
completion of any overseas fund raising by such offshore company;
and
|
5
•
|
an
amendment to the registration with the local SAFE branch is also required
to be filed by such PRC resident when there is any material change
involving a change in the capital of the offshore company, such as (1) an
increase or decrease in its capital, (2) a transfer or swap of shares, (3)
a merger or division, (4) a long term equity or debt investment, or (5)
the creation of any security interests over the relevant assets located in
China.
|
Moreover,
Notice 75 applies retroactively. As a result, PRC residents who have established
or acquired control of offshore companies that have made onshore investments in
the PRC in the past are required to complete the relevant overseas investment
foreign exchange registration procedures by March 31, 2006. Under the relevant
rules, failure to comply with the registration procedures set forth in Notice 75
may result in restrictions being imposed on the foreign exchange activities of
the relevant onshore company, including the payment of dividends and other
distributions to its offshore parent or affiliate and the capital inflow from
the offshore entity, and may also subject relevant PRC residents to penalties
under PRC foreign exchange administration regulations.
On May
29, 2007, SAFE issued Notice 106 to further clarify relevant issues concerning
the implementation and application of Notice 75. Notice 106 sets length of
qualitative financial and operational requirements (normally financial
disclosure for 3 years subject to certain exceptions depending on the type of
investment) for candidate offshore companies. Failure to comply will result in
(i) refusal of registration as a SPV, (ii) refusal of remittance of dividends
and other distributions and (iii) potential punishment for illegal remittance of
foreign exchange.
As a
Cayman Islands company, and therefore a foreign entity, if we purchase the
assets or equity interest of a PRC company owned by PRC residents, such PRC
residents will be subject to the registration procedures described in the
regulations as currently drafted. Moreover, PRC residents who are beneficial
holders of our shares are required to register with SAFE in connection with
their investment in us.
Although
SAFE issued Notice 106 to its various SAFE Bureaus, the uncertainties concerning
how the existing SAFE regulations will be interpreted or implemented, and
uncertainty as to when the new procedures and requirements will take effect or
be enforced, we cannot predict how they will affect our business operations
following a business combination. For example, our ability to conduct foreign
exchange activities following a business combination, such as remittance of
dividends and foreign-currency-denominated borrowings, may be subject to
compliance with the SAFE registration requirements by such PRC residents, over
whom we have no control. In addition, we cannot assure you that such PRC
residents will be able to complete the necessary approval and registration
procedures required by the SAFE regulations. We will require all our
shareholders, following a business combination, who are PRC residents to comply
with any SAFE registration requirements, although we have no control over either
our shareholders or the outcome of such registration procedures. Such
uncertainties may restrict our ability to implement our acquisition strategy and
adversely affect our business and prospects following a business
combination.
6
Dividend
Distribution. The principal laws and regulations in China
governing distribution of dividends by foreign-invested companies
include:
•
|
The
Sino-foreign Equity Joint Venture Law (1979), as
amended;
|
•
|
The
Regulations for the Implementation of the Sino-foreign Equity Joint
Venture Law (1983), as amended;
|
•
|
The
Sino-foreign Cooperative Enterprise Law (1988), as
amended;
|
•
|
The
Detailed Rules for the Implementation of the Sino-foreign Cooperative
Enterprise Law (1995), as amended;
|
•
|
The
Foreign Investment Enterprise Law (1986), as amended;
and
|
•
|
The
Regulations of Implementation of the Foreign Investment Enterprise Law
(1990), as amended.
|
Under
these regulations, foreign-invested enterprises in China may pay dividends only
out of their accumulated profits, if any, determined in accordance with Chinese
accounting standards and regulations. In addition, wholly foreign-owned
enterprises in China are required to set aside at least 10% of their respective
accumulated profits each year, if any, to fund certain reserve funds unless such
reserve funds have reached 50% of their respective registered capital. These
reserves are not distributable as cash dividends.
Regulation
of Foreign Investors’ Merging Chinese Enterprises
On August
8, 2006, the Ministry of Commerce, the State-owned Assets Supervision and
Administration Commission, State Administration of Taxation, State
Administration for Industry and Commerce, China Securities Regulatory Commission
and State Administration of Foreign Exchange jointly promulgated the Provisions
for Foreign Investors to Merge Domestic Enterprises, which took effect from
September 8, 2006, replacing the Interim Provisions for Foreign Investors to
Merge Domestic Enterprises issued in March 2003 by four authorities, the
Ministry of Foreign Trade and Economic Cooperation, State Administration of
Taxation, State Administration for Industry and Commerce and State
Administration of Foreign Exchange. The State-owned Assets Supervision and
Administration Commission and China Securities Regulatory Commission newly join
the regulation promulgation. On December 1, 2007, National Development and
Reform Commission and MOFCOM issued the Catalogue for Guidance of Foreign
Investment Industries, or 2007 Catalogue, as the 4th amendment to its original
1995 Catalogue. The 2007 Catalogue may affect the acquisitions involving foreign
investors and parties in various restricted categories of
industries.
The
requirements and approval procedures for the Equity Acquisition and Assets
Acquisition remains unchanged as those in the interim regulation. The new
regulation adds one chapter on the acquisition with equity as the consideration
including one section on the special purpose company. This chapter stipulated
the relevant conditions and approval procedures in detail making such
acquisitions workable. The currently mandatory requirement for the submission of
fund remittance into China will be changed.
The
Anti-monopoly Chapter in the new regulation is more or less the same as the
existing interim regulation, although Chinese government is recently tightening
such control.
7
We cannot
predict how such regulations especially the anti-monopoly examination will
affect our future completion of a business combination. However, we are
confident our strong and in-depth understanding of Chinese market would help us
minimize the negative impacts.
Use
of Contractual Arrangements
The
government of the PRC has restricted or limited foreign ownership of certain
kinds of assets and companies operating in certain industries. The industry
groups that are restricted are wide ranging, including certain aspects of
telecommunications, advertising, food production, and heavy equipment
manufacturers, for example. In addition there can be restrictions on the foreign
ownership of businesses that are determined from time to time to be in
“important industries” that may affect the national economic security or having
“famous Chinese brand names” or “well established Chinese brand names.” Subject
to the review requirements of the Ministry of Commerce and other relevant
agencies as discussed elsewhere for acquisitions of assets and companies in the
PRC and subject to the various percentage ownership limitations that exist from
time to time, acquisitions involving foreign investors and parties in the
various restricted categories of assets and industries may nonetheless sometimes
be consummated using contractual arrangements with permitted Chinese parties. To
the extent that such agreements are employed, they may be for control of
specific assets such as intellectual property or control of blocks of the equity
ownership interests of a company. The agreements would be designed to provide
our company with the economic benefits of and control over the subject assets or
equity interests similar to the rights of full ownership, while leaving the
technical ownership in the hands of Chinese parties who would be our
nominees.
For
example, these contracts could result in a structure where, in exchange for our
payment of the acquisition consideration, (i) the target company would be
majority owned by Chinese residents whom we designate and the target company
would continue to hold the requisite licenses for the target business, and (ii)
we would establish a new subsidiary in China which would provide technology,
technical support, consulting and related services to the target company in
exchange for fees, which would transfer to us substantially all of the economic
benefits of ownership of the target company.
These
contractual arrangements would be designed to provide the
following:
•
|
Our
exercise of effective control over the target
company;
|
•
|
A
substantial portion of the economic benefits of the target company would
be transferred to us; and
|
•
|
We,
or our designee, would have an exclusive option to purchase all or part of
the equity interests in the target company owned by the Chinese residents
whom we designate, or all or part of the assets of the target company, in
each case when and to the extent permitted by Chinese
regulations.
|
While we
cannot predict the terms of any such contract that we will be able to negotiate,
at a minimum, any contractual arrangement would need to provide us with (i)
effective control over the target’s operations and management either directly
through board control or through affirmative and/or negative covenants and veto
rights with respect to matters such as entry into material agreements,
management changes and issuance of debt or equity securities, among other
potential control provisions and (ii) a sufficient level of economic interest to
ensure that we satisfy the 80% net asset test required for our initial business
combination. We have not, however, established specific provisions which must be
in an agreement in order to meet the definition of business combination. We
would obtain an independent appraisal from an investment bank or industry expert
for the purpose of determining the fair value of any contractual
arrangement.
8
These
agreements likely also would provide for increased ownership or full ownership
and control by us when and if permitted under PRC law and regulation. If we
choose to effect a business combination that employs the use of these types of
control arrangements, we may have difficulty in enforcing our rights. Therefore
these contractual arrangements may not be as effective in providing us with the
same economic benefits, accounting consolidation or control over a target
business as would direct ownership.
Effecting
a Business Combination
General
We are
not presently engaged in, and we will not engage in, any substantive commercial
business until we consummate a business combination. We intend to utilize cash
derived from the proceeds of our IPO, our share capital, debt or a combination
of these in effecting a business combination. A business combination may involve
the acquisition of, or merger with, a company which does not need substantial
additional capital but which desires to establish a public trading market for
its shares, while avoiding what it may deem to be adverse consequences of
undertaking a public offering itself. These include time delays, significant
expense, loss of voting control and compliance with various Federal and state
securities laws. In the alternative, we may seek to consummate a business
combination with a company that may be financially unstable or in its early
stages of development or growth. While we may seek to effect simultaneous
business combinations with more than one target business, we will probably have
the ability, as a result of our limited resources, to effect only a single
business combination.
Selection
of a Target Business and Structuring of a Business Combination
Subject
to the requirement that our initial business combination must be with a target
business having its principal operations in the People’s Republic of China and a
fair market value that is at least 80% of our net assets at the time of such
acquisition, our management has virtually unrestricted flexibility in
identifying and selecting a prospective target business. We have not established
any other specific attributes or criteria (financial or otherwise) for
prospective target businesses. In evaluating a prospective target business, our
management may consider a variety of factors, including one or more of the
following:
•
|
identified
infrastructure projects requiring one-time capital
investment;
|
•
|
stable,
growing cash flows;
|
9
•
|
high
barriers to entry;
|
•
|
opportunities
for organic and acquisition growth;
|
•
|
highly
developed economic environment; and
|
•
|
books
and accounts that have been audited by a fully qualified auditing firm
duly registered in the PRC and proper business
records.
|
These
criteria are not intended to be exhaustive. Any evaluation relating to the
merits of a particular business combination will be based, to the extent
relevant, on the above factors as well as other considerations deemed relevant
by our management in effecting a business combination consistent with our
business objective. In evaluating a prospective target business, we will conduct
an extensive due diligence review which will encompass, among other things,
meetings with incumbent management and inspection of facilities, as well as
review of financial and other information which is made available to us. This
due diligence review will be conducted either by our management or by
unaffiliated third parties we may engage, although we have no current intention
to engage any such third parties. We are also required to have all prospective
target businesses execute agreements with us waiving any right, title, interest
or claim of any kind in or to any monies held in the trust account. If any
prospective target business refused to execute such agreement, we would cease
negotiations with such target business.
The time
and costs required to select and evaluate a target business and to structure and
complete the business combination cannot presently be ascertained with any
degree of certainty. Any costs incurred with respect to the identification and
evaluation of a prospective target business with which a business combination is
not ultimately completed will result in a loss to us and reduce the amount of
capital available to otherwise complete a business combination.
Fair
Market Value of Target Business
The
target business or businesses that we acquire must collectively have a fair
market value equal to at least 80% of our net assets at the time of such
acquisition, although we may acquire a target business whose fair market value
significantly exceeds 80% of our net assets. We anticipate structuring a
business combination to acquire 100% of the equity interests or assets of the
target business. We may, however, structure a business combination to acquire
less than 100% of such interests or assets of the target business but will not
acquire less than a controlling interest (meaning not less than 50.1% of the
voting securities of the target business). If we acquire only a controlling
interest in a target business or businesses, the portion of such business that
we acquire must have a fair market value equal to at least 80% of our net
assets. In order to consummate such an acquisition, we may issue a significant
amount of our debt or equity securities to the sellers of such businesses and/or
seek to raise additional funds through a private offering of debt or equity
securities. If we issue securities in order to consummate a business
combination, our shareholders could end up owning a minority of the combined
company as there is no requirement that our shareholders own a certain
percentage of our company after our business combination. Since we have no
specific business combination under consideration, we have not entered into any
such fund raising arrangement. The fair market value of the target will be
determined by our board of directors based upon one or more standards generally
accepted by the financial community (such as actual and potential sales,
earnings and cash flow and/or book value). If our board is not able to
independently determine that the target business has a sufficient fair market
value, we will obtain an opinion from an unaffiliated, independent investment
banking firm with respect to the satisfaction of such criteria. As the opinion
will be addressed to our board of directors for their use in evaluating the
transaction, we do not anticipate that our shareholders will be entitled to rely
on such opinion. However, as the opinion will be attached to, and thoroughly
described in, our proxy soliciting materials, we believe investors will be
provided with sufficient information in order to allow them to properly analyze
the transaction. Accordingly, whether the independent investment banking firm
allows shareholders to rely on their opinion will not be a factor in determining
which firm to hire. We will not be required to obtain an opinion from an
investment banking firm as to the fair market value if our board of directors
independently determines that the target business complies with the 80%
threshold.
10
Lack
of Business Diversification
Our
business combination must be with a target business or businesses that
collectively satisfy the minimum valuation standard at the time of such
acquisition, as discussed above, although this process may entail the
simultaneous acquisitions of several operating businesses at the same time.
Therefore, at least initially, the prospects for our success may be entirely
dependent upon the future performance of a single business. Unlike other
entities which may have the resources to complete several business combinations
of entities operating in multiple industries or multiple areas of a single
industry, it is probable that we will not have the resources to diversify our
operations or benefit from the possible spreading of risks or offsetting of
losses. By consummating a business combination with only a single entity, our
lack of diversification may:
•
|
subject
us to numerous economic, competitive and regulatory developments, any or
all of which may have a substantial adverse impact upon the particular
industry in which we may operate subsequent to a business combination,
and
|
•
|
result
in our dependency upon the performance of a single operating business or
the development or market acceptance of a single or limited number of
products, processes or services.
|
If we
determine to simultaneously acquire several businesses and such businesses are
owned by different sellers, we will need for each of such sellers to agree that
our purchase of its business is contingent on the simultaneous closings of the
other acquisitions, which may make it more difficult for us, and delay our
ability, to complete the business combination. With multiple acquisitions, we
could also face additional risks, including additional burdens and costs with
respect to possible multiple negotiations and due diligence investigations (if
there are multiple sellers) and the additional risks associated with the
subsequent assimilation of the operations and services or products of the
acquired companies in a single operating business.
11
Limited
Ability to Evaluate the Target Business’ Management
Although
we intend to scrutinize the management of a prospective target business when
evaluating the desirability of effecting a business combination, we cannot
assure you that our assessment of the target business’ management will prove to
be correct. In addition, we cannot assure you that the future management will
have the necessary skills, qualifications or abilities to manage a public
company. Furthermore, the future role of our officers and directors, if any, in
the target business following a business combination cannot presently be stated
with any certainty. While it is possible that some of our key personnel will
remain associated in senior management or advisory positions with us following a
business combination, it is unlikely that they will devote their full time
efforts to our affairs subsequent to a business combination. Moreover, they
would only be able to remain with the company after the consummation of a
business combination if they are able to negotiate employment or consulting
agreements in connection with the business combination. Such negotiations would
take place simultaneously with the negotiation of the business combination and
could provide for them to receive compensation in the form of cash payments
and/or our securities for services they would render to the company after the
consummation of the business combination. While the personal and financial
interests of our key personnel may influence their motivation in identifying and
selecting a target business, their ability to remain with the company after the
consummation of a business combination will not be the determining factor in our
decision as to whether or not we will proceed with any potential business
combination. Additionally, we cannot assure you that our officers and directors
will have significant experience or knowledge relating to the operations of the
particular target business.
Following
a business combination, we may seek to recruit additional managers to supplement
the incumbent management of the target business. We cannot assure you that we
will have the ability to recruit additional managers, or that any such
additional managers we do recruit will have the requisite skills, knowledge or
experience necessary to enhance the incumbent management.
Opportunity
for shareholder approval of business combination
Prior to
the completion of a business combination, we will submit the transaction to our
shareholders for approval, even if the nature of the acquisition is such as
would not ordinarily require shareholder approval under applicable
law.
In
connection with seeking shareholder approval of a business combination, we will
furnish our shareholders with proxy solicitation materials prepared in
accordance with the Securities Exchange Act of 1934, as amended, which, among
other matters, will include a description of the operations of the target
business. We will also provide shareholders with audited financial
statements of the prospective target business as part of the proxy solicitation
materials sent to shareholders to assist them in assessing the target
business. In all likelihood, these financials statements will need to
be prepared in accordance with United States generally accepted accounting
principals. We cannot assure you that any particular target business
identified by us as a potential acquisition candidate will have financial
statements prepared in accordance with United States generally accepted
accounting principals or that the potential target business will be able to
prepare its financial statements in accordance with United States generally
accepted accounting principals. To the extent that such financial
statements cannot be obtained, we may not be able to acquire the proposed target
business. While this may limit the pool of potential acquisition
candidates, we do not believe that this limitation will be
material.
We will
publicly announce the record date for determining the shareholders entitled to
vote at the meeting to approve our business combination at least two business
days prior to such record date.
12
In
connection with the vote required for any business combination, all of our
existing shareholders, including all of our officers and directors, have agreed
to vote their respective initial shares in accordance with the majority of the
Ordinary Shares voted by the public shareholders. This voting arrangement shall
not apply to Ordinary Shares included in Units purchased following our IPO in
the open market by any of our existing shareholders, officers and directors.
Accordingly, they may vote these Ordinary Shares on a proposed business
combination any way they choose.
We will
proceed with the business combination only if a majority of the Ordinary Shares
voted by the public shareholders are voted in favor of the business combination
and public shareholders owning less than 40% of the shares sold in our IPO both
exercise their redemption rights and vote against the business
combination.
Redemption
rights
At the
time we seek shareholder approval of any business combination, we will offer
each public shareholder the right to have such shareholder’s Ordinary Shares
redeemed for cash if the shareholder votes against the business combination and
the business combination is approved and completed. Notwithstanding the
foregoing, a public shareholder, together with any affiliate of his or any other
person with whom he is acting in concert or as a “group” (as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended) will be restricted
from seeking redemption rights with respect to 10% or more of the IPO shares.
Such a public shareholder would still be entitled to vote against a proposed
business combination with respect to all Ordinary Shares owned by him or his
affiliates. We believe this restriction will prevent shareholders from
accumulating large blocks of shares before the vote held to approve a proposed
business combination and attempt to use the redemption right as a means to force
us or our management to purchase their Ordinary Shares at a significant premium
to the then current market price. By limiting a shareholder’s ability to redeem
no more than 10% of the IPO shares, we believe we have limited the ability of a
small group of shareholders to unreasonably attempt to block a transaction which
is favored by our other public shareholders.
Our
existing shareholders will not have such redemption rights with respect to any
Ordinary Shares owned by them, directly or indirectly, whether included in or
underlying their initial Ordinary Shares or purchased by them in our IPO or in
the aftermarket. The actual per-share redemption price will be equal to the
amount in the trust account, inclusive of any interest then held in the trust
account (calculated as of two business days prior to the consummation of the
proposed business combination), divided by the number of Ordinary Shares sold in
our IPO. As of July 31, 2009, the per-share redemption price would be
$5.96.
An
eligible shareholder may request redemption at any time after the mailing to our
shareholders of the proxy statement and prior to the vote taken with respect to
a proposed business combination at a meeting held for that purpose, but the
request will not be granted unless the shareholder votes against the business
combination and the business combination is approved and completed.
Additionally, we may require public shareholders, whether they are a record
holder or hold their Ordinary Shares in “street name,” to either tender their
share certificates to our transfer agent at any time through the vote on the
business combination or to deliver their shares to the transfer agent
electronically using Depository Trust Company’s DWAC (Deposit/Withdrawal At
Custodian) System, at the holder’s option. The proxy solicitation materials that
we will furnish to shareholders in connection with the vote for any proposed
business combination will indicate whether we are requiring shareholders to
satisfy such certification and delivery requirements. Accordingly, a shareholder
would have from the time we send out our proxy statement through the vote on the
business combination to tender his Ordinary Shares if he wishes to seek to
exercise his redemption rights. This time period varies depending on the
specific facts of each transaction. However, as the delivery process can be
accomplished by the shareholder, whether or not he is a record holder or his
Ordinary Shares are held in “street name,” in a matter of hours by simply
contacting the transfer agent or his broker and requesting delivery of his
Ordinary Shares through the DWAC System, we believe this time period is
sufficient for an average investor. However, because we do not have any control
over this process, it may take significantly longer than we anticipated.
Accordingly, we will only require shareholders to deliver their share
certificate prior to the vote if we give shareholders at least two weeks between
the mailing of the proxy solicitation materials and the meeting
date.
13
Traditionally,
in order to perfect redemption rights in connection with a blank check company’s
business combination, a holder could simply vote against a proposed business
combination and check a box on the proxy card indicating such holder was seeking
to redeem. After the business combination was approved, the Company would
contact such shareholder to arrange for him to deliver his certificate to verify
ownership. As a result, the shareholder then had an “option window” after the
consummation of the business combination during which he could monitor the price
of the shares in the market. If the price rose above the redemption price, he
could sell his shares in the open market before actually delivering his shares
to the Company for cancellation. Thus, the redemption right, to which
shareholders were aware they needed to commit before the shareholder meeting,
would become a “put” right surviving past the consummation of the business
combination until the redeeming holder delivered his certificate. The
requirement for physical or electronic delivery prior to the meeting ensures
that a redeeming holder’s election to redeem is irrevocable once the business
combination is approved. There is a nominal cost associated with the
above-referenced tendering process and the act of certificating the shares or
delivering them through the DWAC system. The transfer agent will typically
charge the tendering broker $35 and it would be up to the broker whether or not
to pass this cost on to the redeeming holder. However, this fee would be
incurred regardless of whether or not we require holders seeking to exercise
redemption rights to tender their shares prior to the meeting — the
need to deliver shares is a requirement of redemption regardless of the timing
of when such delivery must be effectuated. Notwithstanding the foregoing, if a
proposed business combination is ultimately rejected and we are unable to
complete another business combination, such fee would have been incurred
unnecessarily.
Any
request for redemption, once made, may be withdrawn at any time up to the vote
taken with respect to the proposed business combination. Furthermore, if a
shareholder delivered his share certificate for redemption and subsequently
decided prior to the meeting not to elect redemption, he may simply request that
the transfer agent return the share certificate (physically or electronically).
It is anticipated that the funds to be distributed to shareholders entitled to
redeem their shares who elect redemption will be distributed promptly after
completion of a business combination. Public shareholders who redeem their
Ordinary Shares for their share of the trust account still have the right to
exercise any Warrants they still hold.
14
If a vote
on our initial business combination is held and the business combination is not
approved, we may continue to try to consummate a business combination with a
different target until thirty months from the date of the IPO prospectus. If the
initial business combination is not approved or completed for any reason, then
public shareholders voting against our initial business combination who
exercised their redemption rights would not be entitled to redeem their Ordinary
Shares for a pro rata share of the aggregate amount then on deposit in the trust
account. In such case, if we have required public shareholders to tender their
share certificates prior to the meeting, we will promptly return such share
certificates to the tendering public shareholder. Public shareholders would be
entitled to receive their pro rata share of the aggregate amount on deposit in
the trust account only in the event that the initial business combination they
voted against was duly approved and subsequently completed, or in connection
with our liquidation.
We will
not complete any business combination if public shareholders, owning 40% or more
of the shares sold in our IPO, both exercise their redemption rights and vote
against the business combination. Accordingly, it is our understanding and
intention in every case to structure and consummate a business combination in
which public shareholders owning 39.99% of the Ordinary Shares sold in our IPO
may exercise their redemption rights and the business combination will still go
forward. We have set the redemption percentage at 40% in order to reduce the
likelihood that a small group of investors holding a block of our Ordinary
Shares will be able to stop us from completing a business combination that is
otherwise approved by a large majority of our public shareholders.
Because
redeeming shareholders will receive their proportionate share of deferred
underwriting compensation at the time of closing of our business combination,
the non-redeeming shareholders will bear the financial effect of such payments
to both the redeeming shareholders and the underwriters as a consequence of the
reduction in our net assets resulting from such distribution.
Automatic
liquidation and subsequent dissolution if no business combination
Our
amended and restated memorandum and articles of association provides that we
will continue in existence only until February 11, 2010 or until February 11,
2011 if a definitive agreement has been executed within 18 months after the
consummation of our IPO and the business combination has not been consummated
within such 18 month period. This provision may not be amended except in
connection with the consummation of a business combination. If we have not
completed a business combination by such date, it will trigger our automatic
liquidation. This has the same effect as if our board of directors and
shareholders had formally voted to approve our winding up and dissolution and
formally began a voluntary winding up procedure under the Companies Law. As a
result, no vote would be required from our shareholders to commence such a
voluntary winding up and dissolution. We view this provision terminating our
corporate life by February 11, 2010 or February 11, 2011 if a definitive
agreement has been executed by February 11, 2010 and the business combination
has not been consummated by such date as an obligation to our shareholders and
will not take any action to propose, support or endorse any proposal by our
shareholders to amend or waive this provision to allow us to survive for a
longer period of time except in connection with the consummation of a business
combination. Under the Companies Law, in the case of a full voluntary
liquidation procedure, a liquidator would give at least 21 days’ notice to
creditors inviting them to submit their claims for payment, by notifying known
creditors (if any) who have not submitted claims and by placing a public
advertisement in the Cayman Islands Official Gazette and taking any other steps
he or she may consider appropriate. In practice this notice requirement need not
necessarily delay the distribution of assets as the liquidator may be satisfied
that no creditors would be adversely affected as a consequence of a distribution
before this time period has expired. We anticipate the trust account would be
liquidated shortly following the expiration of the 21 day period. As soon as the
affairs of the Company are fully wound-up, the liquidator must lay his final
report and accounts before a final general meeting which must be called by a
public notice at least one month before it takes place. After the final meeting,
the liquidator must make a return to the Registrar confirming the date on which
the meeting was held and three months after the date of such filing the Company
is dissolved.
15
If we are
unable to complete a business combination by February 11, 2010 or February 11,
2011 if a definitive agreement has been executed by February 11, 2010 and the
business combination has not been consummated by such date, we will distribute,
as part of our liquidation process, to all of our public shareholders, 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 (subject to our obligations under Cayman Islands law to provide for
claims of creditors, taxes and liquidation costs, if any). We anticipate the
liquidator notifying the trustee of the trust account to begin distributing such
assets promptly after expiration of the 21 day period and anticipate it will
take no more than 10 business days to effectuate such distribution. Our initial
shareholders have waived their rights to participate in any liquidation
distribution with respect to their initial Ordinary Shares. However, we cannot
assure you that we will properly assess all claims that may be potentially
brought against us, and distributions (or part of them) could potentially be
delayed while the liquidator identifies and assesses alleged creditor claims, or
in the event the liquidation becomes subject to the supervision of the Cayman
Islands court. There will be no distribution from the trust account with respect
to our Warrants which will expire worthless. We will pay the costs of
liquidation from our remaining assets outside of the trust fund. If such funds
are insufficient, our initial shareholders have contractually agreed to advance
us the funds necessary to complete such liquidation (currently anticipated to be
no more than $15,000) and have contractually agreed not to seek repayment of
such expenses.
If we
were to expend all of the net proceeds of our IPO, other than the proceeds
deposited in the trust account, and without taking into account interest, if
any, earned on the trust account, the per-share liquidation price as of July 31,
2009 would have been $5.96. The proceeds deposited in the trust
account could, however, become subject to the claims of our creditors (which
could include vendors and service providers we have engaged to assist us in any
way in connection with our search for a target business and that are owed money
by us, as well as target businesses themselves) which could have higher priority
than the claims of our public shareholders. Chien Lee, Bill Haus, James
Preissler, Peter Li and William B. Heyn have agreed, pursuant to agreements with
us and EarlyBirdCapital that, if we liquidate prior to the consummation of a
business combination, they will be personally liable to pay debts and
obligations to target businesses or vendors or other entities that are owed
money by us for services rendered or contracted for or products sold to us in
excess of the net proceeds of our IPO not held in the trust account. We cannot
assure you, however, that they would be able to satisfy those obligations.
Furthermore, if they refused to satisfy their obligations, we would be required
to bring a claim against them to enforce our indemnification rights.
Accordingly, the actual per-share liquidation price could be less than $5.96,
plus interest, due to claims of creditors.
16
Our
public shareholders will be entitled to receive funds from the trust account
only in the event of the expiration of our existence and our automatic
liquidation if they seek to redeem their respective shares into cash upon a
business combination which the shareholder voted against and which is completed
by us. In no other circumstances will a shareholder have any right or interest
of any kind to or in the trust account.
Additionally,
in any liquidation proceedings of the Company under Cayman Islands’ law, the
funds held in our trust account may be included in our estate and subject to the
claims of third parties with priority over the claims of our shareholders. To
the extent any such claims deplete the trust account, we cannot assure you we
will be able to return to our public shareholders the liquidation amounts
payable to them. Furthermore, a liquidator of the Company might seek to hold a
shareholder liable to contribute to our estate to the extent of distributions
received by them pursuant to the dissolution of the trust account beyond the
date of dissolution of the trust account. We cannot assure you that claims will
not be brought against us for these reasons.
If we are
unable to consummate a transaction by February 11, 2011 (assuming the period in
which we need to consummate a business combination has been extended, as
provided in our amended and restated memorandum and articles of association), we
will go into voluntary liquidation and subsequently liquidate the trust account
as part of our liquidation process. Upon notice from the liquidator, the trustee
of the trust account will distribute the investments constituting the trust
account and will turn over the proceeds to our transfer agent for distribution
to our public shareholders. Concurrently, we shall pay, or reserve for payment,
from funds not held in trust, our liabilities and obligations, although we
cannot assure you that there will be sufficient funds for such purpose. If there
are insufficient funds held outside the trust account for such purpose, our
directors and officers have agreed to indemnify us for all claims of creditors
to the extent we obtain valid and enforceable waivers from such entities in
order to protect the amounts held in trust. However, because we are a blank
check company, rather than an operating company, and our operations will be
limited to searching for prospective target businesses to acquire, the only
likely claims to arise would be from our vendors and service providers (such as
accountants, lawyers, investment bankers, etc.) and potential target businesses.
As described above, pursuant to the obligation contained in our underwriting
agreement, we will seek to have all vendors, service providers and prospective
target businesses execute agreements with us waiving any right, title, interest
or claim of any kind they may have in or to any monies held in the trust
account. As a result, we believe the claims that could be made against us will
be limited, thereby lessening the likelihood that any claim would result in any
liability extending to the trust.
We
therefore believe that any necessary provision for creditors will be reduced and
should not have a significant impact on our ability to distribute the funds in
the trust account to our public shareholders. Nevertheless, we cannot assure you
of this fact as there is no guarantee that vendors, service providers and
prospective target businesses will execute such agreements. Nor is there any
guarantee that, even if they execute such agreements with us, they will not seek
recourse against the trust fund. A court could also conclude that such
agreements are not legally enforceable. As a result, if we liquidate, the
per-share distribution from the trust fund could be less than $5.96 due to
claims or potential claims of creditors.
17
In
addition, under certain circumstances distributions received by shareholders
could be viewed by applicable laws (including insolvency laws and certain
equitable and/or restitution principles) as either fraudulent transfers or
mistaken or otherwise wrongful payments. In those circumstances, a Cayman
Islands court could order that amounts received by our shareholders be repaid to
us. We cannot assure you that claims will not be brought against us for these
reasons.
Competition
For a
more complete discussion of the risks that will be applicable to us following
the business combination with AGRL, see our filings referred to above under
"Recent Developments."
If we are
unable to consummate the business combination with AGRL, we will continue
searching for attractive business combinations. In identifying, evaluating and
selecting a target business, we expect to encounter intense competition from
other entities having a business objective similar to ours. There are
numerous blank check companies that have completed initial public offerings that
are seeking to carry out a business plan similar to our business plan.
Additionally, we may be subject to competition from other companies looking to
expand their operations through the acquisition of a target business. Many of
these entities are well established and have extensive experience identifying
and effecting business combinations directly or through affiliates. Many of
these competitors possess greater technical, human and other resources than us
and our financial resources will be relatively limited when contrasted with
those of many of these competitors. While we believe there are numerous
potential target businesses that we could acquire, our ability to compete in
acquiring certain sizable target businesses will be limited by our available
financial resources. This inherent competitive limitation gives others an
advantage in pursuing the acquisition of a target business.
Further:
|
·
|
our
obligation to seek shareholder approval of a business combination may
delay the completion of a
transaction;
|
|
·
|
our
obligation to convert into cash, ordinary shares held by our public
shareholders in certain instances may reduce the resources available to us
for a business combination; and
|
|
·
|
our
outstanding warrants and option, and the future dilution they potentially
represent, may not be viewed favorably by certain target
businesses.
|
Any of
these factors may place us at a competitive disadvantage in successfully
negotiating a business combination. Our management believes, however, that our
status as a public entity and potential access to the United States public
equity markets may give us a competitive advantage over privately-held entities
having a similar business objective as us in acquiring a target business on
favorable terms.
If we
succeed in effecting a business combination, there will be, in all likelihood,
intense competition from competitors of the target business. We cannot assure
you that, subsequent to a business combination, we will have the resources or
ability to compete effectively.
18
Employees
We have
eight executive officers. These individuals are not obligated to devote any
specific number of hours to our matters and intend to devote only as much time
as they deem necessary to our affairs. The amount of time they will devote in
any time period will vary based on whether a target business has been selected
for the business combination and the stage of the business combination process
the Company is in. We do not intend to have any full time employees prior to the
consummation of a business combination.
ITEM
1A.
|
RISK
FACTORS.
|
Risks
Associated with Our Business
In
addition to other information included in this report, the following factors
should be considered in evaluating our business and future
prospects.
We
are a development stage company with no operating history and, accordingly, you
will not have any basis on which to evaluate our ability to achieve our business
objective.
We are a
recently incorporated development stage company with no operating results to
date. Since we do not have an operating history, you will have no basis upon
which to evaluate our ability to achieve our business objective, which is to
acquire an operating business. We will not generate any revenues until, at the
earliest, after the consummation of a business combination.
19
If
we are forced to liquidate before a business combination and distribute the
trust account, our public shareholders may receive less than $5.96 per share and
our Warrants will expire worthless.
Pursuant
to our amended and restated memorandum and articles of association, if we are
unable to complete a business combination within thirty months from the
consummation of the IPO and are forced to liquidate our assets, the per-share
liquidation distribution may be less than $5.96 because of our general and
administrative expenses, the anticipated costs of seeking a business combination
and claims of creditors, if any. Furthermore, there will be no distribution with
respect to our outstanding Warrants which will expire worthless if we liquidate
before the completion of a business combination.
If
we are unable to consummate a business combination, our public shareholders will
be forced to wait until February 11, 2011 (assuming the period in which we need
to consummate a business combination has been extended, as provided in our
memorandum and articles of association) before receiving liquidation
distributions.
We have
until February 11, 2011 in which to complete a business combination (assuming
the period in which we need to consummate a business combination has been
extended, as provided in our memorandum and articles of association). We have no
obligation to return funds to investors prior to such date unless we consummate
a business combination prior thereto and only then in cases where investors have
sought redemption of their shares. Only after the expiration of this full time
period will public shareholders be entitled to liquidation distributions if we
are unable to complete a business combination. Accordingly, investors’ funds may
be unavailable to them until such date.
Because
there are numerous companies with a business plan similar to ours seeking to
effectuate a business combination, it may be more difficult for us to do
so.
There are
numerous similarly structured blank check companies have completed IPOs in the
United States with business plans similar to ours and there are a number of
additional offerings still in registration. While some of those companies must
complete a business combination in specific industries, a number of them may
consummate a business combination in any industry they choose. Therefore, we may
be subject to competition from these and other companies seeking to consummate a
business plan similar to ours. Because of this competition, we cannot assure you
that we will be able to effectuate a business combination within the required
time periods.
If
the funds available to us are insufficient to allow us to operate for at least
the next 30 months, we may be unable to complete a business
combination.
We
believe that the funds available to us outside of the trust account, plus the
interest earned on the funds held in the trust account that may be available to
us, will be sufficient to allow us to operate until February 11, 2011, assuming
that a business combination is not consummated during that time. However, we
cannot assure you that our estimates will be accurate. We could use a portion of
the funds available to us to pay fees to consultants to assist us with our
search for a target business. We could also use a portion of the funds as a down
payment or to fund a “no-shop” provision (a provision in letters of intent
designed to keep target businesses from “shopping” around for transactions with
other companies on terms more favorable to such target businesses) with respect
to a particular proposed business combination, although we do not have any
current intention to do so. If we entered into a letter of intent where we paid
for the right to receive exclusivity from a target business and were
subsequently required to forfeit such funds (whether as a result of our breach
or otherwise), we might not have sufficient funds to continue searching for, or
conduct due diligence with respect to, a target business.
20
A
decline in interest rates could limit the amount available to fund our search
for a target business or businesses and complete a business combination since we
will depend on interest earned on the trust account to fund our search, to pay
our tax obligations and to complete our initial business
combination.
We will
depend on sufficient interest being earned on the proceeds held in the trust
account to provide us with working capital we will need to identify one or more
target businesses and to complete our initial business combination, as well as
to pay any tax obligations that we may owe. While we are entitled to have
released to us for such purposes certain interest earned on the funds in the
trust account, a substantial decline in interest rates may result in our having
insufficient funds available with which to structure, negotiate or close an
initial business combination. In such event, we would need to borrow funds from
our initial shareholders to operate or may be forced to liquidate. Our initial
shareholders are under no obligation to advance funds in such
circumstances.
If
third parties bring claims against us, the proceeds held in trust could be
reduced and the per-share liquidation price received by shareholders may be less
than $5.96 per share.
Our
placing of funds in trust may not protect those funds from third party claims
against us. Although we will seek to have all vendors and service providers we
engage and prospective target businesses we negotiate with, execute agreements
with us waiving any right, title, interest or claim of any kind in or to any
monies held in the trust account for the benefit of our public shareholders,
there is no guarantee that they will execute such agreements. Furthermore, there
is no guarantee that, even if such entities execute such agreements with us,
they will not seek recourse against the trust account. Nor is there any
guarantee that a court would uphold the validity of such agreements.
Accordingly, the proceeds held in trust could be subject to claims which could
take priority over those of our public shareholders. If we liquidate before the
completion of a business combination and distribute the proceeds held in trust
to our public shareholders, Chien Lee, Bill Haus, James Preissler, Peter Li and
William B. Heyn have agreed that they will be personally liable to ensure that
the proceeds in the trust account are not reduced by the claims of target
businesses or claims of vendors or other entities that are owed money by us for
services rendered or contracted for or products sold to us. Because we will seek
to have all vendors and prospective target businesses execute agreements with us
waiving any right, title, interest or claim of any kind they may have in or to
any monies held in the trust account, we believe the likelihood of Chien Lee,
Bill Haus, James Preissler, Peter Li or William B. Heyn having any such
obligations is minimal. Notwithstanding the foregoing, we have questioned such
individuals on their financial net worth and reviewed their financial
information and believe they will be able to satisfy any indemnification
obligations that may arise. However, we cannot assure you that they will be able
to do so. Therefore, we cannot assure you that the per-share distribution from
the trust account, if we liquidate, will not be less than $5.96, plus interest,
due to such claims.
21
Under
certain circumstances, a Cayman Islands court could order that amounts received
by shareholders be repaid to us.
Our
amended and restated memorandum and articles of association provides that we
will continue in existence only until thirty months from the consummation of our
IPO (assuming the period in which we need to consummate a business combination
has been extended, as provided in our amended and restated memorandum and
articles of association). If we have not completed a business combination by
such date and amended this provision in connection thereto, this will trigger
our automatic liquidation and subsequent dissolution. As a result, this has the
same effect as if we had formally went through a voluntary liquidation procedure
under the Companies Law (2007 Revision) of the Cayman Islands (the “Companies
Law”). In such a situation under the Companies Law, a liquidator would give at
least 21 days’ notice to creditors inviting them to submit their claims for
payment, by notifying known creditors (if any) who have not submitted claims and
by placing a public advertisement in the Cayman Islands Official Gazette and
taking any other steps he or she may consider appropriate. In practice this
notice requirement need not necessarily delay the distribution of assets as the
liquidator may be satisfied that no creditors would be adversely affected as a
consequence of a distribution before this time period has expired. As soon as
the affairs of the Company are fully wound-up, the liquidator must lay his final
report and accounts before a final general meeting which must be called by a
public notice at least one month before it takes place. After the final meeting,
the liquidator must make a return to the Cayman Islands Registrar of Companies
(“Registrar”) confirming the date on which the meeting was held and three months
after the date of such filing the Company is dissolved. In the case of a full
voluntary liquidation procedure, any liability of shareholders with respect to a
liquidating distribution would be barred if creditors miss the deadline for
submitting claims. Upon notice from the liquidator, the trustee of the trust
account will distribute the proceeds in our trust account to our public
shareholders as part of our automatic liquidation if we do not complete a
business combination within 30 months after the consummation of our IPO.
Pursuant to our amended and restated memorandum and articles of association,
failure to consummate a business combination within 30 months from the date of
our IPO will trigger an automatic winding up of the Company. However, we cannot
assure you that we will properly assess all claims that may be potentially
brought against us, and distributions (or part of them) could potentially be
delayed while the liquidator identifies and assesses alleged creditor claims, or
in the event the liquidation becomes subject to the supervision of the Cayman
Islands court.
If we are
unable to consummate a transaction within 30 months from the consummation of our
IPO (assuming the period in which we need to consummate a business combination
has been extended by shareholder vote, as provided in our amended and restated
memorandum and articles of association) this will trigger our automatic
liquidation and subsequent dissolution. Upon notice from the liquidator, the
trustee of the trust account will distribute the amount in our trust account to
our public shareholders as part of our liquidation process. Concurrently, we
shall pay, or reserve for payment, from funds not held in trust, our liabilities
and obligations, although we cannot assure you that there will be sufficient
funds for such purpose.
If there
are insufficient funds held outside the trust account for such purpose, Chien
Lee, Bill Haus, James Preissler, Peter Li and William B. Heyn have agreed that
they will be personally liable to ensure that the proceeds in the trust account
are not reduced by the claims of target businesses or claims of vendors or other
entities that are owed money by us for services rendered or contracted for or
products sold to us. In addition, under certain circumstances distributions
received by shareholders could be viewed by applicable laws (including
insolvency laws and certain equitable and/or restitution principles) as either
fraudulent transfers or mistaken or otherwise wrongful payments. In those
circumstances, a Cayman Islands court could order that amounts received by our
shareholders be repaid to us.
22
An
effective registration statement may not be in place when an investor desires to
exercise Warrants, thus precluding such investor from being able to exercise
his, her or its Warrants and causing such Warrants to be practically
worthless.
No
Warrant held by public shareholders will be exercisable and we will not be
obligated to issue Ordinary Shares unless at the time such holder seeks to
exercise such Warrant, a prospectus relating to the Ordinary Shares issuable
upon exercise of the Warrant is current and the Ordinary Shares have been
registered or qualified or deemed to be exempt under the securities laws of the
state of residence of the holder of the Warrants. Under the terms of the Warrant
agreement, we have agreed to use our best efforts to meet these conditions and
to maintain a current prospectus relating to the Ordinary Shares issuable upon
exercise of the Warrants until the expiration of the Warrants. However, we
cannot assure you that we will be able to do so, and if we do not maintain a
current prospectus related to the Ordinary Shares issuable upon exercise of the
Warrants, holders will be unable to exercise their Warrants and we will not be
required to settle any such Warrant exercise. If the prospectus relating to the
Ordinary Shares issuable upon the exercise of the Warrants is not current or if
the Ordinary Shares are not qualified or exempt from qualification in the
jurisdictions in which the holders of the Warrants reside, the Warrants held by
public shareholders may have no value, the market for such Warrants may be
limited and such Warrants may expire worthless. Notwithstanding the foregoing,
the Insider Warrants may be exercisable for unregistered Ordinary Shares even if
the prospectus relating to the Ordinary Shares issuable upon exercise of the
Warrants is not current.
An
investor will only be able to exercise a Warrant if the issuance of Ordinary
Shares upon such exercise has been registered or qualified or is deemed exempt
under the securities laws of the state of residence of the holder of the
Warrants.
No
Warrants will be exercisable and we will not be obligated to issue Ordinary
Shares unless the Ordinary Shares issuable upon such exercise has been
registered or qualified or deemed to be exempt under the securities laws of the
state of residence of the holder of the Warrants. Because the exemptions from
qualification in certain states for resales of Warrants and for issuances of
Ordinary Shares by the issuer upon exercise of a Warrant may be different, a
Warrant may be held by a holder in a state where an exemption is not available
for issuance of Ordinary Shares upon an exercise and the holder will be
precluded from exercise of the Warrant. At the time that the Warrants become
exercisable (following our completion of a business combination), we expect to
become listed on a national securities exchange, which would provide an
exemption from registration in every state. Accordingly, we believe holders in
every state will be able to exercise their Warrants as long as our prospectus
relating to the Ordinary Shares issuable upon exercise of the Warrants is
current. However, we cannot assure you of this fact. As a result, the Warrants
may be deprived of any value, the market for the Warrants may be limited and the
holders of Warrants may not be able to exercise their Warrants if the Ordinary
Shares issuable upon such exercise is not qualified or exempt from qualification
in the jurisdictions in which the holders of the Warrants reside.
23
Since
we have not yet selected a particular industry or target business with which to
complete a business combination, we are unable to currently ascertain the merits
or risks of the industry or business in which we may ultimately
operate.
We may
consummate a business combination with a company in any industry we choose and
are not limited to any particular industry or type of business. Accordingly,
there is no current basis for you to evaluate the possible merits or risks of
the particular industry in which we may ultimately operate or the target
business which we may ultimately acquire. To the extent we complete a business
combination with a financially unstable company or an entity in its development
stage, we may be affected by numerous risks inherent in the business operations
of those entities. If we complete a business combination with an entity in an
industry characterized by a high level of risk, we may be affected by the
currently unascertainable risks of that industry. Although our management will
endeavor to evaluate the risks inherent in a particular industry or target
business, we cannot assure you that we will properly ascertain or assess all of
the significant risk factors. We also cannot assure you that an investment in
our Units will not ultimately prove to be less favorable to investors in our IPO
than a direct investment, if an opportunity were available, in a target
business.
We
may issue shares of our share capital or debt securities to complete a business
combination, which would reduce the equity interest of our shareholders and
likely cause a change in control of our ownership.
Our
amended and restated memorandum and articles of association authorizes the
issuance of up to 50,000,000 Ordinary Shares, par value $.0001 per share, and
1,000,000 preferred shares, par value $.0001 per share. There are 27,012,000
authorized but unissued Ordinary Shares available for issuance (after
appropriate reservation for the issuance of the shares upon full exercise of our
outstanding Warrants and the unit purchase option granted to EarlyBirdCapital,
the representative of the underwriters in our IPO) and all of the 1,000,000
preferred shares available for issuance. We may issue a substantial number of
additional Ordinary Shares or preferred shares, or a combination of ordinary and
preferred shares, to complete a business combination. The issuance of additional
ordinary or preferred shares:
•
|
may
significantly reduce the equity interest of
investors;
|
•
|
may
subordinate the rights of holders of Ordinary Shares if we issue preferred
shares with rights senior to those afforded to our Ordinary
Shares;
|
•
|
may
cause a change in control if a substantial number of Ordinary Shares are
issued, which may affect, among other things, our ability to use our net
operating loss carry forwards, if any, and could result in the resignation
or removal of our present officers and directors;
and
|
•
|
may
adversely affect prevailing market prices for our Ordinary
Shares.
|
Similarly,
if we issue debt securities, it could result in:
24
•
|
default
and foreclosure on our assets if our operating revenues after a business
combination are insufficient to repay our debt
obligations;
|
•
|
acceleration
of our obligations to repay the indebtedness even if we make all principal
and interest payments when due if we breach certain covenants that require
the maintenance of certain financial ratios or reserves without a waiver
or renegotiation of that covenant;
|
•
|
our
immediate payment of all principal and accrued interest, if any, if the
debt security is payable on demand;
and
|
•
|
our
inability to obtain necessary additional financing if the debt security
contains covenants restricting our ability to obtain such financing while
the debt security is
outstanding.
|
Our
ability to successfully effect a business combination and to be successful
thereafter will be totally dependent upon the efforts of our key personnel, some
of whom may join us following a business combination.
Our
ability to successfully effect a business combination is dependent upon the
efforts of key personnel. The role of these individuals in the target business,
however, cannot presently be ascertained. Although some of them may remain with
the target business in senior management or advisory positions following a
business combination, it is likely that some or all of the management of the
target business will remain in place. While we intend to closely scrutinize any
individuals we engage after a business combination, we cannot assure you that
our assessment of these individuals will prove to be correct. These individuals
may be unfamiliar with the requirements of operating a public company which
could cause us to have to expend time and resources helping them become familiar
with such requirements. This could be expensive and time-consuming and could
lead to various regulatory issues which may adversely affect our
operations.
Our
key personnel may negotiate employment or consulting agreements with a target
business in connection with a particular business combination. These agreements
may provide for them to receive compensation following a business combination
and as a result, may cause them to have conflicts of interest in determining
whether a particular business combination is the most advantageous.
Our key
personnel will be able to remain with the Company after the consummation of a
business combination only if they are able to negotiate employment or consulting
agreements in connection with the business combination. Such negotiations would
take place simultaneously with the negotiation of the business combination and
could provide for such individuals to receive compensation in the form of cash
payments and/or our securities for services they would render to the Company
after the consummation of the business combination. The personal and financial
interests of such individuals may influence their motivation in identifying and
selecting a target business. However, we believe the ability of such individuals
to remain with the Company after the consummation of a business combination will
not be the determining factor in our decision as to whether or not we will
proceed with any potential business combination and we do not intend to insist
on arrangements to ensure that our officers and directors will be able to
maintain their positions with the Company after the consummation of our initial
business combination.
25
Our
officers and directors will allocate their time to other businesses thereby
causing conflicts of interest in their determination as to how much time to
devote to our affairs. This conflict of interest could have a negative impact on
our ability to consummate a business combination.
Our
officers and directors are not required to commit their full time to our
affairs, which could create a conflict of interest when allocating their time
between our operations and their other commitments. We do not intend to have any
full time employees prior to the consummation of a business combination. All of
our executive officers are engaged in several other business endeavors and are
not obligated to devote any specific number of hours to our affairs. If our
officers’ and directors’ other business affairs require them to devote more
substantial amounts of time to such affairs, it could limit their ability to
devote time to our affairs and could have a negative impact on our ability to
consummate a business combination. We cannot assure you that these conflicts
will be resolved in our favor. As a result, a potential target business may be
presented to another entity prior to its presentation to us and we may miss out
on a potential transaction.
All
of our officers and directors own Ordinary Shares issued prior to our IPO and an
affiliate of certain of our officers and directors owns warrants. These shares
and warrants will not participate in liquidation distributions and, therefore,
our officers and directors may have a conflict of interest in determining
whether a particular target business is appropriate for a business
combination.
All of
our officers and directors own Ordinary Shares that were issued prior to our
IPO, for which they paid an aggregate of $25,000. Additionally, CS
Capital USA, Bill Haus, James Preissler, Peter Li and William B. Heyn purchased
Insider Warrants upon consummation of the IPO. Such individuals have waived
their right to receive distributions with respect to their initial shares upon
our liquidation if we are unable to consummate a business combination.
Accordingly, the Ordinary Shares acquired prior to our IPO, as well as the
Insider Warrants, and any Warrants purchased by our officers or directors in our
IPO or in the aftermarket will be worthless if we do not consummate a business
combination. The personal and financial interests of our directors and officers
may influence their motivation in timely identifying and selecting a target
business and completing a business combination. Consequently, our directors’ and
officers’ discretion in identifying and selecting a suitable target business may
result in a conflict of interest when determining whether the terms, conditions
and timing of a particular business combination are appropriate and in our
shareholders’ best interest.
If
our Ordinary Shares become subject to the SEC’s penny stock rules,
broker-dealers may experience difficulty in completing customer transactions and
trading activity in our securities may be adversely affected.
If at any
time we have net tangible assets of $5,000,000 or less and our Ordinary Shares
have a market price per share of less than $5.00, transactions in our Ordinary
Shares may be subject to the “penny stock” rules promulgated under the
Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend
such securities to persons other than institutional accredited investors
must:
26
•
|
make
a special written suitability determination for the
purchaser;
|
•
|
receive
the purchaser’s written agreement to the transaction prior to
sale;
|
•
|
provide
the purchaser with risk disclosure documents which identify certain risks
associated with investing in “penny stocks” and which describe the market
for these “penny stocks” as well as a purchaser’s legal remedies;
and
|
•
|
obtain
a signed and dated acknowledgment from the purchaser demonstrating that
the purchaser has actually received the required risk disclosure document
before a transaction in a “penny stock” can be
completed.
|
If our
Ordinary Shares become subject to these rules, broker-dealers may find it
difficult to effectuate customer transactions and trading activity in our
securities may be adversely affected. As a result, the market price of our
securities may be depressed, and you may find it more difficult to sell our
securities.
We
may only be able to complete one business combination with the proceeds of our
IPO, which will cause us to be solely dependent on a single business which may
have a limited number of products or services.
Our
business combination must be with a business with a fair market value of at
least 80% of our net assets at the time of such acquisition, although this may
entail the simultaneous acquisitions of several operating businesses at the same
time. By consummating a business combination with only a single entity, our lack
of diversification may subject us to numerous economic, competitive and
regulatory developments. Further, we would not be able to diversify our
operations or benefit from the possible spreading of risks or offsetting of
losses, unlike other entities which may have the resources to complete several
business combinations in different industries or different areas of a single
industry. Accordingly, the prospects for our success may be:
•
|
solely
dependent upon the performance of a single business,
or
|
•
|
dependent
upon the development or market acceptance of a single or limited number of
products, processes or services.
|
This lack
of diversification may subject us to numerous economic, competitive and
regulatory developments, any or all of which may have a substantial adverse
impact upon the particular industry in which we may operate subsequent to a
business combination.
Alternatively,
if we determine to simultaneously acquire several businesses and such businesses
are owned by different sellers, we will need for each of such sellers to agree
that our purchase of its business is contingent on the simultaneous closings of
the other business combinations, which may make it more difficult for us, and
delay our ability, to complete the business combination. With multiple business
combinations, we could also face additional risks, including additional burdens
and costs with respect to possible multiple negotiations and due diligence
investigations (if there are multiple sellers) and the additional risks
associated with the subsequent assimilation of the operations and services or
products of the acquired companies in a single operating business. If we are
unable to adequately address these risks, it could negatively impact our
profitability and results of operations.
27
We
may proceed with a business combination even if public shareholders owning
39.99% of the shares sold in our IPO exercise their redemption
rights.
We may
proceed with a business combination as long as public shareholders owning less
than 40% of the shares sold in our IPO exercise their redemption rights.
Accordingly, approximately 39.99% of the public shareholders may exercise their
redemption rights and we could still consummate a proposed business combination.
We have set the redemption percentage at 40% in order to reduce the likelihood
that a small group of investors holding a block of our shares will be able to
stop us from completing a business combination that is otherwise approved by a
large majority of our public shareholders.
Our
business combination may require us to use substantially all of our cash to pay
the purchase price. In such a case, because we will not know how many
shareholders may exercise such redemption rights, we may need to arrange third
party financing to help fund our business combination in case a larger
percentage of shareholders exercise their redemption rights than we expect.
Additionally, even if our business combination does not require us to use
substantially all of our cash to pay the purchase price, if a significant number
of shareholders exercise their redemption rights, we will have less cash
available to use in furthering our business plans following a business
combination and may need to arrange third party financing. We have not taken any
steps to secure third party financing for either situation. We cannot assure you
that we will be able to obtain such third party financing on terms favorable to
us or at all.
The
ability of our shareholders to exercise their redemption rights may not allow us
to effectuate the most desirable business combination or optimize our capital
structure.
When we
seek shareholder approval of any business combination, we will offer each public
shareholder (but not our existing shareholders) the right to have his, her or
its Ordinary Shares redeemed for cash if the shareholder votes against the
business combination and the business combination is approved and completed.
Such holder must both vote against such business combination and then exercise
his, her or its redemption rights to receive a pro rata portion of the trust
account. Accordingly, if our business combination requires us to use
substantially all of our cash to pay the purchase price, because we will not
know how many shareholders may exercise such redemption rights, we may either
need to reserve part of the trust account for possible payment upon such
redemption, or we may need to arrange third party financing to help fund our
business combination in case a larger percentage of shareholders exercise their
redemption rights than we expect. Since we have no specific business combination
under consideration, we have not taken any steps to secure third party
financing. Therefore, we may not be able to consummate a business combination
that requires us to use all of the funds held in the trust account as part of
the purchase price, or we may end up having a leverage ratio that is not optimal
for our business combination. This may limit our ability to effectuate the most
attractive business combination available to us.
28
We
may require shareholders who wish to redeem their Ordinary Shares in connection
with a proposed business combination to comply with specific requirements for
redemption that may make it more difficult for them to exercise their redemption
rights prior to the deadline for exercising their rights.
We may
require public shareholders who wish to redeem their Ordinary Shares in
connection with a proposed business combination to either tender their share
certificates to our transfer agent at any time prior to the vote taken at the
shareholder meeting relating to such business combination or to deliver their
Ordinary Shares to the transfer agent electronically using the Depository Trust
Company’s DWAC (Deposit/Withdrawal At Custodian) System. In order to obtain a
physical share certificate, a shareholder’s broker and/or clearing broker, DTC
and our transfer agent will need to act to facilitate this request. It is our
understanding that shareholders should generally allot at least two weeks to
obtain physical share certificates from the transfer agent. However, because we
do not have any control over this process or over the brokers or DTC, it may
take significantly longer than two weeks to obtain a physical share certificate.
While we have been advised that it takes a short time to deliver shares through
the DWAC System, we cannot assure you of this fact. Accordingly, if it takes
longer than we anticipate for shareholders to deliver their shares, shareholders
who wish to redeem may be unable to meet the deadline for exercising their
redemption rights and thus may be unable to redeem their Ordinary Shares.
Moreover, our transfer agent will typically charge the tendering broker $35 to
certificate the shares and it would be up to the broker whether or not to pass
this cost on to the redeeming holder. If a proposed business combination is
ultimately rejected and we are unable to complete another business combination,
such fee would have been incurred unnecessarily. Additionally, if you own very
few shares and this fee is passed on to you when you seek to redeem your shares,
the cost may outweigh the benefit of redemption.
Public
shareholders, together with any affiliates of theirs or any other person with
whom they are acting in concert or as a “group” with, will be restricted from
seeking redemption rights with respect to more than 10% of the shares sold in
our IPO.
When we
seek shareholder approval of any business combination, we will offer each public
shareholder (but not our existing shareholders) the right to have his, her, or
its Ordinary Shares redeemed for cash if the shareholder votes against the
business combination and the business combination is approved and completed.
Notwithstanding the foregoing, a public shareholder, together with any affiliate
of his or any other person with whom he is acting in concert or as a “group”
will be restricted from seeking redemption rights with respect to more than 10%
of the shares sold in our IPO. Accordingly, if you purchase more than 10% of the
shares sold in our IPO and a proposed business combination is approved, you will
not be able to seek redemption rights with respect to the full amount of your
shares and may be forced to hold such additional Ordinary Shares or sell them in
the open market. We cannot assure you that the value of such additional shares
will appreciate over time following a business combination or that the market
price of our Ordinary Shares will exceed the per-share redemption
price.
29
Because
of our limited resources and structure, we may not be able to consummate an
attractive business combination.
We expect
to encounter intense competition from entities other than blank check companies
having a business objective similar to ours, including venture capital funds,
leveraged buyout funds and operating businesses competing for acquisitions. Many
of these entities are well established and have extensive experience in
identifying and effecting business combinations directly or through affiliates.
Many of these competitors possess greater technical, human and other resources
than we do and our financial resources will be relatively limited when
contrasted with those of many of these competitors. While we believe that there
are numerous potential target businesses that we could acquire with the net
proceeds of our IPO, our ability to compete in acquiring certain sizable target
businesses will be limited by our available financial resources. This inherent
competitive limitation gives others an advantage in pursuing the acquisition of
certain target businesses. Furthermore, the obligation we have to seek
shareholder approval of a business combination may delay the consummation of a
transaction. Additionally, our outstanding Warrants, and the future dilution
they potentially represent, may not be viewed favorably by certain target
businesses. Any of these obligations may place us at a competitive disadvantage
in successfully negotiating a business combination. Additionally, the fact that
many blank check companies that have gone public in the United States have not
completed a business combination, it may indicate that there are fewer
attractive target businesses available to such entities like our company or that
many privately held target businesses are not inclined to enter into these types
of transactions with publicly held blank check companies like ours. If we are
unable to consummate a business combination with a target business within the
prescribed time periods, we will be forced to liquidate.
We
may be unable to obtain additional financing, if required, to complete a
business combination or to fund the operations and growth of the target
business, which could compel us to restructure or abandon a particular business
combination.
Although
we believe that the net proceeds of our IPO will be sufficient to allow us to
consummate a business combination, because we have not yet identified any
prospective target business, we cannot ascertain the capital requirements for
any particular transaction. If the net proceeds of our IPO prove to be
insufficient, either because of the size of the business combination, the
depletion of the available net proceeds in search of a target business, or the
obligation to redeem for cash a significant number of Ordinary Shares from
dissenting shareholders, we will be required to seek additional financing. We
cannot assure you that such financing will be available on acceptable terms, if
at all. To the extent that additional financing proves to be unavailable when
needed to consummate a particular business combination, we would be compelled to
either restructure the transaction or abandon that particular business
combination and seek an alternative target business candidate. In addition, if
we consummate a business combination, we may require additional financing to
fund the operations or growth of the target business. The failure to secure
additional financing could have a material adverse effect on the continued
development or growth of the target business. None of our officers, directors or
shareholders is required to provide any financing to us in connection with or
after a business combination.
30
Our
existing shareholders, including our officers and directors, control a
substantial interest in us and thus may influence certain actions requiring a
shareholder vote.
Our
existing shareholders (including all of our officers and directors) collectively
own 20% of our issued and outstanding Ordinary Shares. Our board of
directors is and will be divided into three classes, each of which will
generally serve for a term of three years with only one class of directors being
elected in each year. It is unlikely that there will be an annual meeting of
shareholders to elect new directors prior to the consummation of a business
combination, in which case all of the current directors will continue in office
until at least the consummation of the business combination. If there is an
annual meeting, as a consequence of our “staggered” board of directors, only a
minority of the board of directors will be considered for election and our
existing shareholders, because of their ownership position, will have
considerable influence regarding the outcome. Accordingly, our existing
shareholders will continue to exert control at least until the consummation of a
business combination.
Our
outstanding Warrants and option may have an adverse effect on the market price
of our Ordinary Shares and make it more difficult to effect a business
combination.
We have
issued Warrants to purchase 11,040,000 Ordinary Shares as part of the Units
offered in our IPO and the Insider Warrants to purchase 3,608,000 Ordinary
Shares. We also issued an option to purchase 480,000 Units to the representative
of the underwriters which, if exercised, will result in the issuance of an
additional 960,000 Warrants. To the extent we issue Ordinary Shares to effect a
business combination, the potential for the issuance of a substantial number of
additional shares upon exercise of these Warrants could make us a less
attractive acquisition vehicle in the eyes of a target business. Such
securities, when exercised, will increase the number of issued and outstanding
Ordinary Shares and reduce the value of the shares issued to complete the
business combination. Accordingly, our Warrants and option may make it more
difficult to effectuate a business combination or increase the cost of acquiring
the target business. Additionally, the sale, or even the possibility of sale, of
the Ordinary Shares underlying the Warrants or option could have an adverse
effect on the market price for our securities or on our ability to obtain future
financing. If and to the extent these Warrants and option are exercised, you may
experience dilution to your holdings.
If
our existing shareholders or the holders of the Insider Warrants (or underlying
securities) exercise their registration rights with respect to their securities,
it may have an adverse effect on the market price of our Ordinary Shares and the
existence of these rights may make it more difficult to effect a business
combination.
Our
existing shareholders are entitled to make a demand that we register the resale
of their initial shares at any time commencing three months prior to the date on
which their shares are released from escrow. Additionally, the holders of the
Insider Warrants are entitled to demand that we register the resale of their
Insider Warrants and underlying Ordinary Shares at any time after we consummate
a business combination. If such individuals exercise their registration rights
with respect to all of their securities, then there will be an additional
1,380,000 Ordinary Shares and 3,608,000 Warrants, as well as 3,608,000 Ordinary
Shares underlying the Warrants, eligible for trading in the public market. The
presence of these additional Ordinary Shares trading in the public market may
have an adverse effect on the market price of our Ordinary Shares. In addition,
the existence of these rights may make it more difficult to effectuate a
business combination or increase the cost of acquiring the target business, as
the shareholders of the target business may be discouraged from entering into a
business combination with us or will request a higher price for their securities
because of the potential effect the exercise of such rights may have on the
trading market for our Ordinary Shares.
31
If
we are deemed to be an investment company, we may be required to institute
burdensome compliance requirements and our activities may be restricted, which
may make it difficult for us to complete a business
combination.
A company
that, among other things, is or holds itself out as being engaged primarily, or
proposes to engage primarily, in the business of investing, reinvesting, owning,
trading or holding certain types of securities would be deemed an investment
company under the Investment Company Act of 1940. Since we will invest the
proceeds held in the trust account, it is possible that we could be deemed an
investment company. Notwithstanding the foregoing, we do not believe that our
anticipated principal activities will subject us to the Investment Company Act
of 1940. To this end, the proceeds held in trust may be invested by the trustee
only in United States “government securities” within the meaning of Section
2(a)(16) of the Investment Company Act of 1940 having a maturity of 180 days or
less or in money market funds meeting certain conditions under Rule 2a-7
promulgated under the Investment Company Act of 1940. By restricting the
investment of the proceeds to these instruments, we intend to meet the
requirements for the exemption provided in Rule 3a-1 promulgated under the
Investment Company Act of 1940.
If we are
nevertheless deemed to be an investment company under the Investment Company Act
of 1940, we may be subject to certain restrictions that may make it more
difficult for us to complete a business combination, including:
•
|
restrictions
on the nature of our investments;
and
|
•
|
restrictions
on the issuance of securities.
|
In
addition, we may have imposed upon us certain burdensome requirements,
including:
•
|
registration
as an investment company;
|
•
|
adoption
of a specific form of corporate structure;
and
|
•
|
reporting,
record keeping, voting, proxy, compliance policies and procedures and
disclosure requirements and other rules and
regulations.
|
Compliance
with these additional regulatory burdens would require additional expense for
which we have not allotted.
32
Because
we are incorporated under the laws of the Cayman Islands, you may face
difficulties in protecting your interests, and your ability to protect your
rights through the U.S. federal courts may be limited.
We are a
company incorporated under the laws of the Cayman Islands. We have been advised
that the PRC does not have treaties providing for the reciprocal recognition and
enforcement of judgments of courts with the United States. Further, it is
unclear if extraction treaties now in effect between the United States and the
PRC would permit effective enforcement of criminal penalties of the United
States federal securities laws.
Our
corporate affairs will be governed by our amended and restated memorandum and
articles of association, the Companies Law and other statutes (as the same may
be supplemented or amended from time to time) or the common law of the Cayman
Islands. The rights of shareholders to take action against the directors,
actions by minority shareholders (including shareholder derivative actions) and
the fiduciary responsibilities of our directors to us under Cayman Islands law
are to a large extent governed by the common law of the Cayman Islands. The
common law of the Cayman Islands is derived in part from comparatively limited
judicial precedent in the Cayman Islands as well as from English common law, the
decisions of whose courts are of persuasive authority, but are not binding on a
court in the Cayman Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under Cayman Islands law are not as clearly
established as they would be under statutes or judicial precedent in some
jurisdictions in the United States. Moreover, the Cayman Islands has a less
prescriptive 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. In addition, Cayman Islands companies may not have
standing to initiate a shareholder derivative action in a federal court of the
United States.
Although
there is not statutory enforcement in the Cayman Islands of judgments obtained
in the United States, the courts of the Cayman Islands will recognize a foreign
judgment as the basis for a claim at common law in the Cayman Islands provided
such judgment:
|
•
|
is
given by a competent foreign court;
|
|
•
|
imposes
on the judgment debtor a liability to pay a liquidated sum for which the
judgment has been given;
|
|
•
|
is
final;
|
|
•
|
is
not in respect of taxes, a fine or a penalty;
and
|
|
•
|
was
not obtained in a manner and is not of a kind the enforcement of which is
contrary to the public policy of the Cayman
Islands.
|
As a
result of all of the above, public shareholders may have more difficulty in
protecting their interests in the face of actions taken by management, members
of the board of directors or controlling shareholders than they would as public
shareholders of a United States company.
33
Risks
Related to Operations in China
Business
combinations with companies with operations in China entail special
considerations and risks. If we are successful in completing a business
combination with a target business with operations in China, we will be subject
to, and possibly adversely affected by, the following risks:
After
a business combination, substantially all of our assets will likely be located
in China and substantially all of our revenue will be derived from our
operations in China. Accordingly, our results of operations and prospects will
be subject, to a significant extent, to the economic, political and legal
policies, developments and conditions in China.
The PRC’s
economic, political and social conditions, as well as government policies, could
affect our business. The PRC economy differs from the economies of most
developed countries in many respects. China’s GDP has grown consistently since
1978 (National Bureau of Statistics of China). However, we cannot assure you
that such growth will be sustained in the future. If in the future China’s
economy experiences a downturn or grows at a slower rate than expected, there
may be less demand for spending in certain industries. A decrease in demand for
spending in certain industries could materially and adversely affect our ability
to find an attractive target business with which to consummate a business
combination and if we effect a business combination, the ability of that target
business to become profitable.
The PRC’s
economic growth has been uneven, both geographically and among various sectors
of the economy. The PRC government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures
benefit the overall PRC economy, but may have a negative effect on us, depending
on the industry in which we engage in a business combination. For example, our
financial condition and results of operations may be adversely affected by PRC
government control over capital investments or changes in tax regulations that
are applicable to a potential target business and a business
combination.
The PRC
economy has been transitioning from a planned economy to a more market-oriented
economy. Although in recent years the PRC government has implemented measures
emphasizing the use of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets
in China is still owned by the PRC government. In addition, the PRC government
continues to play a significant role in regulating industry development by
imposing industrial policies. It also exercises significant control over PRC
economic growth through the allocation of resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. We cannot assure
you that China’s economic, political or legal systems will not develop in a way
that becomes detrimental to our business, results of operations and
prospects.
A recent
positive economic change has been the PRC’s entry into the World Trade
Organization, or WTO, the sole global international organization dealing with
the rules of trade between nations. It is believed that the PRC’s entry will
ultimately result in a reduction on tariffs for industrial products, a reduction
in trade restrictions and an increase in trading with the United States. If
actions are not taken to rectify these problems, trade relations may be strained
and this may have a negative impact on China’s economy.
34
If
relations between the United States and the PRC deteriorate, potential target
businesses or their goods or services could become less attractive.
The
relationship between the United States and the PRC is subject to sudden
fluctuation and periodic tension. For instance, the United States recently
announced its intention to impose new short-term quotas on Chinese clothing
imports, which may be extended for several years. Such import quotas may
adversely affect political relations between the two countries and result in
retaliatory countermeasures by the PRC in industries that may affect our
ultimate target business. Relations may also be compromised if the U.S. becomes
a more vocal advocate of Taiwan or proceeds to sell certain military weapons and
technology to Taiwan. Changes in political conditions in the PRC and changes in
the state of Sino-U.S. relations are difficult to predict and could adversely
affect our operations or cause potential target businesses or their goods and
services to become less attractive.
As
a result of merger and acquisition regulations implemented on September 8, 2006
relating to acquisitions of assets and equity interests of Chinese companies by
foreign persons, it is expected that acquisitions will take longer and be
subject to economic scrutiny by the PRC government authorities such that we may
not be able to complete a transaction.
On
September 8, 2006, the Ministry of Commerce, together with several other
government agencies, promulgated a comprehensive set of regulations governing
the approval process by which a Chinese company may participate in an
acquisition of its assets or its equity interests and by which a Chinese company
may obtain public trading of its securities on a securities exchange outside the
PRC. Although there was a complex series of regulations in place prior to
September 8, 2006 for approval of Chinese enterprises that were administered by
a combination of provincial and centralized agencies, the new regulations have
largely centralized and expanded the approval process to the Ministry of
Commerce (MOFCOM), the State Administration of Industry and Commerce (SAIC), the
State Administration of Foreign Exchange (SAFE) or its branch offices, the State
Asset Supervision and Administration Commission, and the China Securities
Regulatory Commission (CSRC). Depending on the structure of the transaction as
determined once a definitive agreement is executed, these regulations will
require the Chinese parties to make a series of applications and supplemental
applications to the aforementioned agencies, some of which must be made within
strict time limits and depending on approvals from one or the other of the
aforementioned agencies. The application process has been supplemented to
require the presentation of economic data concerning a transaction, including
appraisals of the business to be acquired and evaluations of the acquirer which
will permit the government to assess the economics of a transaction in addition
to the compliance with legal requirements. If obtained, approvals will have
expiration dates by which a transaction must be completed. Also, completed
transactions must be reported to MOFCOM and some of the other agencies within a
short period after closing or be subject to an unwinding of the transaction. It
is expected that compliance with the regulations will be more time consuming
than in the past, will be more costly for the Chinese parties and will permit
the government much more extensive evaluation and control over the terms of the
transaction. Therefore, a business combination we propose may not be able to be
completed because the terms of the transaction may not satisfy aspects of the
approval process and may not be completed, even if approved, if they are not
consummated within the time permitted by the approvals granted.
35
Because
the September 8, 2006, PRC merger and acquisition regulations permit the
government agencies to have scrutiny over the economics of an acquisition
transaction and require consideration in a transaction to be paid within stated
time limits, we may not be able to negotiate a transaction that is acceptable to
our shareholders or sufficiently protect their interests in a
transaction.
The
regulations have introduced aspects of economic and substantive analysis of the
target business and the acquirer and the terms of the transaction by MOFCOM and
the other governing agencies through submissions of an appraisal report, an
evaluation report and the acquisition agreement, all of which form part of the
application for approval, depending on the structure of the transaction as
determined once a definitive agreement is executed. The regulations also
prohibit a transaction at an acquisition price obviously lower than the
appraised value of the Chinese business or assets. The regulations require that
in certain transaction structures, the consideration must be paid within strict
time periods, generally not in excess of a year. Because the Chinese authorities
expressed concern with offshore transactions which converted domestic companies
into foreign investment enterprises (FIEs) in order to take advantage of certain
benefits, including reduced taxation, in China, regulations require new foreign
sourced capital of not less than 25% of the domestic company’s post–acquisition
capital in order to obtain FIE treatment. Accordingly, if a sufficient amount of
foreign capital is not infused into the domestic company, it will not be
eligible to obtain FIE treatment. In asset transactions there must be no harm of
third parties and the public interest in the allocation of assets and
liabilities being assumed or acquired. These aspects of the regulations will
limit our ability to negotiate various terms of the acquisition, including
aspects of the initial consideration, contingent consideration, holdback
provisions, indemnification provisions and provisions relating to the assumption
and allocation of assets and liabilities. Therefore, we may not be able to
negotiate a transaction with terms that will satisfy our investors and protect
our shareholders interests in an acquisition of a Chinese business or
assets.
The
PRC merger and acquisition regulations of September 8, 2006, have introduced
industry protection and anti-trust aspects to the acquisition of Chinese
companies and assets which may limit our ability to effect an
acquisition.
Under the
PRC merger and acquisition regulations, acquisitions of Chinese domestic
companies relating to “important industries” that may affect the national
economic security or result in the transfer of “actual control” of companies
having “famous Chinese brand names” or “well established Chinese brand names”
must be reported and approved by the Ministry of Commerce. The merger and
acquisition regulations also provide for antitrust review requirements for
certain large transactions or transactions involving large companies and roll-up
transactions with the same effect in the relevant Chinese market. In addition,
certain mergers and acquisitions among foreign companies occurring outside of
the PRC could also be subject to antitrust review in China which is similar to
United States anti-trust law concepts. The regulations use various economic
tests to determine if the transaction has to be reported to MOFCOM which include
(i) if any of the parties to the transaction has a turnover in the Chinese
market of more than RMB 1,500,000,000, (ii) if in a transaction outside of the
PRC, any party thereto has assets in the PRC of more than RMB 3,000,000,000,
(iii) if any of the parties to the transaction, before its consummation, has
control not less than 20% of the Chinese market, (iv) if any of the parties as a
result of the transaction will control 25% of the Chinese market, (v) the
foreign investor has acquired 10 or more enterprises in related industries in
the PRC during the last year, or (vi) if in a transaction outside of the PRC
results in the foreign entities acquiring 15 or more FIEs in related industries
within the PRC. Exemptions may be sought from the MOFCOM and SAIC on the basis
that: (i) the transaction will improve market competition, (ii) the transaction
will restructure unprofitable entities and ensures employment, (iii) the
transaction will introduce high technologies and increase international
competitiveness, and (iv) the transaction will improve the environment.
Notwithstanding the September 8, 2006, regulations, there is a draft
anti-monopoly law being considered which may replace or supplement the above
provisions. Any transaction that we contemplate will have to comply with these
regulations and may require additional approval or abandonment if we are not
able to satisfy the requirements of the governmental authorities. When we
evaluate a potential transaction, we will consider the need to comply with these
regulations which may result in our modifying or not pursuing a particular
transaction.
36
Ambiguities
in the regulations of September 8, 2006 may make it difficult for us to properly
comply with all applicable rules and may affect our ability to consummate a
business combination.
Although
the merger and acquisition regulations provide specific requirements and
procedures, there are many ambiguities which give the regulators great latitude
in the approval process which will cause uncertainty in our ability to complete
a transaction on a timely basis.
The
merger and acquisition regulations set forth many requirements that have to be
followed, but there are still many ambiguities in the meaning of many
provisions. Although further regulations are anticipated in the future, until
there has been clarification either by pronouncements, regulation or practice,
there is some uncertainty in the scope of the regulations. Moreover, the
ambiguities give the regulators wide latitude in the enforcement of the
regulations and the transactions to which they may or may not apply. Therefore,
we cannot predict the extent to which the regulations will apply to a
transaction, and therefore, there may be uncertainty in whether or not a
transaction will be completed until the approval process is under way or until
the preliminary approvals are obtained. This may negatively impact our ability
to consummate a business combination.
If
the PRC imposes restrictions to reduce inflation, future economic growth in the
PRC could be severely curtailed which could materially and adversely impact our
profitability following a business combination.
While the
economy of the PRC has experienced rapid growth, this growth has been uneven
among various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the supply of money and
rising inflation. In order to control inflation in the past, the PRC has imposed
controls on bank credits, limits on loans for fixed assets and restrictions on
state bank lending. Imposition of similar restrictions may lead to a slowing of
economic growth and decrease the interest in the services or products we may
ultimately offer leading to a material and adverse impact on our
profitability.
37
Any
devaluation of currencies used in the PRC could negatively impact our target
business’ results of operations and any appreciation thereof could cause the
cost of a target business as measured in dollars to increase.
Because
our objective is to complete a business combination with a target business
having its primary operating facilities located in the PRC, and because
substantially all revenues and income following a business combination would be
received in a foreign currency such as Renminbi, the main currency used in the
PRC, the dollar equivalent of our net assets and distributions, if any, would be
adversely affected by reductions in the value of the Renminbi. The value of the
Renminbi fluctuates and is affected by, among other things, changes in the PRC’s
political and economic conditions. The conversion of Renminbi into foreign
currencies such as the United States dollar has been generally based on rates
set by the People’s Bank of China, which are set daily based on the previous
day’s interbank foreign exchange market rates and current exchange rates on the
world financial markets. Historically, China “pegged” its currency to the United
States dollar. This meant that each unit of Chinese currency had a set ratio for
which it could be exchanged for United States currency, as opposed to having a
floating value like other countries’ currencies. Many countries argued that this
system of keeping the Chinese currency low when compared to other countries gave
Chinese companies an unfair price advantage over foreign companies. Due to
mounting pressure from other countries, the PRC recently reformed its economic
policies to establish a floating value for its currency. However, China recently
adopted a floating rate with respect to the Renminbi, with a 0.3% fluctuation.
This floating exchange rate, and any appreciation of the Renminbi that may
result from such rate, could cause the cost of a target business as measured in
dollars to increase. Further, target companies may be adversely affected since
the competitive advantages that existed as a result of the former policies will
cease. We cannot assure you that a target business with which we consummate a
business combination will be able to compete effectively with the new policies
in place.
Fluctuations
in the value of the Renminbi relative to foreign currencies could affect our
operating results.
Following
a business combination, our payroll and other costs of non-United States
operations will be payable in foreign currencies, primarily Renminbi. To the
extent future revenue is denominated in non-United States currencies, we would
be subject to increased risks relating to foreign currency exchange rate
fluctuations that could have a material adverse effect on our business,
financial condition and operating results. The value of Renminbi against the
United States dollar and other currencies may fluctuate and is affected by,
among other things, changes in China’s political and economic conditions. As our
operations will be primarily in China, any significant revaluation of the
Renminbi may materially and adversely affect our cash flows, revenues and
financial condition. For example, to the extent that we need to convert United
States dollars into Chinese Renminbi for our operations, appreciation of this
currency against the United States dollar could have a material adverse effect
on our business, financial condition and results of operations. Conversely, if
we decide to convert our Renminbi into United States dollars for other business
purposes and the United States dollar appreciates against this currency, the
United States dollar equivalent of the Renminbi we convert would be reduced. The
Chinese government recently announced that it is pegging the exchange rate of
the Renminbi against a number of currencies, rather than just the United States
dollar. Fluctuations in the Renminbi exchange rate could adversely affect our
ability to find an attractive target business with which to consummate a
business combination and to operate our business after a business
combination.
38
Exchange
controls that exist in the PRC may limit our ability to utilize our cash flow
effectively following a business combination.
Following
a business combination, we will be subject to the PRC’s rules and regulations on
currency conversion. In the PRC, the State Administration for Foreign Exchange
(SAFE) regulates the conversion of the Renminbi into foreign currencies.
Currently, foreign investment enterprises (FIEs) are required to apply to the
SAFE for “Foreign Exchange Registration Certificates for FIEs.” Following a
business combination, we will likely be an FIE as a result of our ownership
structure. With such registration certificates, which need to be renewed
annually, FIEs are allowed to open foreign currency accounts including a “basic
account” and “capital account.” Currency conversion within the scope of the
“basic account,” such as remittance of foreign currencies for payment of
dividends, can be effected without requiring the approval of the SAFE. However,
conversion of currency in the “capital account,” including capital items such as
direct investment, loans and securities, still require approval of the SAFE. We
cannot assure you that the PRC regulatory authorities will not impose further
restrictions on the convertibility of the Renminbi. Any future restrictions on
currency exchanges may limit our ability to use our cash flow for the
distribution of dividends to our shareholders or to fund operations we may have
outside of the PRC.
If
the PRC enacts regulations in our target business’ proposed industry segments
which forbid or restrict foreign investment, our ability to consummate a
business combination could be severely impaired.
Many of
the rules and regulations that companies face in China are not explicitly
communicated. If new laws or regulations forbid foreign investment in industries
in which we want to complete a business combination, they could severely limit
the candidate pool of potential target businesses. Additionally, if the relevant
Chinese authorities find us or the target business with which we ultimately
complete a business combination to be in violation of any existing or future
Chinese laws or regulations, they would have broad discretion in dealing with
such a violation, including, without limitation:
•
|
levying
fines;
|
•
|
revoking
our business and other licenses;
|
•
|
requiring
that we restructure our ownership or operations;
and
|
•
|
requiring
that we discontinue any portion or all of our
business.
|
39
Recent
regulations relating to offshore investment activities by PRC residents may
increase the administrative burden we face and create regulatory uncertainties
that may limit or adversely affect our ability to acquire PRC
companies.
Notice on
Issues Relating to Administration of Foreign Exchange in Fundraising and Reverse
Investment Activities of Domestic Residents Conducted via Offshore Special
Purpose Companies, or Notice 75, was issued on October 21, 2005 by the SAFE
(that replaced two previously issued regulations on January 24, 2005 and April
8, 2005, respectively) that will require approvals from, and registrations with,
PRC government authorities in connection with direct or indirect offshore
investment activities by PRC residents and PRC corporate entities. The SAFE
regulations retroactively require approval and registration of direct or
indirect investments previously made by PRC residents in offshore companies. In
the event that a PRC shareholder with a direct or indirect stake in an offshore
parent company fails to obtain the required SAFE approval and make the required
registration, the PRC subsidiaries of such offshore parent company may be
prohibited from making distributions of profit to the offshore parent and from
paying the offshore parent proceeds from any reduction in capital, share
transfer or liquidation in respect of the PRC subsidiaries. Further, failure to
comply with the various SAFE approval and registration requirements described
above, as currently drafted, could result in liability under PRC law for foreign
exchange evasion.
Although
SAFE issued an implementation Notice No. 106, or Notice 106, on May 29, 2007 to
its local branches or agencies (but not openly disclosed to the public), the
uncertainty as to when and how the new procedure and requirements will take
effect or be enforced, and uncertainty concerning the reconciliation of the new
regulations with other approval requirements, it remains unclear how these
existing regulations, and any future legislation concerning offshore or
cross-border transactions, will be interpreted, amended and implemented by the
relevant government authorities. We are committed to complying with the relevant
rules. As a result of the foregoing, we cannot assure you that we or the owners
of the target business we intend to acquire, as the case may be, will be able to
complete the necessary approval, filings and registrations for a proposed
business combination. This may restrict our ability to implement our business
combination strategy and adversely affect our operations.
Because
Chinese law will govern almost all of any target business’ material agreements,
we may not be able to enforce our rights within the PRC or elsewhere, which
could result in a significant loss of business, business opportunities or
capital.
Chinese
law will govern almost all of our target business’ material agreements, many of
which may be with Chinese governmental agencies. We cannot assure you that the
target business will be able to enforce any of its material agreements or that
remedies will be available outside of the PRC. The system of laws and the
enforcement of existing laws and contracts in the PRC may not be as certain in
implementation and interpretation as in the United States. The Chinese judiciary
is relatively inexperienced in enforcing corporate and commercial law, leading
to a higher than usual degree of uncertainty as to the outcome of any
litigation. The inability to enforce or obtain a remedy under any of our future
agreements could result in a significant loss of business, business
opportunities or capital.
40
If
we acquire a target business through contractual arrangements with one or more
operating businesses in China, such contracts may not be as effective in
providing operational control as direct ownership of such businesses and may be
difficult to enforce.
The
government of the PRC has restricted or limited foreign ownership of certain
kinds of assets and companies operating in certain industries. The industry
groups that are restricted are wide ranging, including certain aspects of
telecommunications, advertising, food production, and heavy equipment
manufacturers, for example. In addition there can be restrictions on the foreign
ownership of businesses that are determined from time to time to be in
“important industries” that may affect the national economic security or having
“famous Chinese brand names” or “well established Chinese brand names.” Subject
to the review requirements of the Ministry of Commerce and other relevant
agencies as discussed elsewhere for acquisitions of assets and companies in the
PRC and subject to the various percentage ownership limitations that exist from
time to time, acquisitions involving foreign investors and parties in the
various restricted categories of assets and industries may nonetheless sometimes
be consummated using contractual arrangements with permitted Chinese parties. To
the extent that such agreements are employed, they may be for control of
specific assets such as intellectual property or control of blocks of the equity
ownership interests of a company which may not be subject to the merger and
acquisition regulations mentioned above since these types of arrangements
typically do not involve a change of equity ownership in a PRC operating
company, injure a third party or affect the social public interest. The
agreements would be designed to provide our company with the economic benefits
of and control over the subject assets or equity interests similar to the rights
of full ownership, while leaving the technical ownership in the hands of Chinese
parties who would be our nominees and, therefore, may exempt the transaction
from the merger and acquisition regulations, including the application process
required thereunder. However, since there has been limited implementation
guidance provided with respect to the merger and acquisition regulations, there
can be no assurance that the relevant government agency would not apply them to
a business combination effected through contractual arrangements. If such an
agency determines that such an application should have been made consequences
may include levying fines, revoking business and other licenses, requiring
restructure of ownership or operations and requiring discontinuation of any
portion of all of the acquired business. These agreements likely also would
provide for increased ownership or full ownership and control by us when and if
permitted under PRC law and regulation. If we choose to effect a business
combination that employs the use of these types of control arrangements, we may
have difficulty in enforcing our rights. Therefore these contractual
arrangements may not be as effective in providing us with the same economic
benefits, accounting consolidation or control over a target business as would
direct ownership. For example, if the target business or any other entity fails
to perform its obligations under these contractual arrangements, we may have to
incur substantial costs and expend substantial resources to enforce such
arrangements, and rely on legal remedies under Chinese law, including seeking
specific performance or injunctive relief, and claiming damages, which we cannot
assure will be sufficient to off-set the cost of enforcement and may adversely
affect the benefits we expect to receive from the business
combination.
Moreover,
we expect that the contractual arrangements upon which we would be relying would
be governed by Chinese law and would be the only basis of providing resolution
of disputes which may arise through either arbitration or litigation in China.
Accordingly, these contracts would be interpreted in accordance with Chinese law
and any disputes would be resolved in accordance with Chinese legal procedures.
Uncertainties in the Chinese legal system could limit our ability to enforce
these contractual arrangements. In the event we are unable to enforce these
contractual arrangements, we may not be able to exert the effective level of
control or receive the full economic benefits of full direct ownership over the
target business.
41
If
our management following a business combination is unfamiliar with United States
securities laws, they may have to expend time and resources becoming familiar
with such laws which could lead to various regulatory issues.
Following
a business combination, our management will likely resign from their positions
as officers of the Company and the management of the target business at the time
of the business combination will remain in place. We cannot assure you that
management of the target business will be familiar with United States securities
laws. If new management is unfamiliar with our laws, they may have to expend
time and resources becoming familiar with such laws. This could be expensive and
time-consuming and could lead to various regulatory issues which may adversely
affect our operations.
Because
any target business with which we attempt to complete a business combination may
be required to provide our shareholders with financial statements prepared in
accordance with and reconciled to United States generally accepted accounting
principles, prospective target businesses may be limited.
In
accordance with requirements of United States Federal securities laws, in order
to seek shareholder approval of a business combination, a proposed target
business may be required to have certain financial statements which are prepared
in accordance with, or which can be reconciled to, U.S. generally accepted
accounting principles and audited in accordance with U.S. generally accepted
auditing standards. To the extent that a proposed target business does not have
financial statements which have been prepared with, or which can be reconciled
to, U.S. generally accepted accounting principles and audited in accordance with
U.S. generally accepted auditing standards, we may not be able to complete a
business combination with that proposed target business. These financial
statement requirements may limit the pool of potential target businesses with
which we may complete a business combination. Furthermore, to the extent that we
seek to acquire a target business that does not have financial statements
prepared in accordance with United States generally accepted accounting
principles, it could make it more difficult for our management to analyze such
target business and determine whether it has a fair market value in excess of
80% of our net assets. It could also delay our preparation of our proxy
statement that we will send to shareholders relating to the proposed business
combination with such a target business, thereby making it more difficult for us
to consummate such a business combination.
If
certain exemptions within the PRC regarding withholding taxes are removed, we
may be required to deduct Chinese corporate withholding taxes from dividends we
may pay to our shareholders following a business combination.
According
to the PRC’s applicable income tax laws, regulations, notices and decisions
related to foreign investment enterprises and their investors (the “Applicable
Foreign Enterprises Tax Law”), income such as dividends and profits distribution
derived from the PRC and received by a foreign enterprise which has no
establishment in the PRC is subject to a 20% withholding tax, unless the
relevant income is specifically exempted from tax under the Applicable Foreign
Enterprises Tax Law. Currently, profits received by a shareholder, such as
through dividends, from a foreign-invested enterprise (an “FIE”) is exempted.
Under a newly promulgated Enterprise Income Tax Law, the foregoing exemption
will be removed starting from January 1, 2008 when such new law becomes
effective, in which circumstances we may be required to deduct certain amounts
from dividends we may pay to our shareholders to pay corporate withholding
taxes.
42
After
we consummate a business combination, our operating company in China will be
subject to restrictions on dividend payments.
After we
consummate a business combination, we will rely on dividends and other
distributions from our operating company to provide us with cash flow and to
meet our other obligations. Current regulations in China would permit our
operating company in China to pay dividends to us only out of its accumulated
distributable profits, if any, determined in accordance with Chinese accounting
standards and regulations. In addition, our operating company in China will be
required to set aside at least 10% (up to an aggregate amount equal to half of
its registered capital) of its accumulated profits each year. Such reserve
account may not be distributed as cash dividends. In addition, if our operating
company in China incurs debt on its own behalf in the future, the instruments
governing the debt may restrict its ability to pay dividends or make other
payments to us.
If
any dividend is declared in the future and paid in a foreign currency, you may
be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you
will actually ultimately receive.
If you
are a U.S. holder, you will be taxed on the U.S. dollar value of your dividends
at the time you receive them, even if you actually receive a smaller amount of
U.S. dollars when the payment is in fact converted into U.S. dollars.
Specifically, if a dividend is declared and paid in a foreign currency, the
amount of the dividend distribution that you must include in your income as a
U.S. holder will be the U.S. dollar value of the payments made in the foreign
currency, determined at the conversion rate of the foreign currency to the U.S.
dollar on the date the dividend distribution is includible in your income,
regardless of whether the payment is in fact converted into U.S. dollars. Thus,
if the value of the foreign currency decreases before you actually convert the
currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars
than the U.S. dollar amount that you will actually ultimately
receive.
If
we are treated as a “passive foreign investment company,” it could have adverse
U.S. federal income tax consequences to U.S. holders.
If we are
determined to be a passive foreign investment company, known as a “PFIC,” U.S.
holders could be subject to adverse United States federal income tax
consequences. Specifically, if we are determined to be a PFIC for any taxable
year, each U.S. holder may be subject to increased tax liabilities under U.S.
tax laws and regulations and may be subject to additional reporting
requirements. The determination of whether we are a PFIC will be made on an
annual basis and will depend on the composition of our income and assets,
including goodwill. The calculation of goodwill will be based, in part, on the
market value of our Ordinary Shares from time to time, which may be volatile. In
general, we will be classified as a PFIC for any taxable year in which either
(1) at least 75% of our gross income is passive income or (2) at least 50% of
the value (determined on the basis of a quarterly average) of our assets is
attributable to assets that produce or are held for the production of passive
income. For purposes of these tests, cash, including working capital, and
investments are considered assets that produce or are held for the production of
passive income. If a corporation would otherwise be a PFIC in its start-up year
(defined as the first taxable year such corporation earns gross income), it is
not treated as a PFIC in that taxable year, provided that: (i) no predecessor
corporation was a PFIC; (ii) it is established to the Internal Revenue Service’s
satisfaction that the corporation will not be a PFIC in either of the two
succeeding taxable years; and (iii) the corporation is not, in fact, a PFIC for
either succeeding taxable year. We cannot assure you that we will not be treated
as a PFIC for U.S. federal income tax purposes. We urge U.S. investors to
consult their own tax advisors regarding the possible application of the PFIC
rules.
43
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
None.
ITEM
2.
|
PROPERTIES.
|
Our
executive offices are currently located at Room 1708 Dominion Centre, 43-59
Queen’s Road East, Wanchai, Hong Kong. The cost for this space is included in
the $3,000 per-year fee Russell Bedford Hong Kong Limited charges us for
registered agent and general and administrative services. We consider
our current office space, combined with the other office space otherwise
available to our executive officers, adequate for our current operations. We may
determine to lease additional space in the future in other locations, including
China, depending on the activities of our executive officers. To the extent we
lease such additional space, we will use our available working capital to pay
for such space.
In
connection with our IPO, CS Capital USA, an affiliate of Chien Lee, agreed to
provide us with office space and certain office and secretarial services for a
fee of $7,500 per month, should we choose to avail ourselves of such space and
services, which, to this point, we have not chosen to do.
ITEM
3.
|
LEGAL
PROCEEDINGS.
|
None.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
|
No matter
was submitted to a vote of our security holders during the fourth quarter of the
fiscal year ended July 31, 2009.
44
PART
II
ITEM
5.
|
MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
|
Market
Information
Our
Units, Ordinary Shares and Warrants trade on the OTC Bulletin Board under the
symbols CSACF, CSAQF, and CSAXF, respectively. The following table sets forth
the range of high and low closing bid prices for the Units, Ordinary Shares and
Warrants for the periods indicated since the Units commenced public trading on
August 15, 2008, and since the Ordinary Shares and Warrants commenced separate
public trading on September 4, 2008. The over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily reflect actual transactions.
Units
|
Ordinary Shares
|
Warrants
|
||||||||||||||||||||||
High
|
Low
|
High
|
Low
|
High
|
Low
|
|||||||||||||||||||
2009:
|
||||||||||||||||||||||||
First
Quarter*
|
6.70 | 5.50 | 5.80 | 5.47 | 0.50 | 0.101 | ||||||||||||||||||
2008:
|
||||||||||||||||||||||||
Fourth
Quarter
|
6.25 | 5.40 | 5.60 | 5.20 | 0.51 | 0.06 | ||||||||||||||||||
Third
Quarter
|
5.35 | 5.00 | 6.00 | 5.01 | 0.06 | 0.03 | ||||||||||||||||||
Second
Quarter
|
5.15 | 4.55 | 5.25 | 4.60 | 0.26 | 0.04 | ||||||||||||||||||
First
Quarter
|
6.14 | 4.78 | 5.275 | 4.25 | 0.45 | 0.26 |
* Through
November 2, 2009.
Holders
As of
November 13, 2009, there was 1 holder of record of our Units, 7 holders of
record of our ordinary shares and 6 holders of record of our
Warrants.
Issuer
Purchases of Equity Securities
None.
45
Dividends
We have
not paid any cash dividends on our Ordinary Shares to date and do not intend to
pay cash dividends prior to the completion of a business combination. The
payment of cash dividends in the future will be contingent upon our revenues and
earnings, if any, capital requirements and general financial condition
subsequent to completion of a business combination. The payment of any dividends
subsequent to a business combination will be within the discretion of our then
board of directors. It is the present intention of our board of directors to
retain all earnings, if any, for use in our business operations and,
accordingly, our board does not anticipate declaring any dividends in the
foreseeable future.
Recent
Sales of Unregistered Securities and Use of Proceeds
In
September 2007, we sold the following ordinary shares (“Founders’ Shares”)
without registration under the Securities Act of 1933, as amended:
Shareholders
|
Number of Shares
|
|
Chien
Lee
|
517,500
|
|
Sylvia
Lee
|
517,500
|
|
Michael
Zhang
|
115,000
|
Such
shares were issued in connection with our organization pursuant to the exemption
from registration contained in Section 4(2) of the Securities Act as they were
sold to accredited investors. The shares issued to the individuals above were
sold at a purchase price of approximately $0.02 per share (an aggregate of
$25,000).
In June
2008, Chien Lee transferred 517,500 shares to CS Capital USA and Sylvia Lee
transferred 172,500 shares to Bill Haus, 146,625 shares to each of James
Preissler and Peter Li and 51,750 shares to William B. Heyn, all at the same
price they originally paid for such shares. On August 11, 2008, our board of
directors authorized a dividend of 0.2 Ordinary Shares for each outstanding
Ordinary Share.
Simultaneously
with the consummation of our IPO, CS Capital USA, Bill Haus, James Preissler,
Peter Li and William B. Heyn purchased 3,608,000 Insider Warrants at a purchase
price of $0.50 per Warrant (for a total purchase price of $1,804,000) from us.
These purchases took place on a private placement basis pursuant to the
exemption from registration contained in Section 4(2) of the Securities Act as
they were sold to accredited investors.
Initial
Public Offering
On August
15, 2008, we closed our IPO of 4,800,000 Units with each unit consisting of one
Ordinary Share and two Warrants, each Warrant to purchase one Ordinary Share at
an exercise price of $5.00 per share. On August 21, 2008, we
consummated the closing of an additional 720,000 Units which were subject to the
over-allotment option. The Units from the IPO (including the
over-allotment option) were sold at an offering price of $6.00 per unit,
generating total gross proceeds of $34,294,000. EarlyBirdCapital,
Inc. acted as representative of the underwriters. The securities sold
in our IPO were registered under the Securities Act of 1933 on a registration
statement on Form S-1 (No. 333-147294 and 333-152947). The Securities
and Exchange Commission declared the registration statement effective on August
11, 2008.
46
We paid a
total of $1,324,800 in underwriting discounts and commissions (after deferring
$993,600) and for costs and expenses related to our IPO. After
deducting the underwriting discounts and commissions and our offering expenses,
the total net proceeds to us from our IPO were $33,280,880 (including the
over-allotment option and the private sale of Insider Warrants), of which
$32,899,200 was deposited into the trust account and the remaining proceeds
became available to be used to provide for business, legal and accounting due
diligence on prospective business combinations and continuing general and
administrative expenses.
The total
amount deposited into the trust fund was $32,899,200 (or approximately $5.96 per
share sold in our IPO). The net proceeds deposited into the trust
fund remain on deposit in the trust fund and have earned $355,599 in interest
through July 31, 2009.
ITEM
6.
|
SELECTED
FINANCIAL DATA.
|
Not
applicable.
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The
following discussion should be read in conjunction with the Company’s
Consolidated Financial Statements and footnotes thereto contained in this
report.
Forward
Looking Statements
The
statements discussed in this Report include forward looking statements that
involve risks and uncertainties detailed from time to time in the Company’s
reports filed with the Securities and Exchange Commission.
Plan
of Operations
We are a
Cayman Islands company incorporated on September 24, 2007 as an exempted company
with limited liability. Exempted companies are Cayman Islands companies wishing
to conduct business outside the Cayman Islands. As an exempted company, we are
able to avoid direct taxation from the Cayman Islands government for a period of
20 years if such direct taxation were ever introduced in the Cayman Islands by
obtaining a tax undertaking from the Cayman Islands government.
We were
formed as a blank check company with the purpose of acquiring, through a share
exchange, asset acquisition, plan of arrangement, recapitalization,
reorganization or similar business combination, an operating business, or
control of such operating business through contractual arrangements, that has
its principal operations located in the PRC, which includes the Hong Kong
Special Administrative Region and the Macao Special Administrative Region but
not Taiwan. Our efforts to identify a prospective target business will not be
limited to a particular industry.
47
Critical
Accounting Policies
Deferred
income taxes are provided for the differences between bases of assets and
liabilities for financial reporting and income tax purposes. A valuation
allowance is established when necessary to reduce deferred tax assets to the
amount expected to be realized.
Basic and
diluted income (loss) per share is computed by dividing net income (loss) by the
weighted-average number of ordinary shares outstanding during the
period.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
Management
does believe that any recently issued, but not yet effective, accounting
standards if currently adopted would have a material effect on the accompanying
financial statements.
Results
of Operations for the Year Ended 2009 and the Period from September 24, 2007
(inception) to July 31, 2008
For the
fiscal year ended July 31, 2009, we had net income of $68,876 derived from
interest income of $355,599, offset by $286,722 of total expenses.
For the
period from September 24, 2007 (inception) to July 31, 2008, we had a net loss
of $26,955 derived from $26,955 for travel and other expenses.
Liquidity
and Capital Resources
On August
15, 2008, we consummated our IPO of 4,800,000 Units. On August 21,
2008, we consummated the closing of and additional 720,000 units which were
subject to the underwriters’ over-allotment option. Each Unit
consists of one Ordinary Share, $.0001 par value per share, and two Redeemable
Ordinary Share Purchase Warrants. Each Warrant entitles the holder to
purchase one Ordinary Share at an exercise price of $5.00 commencing upon the
later of the completion of a business combination or August 11, 2009
and expiring August 10, 2013. Simultaneously with the consummation of our IPO
and the consummation of the sale of additional units pursuant to the
underwriters’ over-allotment option, we consummated the sale of an aggregate of
3,608,000 Insider Warrants at $0.50 per Warrant (for an aggregate purchase price
of $1,804,000) in a private placement. Gross proceeds from our IPO
(including from our private placement of Insider Warrants and exercise of the
underwriters’ over-allotment option) were $34,924,000. We paid a
total of $1,324,800 in underwriting discounts and commissions (after deferring
$993,600) and for costs and expenses related to our IPO. After deducting the
underwriting discounts and commissions and our offering expenses, the total net
proceeds to us from our IPO (including the over-allotment option and the private
sale) were $33,280,880, of which $32,899,200 was deposited into the trust
account and the remaining proceeds became available to be used to provide for
business, legal and accounting due diligence on prospective business
combinations and continuing general and administrative expenses. In addition, we may draw
for use of working capital up to $1,050,000 of interest earned on the trust
account, as well as any amounts necessary to pay our tax
obligations. Through July 31, 2009, we have used all of the net proceeds that
were not deposited into the trust fund to pay general and administrative
expenses, and we have drawn interest income in the amount of $339,631 for our
working capital. The net proceeds deposited into the trust fund
remain on deposit in the trust fund earning interest. As of July 31, 2009, there
was $32,899,200 plus accrued interest of $15,967 held in the trust
fund.
48
We intend
to use substantially all of the net proceeds of the IPO to acquire a target
business, including identifying and evaluating prospective acquisition
candidates, selecting the target business, and structuring, negotiating and
consummating the business combination. To the extent that our capital
shares 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 net
proceeds not expended will be used to finance the operations of the target
business.
We
believe we will have sufficient available funds outside of the trust fund to
operate through February 11, 2011, assuming that a business combination is not
consummated during that time. As indicated above, there can be released to us,
from time to time, interest earned on the funds held in the trust account, up to
an aggregate of $1,050,000, of which $339,631 has already been drawn down as of
July 31, 2009, to fund expenses related to investigating and selecting a target
business, as well as any amounts necessary to pay our tax obligations. We do not
believe we will need to raise additional funds following the IPO in order to
meet the expenditures required for operating our business. However, we may need
to raise additional funds through a private offering of debt or equity
securities if such funds are required to consummate a business combination that
is presented to us, although we have not entered into any such arrangement and
have no current intention of doing so.
In
connection with our IPO, CS Capital USA, an affiliate of Chien Lee, agreed to
provide us with office space and certain office and secretarial services for a
fee of $7,500 per month, should we choose to avail ourselves of such space and
services, which, to this point, we have not chosen to
do. Additionally, certain of our officers and initial shareholders
advanced an aggregate of $138,000 to us, on a non-interest bearing basis, for
payment of offering expenses on our behalf. The entire principal of
this advance was repaid prior to July 31, 2009.
Off-Balance
Sheet Arrangements
Warrants
issued in conjunction with our IPO are equity linked derivatives and accordingly
represent off-balance sheet arrangements. The Warrants meet the scope exception
in paragraph 11(a) of Financial Accounting Standard (FAS) 133 and are
accordingly not accounted for as derivatives for purposes of FAS 133, but
instead are accounted for as equity. See Notes 3 and 6 to the financial
statements for more information.
49
Contractual
Obligations
We do not
have any long term debt, capital lease obligations, operating lease obligations,
purchase obligations or other long term liabilities.
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
Market
risk is the sensitivity of income to changes in interest rates, foreign
exchanges, commodity prices, equity prices and other market-driven rates or
prices. We are not presently engaged in and, if a suitable business
target is not identified by us prior to the prescribed liquidation date of the
trust fund, we may not engage in, any substantive commercial
business. Accordingly, we are not, and, until such time as we
consummate a business combination, we will not be, exposed to risks associated
with foreign exchange rates, commodity prices, equity prices and other
market-driven rates or prices. The net proceeds of our initial public
offering held in the trust fund have been invested only in money market funds
meeting certain conditions under Rule 2a-7 promulgated under the Investment
Company Act of 1940. Given our limited risk in our exposure to money
market funds, we do not view the interest rate risk to be
significant.
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
This
information appears following Item 15 of this Report and is incorporated herein
by reference and include:
Balance
Sheets as of July 31, 2008 and 2009
Statements
of Operations for the Year Ended 2009 and the periods from September 24, 2007
(inception) to July 31, 2008 and 2009
Statement
of Shareholders’ Equity from September 24, 2007 (inception) to July 31,
2009
Statements
of Cash Flows for the Year Ended 2009 and the periods from September 24, 2007
(inception) to July 31, 2008 and 2009
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
None.
ITEM
9A(T).
|
CONTROLS
AND PROCEDURES.
|
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in company reports filed or
submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in company reports filed or submitted under the Exchange Act is
accumulated and communicated to management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
50
As
required by Rules 13a-15 and 15d-15 under the Exchange Act, our chief
executive officer and chief financial officer carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures as of July 31, 2009. Based upon their evaluation, they
concluded that our disclosure controls and procedures were
effective.
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within a company have been detected. Our disclosure controls and
procedures are designed to provide reasonable assurance of achieving its
objectives. Our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective at that
reasonable assurance level.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as such term is defined in Exchange Act Rule
13a-15(f). Our internal control over financial reporting is a process designed
by, or under the supervision of, our chief executive officer and chief operating
officer and effected by our board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of our financial statements for external purposes
in accordance with generally accepted accounting principles. Internal
control over financial reporting includes policies and procedures that pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
our financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in
accordance with the authorization of our board of directors and management; and
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements.
An
internal control system over financial reporting has inherent limitations and
may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. However,
these inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process safeguards to
reduce, though not eliminate, this risk.
Our
management assessed the effectiveness of the Company’s internal control over
financial reporting as of July 31, 2009. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control — Integrated
Framework. Based on management’s assessment and those criteria, our
management believes that the Company maintained effective internal control over
financial reporting as of July 31, 2009.
51
This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this Annual Report.
ITEM
9B.
|
OTHER
INFORMATION.
|
None.
52
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
|
Directors
and Executive Officers
Our
current directors and executive officers are as follows:
Name
|
Age
|
Position
|
||
Chien
Lee
|
47
|
Chairman
of the Board
|
||
William
(Bill) P. Haus
|
44
|
Chief
Executive Officer and Director
|
||
James
Preissler
|
37
|
Chief
Financial Officer, Secretary and Director
|
||
Michael
Zhang
|
47
|
Executive
Vice President and Director
|
||
Peter
Li
|
44
|
Director
|
||
Clarence
Li
|
51
|
Director
and Vice President
|
||
Wei
(Will) Lu
|
34
|
Director
and Vice President
|
||
Weidong
Hong
|
41
|
Director
and Vice President
|
||
Jie
Liu
|
35
|
Director
and Vice
President
|
Chien Lee
has served as our chairman of the board since our inception. He also served as
our chief executive officer from our inception to June 2008. Mr. Lee is a
founding member, and has served as the chairman and chief executive officer of
CS Capital USA, LLC since August 2004. CS Capital USA is a private equity firm
focused on diversified investments in China. Its investments include SK
Development (Zhongshan) Company, Ltd., a land acquisition and real estate
development company located in China. Mr. Lee has been the vice chairman of SK
Development since its formation in May 2005. In October 2004, Mr. Lee co-founded
7 Days Inn, one of the leading budget hotel chains in China. Mr. Lee also
co-founded The Officebox, a retail office products chain superstore in China, in
April 2004 and has served as a director since its formation. Since August 1989,
Mr. Lee has been a founding member and serves as the president of Lee Holdings
Company, Inc., a Miami-based investment company focusing on the acquisition of
non-performing assets in the United States from different sources, including but
not limited to major banks and life insurance companies. Mr. Lee has also been a
special advisor to the Zhongshan Xiaolan Asset Management Company, Ltd., an
investment and asset management company, in Guangdong, China since April, 2007.
From January 1988 to August 1995, Mr. Lee served as the president and was the
founder of City Homes, Inc., a real estate investment company in
Miami.
William (Bill) P.
Haus, CFA, has served as our chief executive officer and a member of our
board of directors since June 2008. Since May 2008, Mr. Haus has acted as a
consultant providing advisory and consulting services. From September 2005 to
May 2008, Mr. Haus served as an analyst for The Pinnacle China Fund, a
China-focused hedge fund. From April 2005 to September 2005, Mr. Haus served as
a senior vice president and equity research analyst with the Stanford Group
Company, a broker dealer. From March 2000 to March 2005, Mr. Haus served as a
senior research analyst at Advest, Inc., a securities brokerage firm. From 1998
to March 2000, Mr. Haus was associate vice president, manager and financial and
business analyst at State Street Corporation, a financial services provider.
From 1996 to 1998, Mr. Haus was a senior financial analyst at Fidelity
Investments. Mr. Haus received a B.S. from the State University of New York at
Fredonia and an M.B.A. from Boston University. Mr. Haus is a Chartered Financial
Analyst (CFA) and member of the CFA Institute.
53
James
Preissler has served as our chief financial officer, secretary and a
member of our board of directors since June 2008. Since November 2006, Mr.
Preissler has served as a managing partner of Panthera Capital Group, an
advisory firm for Chinese companies. From November 2004 until November 2006, Mr.
Preissler served as the chief financial officer and secretary for China Unistone
Acquisition Corp., a blank check company that subsequently merged with a target
in China to form Yucheng Technologies (Nasdaq: YTEC), a provider of financial
technologies and solutions to banks in China. Mr. Preissler has served as an
investment advisor to Yucheng Technologies since its merger in November 2006.
From March 2003 until September 2005, Mr. Preissler served as the associate
director of research for Majestic Research, a New York-based independent
research boutique firm focused on proprietary research for hedge funds and
institutional investors. From March 2002 to February 2003, he served as a head
of the digital media research group of Investec, an investment bank specializing
on mid-cap growth companies in the United States and Europe. Mr. Preissler
received a B.A. from Yale University and currently holds Series 7, 24, and 63
securities licenses.
Michael Zhang
has served as our executive vice president and a member of our board of
directors since our inception. Since April 2002, Mr. Zhang has served as vice
president of Hailiang Group Co. Ltd., a Fortune 500 company in China and the
parent company of Hailiang Stock Company, a Shenzhen Stock Exchange listed
company that is one of the world’s largest producers of copper and copper alloy
products, where he leads the real estate development group in the U.S., China
and Vietnam and the venture capital and mergers and acquisitions groups of the
company. From October 2001 to March 2002, Mr. Zhang served as general counsel to
the International Data Group (IDG), an international IT media, research and
exposition company in China providing legal expertise in corporate and venture
capital matters. From January 2000 to September 2001, Mr. Zhang served as vice
president of Shenzhen New Industries Investment Company, an investment banking
firm in China focusing on mergers and acquisition. From January 1993 to December
1999, Mr. Zhang was an attorney at the law firm of Becker & Poliakoff, PA,
and later was named managing partner of the firm’s Guangzhou and Beijing Office.
Mr. Zhang represented many U.S. companies doing business in China in strategic
business negotiations, joint ventures, and mergers and acquisitions. He was the
author of three published books and numerous articles in newspapers and
magazines in China. Mr. Zhang was also a frequent lecturer on U.S. laws and on
doing business in China. Mr. Zhang founded his own law firm in January 1990 and
provided advice mainly focusing on immigration and corporate law and mergers and
acquisitions until December 1992. Mr. Zhang received a J.D. from Nova
Southeastern University, graduated from The Graduate School of the Chinese
Academy of Social Sciences in Beijing, China, and received a B.A. from Shandong
University in Jinan, China.
Peter Li
has served as a member of our board of directors since June 2008. Since June
2008, Mr. Li has also served as an independent director and audit committee
chairman for Yuhe International Inc., an OTCBB listed company (YUII.OB) engaged
in the broiler breeding business in China. Since February 2008, Mr. Li has
served as the senior advisor for Yucheng Technologies. Since November 2006, he
has also served as chief financial officer of Yucheng Technologies. From October
2004 to October 2006, Mr. Li was the chief financial officer for Beijing
Sihitech Technology Co. Ltd. From September 2002 to March 2004, Mr. Li held the
position of internal controller at Levono. Prior to September 2002, Mr. Li held
various positions in corporate financial management across different industries.
Mr. Li is a Certified General Accountant designated in Ontario, Canada. Mr. Li
received a B.A. from Beijing Foreign Studies University and Master of Education
majoring in educational administration from University of
Toronto.
54
Clarence
Li has served as a member of our board of directors since February 2009
and our Vice President since September 30, 2009. Mr. Li has over 25 years of
financial and management accounting experiences in Hong Kong and Canada. Since
January 2008, Mr. Li has served as the Deputy Director of Industrial Operation
Finance, and held various Financial and Management Accounting positions from
1996 to 2007, at Sanofi Pasteur Limited in Toronto, Canada, a division of
Sanofi-aventis (Ticker: Paris-SAN, NYSE-SNY), a leader in the pharmaceutical
industry. From 1990 to 1995, Mr. Li was an independent financial
consultant. From 1981 to 1989, Mr. Li held executive management
positions in AMF Overseas Corp., a subsidiary of AMF Inc., and the Tung-Wah
Group, the largest non-profit organization in Hong Kong. Mr. Li started his
career as an accountant at the PricewaterhouseCoopers in Hong
Kong. Mr. Li is a Chartered Management Accountant, United Kingdom
(ACMA); a Chartered Certified Accountant, United Kingdom (FCCA); a Certified
Public Accountant, Hong Kong (CPA); and a Certified General Accountant, Canada
(CGA).
Wei (Will)
Lu has served as a member of our board of directors since February 2009
and our Vice President since September 30, 2009. Mr. Lu founded, and
since May 2007, has served as the founder and managing director of Fidelity
Capital Partners, a business consulting practice focused on strategic and
financing planning for Chinese companies. From 2001 to April 2007,
Mr. Lu served as a managing director with World Capital Market, a Los
Angeles-based boutique investment banking firm. From 1997 to 2001,
Mr. Lu worked at Arthur Andersen Business Consulting. Mr. Lu received his
Bachelor's degree from Fudan University, major in International Finance and
minor in International Law. He also received an MBA from the
University of Southern California, Marshall Business School.
Weidong
Hong has served as a member of our board of directors since February 2009
and our Vice President since September 30, 2009. Mr. Hong has served
as the Chief Executive Officer and a director of Yucheng Technologies (NASDAQ:
YTEC), a leading IT service provider to banking industry in China, since
November 2006. Mr. Hong was the Chairman and Chief Executive Officer of Beijing
Sihitech Technology Co. Ltd. between June 1999 and November 2006, which was
merged with Beijing e-Channels Technology Co. Ltd. and China Unistone
Acquisition Corp. to form Yucheng Technologies in November 2006. From May 1997
to June 1999, Mr. Hong served as General Manager of GIT, a company engaged in
the business of providing IT services to the Chinese banking
industry. From December 1994 to May 1997, Mr. Hong was Vice President
of the PC Department of Secom China Ltd. Mr. Hong received B.E and EMBA degrees
from Tsinghua University.
55
Jie Liu
has served as a member of our board of directors since February 2009 and our
Vice President since September 30, 2009. Mr. Liu has served as the
Chief Executive Officer of Shenzhen New Industries Venture Capital Co., Ltd.,
the venture capital affiliate of New Industries Investment Co., Ltd. (NII), an
investment banking enterprise in Shenzhen, China sponsored by the State Planning
and Development Commission. NII has been a pioneer in venture capital
investments in China with principal investments focused in the high-tech,
communications, bio-tech, and new materials sectors. Mr. Liu joined Shenzhen New
Industries Venture Capital in January 2001 as Manager of the Investment
Department and was later named Deputy General Manager and eventually Chief
Executive Officer. From July 1999 to January 2001, Mr. Liu led the Development
& Research Department at NII. From March 1998 to July 1999, he was a Manager
in the Investment Banking Division at New China Trust & Investment Co.,
Ltd., an investment banking firm. From March 1996 to March 1998, he was General
Manager of the Chonqing Silian Environment Engineering Co., Ltd., a project
engineering firm. He currently serves on the Board of Directors of the Shenzhen
New Industry Medical & Development Co., Ltd., Shenzhen New Industry
Biomedical Engineering Co., Ltd. and Changchun New Industry Optoelectronics
Tech. Co., Ltd. He also currently serves as Executive Director of the Shenzhen
Venture Capital Association and General Manager and Fund Manager of the Direct
Investment Department of New China Trust & Investment Co., Ltd. Mr. Liu
graduated from the Beijing University of Aeronautics & Astronautics and
received a BS with honors in Management Information Systems.
Our board
of directors is divided into three classes with only one class of directors
being elected in each year and each class serving a three-year term. The term of
office of the first class of directors, consisting of Michael Zhang, Clarence Li
and Wei (Will) Lu, will expire at our first annual meeting of shareholders. The
term of office of the second class of directors, consisting of James Preissler,
Peter Li and Weidong Hong, will expire at the second annual meeting. The term of
the third class of directors, consisting of Chien Lee, Bill Haus and Jie Lui,
will expire at the third annual meeting.
These
individuals will play a key role in identifying and evaluating prospective
acquisition candidates, selecting the target business, and structuring,
negotiating and consummating its acquisition. We believe that the skills and
expertise of these individuals, their collective access to acquisition
opportunities and ideas, their contacts, and their transactional expertise
should enable them to successfully identify and effect an
acquisition.
Special
Advisor
We may
seek guidance and advice from the following special advisor. We have no formal
arrangements or agreements with this advisor to provide services to us and
accordingly, he has no fiduciary obligations to present business opportunities
to us. This special advisor will simply provide advice, introductions to
potential targets, and assistance to us, at our request, only if he is able to
do so. Nevertheless, we believe with his business background and extensive
contacts, he will be helpful to our search for a target business and our
consummation of a business combination.
56
Jie Liu is
the chief executive officer of Shenzhen New Industries Venture Capital Co.,
Ltd., the venture capital affiliate of New Industries Investment Co., Ltd.
(NII), an investment banking enterprise in Shenzhen, China sponsored by the
State Planning and Development Commission. NII has principal investments focused
in the high-tech, communications, bio-tech, and new materials sectors. Mr. Liu
joined Shenzhen New Industries Venture Capital in January 2001 as manager of the
Investment Department was later named deputy general manager and eventually
chief executive officer. From July 1999 to January 2001, Mr. Liu led the
development and research department at NII. From March 1998 to July 1999, he was
a manager in the investment banking division at New China Trust & Investment
Co., Ltd., an investment banking firm. From March 1996 to March 1998, he served
as general manager of the Chonqing Silian Environment Engineering Co., Ltd., a
project engineering firm. Mr. Liu began his career as a principal staff member
of the National Economic Comprehensive Department within the National
Development and Reform Commission. He currently serves on the board of directors
of the Shenzhen New Industry Medical & Development Co., Ltd., Shenzhen New
Industry Biomedical Engineering Co., Ltd. and Changchun New Industry
Optoelectronics Tech. Co., Ltd. He also currently serves as executive director
of the Shenzhen Venture Capital Association and General Manager and fund manager
of the Direct Investment Department of New China Trust & Investment Co.,
Ltd. Mr. Liu received a B.S. with honors in Management Information Systems from
the Beijing University of Aeronautics & Astronautics.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our officers, directors
and persons who own more than ten percent of a registered class of our equity
securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and ten percent
stockholders are required by regulation to furnish us with copies of all Section
16(a) forms they file. Based solely on copies of such forms received or written
representations from certain reporting persons that no Form 5s were required for
those persons, we believe that, during the fiscal year ended July 31, 2009, all
filing requirements applicable to our officers, directors and greater than ten
percent beneficial owners were complied with.
Code
of Ethics
In August
2008, our board of directors adopted a code of ethics that applies to our
directors, officers and employees as well as those of our subsidiaries. Requests
for copies of our code of ethics should be sent in writing to CS China
Acquisition Corp., Room 1708 Dominion Centre, 43-59 Queen’s Road East, Wanchai,
Hong Kong.
Corporate
Governance
We
currently do not have audit or nominating committees as we are not a listed
issuer and are not required to do so. In connection with a proposed business
combination, we anticipate applying to have our securities listed on a national
securities exchange. At that time, we will adhere to the rules of whatever
exchange we seek to have our securities listed on and will form audit and
nominating committees, if required.
57
ITEM
11.
|
EXECUTIVE
COMPENSATION.
|
No
executive officer has received any cash compensation for services rendered to
us. In connection with our IPO, CS Capital USA, an affiliate of Chien Lee,
agreed to provide us with office space and certain office and secretarial
services for a fee of $7,500 per month, should we choose to avail ourselves of
such space and services, which, to this point, we have not chosen to
do. However, this arrangement is solely for our benefit and is not
intended to provide Mr. Lee compensation in lieu of a salary. No
compensation of any kind, including finders, consulting or other similar fees,
will be paid to any of our existing shareholders, including our directors, or
any of their respective affiliates, prior to, or for any services they render in
order to effectuate, the consummation of a business combination. However, such
individuals will 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. There
is no limit on the amount of these out-of-pocket expenses and there will be no
review of the reasonableness of the expenses by anyone other than our board of
directors, which includes persons who may seek reimbursement, or a court of
competent jurisdiction if such reimbursement is challenged.
Compensation
Discussion and Analysis
Overall,
following our initial business combination, we will seek to provide total
compensation packages that are competitive in terms of potential value to our
executives, and which are tailored to the unique characteristics and needs of
our company within our industry in order to create an executive compensation
program that will adequately reward our executives for their roles in creating
value for our shareholders. We intend to be competitive with other similarly
situated companies in our industry following completion of our initial business
combination. The compensation decisions regarding our executives will be based
on our need to attract individuals with the skills necessary for us to achieve
our business plan, to reward those individuals fairly over time, and to retain
those individuals who continue to perform at or above our
expectations.
It is
likely that our executives’ compensation will have three primary components -
salary, cash incentive bonus and stock-based awards. We will view the three
components of executive compensation as related but distinct. We do not believe
that significant compensation derived from one component of compensation should
negate or reduce compensation from other components. We anticipate determining
the appropriate level for each compensation component based in part, but not
exclusively, on our view of internal equity and consistency, individual
performance and other information deemed relevant and timely. We have not
adopted any formal or informal policies or guidelines for allocating
compensation between long-term and currently paid out compensation, between cash
and non-cash compensation, or among different forms of
compensation.
We may
utilize the services of third parties from time to time in connection with the
hiring and compensation awarded to executive employees. This could include
subscriptions to executive compensation surveys and other
databases.
58
Benchmarking
of Cash and Equity Compensation
We
believe it is important when making compensation-related decisions to be
informed as to current practices of similarly situated publicly held companies.
We expect to stay apprised of the cash and equity compensation practices of
publicly held companies in the industry we operate in following our initial
business combination through the review of such companies’ public reports and
through other resources. It is expected that any companies chosen for inclusion
in any benchmarking group would have business characteristics comparable to our
company, including revenues, financial growth metrics, stage of development,
employee headcount and market capitalization. While benchmarking may not always
be appropriate as a stand-alone tool for setting compensation due to the aspects
of our post-acquisition business and objectives that may be unique to us, we
generally believe that gathering this information will be an important part of
our compensation-related decision-making process.
Compensation
Components
Base Salary. Generally, we
anticipate setting executive base salaries at levels comparable with those of
executives in similar positions and with similar responsibilities at comparable
companies. We will seek to maintain base salary amounts at or near the industry
norms while avoiding paying amounts in excess of what we believe is necessary to
motivate executives to meet corporate goals. It is anticipated base salaries
will generally be reviewed annually, subject to terms of employment agreements,
and that we will seek to adjust base salary amounts to realign such salaries
with industry norms after taking into account individual responsibilities,
performance and experience.
Annual Bonuses. We may design
and utilize cash incentive bonuses for executives to focus them on achieving key
operational and financial objectives within a yearly time horizon. We will
structure cash incentive bonus compensation so that it is taxable to our
employees at the time it becomes available to them. At this time, it is not
anticipated that any executive officer’s annual cash compensation will exceed $1
million, and we have accordingly not made any plans to qualify for any
compensation deductions under Section 162(m) of the Internal Revenue
Code.
Equity Awards. We may also
use stock options and other stock-based awards to reward long-term performance.
We believe that providing a meaningful portion of our executives’ total
compensation package in stock options and other stock-based awards will align
the incentives of our executives with the interests of our shareholders and with
our long-term success.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
|
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information regarding the beneficial ownership of our
Ordinary Shares as of November 13, 2009 by:
|
·
|
each
person known by us to be the beneficial owner of more than 5% of our
outstanding Ordinary Shares;
|
59
|
·
|
each
of our officers and directors; and
|
|
·
|
all
our officers and directors as a
group.
|
Unless
otherwise indicated, we believe that all persons named in the table have sole
voting and investment power with respect to all ordinary shares beneficially
owned by them.
Name and Address of Beneficial Holder (1)
|
Amount of
Beneficial Ownership
|
Percentage of
Outstanding
Ordinary Shares
|
||||||
Craig
Samuels
|
536,875 | (2) | 7.8 | % | ||||
Mitchell
Metzman
|
534,000 | (3) | 7.8 | % | ||||
Philip
J. Hempleman
|
483,600 | (4) | 7.0 | % | ||||
Israel
A. Englander
|
381,900 | (5) | 18.9 | % | ||||
Chien
Lee
|
621,000 | (6) | 36.5 | % | ||||
Bill
Haus
|
207,000 | (7) | 4.0 | % | ||||
James
Preissler
|
175,950 | (8) | 4.7 | % | ||||
Peter
Li
|
175,950 | (9) | 4.7 | % | ||||
Michael
Zhang
|
138,000 | 1.7 | % | |||||
Clarence
Li
|
0 | 0 | ||||||
Weidong
Hong
|
0 | 0 | ||||||
Jie
Liu
|
0 | 0 | ||||||
Wei
Lu
|
0 | 0 | ||||||
All
directors and executive officers as a group (nine
individuals)
|
1,317,900 | (10) | 19.1 | % |
________________________
*
|
Less
than 1%.
|
(1)
|
Unless
otherwise indicated, the business address of each of the individuals is
Room 1708 Dominion Centre, 43-59 Queen’s Road East, Wanchai, Hong
Kong.
|
(2)
|
The
business address for Craig Samuels is 13990 Rancho Dorado Bend, San Diego,
California 92130. The foregoing information is derived from a
Schedule 13G filed with the Securities and Exchange Commission on August
18, 2008, as amended on February 13,
2009
|
(3)
|
Represents
534,000 Ordinary Shares over which Mitchell Metzman and Marnie Metzman
each have shared voting and dispositive power. The business
address for the foregoing is 4804 Morrland Lane, Suite 109, Bethesda,
Maryland 20814. The foregoing information is derived from a
Schedule 13G filed with the Securities and Exchange Commission on February
17, 2009.
|
(4)
|
Represents
(i) 292,900 Ordinary Shares beneficially owned by Ardsley
Partners Fund II, L.P., (“AP II”) (ii) 183,600 Ordinary Shares
beneficially owned by Ardsley Partners Institutional Fund, L.P. (“Ardsley
Institutional”), (iii) 483,600 Ordinary Shares beneficially owned by
Ardsley Advisory Partners (“Ardsley”), (iv) 476,500 Ordinary
Shares beneficially owned by Ardsley Partners I (“Ardsley Partners”), and
(v) 483,600 beneficially owned by Phillip J.
Hempleman. Ardsley, the Investment Manager of Ardsley Offshore
Fund. Ltd. (“Ardsley Offshore”) and the Investment Adviser of one or more
managed accounts, has the power to vote and direct the disposition of the
proceeds from the sale of the Ordinary Shares owned by Ardsley Offshore,
and the managed accounts, and accordingly may be deemed the direct
beneficial owner of such Ordinary Shares. Ardsley, the Investment Adviser
of AP II and Ardsley Institutional, shares the power to vote and direct
the disposition of the proceeds from the sale of the Ordinary Shares owned
by AP II and Ardsley Institutional and, accordingly, may be deemed the
direct beneficial owner of such Ordinary Shares. Ardsley Partners, the
General Partner of AP II and Ardsley Institutional, shares the power to
vote and direct the disposition of the Ordinary Shares owned by AP II and
Ardsley Institutional, and, accordingly, may be deemed the direct
beneficial owner of such Ordinary Shares. Mr. Hempleman is the Managing
Partner of Ardsley and Ardsley Partners and in that capacity directs their
operations and therefore may be deemed to be the indirect beneficial owner
of the Ordinary Shares owned by Ardsley Offshore, AP II, Ardsley
Institutional and the managed accounts. The business address for all of
the foregoing, except for Ardsley Offshore Fund Ltd. is 262 Harbor Drive,
Stamford, Connecticut 06902. The address of the registered
office of Ardsley Offshore is Romansco Place, Wickhams Cay 1, Roadtown
Tortoal, British Virgin Islands. The foregoing information is
derived from a Schedule 13G filed with the Securities and Exchange
Commission on August 20, 2008, as amended on February 13,
2009
|
60
(5)
|
Represents
381,900 Ordinary Shares held by Integrated Core Strategies (US) LLC
(“ICS”). This amount does not include 1,138,695 Ordinary Shares issuable
upon exercise of Warrants held by ICS that become exercisable upon the
consummation of a business combination. Mr. Englander is the managing
member of Millenium Management LLC (“MM”); MM is the general partner of
Integrated Holding Group LP (“IHG”); and IHG is the managing member of
ICS. As a result, each may be deemed to have shared voting control and
investment discretion over the securities. The business address of Mr.
Englander and each of the entities is c/o Millennium Management LLC, 666
Fifth Avenue, New York, New York 10103. The foregoing information is
derived from a Schedule 13G filed with the Securities and Exchange
Commission on August 17, 2009.
|
(6)
|
Represents
621,000 Ordinary Shares held by CS Capital USA, an affiliate of Chien
Lee. This amount does not include 2,988,000 Ordinary Shares
issuable upon exercise of the Warrants held by CS Capital USA that become
exercisable upon the consummation of a business combination. The foregoing
information is derived from a Schedule 13G filed with the Securities and
Exchange Commission on February 17,
2009.
|
(7)
|
Does
not include 110,132 Ordinary Shares issuable upon exercise of the Warrants
held by Bill Haus that become exercisable upon the consummation of a
business combination.
|
(8)
|
Does
not include 188,666 Ordinary Shares issuable upon exercise of the Warrants
held by James Preissler that become exercisable upon the consummation of a
business combination.
|
(9)
|
Does
not include 2 Ordinary Shares issuable upon exercise of the Warrants held
by Peter Li that become exercisable upon the consummation of a business
combination.
|
(10)
|
Does
not include 3,608,000 Ordinary Shares issuable upon exercise of the
Warrants held by such individuals that become exercisable upon the
consummation of a business
combination.
|
All of
the Founders’ Shares have been placed in escrow with Continental Stock Transfer
& Trust Company, as escrow agent, until one year after the consummation of a
business combination. The Founders’ Shares may be released from escrow earlier
than this date if, within the first year after we consummate a business
combination, we consummate a subsequent liquidation, share exchange or other
similar transaction which results in all of our shareholders having the right to
exchange their Ordinary Shares for cash, securities or other property.
Additionally, if holders of more than 20% of the Ordinary Shares sold in our IPO
vote against a proposed business combination and seek to exercise their
redemption rights and such business combination is consummated, our existing
shareholders have agreed to forfeit and return to us for cancellation a number
of shares so that the existing shareholders will collectively own no more than
23.81% of our outstanding Ordinary Shares upon consummation of such business
combination (without giving effect to any shares that may be issued in the
business combination).
During
the escrow period, the holders of these shares will not be able to sell or
transfer their securities except (i) to an entity’s members upon its
liquidation, (ii) to relatives and trusts for estate planning purposes, (iii) by
virtue of the laws of descent and distribution upon death, (iv) pursuant to a
qualified domestic relations order or (v) by private sales made at or prior to
the consummation of a business combination at prices no greater than the price
at which the shares were originally purchased, in each case where the transferee
agrees to the terms of the escrow agreement, but will retain all other rights as
our shareholders, including, without limitation, the right to vote their
Ordinary Shares and the right to receive cash dividends, if declared. If
dividends are declared and payable in Ordinary Shares, such dividends will also
be placed in escrow. If we are unable to effect a business combination and
liquidate, none of our existing shareholders will receive any portion of the
liquidation proceeds with respect to their initial Ordinary
Shares.
61
Simultaneously
with the consummation of our IPO, CS Capital USA, Bill Haus, James Preissler,
Peter Li and William B. Heyn purchased 3,608,000 Insider Warrants (for a total
purchase price of $1,804,000) from us. These purchases took place on a private
placement basis.
Chien
Lee, Bill Haus, James Preissler, Peter Li and Michael Zhang are our “promoters,”
as that term is defined under the Federal securities laws.
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
Certain
Relationships and Related Transactions
In
September 2007, we issued 1,150,000 Ordinary Shares to the individuals set forth
below for $25,000 in cash, at a purchase price of approximately $0.02 per share,
as follows:
Name
|
Number of Shares
|
Relationship to Us
|
||
Chien
Lee
|
517,500
|
Chairman
of the Board
|
||
Sylvia
Lee
|
517,500
|
President,
Chief Financial Officer, Secretary and Director
|
||
Michael
Zhang
|
115,000
|
Executive
Vice President and
Director
|
In June
2008, Chien Lee transferred 517,500 shares to CS Capital USA and Sylvia Lee
transferred 172,500 shares to Bill Haus, 146,625 shares to James Preissler and
Peter Li and 51,750 shares to William B. Heyn, all at the same price they
originally paid for such shares. On August 11, 2008, our board of directors
authorized a dividend of 0.2 Ordinary Shares for each outstanding Ordinary
Share.
The
holders of the majority of these Ordinary Shares will be entitled to make up to
two demands that we register these shares pursuant to an agreement signed about
the date of our IPO. The holders of the majority of these Ordinary Shares may
elect to exercise these registration rights at any time commencing three months
prior to the date on which these Ordinary Shares are released from escrow. In
addition, these shareholders have certain “piggy-back” registration rights with
respect to registration statements filed subsequent to the date on which these
Ordinary Shares are released from escrow. We will bear the expenses incurred in
connection with the filing of any such registration statements.
Simultaneously
with the consummation of our IPO, CS Capital USA, Bill Haus, James Preissler,
Peter Li and William B. Heyn purchased 3,608,000 Insider Warrants (for a total
purchase price of $1,804,000) from us. These purchases took place on a private
placement basis. The Insider Warrants are identical to the Warrants underlying
the units offered in our IPO except that if we call the Warrants for redemption,
the Insider Warrants will be exercisable on a cashless basis so long as such
Warrants are held by these purchasers or their affiliates. These purchasers have
agreed that the Insider Warrants will not be sold or transferred by it until
after we have completed a business combination. The holders of the majority of
these Insider Warrants (or underlying shares) will be entitled to demand that we
register these securities pursuant to an agreement to be signed prior to or on
the date of our prospectus. The holders of the majority of these securities may
elect to exercise these registration rights with respect to such securities at
any time after we consummate a business combination. In addition, these holders
have certain “piggy-back” registration rights with respect to registration
statements filed subsequent to such date. We will bear the expenses incurred in
connection with the filing of any such registration statements.
62
In connection with our
IPO, CS Capital USA, an affiliate of Chien Lee, agreed to provide us with office
space and certain office and secretarial services for a fee of $7,500 per month,
should we choose to avail ourselves of such space and services, which, to this
point, we have not chosen to do. Chien Lee is the chairman of
CS Capital USA. Accordingly, he will benefit from the transaction to the extent
of his interest in CS Capital USA. However, this arrangement is solely for our
benefit and is not intended to provide Mr. Lee compensation in lieu of a salary.
We believe, based on rents and fees for similar services in the Miami, Florida
metropolitan area, that the fee charged by CS Capital USA is at least as
favorable as we could have obtained from an unaffiliated person. However, as our
directors may not be deemed “independent,” we did not have the benefit of
disinterested directors approving this transaction.
Chien Lee
and his wife advanced to us $138,000 to cover expenses related to our IPO. The
loans were repaid without interest from the proceeds of our IPO not placed in
trust.
In August
2009 and subsequently, the Company issued, in aggregate, $135,000 principal
amount of additional unsecured promissory notes to certain officers and initial
shareholders.
We will
reimburse our officers and directors for any reasonable out-of-pocket business
expenses incurred by them in connection with certain activities on our behalf
such as identifying and investigating possible target businesses and business
combinations. There is no limit on the amount of out-of-pocket expenses
reimbursable by us, which will be reviewed only by our board or a court of
competent jurisdiction if such reimbursement is challenged.
No
compensation or fees of any kind, including finder’s fees, consulting fees or
other similar compensation, will be paid to any of our existing shareholders,
officers or directors who owned our Ordinary Shares prior to our IPO, or to any
of their respective affiliates, prior to or with respect to the business
combination (regardless of the type of transaction that it is).
All
ongoing and future transactions between us and any of our officers and directors
or their respective affiliates, including loans by our officers and directors,
will be on terms believed by us to be no less favorable to us than are available
from unaffiliated third parties. Such transactions or loans, including any
forgiveness of loans, will require prior approval by a majority of our
uninterested independent directors or the members of our board who do not have
an interest in the transaction, in either case who had access, at our expense,
to our attorneys or independent legal counsel. We will not enter into any such
transaction unless our disinterested independent directors determine that the
terms of such transaction are no less favorable to us than those that would be
available to us with respect to such a transaction from unaffiliated third
parties.
63
Related
party policy
Our Code
of Ethics requires us to avoid, wherever possible, all related party
transactions that could result in actual or potential conflicts of interest,
except under guidelines approved by the board of directors (or the audit
committee). Related-party transactions are defined as transactions in which (1)
the aggregate amount involved will or may be expected to exceed $120,000 in any
calendar year, (2) we or any of our subsidiaries is a participant, and (3) any
(a) executive officer, director or nominee for election as a director, (b)
greater than 5 percent beneficial owner of our ordinary shares, or (c) immediate
family member, of the persons referred to in clauses (a) and (b), has or will
have a direct or indirect material interest (other than solely as a result of
being a director or a less than 10 percent beneficial owner of another entity).
A conflict of interest situation can arise when a person takes actions or has
interests that may make it difficult to perform his or her work objectively and
effectively. Conflicts of interest may also arise if a person, or a member of
his or her family, receives improper personal benefits as a result of his or her
position. While we have agreed not to consummate a business combination with an
entity which is affiliated with any of our officers, directors or founders, we
are not prohibited from entering into other related-party
transactions.
Our board
of directors is responsible for reviewing and approving related-party
transactions to the extent we enter into such transactions. The board of
directors will consider all relevant factors when determining whether to approve
a related party transaction, including whether the related party transaction is
on terms no less favorable than terms generally available to an unaffiliated
third-party under the same or similar circumstances and the extent of the
related party’s interest in the transaction. No director may participate in the
approval of any transaction in which he is a related party, but that director is
required to provide the other members of the board of directors with all
material information concerning the transaction. Additionally, we require each
of our directors and executive officers to complete a directors’ and officers’
questionnaire that elicits information about related party transactions. These
procedures are intended to determine whether any such related party transaction
impairs the independence of a director or presents a conflict of interest on the
part of a director, employee or officer.
Director
Independence
Our
securities are not currently listed on a national securities
exchange. In connection with a proposed business combination, we
anticipate applying to have our securities listed on such a national securities
exchange. NASDAQ and NYSE Alternext US listing standards define an
“independent director” generally as a person, other than an officer of a
company, who does not have a relationship with the Company that would interfere
with the director’s exercise of independent judgment. Currently, only
Clarence Li, Wei Lu, Weidong Hong, and Jie Liu would be considered “independent”
under that general definition. At the time of our proposed business
combination, we will adhere to the rules of whatever exchange we seek to have
our securities listed on.
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
The firm
of UHY LLP acts as our principal accountant. The following is a summary of fees
paid to our principal accountant for services rendered. UHY LLP leases all its
personnel, who work under the control of UHY LLP partners, from wholly-owned
subsidiaries of UHY Advisors, Inc. (“UHY”) in an alternative practice
structure.
64
Audit
Fees
During
the fiscal years ended July 31, 2009 and July 31, 2008 UHY LLP billed us an
aggregate of $47,750 and $104,850, respectively, in fees for the professional
services rendered in connection with the audits of our annual financial
statements included in our Annual Reports on Form 10-K for those two fiscal
years, the review of our financial statements included in our Quarterly Reports
on Form 10-Q during those two fiscal years, and our registration statement
filings.
Audit-Related
Fees
During
the fiscal years ended July 31, 2009 and July 31, 2008, we were not billed by
UHY LLP for any fees for audit-related services reasonably related to the
performance of the audits and reviews for those two fiscal years, in additional
to the fees described above under the heading “Audit Fees.”
Tax
Fees
During
the fiscal years ended July 31, 2009 and July 31, 2008, UHY billed us an
aggregate of $0 and $1,550, respectively, for professional services rendered for
tax compliance, tax advice, and tax planning services. These
professional services consisted of general consultation from time to time
regarding compliance with and planning for federal, state, local and
international tax matters.
All
Other Fees
During
the fiscal years ended July 31, 2009 and 2008, we were not billed by UHY LLP or
UHY for any fees for services, other than those described above, rendered to us
for those two fiscal years.
Audit
Committee Approval
As we do
not have an audit committee, the audit committee did not pre-approve any
accounting-related or tax services. However, our board of directors has approved
the services described above.
PART
IV
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
|
(a) The
following Exhibits are filed as part of this report.
65
Exhibit No.
|
Description
|
|
3.1
|
Amended
and Restated Memorandum and Articles of Association.*
|
|
4.1
|
Specimen
Unit Certificate.*
|
|
4.2
|
Specimen
Ordinary Certificate.*
|
|
4.3
|
Specimen
Warrant Certificate.*
|
|
4.4
|
Form
of Unit Purchase Option granted to Representative.*
|
|
4.5
|
Form
of Warrant Agreement between Continental Stock Transfer & Trust
Company and the Registrant.*
|
|
10.1
|
Letter
Agreement among the Registrant, EarlyBirdCapital, Inc. and Chien
Lee.*
|
|
10.2
|
Letter
Agreement among the Registrant, EarlyBirdCapital, Inc. and Sylvia
Lee.*
|
|
10.3
|
Letter
Agreement among the Registrant, EarlyBirdCapital, Inc. and Michael
Zhang.*
|
|
10.4
|
Form
of Investment Management Trust Agreement between Continental Stock
Transfer & Trust Company and the Registrant.*
|
|
10.5
|
Form
of Stock Escrow Agreement between the Registrant, Continental Stock
Transfer & Trust Company and the Initial
Shareholders.*
|
|
10.6
|
Form
of Letter Agreement between the Registrant and CS Capital USA, LLC
regarding administrative support.*
|
|
10.7
|
Form
of Promissory Note, dated as of October 16, 2007, issued to Chien Lee and
Sylvia Lee.*
|
|
10.8
|
Form
of Registration Rights Agreement among the Registrant and the Initial
Shareholders.*
|
|
10.9
|
Form
of Subscription Agreement among the Registrant, EarlyBirdCapital, Inc.,
Graubard Miller and each of CS Capital USA, LLC, Bill Haus, James
Preissler, Peter Li and William B. Heyn.*
|
|
10.10
|
Letter
Agreement among the Registrant, EarlyBirdCapital, Inc. and Bill
Haus.*
|
|
10.11
|
Letter
Agreement among the Registrant, EarlyBirdCapital, Inc. and Jim
Preissler.*
|
|
10.12
|
Letter
Agreement among the Registrant, EarlyBirdCapital, Inc. and Peter
Li.*
|
|
10.13
|
Letter
Agreement among the Registrant, EarlyBirdCapital, Inc. and William B.
Heyn.*
|
|
10.1
|
Stock
Purchase Agreement dated as of October 6, 2009 by and among CS China
Acquisition Corp., Asia Gaming & Resort, Ltd., and Spring Fortune
Investment Ltd. †
|
|
10.2
|
Amendment
No. 1 to Stock Purchase Agreement dated November 10, 2009 by and among CS
China Acquisition Corp., Asia Gaming & Resort, Ltd. and Spring Fortune
Investment Ltd.†
|
|
10.3
|
Form
of Escrow Agreement. †
|
|
10.4
|
Form
of Employment Agreement. †
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.
|
___________________
*
|
Incorporated
by reference to the Registrant’s Registration Statement on Form S-1 (SEC
File No. 333-147294).
|
†
|
Incorporated
by reference to the Registrant’s Report of Foreign Private Issuer on Form
6-K initially filed on October 13, 2009, as
amended.
|
66
CS
CHINA ACQUISITION CORP.
(a
corporation in the development stage)
TABLE
OF CONTENTS
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Financial
Statements
|
||
Balance
Sheets
|
F-2
|
|
Statements
of Operations
|
F-3
|
|
Statements
of Changes in Shareholders’ Equity (Deficit)
|
F-4
|
|
Statements
of Cash Flows
|
F-5
|
|
Notes
to Financial Statements
|
|
F-6-15
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
CS China
Acquisition Corp.
We have
audited the accompanying balance sheets of CS China Acquisition Corp. (a
corporation in the development stage) (the “Company”) as of July 31, 2009 and
2008, and the related statements of operations, changes in shareholders’ equity
(deficit) and cash flows for the year ended July 31, 2009 and the periods from
September 24, 2007 (inception) to July 31, 2008 and September 24, 2007
(inception) to July 31, 2009 (cumulative). These financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
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 CS China Acquisition Corp. as of
July 31, 2009 and 2008, and the results of its operations and its cash flows for
the year ended July 31, 2009 and the periods from September 24, 2007 (inception)
to July 31, 2008 and September 24, 2007 (inception) to July 31, 2009
(cumulative), in conformity with accounting principles generally accepted in the
United States of America.
On
October 6, 2009, the Company entered into a Stock Purchase Agreement (the
“Agreement”) with Asia Gaming & Resort, Ltd. (See note 11).
/s/ UHY
LLP
New York,
New York
November
12, 2009
F-1
CS
China Acquisition Corp.
(a
corporation in the development stage)
Balance
Sheets
July 31,
2009
|
July 31,
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
|
$ | 14,962 | $ | 1,167 | ||||
Investments
held in trust
|
32,915,167 | — | ||||||
Prepaid
insurance
|
64,209 | — | ||||||
Deferred
offering costs associated with proposed public offering
|
— | 254,506 | ||||||
Total
assets (all current)
|
$ | 32,994,338 | $ | 255,673 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accrued
expenses
|
$ | 6,000 | $ | 122,628 | ||||
Deferred
underwriter fee
|
993,600 | — | ||||||
Insurance
premiums payable
|
64,209 | — | ||||||
Notes
payable to shareholders
|
— | 135,000 | ||||||
Total
current liabilities
|
1,063,809 | 257,628 | ||||||
Common
stock subject to possible redemption, 2,207,999
|
||||||||
shares
at conversion value
|
13,159,674 | — | ||||||
COMMITMENTS
|
||||||||
SHAREHOLDERS’
EQUITY (DEFICIT)
|
||||||||
Preferred
shares, $0.0001 par value
|
||||||||
Authorized
1,000,000 shares; none issued
|
— | — | ||||||
Ordinary
shares, $0.0001 par value
|
||||||||
Authorized
50,000,000 shares; issued and outstanding 6,900,000 shares and 1,150,000
shares at July 31, 2009 and 2008, respectively (which includes 2,207,999
shares subject to possible redemption at July 31, 2009)
|
690 | 115 | ||||||
Warrants
|
7,324,000 | — | ||||||
Additional
paid-in capital
|
11,404,244 | 24,885 | ||||||
Retained
earnings (deficit accumulated) during the development
stage
|
41,921 | (26,955 | ) | |||||
Total
shareholders’ equity (deficit)
|
18,770,855 | (1,955 | ) | |||||
Total
liabilities and shareholders’ equity (deficit)
|
$ | 32,994,338 | $ | 255,673 |
See
notes to financial statements
F-2
CS
China Acquisition Corp.
(a
corporation in the development stage)
Statements
of Operations
For the Year
Ended July 31,
2009
|
For the
Period from
September 24,
2007
(Inception) to
July 31, 2008
|
For the
Period from
September 24,
2007
(Inception) to
July 31, 2009
(Cumulative)
|
||||||||||
Income
|
||||||||||||
Interest
Income
|
$ | 355,599 | $ | — | $ | 355,599 | ||||||
Expenses
|
||||||||||||
Travel
and Entertainment Expense
|
150,365 | — | 150,365 | |||||||||
Insurance
Expense
|
81,053 | — | 81,053 | |||||||||
Legal
Expense
|
15,474 | — | 15,474 | |||||||||
Formation
Costs
|
50 | 3,837 | 3,887 | |||||||||
General
and Administrative Expense
|
39,781 | 23,118 | 62,899 | |||||||||
Total
expenses
|
286,722 | 26,955 | 313,677 | |||||||||
Operating
income (loss)
|
68,876 | (26,955 | ) | 41,921 | ||||||||
Net
income (loss)
|
$ | 68,876 | $ | (26,955 | ) | $ | 41,921 | |||||
Weighted
average shares outstanding – basic and diluted
|
6,669,505 | 1,150,000 | 4,126,444 | |||||||||
Basic
and diluted net income (loss) per share
|
$ | 0.01 | $ | (0.02 | ) | $ | 0.01 |
See
notes to financial statement
F-3
CS
China Acquisition Corp.
(a
corporation in the development stage)
Statements
of Changes in Shareholders’ Equity (Deficit)
For
the period from September 24, 2007 (inception) to July 31, 2009
Ordinary Shares
|
Additional
Paid-In
|
Retained
Earnings
(Deficit
Accumulated)
During the
Development
|
Shareholders’
|
|||||||||||||||||||||
Shares
|
Amount
|
Warrants
|
Capital
|
Stage
|
Equity(Deficit)
|
|||||||||||||||||||
Ordinary
shares issued September 24, 2007 to Initial Shareholders for
cash
|
1,150,000 | $ | 115 | $ | — | $ | 24,885 | $ | - | $ | 25,000 | |||||||||||||
Net
loss September 24, 2007 to July 31, 2008
|
— | — | — | — | (26,955 | ) | (26,955 | ) | ||||||||||||||||
Balance
at July 31, 2008
|
1,150,000 | 115 | — | 24,885 | (26,955 | ) | (1,955 | ) | ||||||||||||||||
Dividend
issued on August 11, 2008
|
230,000 | 23 | — | (23 | ) | — | — | |||||||||||||||||
Proceeds
from private placement of insider warrants
|
— | — | 1,804,000 | — | — | 1,804,000 | ||||||||||||||||||
Sale
of 5,520,000 units, net of underwriters'
|
||||||||||||||||||||||||
discount
and offering expenses ($2,066,892) (includes 2,207,999 shares subject to
possible conversion)
|
5,520,000 | 552 | 5,520,000 | 24,538,956 | — | 30,059,508 | ||||||||||||||||||
Proceeds
subject to possible conversion of 2,207,999 shares
|
— | — | — | (13,159,674 | ) | — | (13,159,674 | ) | ||||||||||||||||
Proceeds
from issuance of underwriter purchase option
|
— | — | — | 100 | — | 100 | ||||||||||||||||||
Net
income
|
— | — | — | — | 68,876 | 68,876 | ||||||||||||||||||
Balance
at July 31, 2009
|
6,900,000 | $ | 690 | $ | 7,324,000 | $ | 11,404,244 | $ | 41,921 | $ | 18,770,855 |
See
notes to financial statements
F-4
CS
China Acquisition Corp.
(a
corporation in the development stage)
Statements
of Cash Flows
For the Year
Ended July
31, 2009
|
For the
Period from
September
24, 2007
(Inception) to
July 31, 2008
|
For the
Period from
September
24, 2007
(Inception) to
July 31, 2009
(Cumulative)
|
||||||||||
CASH
FLOW FROM OPERATING ACTIVITIES
|
||||||||||||
Net
income (loss)
|
$ | 68,876 | $ | (26,955 | ) | $ | 41,921 | |||||
Adjustments
to reconcile net income (loss) to net cash
|
||||||||||||
provided
by (used in) operating activities:
|
||||||||||||
Change
in accrued expenses
|
(5,706 | ) | 11,706 | 6,000 | ||||||||
Net
cash provided by (used in) operating activities
|
63,170 | (15,249 | ) | 47,921 | ||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
Cash
held in trust Fund
|
(32,915,167 | ) | — | (32,915,167 | ) | |||||||
Net
cash used in investing activities
|
(32,915,167 | ) | — | (32,915,167 | ) | |||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
Gross
proceeds of public offering
|
$ | 33,120,000 | $ | — | $ | 33,120,000 | ||||||
Proceeds
from the private placement of insider warrants
|
1,804,000 | — | 1,804,000 | |||||||||
Proceeds
from sale of ordinary shares to founding shareholders
|
— | 25,000 | 25,000 | |||||||||
Proceeds
from issuance of underwriter purchase option
|
100 | — | 100 | |||||||||
Proceeds
from shareholders’ note payable
|
3,000 | 135,000 | 138,000 | |||||||||
Payments
of shareholders’ note payable
|
(138,000 | ) | — | (138,000 | ) | |||||||
Payments
of costs associated with public offering
|
(1,923,308 | ) | (143,584 | ) | (2,066,892 | ) | ||||||
Net
cash provided by financing activities
|
32,865,792 | 16,416 | 32,882,208 | |||||||||
NET
INCREASE IN CASH
|
13,795 | 1,167 | 14,962 | |||||||||
CASH,
Beginning
|
1,167 | — | — | |||||||||
CASH,
Ending
|
$ | 14,962 | $ | 1,167 | $ | 14,962 | ||||||
Supplemental
schedule of non-cash financing activity:
|
||||||||||||
Increase
(decrease) in accrual for offering costs
|
$ | (110,992 | ) | $ | 110,922 | $ | — | |||||
Deferred
underwriter fees
|
$ | 993,600 | $ | — | $ | 993,600 | ||||||
Fair
value of underwriter purchase option
|
$ | 1,804,800 | $ | — | $ | 1,804,800 |
See
notes to financial statements
F-5
CS
China Acquisition Corp.
(a
corporation in the development stage)
Notes
to Financial Statements
For
the Year Ended July 31, 2009 and
for
the periods from September 24, 2007 (inception) to July 31, 2008 and
2009
NOTE
1 - ORGANIZATION AND PLAN OF BUSINESS OPERATIONS
CS China
Acquisition Corp. (the “Company”) was incorporated in the Cayman Islands on
September 24, 2007 as a blank check company whose objective is to acquire,
through a share exchange, asset acquisition or other similar business
combination, an operating business, or control of such operating business
through contractual arrangements, that has its principal operations located in
People’s Republic of China (“PRC”).
All
activity from September 24, 2007 (inception) through August 15, 2008 relates to
the Company’s formation and its initial public offering described
below. Since August 15, 2008, the Company has been searching for a
target business to acquire. The Company has selected July 31 as its
fiscal year-end.
The
Company consummated its initial public offering (“Offering”) of units (“units”)
on August 15, 2008 and received net proceeds of $27,319,681 net of transaction
costs (Note 3). Simultaneously with the consummation of the Offering,
the Company sold 3,320,000 Insider Warrants (Note 6) to certain Initial
Shareholders (defined below) of the Company at $0.50 per Insider Warrant for
proceeds of $1,660,000. The Company’s management has broad discretion
with respect to the specific application of the net proceeds of the Offering,
although substantially all of the net proceeds of the Offering are intended to
be generally applied toward consummating a business combination with an
operating business that has its principal operations located in the PRC
(“Business Combination”). Furthermore, there is no assurance that the
Company will be able to affect a Business Combination
successfully. On August 20, 2008, the underwriters notified the
Company that they had exercised their over-allotment option to purchase an
additional 720,000 units and the over-allotment option was consummated on August
21, 2008. The additional units sold pursuant to the over allotment
option generated gross proceeds of $4,320,000. Simultaneously with
the consummation of the over-allotment option, the Company sold an additional
288,000 Insider Warrants to certain Initial Shareholders of the Company at $0.50
per Insider Warrant for proceeds of $144,000. An amount of
$32,899,200 (including $1,804,000 of proceeds from the sale of Insider Warrants)
is being held in a trust account (“Trust Account”). Upon consummation
of the Offering, such funds were deposited with HSBC Bank USA, National
Association and are currently invested in the HSBC Investor Tax-Free Money
Market Fund. Such funds have been invested in United States
“government securities” within the meaning of Section 2(a) (16) of the
Investment Company Act of 1940 having a maturity of 180 days or less or in money
market funds meeting certain conditions under Rule 2a-7 promulgated under the
Investment Company Act of 1940 until the earlier of (i) the consummation of an
initial Business Combination and (ii) liquidation of the Company. The
placing of funds in the Trust Account may not protect those funds from third
party claims against the Company. Although the Company will seek to
have all vendors, prospective target businesses or other entities it engages,
execute agreements with the Company waiving any right, title, interest or claim
of any kind in or to any monies held in the Trust Account, there is no guarantee
that they will execute such agreements. Certain of the Initial
Shareholders have agreed that they will be liable under certain circumstances to
ensure that the proceeds in the Trust Account are not reduced by the claims of
target businesses or vendors or other entities that are owed money by the
Company for services rendered, contracted for or products sold to the
Company. However, there can be no assurance that they will be able to
satisfy those obligations should they arise. The remaining net
proceeds (not held in the Trust Account) may be used to pay for business, legal
and accounting due diligence on prospective acquisitions and continuing general
and administrative expenses. Additionally, up to an aggregate of
$1,050,000 of interest earned on the Trust Account balance may be released to
the Company to fund working capital requirements as well as any amounts that are
necessary to pay the Company’s tax obligations. As of July 31, 2009,
$339,631 has been released to fund working capital requirements and an
additional $15,967 is accrued in the Trust Account but has not been released to
the Company.
F-6
CS
China Acquisition Corp.
(a
corporation in the development stage)
Notes
to Financial Statements
For
the Year Ended July 31, 2009 and
for
the periods from September 24, 2007 (inception) to July 31, 2008 and
2009
On
October 6, 2009, the Company entered into a Stock Purchase Agreement,
subsequently amended on November 10, 2009, (the “Agreement”) with Asia
Gaming & Resort, Ltd. (“AGRL”) and Spring Fortune Investment Ltd. (the
“Shareholder”). Pursuant to the Agreement, the Company will purchase
all of the outstanding shares of AGRL stock from the Shareholder.
The
Company, after signing a definitive agreement for a Business Combination, is
required to submit such transaction for shareholder approval. In the
event that shareholders owning 40% or more of the shares sold in the Offering
vote against the Business Combination and exercise their redemption rights
described below, the Business Combination will not be
consummated. All of the Company’s shareholders prior to the Offering,
including all of the officers and directors of the Company (“Initial
Shareholders”), have agreed to vote their founding shares in accordance with the
vote of the majority in interest of all other shareholders of the Company
(“Public Shareholders”) with respect to any Business
Combination. After consummation of a Business Combination, these
voting safeguards will no longer be applicable.
With
respect to a Business Combination which is approved and consummated, any Public
Shareholder who voted against the Business Combination may demand that the
Company redeem his or her shares; provided, however, that a Public Shareholder,
together with any affiliate of his or her or any other person with whom he or
she is acting in concert or as a “group” (as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended) will be restricted from seeking
redemption rights with respect to 10% or more of the ordinary shares sold in the
Offering. The per share redemption price will equal the amount in the
Trust Account, calculated as of two business days prior to the consummation of
the proposed Business Combination, divided by the number of ordinary shares sold
in the Offering. Accordingly, Public Shareholders holding up to
39.99% of the aggregate number of shares owned by all Public Shareholders may
seek redemption of their shares in the event of a Business
Combination. Such Public Shareholders are entitled to receive their
per share interest in the Trust Account computed without regard to the shares
held by Initial Shareholders.
The
Company’s Memorandum and Articles of Association provides that the Company will
continue in existence only until February 11, 2010, or February 11, 2011 if a
definitive agreement has been executed by February 11, 2010 and the Business
Combination has not been consummated by February 11, 2010. If the
Company has not completed a Business Combination by such date, its corporate
existence will cease and it will liquidate and dissolve for the purposes of
winding up its affairs. In the event of liquidation, it is likely
that the per share value of the residual assets remaining available for
distribution (including Trust Account assets) will be less than the initial
public offering price per share in the Offering (assuming no value is attributed
to the Warrants contained in the Units offered in the Offering discussed in Note
3). As of the October 6, 2009 Agreement, the Company has met the
conditions to extend the liquidation of the Company until February 11, 2011 by
entering a definitive agreement prior to February 11, 2010.
F-7
CS
China Acquisition Corp.
(a
corporation in the development stage)
Notes
to Financial Statements
For
the Year Ended July 31, 2009 and
for
the periods from September 24, 2007 (inception) to July 31, 2008 and
2009
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES
Development
Stage Enterprise
The
Company complies with the reporting requirements of Statements of Financial
Accounting Standards (“SFAS”) No.7 “Accounting and Reporting by Development
Stage Enterprises”.
CASH
AND CASH EQUIVALENTS/CONCENTRATION OF CREDIT RISK
Cash
comprises cash in bank and demand deposits with banks and other financial
institutions.
The
Company classifies all highly liquid debt instruments purchased with a maturity
of three months or less as cash equivalents. Cash and cash equivalents are
maintained in FDIC insured accounts at credit qualified financial
institutions
In
October 2008, the FDIC increased its insurance from $100,000 per depositor to
$250,000, and to an unlimited amount for non-interest bearing accounts. The
coverage increase, which is temporary, extends through December 31, 2013 for
interest bearing accounts and June 30, 2010 for non-interest bearing accounts.
At July 31, 2009 and 2008, there were no uninsured cash balances.
INVESTMENTS
HELD IN TRUST
The
Company’s restricted investment held in the Trust Account at July 31, 2009 is
comprised of one tax free money market fund with a short term
maturity.
INCOME
TAXES
Income
taxes are accounted for under the provisions of SFAS No. 109, “Accounting for
Income Taxes” (“SFAS No. 109”), which requires the use of the “asset and
liability method” of accounting for income taxes. Accordingly, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and income tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected
to reverse. A valuation allowance is required if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Current income taxes are based on the
current period taxable income for federal, state and local income tax reporting
purposes.
F-8
CS
China Acquisition Corp.
(a
corporation in the development stage)
Notes
to Financial Statements
For
the Year Ended July 31, 2009 and
for
the periods from September 24, 2007 (inception) to July 31, 2008 and
2009
UNCERTAIN
TAX POSITION
The
Company has elected to defer the application of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, in accordance with FASB Staff
Position No. 48-3, Effective Date of FASB Interpretation No. 48 for Certain
Nonpublic Companies. The Company will continue to evaluate uncertain tax
positions in accordance with FASB Statement No. 5, Accounting for
Contingencies. Under that Statement, if it is probable that an
uncertain tax position will result in a material liability and the amount of the
liability can be estimated, then the estimated liability is accrued. As of July
31, 2009 and 2008, there were no amounts that had been accrued with respect to
uncertain tax positions.
EARNINGS
PER SHARE
Basic and
diluted income (loss) per share is computed by dividing net income (loss) by the
weighted-average number of ordinary shares outstanding during the period and
weighted average number of ordinary shares on an as exercised
basis:
For the Year
Ended July 31,
2009
|
For the Period
from
September 24,
2007
(Inception) to
July 31, 2008
|
For the Period
from
September 24, 2007
(Inception) to
July 31, 2009
(Cumulative)
|
||||||||||
Net
income (loss)
|
$ | 68,876 | $ | (26,955 | ) | $ | 41,921 | |||||
Denominator
|
||||||||||||
Basic
weighted average shares
|
6,669,505 | 1,150,000 | 4,126,444 | |||||||||
Basic
income (loss) per share
|
$ | 0.01 | $ | (0.02 | ) | $ | 0.01 |
There
were no potentially dilutive securities for the period from September 24, 2007
(inception) to July 31, 2008, for the year ended July 31, 2009 and for the
period from September 24, 2007 (inception) to July 31, 2009
(cumulative).
The
following warrants were not included in the diluted earnings per share
computation.
Warrants
Outstanding
|
Warrants
Exercisable
|
Weighted
Average
Exercise
Price
|
Average
Remaining
Contractual
Life
|
|||||||||||
Outstanding
September 24, 2007
|
— | — | — | |||||||||||
Granted
|
— | — | — | |||||||||||
Forfeited
|
— | — | — | |||||||||||
Exercised
|
— | — | — | |||||||||||
Outstanding
July 31, 2008
|
— | — | — | |||||||||||
Granted
|
14,648,000 | — | $ | 5.00 |
5
years
|
|||||||||
Forfeited
|
— | — | — | |||||||||||
Exercised
|
— | — | — | |||||||||||
Outstanding
July 31, 2009
|
14,648,000 | — | $ | 5.00 |
4
years
|
F-9
CS
China Acquisition Corp.
(a
corporation in the development stage)
Notes
to Financial Statements
For
the Year Ended July 31, 2009 and
for
the periods from September 24, 2007 (inception) to July 31, 2008 and
2009
USE
OF ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
expenses during the reporting period. Actual results could differ
from those estimates.
SUBSEQUENT
EVENTS
For
purposes of preparing this 10-K, the Company considered events through November
12, 2009. See Note 11 for disclosure regarding subsequent events. No
material events have occurred since November 12, 2009, which have not been
disclosed in these financial statements.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
Management
does not believe that any recently issued, but not yet effective, accounting
standards if currently adopted would have a material effect on the accompanying
financial statements.
NOTE
3 - INITIAL PUBLIC OFFERING
On August
15, 2008, the Company sold 4,800,000 units at a price of $6.00 per unit in the
Offering. On August 20, 2008, the underwriters notified the Company
that they had exercised their over allotment option to purchase an additional
720,000 units and such additional units were sold on August 21,
2008. Each unit consists of one ordinary share of the Company’s stock
and two Redeemable Ordinary Share Purchase Warrants
(“Warrants”). Each Warrant entitles the holder to purchase from the
Company one ordinary share at an exercise price of $5.00 commencing the later of
the completion of a Business Combination or August 11, 2009 and expiring August
10, 2013. The Company may redeem the Warrants, with the prior consent
of EarlyBirdCapital, Inc. (”EBC”), the representative of the underwriters in the
Offering, at a price of $0.01 per Warrant upon 30 days notice while the Warrants
are exercisable, only in the event that the last sale price of the ordinary
shares is at least $8.50 per share for any 20 trading days within a 30 trading
day period ending on the third day prior to the date on which notice of
redemption is given. If the Company redeems the Warrants as described
above, management will have the option to require any holder that wishes to
exercise his Warrant to do so on a “cashless basis.” In such event, the holder
would pay the exercise price by surrendering his Warrants for that number of
ordinary shares equal to the quotient obtained by dividing (x) the product of
the number of ordinary shares underlying the Warrants, multiplied by the
difference between the exercise price of the Warrants and the “fair market
value” (defined below) by (y) the fair market value. The “fair market
value” shall mean the average reported last sale price of the ordinary shares
for the 10 trading days ending on the third trading day prior to the date on
which the notice of redemption is sent to holders of Warrants. In
accordance with the warrant agreement, relating to the Warrants sold and issued
in the Offering, the Company is only required to use its best efforts to
maintain the effectiveness of the registration statement covering the
Warrants. The Company will not be obligated to deliver securities,
and there are no contractual penalties for failure to deliver securities, if a
registration statement is not effective at the time of
exercise. Additionally, in the event that a registration is not
effective at the time of exercise, the holder of such Warrant shall not be
entitled to exercise such Warrant and in no event (whether in the case of a
registration statement not being effective or otherwise) will the Company be
required to net cash settle the Warrant exercise. Consequently, the
Warrants may expire unexercised and unredeemed.
F-10
CS
China Acquisition Corp.
(a
corporation in the development stage)
Notes
to Financial Statements
For
the Year Ended July 31, 2009 and
for
the periods from September 24, 2007 (inception) to July 31, 2008 and
2009
The
Company paid the underwriters in the Offering an underwriting discount of 4%
($1,324,800) of the gross proceeds of the Offering. The Company is
obligated to pay the underwriters an underwriting discount of an additional 3%
of the gross proceeds of the Offering ($993,600) if the Company completes a
Business Combination. The underwriters have waived their right to
receive such payment upon the Company’s liquidation if it is unable to complete
a Business Combination. The Company also issued a unit purchase
option, for $100, to EBC (and its designees) to purchase 480,000 units at an
exercise price of $6.60 per unit. The units issuable upon exercise of
this option are identical to the units sold in the Offering. The
Company has accounted for the fair value of the unit purchase option, inclusive
of the receipt of $100 cash payment, as an expense of the Offering resulting in
a charge directly to shareholders’ equity. The Company estimated that
the fair value of this unit purchase option was approximately $1,804,800 ($3.76
per unit) using a Black-Scholes option-pricing model. The fair value
of the unit purchase option granted to EBC was estimated as of the date of grant
using the following assumptions: (1) expected volatility of 76.06%, (2)
risk-free interest rate of 4.12% and (3) expected life of 5
years. The unit purchase 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 unit purchase option (the difference between the
exercise prices of the unit purchase option and the underlying Warrants and the
market price of the Units and underlying ordinary shares) to exercise the unit
purchase option without the payment of any cash. The Company has no
obligation to net cash settle the exercise of the unit purchase option or the
Warrants underlying the unit purchase option. The holder of the unit
purchase option will not be entitled to exercise the unit purchase option or the
Warrants underlying the unit purchase option unless a registration statement
covering the securities underlying the unit purchase option is effective or an
exemption from registration is available. If the holder is unable to
exercise the unit purchase option or underlying Warrants, the unit purchase
option or Warrants, as applicable, will expire worthless.
F-11
CS
China Acquisition Corp.
(a
corporation in the development stage)
Notes
to Financial Statements
For
the Year Ended July 31, 2009 and
for
the periods from September 24, 2007 (inception) to July 31, 2008 and
2009
NOTE
4 – DEFERRED OFFERING COSTS
Deferred
offering costs consist principally of legal and underwriting fees incurred prior
to the initial public offering that are directly related to the
offering. At closing, the deferred offering costs were paid and
offset the gross proceeds in shareholders’ equity.
NOTE
5 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company has adopted SFAS 157 on January 1, 2008. This statement
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS 157 establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value
into three levels as follows:
Level 1 - Quoted
prices (unadjusted) in active markets for identical assets or liabilities that
the Company has the ability to access as of the measurement
date. Financial assets and liabilities utilizing Level 1 inputs
include active exchange traded securities and exchange based
derivatives.
Level 2 – Inputs
other than quoted prices included within Level 1 that are directly observable
for the asset or liability or indirectly observable through corroboration with
observable market data. Financial assets and liabilities utilizing
Level 2 inputs include fixed income securities; non-exchange based derivatives,
mutual funds and fair value hedges.
Level 3 –
Unobservable inputs for asset or liability only used when its little, if any,
market activity for the asset or liability at the measurement
date. Financial assets and liabilities utilizing Level 3 inputs
include infrequently traded, non exchange based derivatives and commingled
investment funds, and are measured using present value pricing
models.
In
accordance with SFAS 157, the Company determines the level in the fair value
hierarchy within which each fair value measurement in its entirety falls, based
on the lowest level input that is significant to the fair value measurement in
its entirety. The following table presents the investment in a money
market fund, the Company’s only financial asset measured and recorded at fair
value on the Company’s balance sheets on a recurring basis and its level within
the fair value hierarchy as of July 31, 2009:
Fair Value
|
||||||||||||||||
As of July 31, 2009
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
Investment
in Money Market
|
$ | 32,915,167 | $ | — | $ | — | $ | 32,915,167 |
There is
no gain on fair value of the financial instrument recognized.
The
valuation of the money market fund is based on the fair value of all securities
underlying the fund.
F-12
CS
China Acquisition Corp.
(a
corporation in the development stage)
Notes
to Financial Statements
For
the Year Ended July 31, 2009 and
for
the periods from September 24, 2007 (inception) to July 31, 2008 and
2009
NOTE
6 – INSIDER WARRANTS
Simultaneously
with the Offering, certain of the Initial Shareholders of the Company purchased
3,320,000 Warrants (“Insider Warrants”) at $0.50 per Warrant (for an aggregate
purchase price of $1,660,000) in a private placement. The purchasers
of the Insider Warrants purchased an additional 288,000 Insider Warrants for an
aggregate of $144,000 when the underwriters in the Offering exercised their
over-allotment option in full. The Company believes the purchase
price of these warrants approximated the fair value of such
warrants. The warrants were accounted for as permanent
equity. All of the proceeds received from this purchase were placed
in the Trust Account. The Insider Warrants purchased by such
purchasers are identical to the Warrants in the Offering except that if the
Company calls the Warrants for redemption, the Insider Warrants may be
exercisable on a “cashless basis,” at the holder’s option (except in the case of
a forced cashless exercise upon the Company’s redemption of the Warrants, as
described above), so long as such securities are held by such purchasers or
their affiliates. Furthermore, the purchasers have agreed that the
Insider Warrants will not be sold or transferred by them until after the Company
has completed a Business Combination.
NOTE
7 - NOTES PAYABLE TO SHAREHOLDERS
The
Company issued, in aggregate, $138,000 principal amount of unsecured promissory
notes to certain officers and Initial Shareholders. The notes were
noninterest bearing and payable on July 31, 2009. The Company repaid
the entire principal amount of these notes prior to July 31, 2009.
NOTE
8 - COMMITMENTS
In
connection with the Company’s IPO, CS
Capital USA, an affiliate of Chien Lee, agreed to provide the
Company with office space and certain office and secretarial services for a
fee of $7,500 per month, should the Company choose to
avail themselves of such space and services, which, as of July 31, 2009 the
Company has not.
Pursuant
to letter agreements dated as of August 11, 2008 with the Company and EBC, the
Initial Shareholders have waived their right to receive distributions with
respect to their founding shares upon the Company’s liquidation.
The
Initial Shareholders and the holders of the Insider Warrants (or underlying
ordinary shares) are entitled to registration rights with respect to their
founding shares and Insider Warrants (or underlying ordinary shares) pursuant to
an agreement signed on August 11, 2008. The holders of the majority
of the founding shares are entitled to demand that the Company register these
shares at any time commencing three months prior to the first anniversary of the
consummation of a Business Combination. The holders of the Insider
Warrants (and underlying ordinary shares) are entitled to demand that the
Company register these securities at any time after the Company consummates a
Business Combination. In addition, the Initial Shareholders and
holders of the Insider Warrants (and underlying ordinary shares) have certain
“piggy-back” registration rights on registration statements filed after the
Company’s consummation of a Business Combination.
F-13
CS
China Acquisition Corp.
(a
corporation in the development stage)
Notes
to Financial Statements
For
the Year Ended July 31, 2009 and
for
the periods from September 24, 2007 (inception) to July 31, 2008 and
2009
NOTE
9 - PREFERRED STOCK
The
Company is authorized to issue 1,000,000 preferred shares with such
designations, voting and other rights and preferences as may be determined from
time to time by the Board of Directors.
The
agreement with the underwriters prohibits the Company, prior to a Business
Combination, from issuing preferred shares which participate in the proceeds of
the Trust Account or which votes as a class with the ordinary shares on a
Business Combination.
NOTE
10 – ORDINARY SHARES
At July
31, 2009, 16,088,000 ordinary shares have been reserved for issuance upon
exercise of outstanding Warrants and underwriter unit purchase
option.
NOTE
11 – SUBSEQUENT EVENTS
Stock
Purchase Agreement – Business Combination
On
October 6, 2009, the Company entered into a Stock Purchase Agreement,
subsequently amended on November 10, 2009, (the “Agreement”) with Asia Gaming
& Resort, Ltd. (“AGRL”) and Spring Fortune Investment Ltd. (the
“Shareholder”). As a result of the signed agreement the Company has
until February 11, 2011 to complete the Business
Combination. Pursuant to the Agreement, the Company will purchase all
of the outstanding shares of AGRL stock from the Shareholder.
AGRL is
an investment holding company. The principal business activities of its wholly
owned subsidiaries are to hold Profit Agreements with VIP Room gaming promoter
companies (“Promoters”) and to receive 100% of the profit streams from the
Promoters. The Promoters currently participate in the promotion of
two major luxury VIP gaming facilities (“VIP rooms”) in Macau, China, the
largest gaming market in the world. One of the Macau VIP rooms is
located at the top-tier MGM Grand Macau Casino in downtown Macau and is operated
by the MGM Grand Paradise S.A. Another Macau VIP gaming facility is
operated by Galaxy Casino, S.A. and is located in the luxury 5-star hotel, the
Star World Hotel & Casino in downtown Macau. In addition, the
Promoters plan to promote the first luxury VIP room in Jeju Island in South
Korea, which will offer Macau-style gaming, and have concluded a favorable trial
operation there.
F-14
CS
China Acquisition Corp.
(a
corporation in the development stage)
Notes
to Financial Statements
For
the Year Ended July 31, 2009 and
for
the periods from September 24, 2007 (inception) to July 31, 2008 and
2009
The
transaction is expected to be consummated no later than the fourth business day
after the date on which the last of the conditions set forth in the Agreement is
fulfilled.
The
aggregate consideration (“Purchase Consideration”) to be paid by the Company to
the Shareholder for the shares of AGRL Stock will be (a) 10,350,000 Ordinary
Shares, which shall be paid at the closing of the transaction and (b)
4,120,000 Ordinary Shares of the Company stock which shall be paid no later than
5 business days after the filing of our Annual Report for the fiscal year ending
December 31, 2010.
In
addition, the Shareholder shall be entitled to receive additional Ordinary
Shares of the Company stock for each of the years 2009, 2010, 2011 and 2012 in
which AGRL has net after tax income that equals or exceeds the target specified
for such year in the Agreement (the “Incentive Target”). The total
maximum number of incentive shares that the Shareholder may receive is
17,196,000. With respect to year 2009, the Shareholder will not be
entitled to receive any incentive shares unless, in addition to achieving the
Incentive Target, AGRL’s rolling chip turnover (as such term is commonly
understood in the gaming and junket operations industry) exceeds $3,668,257,008,
and with respect to years 2009 and 2010, the maximum aggregate number of
incentive shares that the Shareholder will be entitled to receive is
12,050,000.
In
addition, for each of the years 2009, 2010, 2011 and 2012, we will issue 530,000
Ordinary Shares of the Company stock if AGRL has adjusted net income equal to or
greater than $29 million, $60 million, $75 million and $82.5 million,
respectively.
We expect
that the transaction will be consummated shortly after the special meeting of
shareholders that we will schedule to approve the
transaction.
Notes
Payable to Shareholders
In August
2009 and subsequently, the Company issued, in aggregate, $135,000 principal
amount of additional unsecured promissory notes to certain officers and Initial
Shareholders. The notes are noninterest bearing and payable on the
earlier of July 31, 2012 or the closing of a business combination.
F-15
SIGNATURES
Pursuant
to the requirements of the Section 13 or 15 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 on the 13th day of
November 2009.
CS
CHINA ACQUISITION CORP.
|
||
By:
|
/s/
William P. Haus
|
|
William
P. Haus
|
||
(Principal
Executive Officer)
|
In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Name
|
Title
|
Date
|
||
/s/ Chien Lee
|
Chairman
of the Board
|
November
13, 2009
|
||
Chien
Lee
|
||||
/s/ William P. Haus
|
Chief
Executive Officer (Principal Executive
|
November
13, 2009
|
||
William
P. Haus
|
Officer)
|
|||
/s/ James Preissler
|
Chief
Financial Officer, Secretary and Director
|
November
13, 2009
|
||
James
Preissler
|
(Principal
Accounting Officer and Principal
Financial
Officer)
|
|||
/s/ Michael Zhang
|
Executive
Vice President and Director
|
November 13,
2009
|
||
Michael
Zhang
|
||||
/s/ Peter Li
|
Director
|
November 13,
2009
|
||
Peter
Li
|
||||
/s/ Clarence Li
|
Director
and Vice President
|
November 13,
2009
|
||
Clarence
Li
|
||||
/s/ Wei Lu
|
Director
and Vice President
|
November 13,
2009
|
||
Wei
Lu
|
||||
/s/ Weidong Hong
|
Director
and Vice President
|
November 13,
2009
|
||
Weidong
Hong
|
||||
/s/ Jie Liu
|
Director
and Vice President
|
November 13,
2009
|
||
Jie
Liu
|