Attached files
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| 8-K - ShengdaTech, Inc. | v205868_8k.htm |
EXHIBIT
99.1
ShengdaTech, Inc - Investor
Questions and Responses
December 17,
2010
ShengdaTech,
Inc. (“ShengdaTech” or the “Company”) outlines a detailed question and
answers (“Q&A”) list in response to investor inquiries related to the
offering of the Company’s 6.50% senior convertible notes due
2015.
1. ShengdaTech
currently has approximately $120 million of cash on its balance sheet. Why did
the Company decide to raise capital given such a strong cash
position?
A: As of
September 30, 2010, ShengdaTech had approximately $121 million in cash; however
approximately $98 million of this cash position was held in RMB in Chinese
banks, which was generated accumulatively from continuing operations. As
disclosed in our public filings, it is cost prohibitive for the Company to
convert the RMB cash balance into USD and make wire payments according to
China’s financial laws and regulations and RMB restriction policy enforced by
China State Administration of Foreign Exchange ("SAFE"). The Company can only
wire USD out of China in the name of a dividend from subsidiaries of an overseas
holding company. However, this would result in the Company incurring
a 34% income tax expense.
The net
proceeds from the offering of the Senior Convertible Notes issued in 2008, after
deducting the related offering expenses, was approximately $110 million, of
which $56 million were used for the new Zibo facility, $13 million for
the repurchase of a portion of the convertible notes, approximately $18 million
for interest payments of the convertible notes and other capital expenditures
and working capital needs. As of September 30, 2010, the remaining balance of
the proceeds was approximately $23 million and is being held in USD in Chinese
banks.
The
Company was obligated to expansion costs of approximately $60 million
to the PRC government, which must be paid in USD by contract due to the
preferential tax policies granted by the government, including $30 million for
mining rights in Zibo, Shandong Province and $30 million for Anhui Yuanzhong by
December 2010. In addition, the Company was obligated, if called by holders in
June 2011, to purchase all or a portion of our outstanding convertible notes
issued in 2008 and due 2018, for a potential additional cash demand of
approximately USD $90 million.
-1-
2. Why
did the Company choose to raise capital through a convertible debt offering and
not conduct an equity offering?
A: The
Company, its Board and financial advisors considered a number of alternatives
for raising capital, including securing loans using our RMB bank deposits as
collateral, an equity offering and a convertible debt offering. Given
the near-term need for capital and prevailing market conditions, our financial
advisors advised us that an equity offering would be difficult to achieve and
advised a convertible debt offering. The Company, its Board and its financial
advisors evaluated these options in detail before making a
decision.
3. Given
the surplus cash on its balance sheet, why did the Company not repurchase
additional convertibles in 2009 at attractive market prices?
A: Our
Board determined that the repurchases in 2009 offered a rare opportunity to
reduce the debt, reduce the potential dilution to shareholders, and record a
profit at attractive values. However, the Company decided not to repurchase
additional convertibles due to unfavorable changes in market price and
anticipated capital expenditures.
4. The
new senior convertible debt raised is less favorable than the existing debt.
Please explain the Company’s rationale behind raising additional debt at
unfavorable terms to repurchase the existing debt and why did the Company need
to raise $130 million when it had announced plans to raise $90
million?
A: As
explained above, given the fact that market conditions prevented an equity
offering, we were advised by our financial advisors (investment banks) to raise
capital through a convertible debt offering. To attract sufficient investors,
even for a smaller offering, for our convertible notes offering, our financial
advisors determined that it was necessary to offer a “senior” convertible
offering. According to the indenture for the notes due 2018, the Company could
not issue new senior convertible notes unless the aggregate principal amount of
the notes due 2018 outstanding is less than 25% of the initial aggregate
principal amount issued. Therefore, the Company used approximately $67
million of the new proceeds to buy back the old debt and remove this
restriction for issuance of new senior debt. We would like to note that the
convertible debt due 2018 has a put option exercisable in June 2011, potentially
reducing the term of the debt. Thus, we believe the new and the old debt are no
different in terms of period to maturity. The pricing and terms of the new debt
were driven by market conditions and investor demand.
-2-
5. There
is a rumor in the market that there was some stock price manipulation on
Thursday, December 9, 2010 to lower the conversion price on the new convertible
debt offering. Please comment.
A: We are
unable to comment on the trading activity in our stock.
6. Why
is the Company holding surplus cash on its balance sheet?
A: In
2009, the Company found itself in a surplus cash position (held primarily in
RMB) after we decided that the acquisition of Jinan Fertilizer Co.,
Ltd. was not in the best interests of the Company and its shareholders.
Since then, we have been actively evaluating strategic acquisition
opportunities. We also continued to aggressively expand our NPCC
business.
The
existing cash of approximately $121 million (all but approximately $23 million
held in RMB) will be used for additional planned capacity expansions, including
production lines for Zibo Phase II of 40,000 metric tons, Anhui Phase
II and for R&D upgrades. Such a cash position will allow us to finance a
significant portion of the Company’s anticipated capital expenditures, working
capital requirements and other general corporate activities.
7. Will
there be additional future financing? Or does the Company feel it has sufficient
capital to finance the expansion?
A: Given
our strong balance sheet position, net proceeds from this convertible debt
offering and positive and increasing cash flow generation from operating
activities, we are confident in our ability to finance our existing near-term
expansion plans, which includes the addition of 40,000 metric tons of
NPCC capacity at our Zibo facility and an additional 100,000 metric tons of NPCC
capacity expansion at our Anhui Yuanzhong facility along with R&D upgrades.
However, the Company continues to actively identify attractive acquisition
opportunities; consequently, in addition to the capital required to further
expand NPCC production facilities as part of our longer-term strategy, there may
be other investment opportunities that present themselves that will require more
cash than we can generate from current operating cash flow.
-3-
8. Who
is advising the Company on capital market financing? Management’s decision in
terms of financing seems to have an adverse effect on shareholder
value.
A: In
addition to the Company’s internal finance team and Board oversight, ShengdaTech
received professional and financial advice from qualified institutions like
Morgan Stanley and Oppenheimer & Co. Inc, both of which are recognized
worldwide as highly regarded and proven financial advisors in the area of
raising capital. Engaging them for professional advice is consistent with the
Company’s commitment to receiving the best possible advice in terms of its
capital markets strategy.
9. Can
you provide additional details on the Company’s further use of the remaining
cash, which includes NPCC capacity expansion and R&D
activities?
A: In
addition to NPCC capacity expansion plans at our Zibo and Anhui
Yuanzhong facilities mentioned, we plan to carry out a number of important
R&D activities including the purchase of new state-of-the art equipment and
further expansion of our R&D facilities. Such R&D investments are
essential to our growth and will allow us to continue to create and develop
value-added NPCC products for new and innovative applications and to accelerate
the process of achieving successful market-ready R&D results.
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